Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX Emerald, LLC To Amend the Fee Schedule To Modify Certain Connectivity and Port Fees, 2651-2668 [2023-00659]
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Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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–CBOE–2022–062 and
should be submitted on or before
February 7, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–00655 Filed 1–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96628; File No. SR–
EMERALD–2023–01]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change by MIAX Emerald, LLC To
Amend the Fee Schedule To Modify
Certain Connectivity and Port Fees
January 10, 2023.
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 January 9,
2023, MIAX Emerald, LLC (‘‘MIAX
Emerald’’ or ‘‘Exchange’’), filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Emerald Fee Schedule
(the ‘‘Fee Schedule’’) to amend its Fee
Schedule (the ‘‘Fee Schedule’’) to
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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amend certain connectivity and port
fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/emerald, at MIAX’s principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV 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 as follows: (1) increase the
fees for a 10 gigabit (‘‘Gb’’) ultra-low
latency (‘‘ULL’’) fiber connection for
Members 3 and non-Members; and (2)
adopt a tiered-pricing structure for
Limited Service MIAX Emerald Express
Interface (‘‘MEI’’) Ports 4 available to
Market Makers.5 The Exchange last
increased the fees for both 10Gb ULL
fiber connections and Limited Service
MEI Ports beginning with a series of
filings on October 1, 2020 (with the final
filing made on March 24, 2021).6 Prior
to that fee change, the Exchange
provided Limited Service MEI Ports for
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 The MIAX Emerald Express Interface (‘‘MEI’’) is
a connection to the MIAX Emerald System that
enables Market Makers to submit simple and
complex electronic quotes to MIAX Emerald. See
the Definitions Section of the Fee Schedule.
5 The term ‘‘Market Makers’’ refers to Lead Market
Makers (‘‘LMMs’’), Primary Lead Market Makers
(‘‘PLMMs’’), and Registered Market Makers
(‘‘RMMs’’) collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
6 See Securities Exchange Act Release Nos. 91460
(April 1, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11); 90184 (October 14, 2020), 85
FR 66636 (October 20, 2020) (SR–EMERALD–2020–
12); 90600 (December 8, 2020), 85 FR 80831
(December 14, 2020) (SR–EMERALD–2020–17);
91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR–EMERALD–2021–02); and 91200
(February 24, 2021), 86 FR 12221 (March 2, 2021)
(SR–EMERALD–2021–07).
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$50 per port, after the first two Limited
Service MEI Ports that are provided free
of charge, and the Exchange incurred all
the costs associated to provide those
first two Limited Service MEI Ports
since it commenced operations in
March 2019. The Exchange then
increased the fee by $50 to a modest
$100 fee per Limited Service MEI Port
and increased the fee for 10Gb ULL fiber
connections from $6,000 to $10,000 per
month.
Also, in that fee change, the Exchange
adopted fees for providing five different
types of ports for the first time. These
ports were FIX Ports, MEI Ports,
Clearing Trade Drop Ports, FIX Drop
Copy Ports, and Purge Ports.7 Again, the
Exchange absorbed all costs associated
with providing these ports since its
launch in March 2019. As explained in
that filing, expenditures, as well as
research and development (‘‘R&D’’) in
numerous areas resulted in a material
increase in expense to the Exchange and
were the primary drivers for that
proposed fee change. In that filing, the
Exchange allocated a total of $9.3
million in expenses to providing 10Gb
ULL fiber connectivity, additional
Limited Service MEI Ports, FIX Ports,
MEI Ports, Clearing Trade Drop Ports,
FIX Drop Copy Ports, and Purge Ports.8
Since the time of 2021 increase
discussed above, the Exchange
experienced ongoing increases in
expenses, particularly internal
expenses. As discussed more fully
below, the Exchange recently calculated
increased annual aggregate costs of
$11,361,586 for providing 10Gb ULL
connectivity and $1,779,066 for
providing Limited Service MEI Ports.
Much of the cost relates to monitoring
and analysis of data and performance of
the network via the subscriber’s
connection with nanosecond
granularity, and continuous
improvements in network performance
with the goal of improving the
subscriber’s experience. The costs
associated with maintaining and
enhancing a state-of-the-art network is a
significant expense for the Exchange,
and thus the Exchange believes that it
is reasonable and appropriate to help
offset those increased costs by amending
fees for connectivity services.
Subscribers expect the Exchange to
provide this level of support so they
continue to receive the performance
they expect. This differentiates the
Exchange from its competitors.
The Exchange now proposes to amend
the Fee Schedule to amend the fees for
10Gb ULL connectivity and Limited
7 See
id. for a description of each of these ports.
8 Id.
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Service MEI Ports in order to recoup
ongoing costs and increase in expenses
set forth below in the Exchange’s cost
analysis.
*
*
*
*
*
Starting in 2017, following the United
States Court of Appeals for the District
of Columbia’s Susquehanna Decision 9
and various other developments, the
Commission began to undertake a
heightened review of exchange filings,
including non-transaction fee filings
that was substantially and materially
different from it prior review process
(hereinafter referred to as the ‘‘Revised
Review Process’’). In the Susquehanna
Decision, the D.C. Circuit Court stated
that the Commission could not maintain
a practice of ‘‘unquestioning reliance’’
on claims made by a self-regulatory
organization (‘‘SRO’’) in the course of
filing a rule or fee change with the
Commission.10 Then, on October 16,
2018, the Commission issued an
opinion in Securities Industry and
Financial Markets Association finding
that exchanges failed both to establish
that the challenged fees were
constrained by significant competitive
forces and that these fees were
consistent with the Act.11 On that same
day, the Commission issued an order
remanding to various exchanges and
national market system (‘‘NMS’’) plans
challenges to over 400 rule changes and
plan amendments that were asserted in
57 applications for review (the ‘‘Remand
Order’’).12 The Remand Order directed
the exchanges to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based
on that record, in a written decision that
is sufficient to enable us to perform our
review.’’ 13 The Commission denied
requests by various exchanges and plan
participants for reconsideration of the
Remand Order.14 However, the
Commission did extend the deadlines in
the Remand Order ‘‘so that they d[id]
not begin to run until the resolution of
the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the
9 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
10 Id.
11 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84432, 2018 WL 5023228
(October 16, 2018) (the ‘‘SIFMA Decision’’).
12 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84433, 2018 WL 5023230
(Oct. 16, 2018). See 15 U.S.C. 78k–1, 78s; see also
Rule 608(d) of Regulation NMS, 17 CFR 242.608(d)
(asserted as an alternative basis of jurisdiction in
some applications).
13 Id. at page 2.
14 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 85802, 2019 WL 2022819
(May 7, 2019) (the ‘‘Order Denying
Reconsideration’’).
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court’s mandate.’’ 15 Both the Remand
Order and the Order Denying
Reconsideration were appealed to the
D.C. Circuit.
While the above appeal to the D.C.
Circuit was pending, on March 29, 2019,
the Commission issued an order
disapproving a proposed fee change by
BOX Exchange LLC (‘‘BOX’’) to
establish connectivity fees (the ‘‘BOX
Order’’), which significantly increased
the level of information needed for the
Commission to believe that an
exchange’s filing satisfied its obligations
under the Act with respect to changing
a fee.16 Despite approving hundreds of
access fee filings in the years prior to
the BOX Order (described further
below) utilizing a ‘‘market-based’’ test,
the Commission changed course and
disapproved BOX’s proposal to begin
charging connectivity at one-fourth the
rate of competing exchanges’ pricing.
Also while the above appeal was
pending, 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.’’ 17 In the Staff Guidance,
the Commission Staff states that, ‘‘[a]s
an initial step in assessing the
reasonableness of a fee, staff considers
whether the fee is constrained by
significant competitive forces.’’ 18 The
Staff Guidance also 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.’’ 19
Following the BOX Order and Staff
Guidance, on August 6, 2020, the D.C.
15 Order Denying Reconsideration, 2019 WL
2022819, at *13.
16 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).
The Commission noted in the BOX Order that it
‘‘historically applied a ‘market-based’ test in its
assessment of market data fees, which [the
Commission] believe[s] present similar issues as the
connectivity fees proposed herein.’’ Id. at page 16.
Despite this admission, the Commission
disapproved BOX’s proposal to begin charging
$5,000 per month for 10Gb connections (while
allowing legacy exchanges to charge rates equal to
3–4 times that amount utilizing ‘‘market-based’’ fee
filings from years prior).
17 See Staff Guidance on SRO Rule Filings
Relating to Fees (May 21, 2019), available at https://
www.sec.gov/tm/staff-guidance-sro-rule-filings-fees
(the ‘‘Staff Guidance’’).
18 Id.
19 Id.
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Circuit vacated the Commission’s
SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC 20 and remanded for
further proceedings consistent with its
opinion.21 That same day, the D.C.
Circuit issued an order remanding the
Remand Order to the Commission for
reconsideration in light of NASDAQ.
The court noted that the Remand Order
required the exchanges and NMS plan
participants to consider the challenges
that the Commission had remanded in
light of the SIFMA Decision. The D.C.
Circuit concluded that because the
SIFMA Decision ‘‘has now been
vacated, the basis for the [Remand
Order] has evaporated.’’ 22 Accordingly,
on August 7, 2020, the Commission
vacated the Remand Order and ordered
the parties to file briefs addressing
whether the holding in NASDAQ v. SEC
that Exchange Act Section 19(d) does
not permit challenges to generally
applicable fee rules requiring dismissal
of the challenges the Commission
previously remanded.23 The
Commission further invited ‘‘the parties
to submit briefing stating whether the
challenges asserted in the applications
for review . . . should be dismissed,
and specifically identifying any
challenge that they contend should not
be dismissed pursuant to the holding of
Nasdaq v. SEC.’’ 24 Without resolving
the above issues, on October 5, 2020, the
Commission issued an order granting
SIFMA and Bloomberg’s request to
withdraw their applications for review
and dismissed the proceedings.25
As a result of the Commission’s loss
of the NASDAQ v. SEC case noted
above, the Commission never followed
through with its intention to subject the
over 400 fee filings to ‘‘develop a
record,’’ and to ‘‘explain their
conclusions, based on that record, in a
written decision that is sufficient to
20 NASDAQ Stock Mkt., LLC v. SEC, No 18–1324,
--- Fed. App’x ----, 2020 WL 3406123 (D.C. Cir. June
5, 2020). The court’s mandate was issued on August
6, 2020.
21 Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C.
Cir. 2020). The court’s mandate issued on August
6, 2020. The D.C. Circuit held that Exchange Act
‘‘Section 19(d) is not available as a means to
challenge the reasonableness of generallyapplicable fee rules.’’ Id. The court held that ‘‘for
a fee rule to be challengeable under Section 19(d),
it must, at a minimum, be targeted at specific
individuals or entities.’’ Id. Thus, the court held
that ‘‘Section 19(d) is not an available means to
challenge the fees at issue’’ in the SIFMA Decision.
Id.
22 Id. at *2; see also id. (‘‘[T]he sole purpose of
the challenged remand has disappeared.’’).
23 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 89504, 2020 WL 4569089
(August 7, 2020) (the ‘‘Order Vacating Prior Order
and Requesting Additional Briefs’’).
24 Id.
25 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 90087 (October 5, 2020).
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enable us to perform our review.’’ 26 As
such, all of those fees remained in place
and amounted to a baseline set of fees
for those exchanges that had the benefit
of getting their fees in place before the
Commission Staff’s fee review process
materially changed. The net result of
this history and lack of resolution in the
D.C. Circuit Court resulted in an uneven
competitive landscape where the
Commission subjects all new nontransaction fee filings, particularly those
submitted by new exchanges, to the new
Revised Review Process, while allowing
the previously challenged fee filings,
mostly submitted by incumbent
exchanges prior to 2019, to remain in
effect and not subject to the ‘‘record’’ or
‘‘review’’ earlier intended by the
Commission.
While the Exchange appreciates that
the Staff Guidance articulates an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable,
the practical effect of the Revised
Review Process, Staff Guidance, and the
Commission’s related practice of
continuous suspension of new fee
filings, is anti-competitive,
discriminatory, and has put in place an
un-level playing field, which has
negatively impacted smaller, nascent,
non-legacy exchanges (‘‘non-legacy
exchanges’’), while favoring larger,
incumbent, entrenched, legacy
exchanges (‘‘legacy exchanges’’).27 The
legacy exchanges all established a
significantly higher baseline for access
and market data fees prior to the
Revised Review Process. From 2011
until the issuance of the Staff Guidance
in 2019, national securities exchanges
filed, and the Commission Staff did not
abrogate or suspend (allowing such fees
to become effective), at least 92 filings 28
26 See
supra note 12, at page 2.
Chair Gary Gensler recently
reiterated the Commission’s mandate to ensure
competition in the equities markets. See ‘‘Statement
on Minimum Price Increments, Access Fee Caps,
Round Lots, and Odd-Lots’’, by Chair Gary Gensler,
dated December 14, 2022 (stating ‘‘[i]n 1975,
Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the
establishment of the national market system and
enhance competition in the securities markets,
including the equity markets’’ (emphasis added)).
In that same statement, Chair Gary Gensler cited the
five objectives laid out by Congress in 11A of the
Exchange Act (15 U.S.C. 78k–1), including ensuring
‘‘fair competition among brokers and dealers,
among exchange markets, and between exchange
markets and markets other than exchange
markets. . . .’’ (emphasis added). Id. at note 1. See
also Securities Acts Amendments of 1975, available
at https://www.govtrack.us/congress/bills/94/s249.
28 This timeframe also includes challenges to over
400 rule filings by SIFMA and Bloomberg discussed
above. Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84433, 2018 WL 5023230
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27 Commission
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to amend exchange connectivity or port
fees (or similar access fees). The support
for each of those filings was a simple
statement by the relevant exchange that
the fees were constrained by
competitive forces.29 These fees remain
in effect today.
The net result is that the non-legacy
exchanges are effectively now blocked
by the Commission Staff from adopting
or increasing fees to amounts
comparable to the legacy exchanges
(which were not subject to the Revised
Review Process and Staff Guidance),
despite providing enhanced disclosures
and rationale to support their proposed
fee changes that far exceed any such
support provided by legacy exchanges.
Simply put, legacy exchanges were able
to increase their non-transaction fees
during an extended period in which the
Commission applied a ‘‘market-based’’
test that only relied upon the assumed
presence of significant competitive
forces, while exchanges today are
subject to a cost-based test requiring
extensive cost and revenue disclosures,
a process that is complex, inconsistently
applied, and rarely results in a
successful outcome, i.e., nonsuspension. The Revised Review
Process and Staff Guidance changed
decades-long Commission Staff
standards for review, resulting in unfair
discrimination and placing an undue
burden on inter-market competition
between legacy exchanges and nonlegacy exchanges.
Commission Staff now require
exchange filings, including from nonlegacy exchanges such as the Exchange,
to provide detailed cost-based analysis
in place of competition-based arguments
to support such changes. However, even
with the added detailed cost and
expense disclosures, the Commission
Staff continues to either suspend such
filings and institute disapproval
proceedings, or put the exchanges in the
unenviable position of having to
repeatedly withdraw and re-file with
additional detail in order to continue to
(Oct. 16, 2018). Those filings were left to stand,
while at the same time, blocking newer exchanges
from the ability to establish competitive access and
market data fees. See The Nasdaq Stock Market,
LLC v. SEC, Case No. 18–1292 (D.C. Cir. June 5,
2020). The expectation at the time of the litigation
was that the 400 rule flings challenged by SIFMA
and Bloomberg would need to be justified under
revised review standards.
29 See, e.g., Securities Exchange Act Release Nos.
74417 (March 3, 2015), 80 FR 12534 (March 9,
2015) (SR–ISE–2015–06); 83016 (April 9, 2018), 83
FR 16157 (April 13, 2018) (SR–PHLX–2018–26);
70285 (August 29, 2013), 78 FR 54697 (September
5, 2013) (SR–NYSEMKT–2013–71); 76373
(November 5, 2015), 80 FR 70024 (November 12,
2015) (SR–NYSEMKT–2015–90); 79729 (January 4,
2017), 82 FR 3061 (January 10, 2017) (SR–
NYSEARCA–2016–172).
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2653
charge those fees.30 By impeding any
path forward for non-legacy exchanges
to establish commensurate nontransaction fees, or by failing to provide
any alternative means for smaller
markets to establish ‘‘fee parity’’ with
legacy exchanges, the Commission is
stifling competition: non-legacy
exchanges are, in effect, being deprived
of the revenue necessary to compete on
a level playing field with legacy
exchanges. This is particularly harmful,
given that the costs to maintain
exchange systems and operations
continue to increase. The Commission
Staff’s change in position impedes the
ability of non-legacy exchanges to raise
revenue to invest in their systems to
compete with the legacy exchanges who
already enjoy disproportionate nontransaction fee based revenue. For
example, the Cboe Exchange, Inc.
(‘‘Cboe’’) reported ‘‘access and capacity
fee’’ revenue of $70,893,000 for 2020 31
and $80,383,000 for 2021.32 Cboe C2
Exchange, Inc. (‘‘C2’’) reported ‘‘access
and capacity fee’’ revenue of
$19,016,000 for 2020 33 and $22,843,000
for 2021.34 Cboe BZX Exchange, Inc.
(‘‘BZX’’) reported ‘‘access and capacity
fee’’ revenue of $38,387,000 for 2020 35
and $44,800,000 for 2021.36 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
‘‘access and capacity fee’’ revenue of
$26,126,000 for 2020 37 and $30,687,000
for 2021.38 For 2021, the affiliated Cboe,
C2, BZX, and EDGX (the four largest
exchanges of the Cboe exchange group)
reported $178,712,000 in ‘‘access and
capacity fees’’ in 2021. NASDAQ Phlx,
30 The Exchange has filed, and subsequently
withdrawn, various forms of this proposed fee
numerous times since August 2021 with each
proposal containing hundreds of cost and revenue
disclosures never previously disclosed by legacy
exchanges in their access and market data fee filings
prior to 2019.
31 According to Cboe’s 2021 Form 1 Amendment,
access and capacity fees represent fees assessed for
the opportunity to trade, including fees for tradingrelated functionality. See Cboe 2021 Form 1
Amendment, available at https://www.sec.gov/
Archives/edgar/vprr/2100/21000465.pdf.
32 See Cboe 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001155.pdf.
33 See C2 2021 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000469.pdf.
34 See C2 2022 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2200/
22001156.pdf.
35 See BZX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000465.pdf.
36 See BZX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001152.pdf.
37 See EDGX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000467.pdf.
38 See EDGX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001154.pdf.
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LLC (‘‘NASDAQ Phlx’’) reported ‘‘Trade
Management Services’’ revenue of
$20,817,000 for 2019.39 The Exchange
notes it is unable to compare ‘‘access
fee’’ revenues with NASDAQ Phlx (or
other affiliated NASDAQ exchanges)
because after 2019, the ‘‘Trade
Management Services’’ line item was
bundled into a much larger line item in
PHLX’s Form 1, simply titled ‘‘Market
services.’’ 40
The much higher non-transaction fees
charged by the legacy exchanges
provides them with two significant
competitive advantages. First, legacy
exchanges are able to use their
additional non-transaction revenue for
investments in infrastructure, vast
marketing and advertising on major
media outlets,41 new products and other
innovations. Second, higher nontransaction fees provide the legacy
exchanges with greater flexibility to
lower their transaction fees (or use the
revenue from the higher non-transaction
fees to subsidize transaction fee rates),
which are more immediately impactful
in competition for order flow and
market share, given the variable nature
of this cost on member firms. The
prohibition of a reasonable path forward
denies the Exchange (and other nonlegacy exchanges) this flexibility,
eliminates the ability to remain
competitive on transaction fees, and
hinders the ability to compete for order
flow and market share with legacy
exchanges. While one could debate
whether the pricing of non-transaction
fees are subject to the same market
forces as transaction fees, there is little
doubt that subjecting one exchange to a
materially different standard than that
historically applied to legacy exchanges
for non-transaction fees leaves that
exchange at a disadvantage in its ability
to compete with its pricing of
transaction fees.
While the Commission has clearly
noted that the Staff Guidance is merely
guidance and ‘‘is not a rule, regulation
or statement of the . . . Commission
. . . the Commission has neither
approved nor disapproved its
content. . .’’,42 this is not the reality
39 According to PHLX, ‘‘Trade Management
Services’’ includes ‘‘a wide variety of alternatives
for connectivity to and accessing [the PHLX]
markets for a fee. These participants are charged
monthly fees for connectivity and support in
accordance with [PHLX’s] published fee
schedules.’’ See PHLX 2020 Form 1 Amendment,
available at https://www.sec.gov/Archives/edgar/
vprr/2001/20012246.pdf.
40 See PHLX Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf.
41 See, e.g., CNBC Debuts New Set on NYSE Floor,
available at https://www.cnbc.com/id/46517876.
42 See supra note 17, at note 1.
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experienced by exchanges such as
MIAX Emerald. As such, non-legacy
exchanges are forced to rely on an
opaque cost-based justification
standard. However, because the Staff
Guidance is devoid of detail on what
must be contained in cost-based
justification, this standard is nearly
impossible to meet despite good-faith
efforts by the Exchange to provide
substantial amount of cost-related
details. The Exchange has attempted to
increase fees using a cost-based
justification numerous times, having
submitted over six filings.43 However,
despite providing 100+ page filings
describing in extensive detail its costs
associated with providing the services
described in the filings, Commission
Staff continues to suspend such filings,
with the rationale that the Exchange has
not provided sufficient detail of its
costs. The Commission Staff appears to
be interpreting the reasonableness
standard set forth in Section 6(b)(4) of
the Act 44 in a manner that is not
possible to achieve. This essentially
nullifies the cost-based approach for
exchanges as a legitimate alternative as
laid out in the Staff Guidance. By
refusing to accept a reasonable costbased argument to justify nontransaction fees (in addition to refusing
to accept a competition-based argument
as described above), or by failing to
provide the detail required to achieve
that standard, the Commission Staff is
effectively preventing non-legacy
exchanges from making any nontransaction fee changes, which benefits
the legacy exchanges and
anticompetitive to the non-legacy
exchanges. This does not meet the
fairness standard under the Act and is
discriminatory.
Because of the un-level playing field
created by the Revised Review Process
and Staff Guidance, the Exchange
believes that the Commission Staff, at
43 See Securities Exchange Act Release Nos.
94889 (May 11, 2022), 87 FR 29928 (May 17, 2022)
(SR–EMERALD–2022–19); 94718 (April 14, 2022),
87 FR 23633 (April 20, 2022) (SR–EMERALD–2022–
15); 94717 (April 14, 2022), 87 FR 23648 (April 20,
2022) (SR–EMERALD–2022–13); 94260 (February
15, 2022), 87 FR 9695 (February 22, 2022) (SR–
EMERALD–2022–05); 94257 (February 15, 2022), 87
FR 9678 (February 22, 2022) (SR–EMERALD–2022–
04); 93772 (December 14, 2021), 86 FR 71965
(December 20, 2021) (SR–EMERALD–2021–43);
93776 (December 14, 2021), 86 FR 71983 (December
20, 2021) (SR–EMERALD–2021–42); 93188
(September 29, 2021), 86 FR 55052 (October 5,
2021) (SR–EMERALD–2021–31); (SR–EMERALD–
2021–30) (withdrawn without being noticed by the
Commission); 93166 (September 28, 2021), 86 FR
54760 (October 4, 2021) (SR–EMERALD–2021–29);
92662 (August 13, 2021), 86 FR 46726 (August 19,
2021) (SR–EMERALD–2021–25); 92645 (August 11,
2021), 86 FR 46048 (August 17, 2021) (SR–
EMERALD–2021–23).
44 15 U.S.C. 78f(b)(4).
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this point, should either (a) provide
sufficient clarity on how its cost-based
standard can be met, including a clear
and exhaustive articulation of required
data and its views on acceptable
margins,45 to the extent that this is
pertinent; (b) establish a framework to
provide for commensurate nontransaction based fees among competing
exchanges to ensure fee parity; 46 or (c)
accept that certain competition-based
arguments are applicable given the
linkage between non-transaction fees
and transaction fees, especially where
non-transaction fees among exchanges
are based upon disparate standards of
review, lack parity, and impede fair
competition. Considering the absence of
any such framework or clarity, the
Exchange believes that the Commission
does not have a reasonable basis to deny
the Exchange this change in fees, where
the proposed change would result in
fees meaningfully lower than
comparable fees at competing exchanges
and where the associated nontransaction revenue is meaningfully
lower than competing exchanges.
In light of the above, disapproval of
this would not meet the fairness
standard under the Act, would be
discriminatory and place a substantial
burden on competition. The Exchange
would be uniquely disadvantaged by
not being able to increase its access fees
to comparable levels (or lower levels
than current market rates) to those of
other options exchanges for
connectivity. If the Commission Staff
were to disapprove this proposal, that
action, and not market forces, would
substantially affect whether the
Exchange can be successful in its
competition with other options
exchanges. Disapproval of this filing
could also be viewed as an arbitrary and
capricious decision should the
Commission Staff continue to ignore its
past treatment of non-transaction fee
filings before implementation of the
Revised Review Process and Staff
Guidance and refuse to allow such
filings to be approved despite
45 To the extent that the cost-based standard
includes Commission Staff making determinations
as to the appropriateness of certain profit margins,
the Exchange believes that Staff should be clear as
to what they determine is an appropriate profit
margin.
46 In light of the arguments above regarding
disparate standards of review for historical legacy
non-transaction fees and current non-transaction
fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the
current unfair and discriminatory effect of the Staff
Guidance and Revised Review Process. See, e.g.,
CSA Staff Consultation Paper 21–401, Real-Time
Market Data Fees, available at https://
www.bcsc.bc.ca/-/media/PWS/Resources/
Securities_Law/Policies/Policy2/21401_Market_
Data_Fee_CSA_Staff_Consulation_Paper.pdf.
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significantly enhanced arguments and
cost disclosures.47
Lastly, the Exchange notes that the
Commission Staff has allowed similar
fee increases by other exchanges to
remain in effect by publishing those
filings for comment and allowing the
exchange to withdraw and re-file
numerous times.48 Recently, the
Commission Staff has not afforded the
Exchange the same flexibility.49 This
again is evidence that the Commission
Staff is not treating non-transaction fee
filings in a consistent manner and is
holding exchanges to different levels of
scrutiny in reviewing filings.
*
*
*
*
*
10Gb ULL Connectivity Fee Change
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The Exchange proposes to amend the
Fee Schedule to increase the fees for
Members and non-Members to access
the Exchange’s system networks 50 via a
10Gb ULL fiber connection.
Specifically, the Exchange proposes to
amend Sections (5)(a)–(b) of the Fee
Schedule to increase the 10Gb ULL
connectivity fee for Members and non47 The Exchange’s costs have clearly increased
and continue to increase, particularly regarding
capital expenditures, as well as employee benefits
provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed
by the Exchange to cover its ever-increasing costs
has been acceptable to the Commission Staff since
2021. The only other fair and reasonable alternative
would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance
and Revised Review Process to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based on that
record, in a written decision that is sufficient to
enable us to perform our review,’’ and to ensure a
comparable review process with the Exchange’s
filing.
48 See, e.g., Securities Exchange Act Release Nos.
93937 (January 10, 2022), 87 FR 2466 (January 14,
2022) (SR–MEMX–2021–22); 94419 (March 15,
2022), 87 FR 16046 (March 21, 2022) (SR–MEMX–
2022–02); SR–MEMX–2022–12 (withdrawn before
being noticed); 94924 (May 16, 2022), 87 FR 31026
(May 20, 2022) (SR–MEMX–2022–13); 95299 (July
15, 2022), 87 FR 43563 (July 21, 2022) (SR–MEMX–
2022–17); SR–MEMX–2022–24 (withdrawn before
being noticed); 95936 (September 27, 2022), 87 FR
59845 (October 3, 2022) (SR–MEMX–2022–26);
94901 (May 12, 2022), 87 FR 30305 (May 18, 2022)
(SR–MRX–2022–04); SR–MRX–2022–06
(withdrawn before being noticed); 95262 (July 12,
2022), 87 FR 42780 (July 18, 2022) (SR–MRX–2022–
09); 95710 (September 8, 2022), 87 FR 56464
(September 14, 2022) (SR–MRX–2022–12); 96046
(October 12, 2022), 87 FR 63119 (October 18, 2022)
(SR–MRX–2022–20); 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR–MEMX–2022–
26); and 96430 (December 1, 2022), 87 FR 75083
(December 7, 2022) (SR–MEMX–2022–32).
49 See Securities Exchange Act Release Nos.
94889 (May 11, 2022), 87 FR 29928 (May 17, 2022)
(SR–EMERALD–2022–19); 94718 (April 14, 2022),
87 FR 23633 (April 20, 2022) (SR–EMERALD–2022–
15).
50 The Exchange’s system networks consist of the
Exchange’s extranet, internal network, and external
network.
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Members from $10,000 per month to
$13,500 per month (‘‘10Gb ULL Fee’’).51
The Exchange will continue to assess
monthly Member and non-Member
network connectivity fees for
connectivity to the primary and
secondary facilities in any month the
Member or non-Member is credentialed
to use any of the Exchange APIs or
market data feeds in the production
environment. The Exchange will
continue to pro-rate the fees when a
Member or non-Member makes a change
to the connectivity (by adding or
deleting connections) with such prorated fees based on the number of
trading days that the Member or nonMember has been credentialed to utilize
any of the Exchange APIs or market data
feeds in the production environment
through such connection, divided by the
total number of trading days in such
month multiplied by the applicable
monthly rate.
Limited Service MEI Ports
Background
The Exchange also proposes to amend
Section 5)(d) of the Fee Schedule to
adopt a tiered-pricing structure for
Limited Service MEI Ports available to
Market Makers. The Exchange allocates
two (2) Full Service MEI Ports 52 and
two (2) Limited Service MEI Ports 53 per
matching engine 54 to which each
51 Market participants that purchase additional
10Gb ULL connections as a result of this change
will not be subject to the Exchange’s Member
Network Connectivity Testing and Certification Fee
under Section (4)(c) of the Exchange’s fee schedule.
See Section (4)(c) of the Exchange’s fee schedule
available at https://www.miaxoptions.com/sites/
default/files/fee_schedule-files/MIAX_Options_Fee_
Schedule_10192022.pdf (providing that ‘‘Network
Connectivity Testing and Certification Fees will not
be assessed in situations where the Exchange
initiates a mandatory change to the Exchange’s
system that requires testing and certification.
Member Network Connectivity Testing and
Certification Fees will not be assessed for testing
and certification of connectivity to the Exchange’s
Disaster Recovery Facility.’’).
52 The term ‘‘Full Service MEI Ports’’ means a
port which provides Market Makers with the ability
to send Market Maker simple and complex quotes,
eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also
capable of receiving administrative information.
Market Makers are limited to two Full Service MEI
Ports per Matching Engine. See the Definitions
Section of the Fee Schedule.
53 The term ‘‘Limited Service MEI Ports’’ means
a port which provides Market Makers with the
ability to send simple and complex eQuotes and
quote purge messages only, but not Market Maker
Quotes, to the MIAX Emerald System. Limited
Service MEI Ports are also capable of receiving
administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching
Engine. See the Definitions Section of the Fee
Schedule.
54 The term ‘‘Matching Engine’’ means a part of
the MIAX Emerald electronic system that processes
options orders and trades on a symbol-by-symbol
basis. Some Matching Engines will process option
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2655
Market Maker connects. Market Makers
may also request additional Limited
Service MEI Ports for each matching
engine to which they connect. The Full
Service MEI Ports and Limited Service
MEI Ports all include access to the
Exchange’s primary and secondary data
centers and its disaster recovery center.
Market Makers may request additional
Limited Service MEI Ports. Currently,
Market Makers are assessed a $100
monthly fee for each Limited Service
MEI Port for each matching engine
above the first two Limited Service MEI
Ports that are included for free.
Limited Service MEI Port Fee Changes
The Exchange now proposes to move
from a flat monthly fee per Limited
Service MEI Port for each matching
engine to a tiered-pricing structure for
Limited Service MEI Ports for each
matching engine under which the
monthly fee would vary depending on
the number of Limited Service MEI
Ports each Market Maker elects to
purchase. Specifically, the Exchange
will continue to provide the first and
second Limited Service MEI Ports for
each matching engine free of charge. For
Limited Service MEI Ports, the
Exchange proposes to adopt the
following tiered-pricing structure: (i) the
third and fourth Limited Service MEI
Ports for each matching engine will
increase from the current flat monthly
fee of $100 to $200 per port; (ii) the fifth
and sixth Limited Service MEI Ports for
each matching engine will increase from
the current flat monthly fee of $100 to
$300 per port; and (iii) the seventh or
more Limited Service MEI Ports will
increase from the current monthly flat
fee of $100 to $400 per port.55 The
Exchange believes a tiered-pricing
structure will encourage Market Makers
to be more efficient when determining
how to connect to the Exchange. This
should also enable the Exchange to
better monitor and provide access to the
Exchange’s network to ensure sufficient
classes with multiple root symbols, and other
Matching Engines may be dedicated to one single
option root symbol (for example, options on SPY
may be processed by one single Matching Engine
that is dedicated only to SPY). A particular root
symbol may only be assigned to a single designated
Matching Engine. A particular root symbol may not
be assigned to multiple Matching Engines. See the
Definitions Section of the Fee Schedule.
55 As noted in the Fee Schedule, Market Makers
will continue to be limited to fourteen Limited
Service MEI Ports per Matching Engine. The
Exchange also proposes to make a ministerial
clarifying change to remove the defined term
‘‘Additional Limited Service MEI Ports’’ as a result
of moving to a tiered pricing structure where the
first two Limited Service MEI Ports continue to be
provided free of charge. The Exchange proposes to
make a related change to add the term ‘‘Limited
Service MEI Ports’’ after the word ‘‘fourteen’’ in the
Fee Schedule.
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capacity and headroom in the System 56
in accordance with its fair access
requirements under Section 6(b)(5) of
the Act.57
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, Market
Makers who take the maximum amount
of Limited Service MEI Ports account for
approximately greater than 99% of
message traffic over the network, while
Market Makers with fewer Limited
Service MEI Ports account for
approximately less than 1% of message
traffic over the network. In the
Exchange’s experience, Market Makers
who only utilize the two free Limited
Service MEI Ports do not have a
business need for the high performance
network solutions required by Market
Makers who take the maximum amount
of Limited Service MEI Ports. The
Exchange’s high performance network
solutions and supporting infrastructure
(including employee support), provides
unparalleled system throughput and the
capacity to handle approximately 18
million quote messages per second.
Based on November 2022 trading
results, on an average day, the Exchange
handles over approximately 6.9 billion
quotes, and more than 146 billion
quotes over the entire month. Of that
total, Market Makers with the maximum
amount of Limited Service MEI Ports
generate over 4 billion quotes, and
Market Makers who utilize the two free
Limited Service MEI Ports generate
approximately 1.6 billion quotes. Also
for November 2022, Market Makers who
utilized 7 to 9 Limited Service MEI
ports submitted an average of
1,264,703,600 quotes per day. 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 network connectivity
expense for storage and network
transport capabilities. The Exchange
must also purchase additional storage
capacity on an ongoing basis to ensure
56 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See the Definitions Section of the Fee
Schedule and Exchange Rule 100.
57 See 15 U.S.C. 78f(b). The Exchange may offer
access on terms that are not unfairly discriminatory
among its Members, and ensure sufficient capacity
and headroom in the System. The Exchange
monitors the System’s performance and makes
adjustments to its System based on market
conditions and Member demand.
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it has sufficient capacity to store these
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.58 Thus, as the number of
connections a Market Maker has
increases, certain other costs incurred
by the Exchange that are correlated to,
though not directly affected by,
connection costs (e.g., storage costs,
surveillance costs, service expenses)
also increase. The Exchange sought to
design the proposed tiered-pricing
structure to set the amount of the fees
to relate to the number of connections
a firm purchases. The more connections
purchased by a Market Maker likely
results in greater expenditure of
Exchange resources and increased cost
to the Exchange. With this in mind, the
Exchange proposes no fee or lower fees
for those Market Makers who receive
fewer Limited Service MEI Ports since
those Market Makers generally tend to
send the least amount of orders and
messages over those connections. Given
this difference in network utilization
rate, the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that Market Makers who
take the most Limited Service MEI Ports
pay for the vast majority of the shared
network resources from which all
Member and non-Member users benefit,
but is designed and maintained from a
capacity standpoint to specifically
handle the message rate and
performance requirements of those
Market Makers.
The Exchange proposes to increase its
monthly Limited Service MEI Port fees
to recover a portion of the costs
associated with directly accessing the
Exchange.
Implementation
The Exchange initially filed this
proposal on December 30, 2022 as SR–
EMERALD–2022–38. On January 9,
2023, the Exchange withdrew SR–
EMERALD–2022–38 and resubmitted
this proposal. The proposed fee changes
are immediately effective.
2. Statutory Basis
The Exchange believes that the
proposed fees are consistent with
Section 6(b) of the Act 59 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 60 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among Members and other persons
58 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
59 15 U.S.C. 78f(b).
60 15 U.S.C. 78f(b)(4).
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using any facility or system which the
Exchange operates or controls. The
Exchange also believes the proposed
fees further the objectives of Section
6(b)(5) of the Act 61 in that they are
designed to promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general protect investors and the public
interest and are not designed to permit
unfair discrimination between
customers, issuers, brokers and dealers.
The Exchange believes that the
information provided to justify the
proposed fees meets or exceeds the
amount of detail required in respect of
proposed fee changes under the Revised
Review Process and as set forth in
recent Staff Guidance. Based on both the
BOX Order 62 and the Staff Guidance,63
the Exchange believes that the proposed
fees are consistent with the Act because
they are: (i) reasonable, equitably
allocated, not unfairly discriminatory,
and not an undue burden on
competition; (ii) comply with the BOX
Order and the Staff Guidance; and (iii)
supported by evidence (including
comprehensive revenue and cost data
and analysis) that they are fair and
reasonable and will not result in
excessive pricing or supra-competitive
profit.
The Exchange believes that
exchanges, in setting fees of all types,
should meet high standards of
transparency to demonstrate why each
new fee or fee amendment meets the
requirements of the Act that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
market participants. The Exchange
believes this high standard is especially
important when an exchange imposes
various fees for market participants to
access an exchange’s marketplace.
In the Staff Guidance, the
Commission Staff states that, ‘‘[a]s an
initial step in assessing the
reasonableness of a fee, staff considers
whether the fee is constrained by
significant competitive forces.’’ 64 The
Staff 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.’’ 65
In the Staff Guidance, the Commission
61 15
U.S.C. 78f(b)(5).
supra note 16.
63 See supra note 17.
64 Id.
65 Id.
62 See
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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, . . . , specific information,
including quantitative information,
should be provided to support that
argument.’’ 66
The proposed fees are reasonable
because they promote parity among
exchange pricing for access, which
promotes competition, including in the
Exchanges’ ability to competitively
price transaction fees, invest in
infrastructure, new products and other
innovations, all while allowing the
Exchange to recover its costs to provide
dedicated access via 10Gb ULL
connectivity and Limited Service MEI
Ports. As discussed above, the Revised
Review Process and Staff Guidance have
created an uneven playing field between
legacy and non-legacy exchanges by
severely restricting non-legacy
exchanges from being able to increase
non-transaction relates fees to provide
them with additional necessary revenue
to better compete. The much higher
non-transaction fees charged by the
legacy exchanges provides them with
two significant competitive advantages:
(i) additional non-transaction revenue
that may be used to fund areas other
than the non-transaction service related
to the fee, such as investments in
infrastructure, advertising, new
products and other innovations; and (ii)
greater flexibility to lower their
transaction fees (or use the revenue from
the higher non-transaction fees to
subsidize transaction fee rates). The
latter is more immediately impactful in
competition for order flow and market
share, given the variable nature of this
cost on Member firms. The absence of
a reasonable path forward to increase
non-transaction fees to comparable (or
lower rates) limits the Exchange’s
flexibility to, among other things, make
additional investments in infrastructure
and advertising, diminishes the ability
to remain competitive on transaction
fees, and hinders the ability to compete
for order flow and market share. Again,
while one could debate whether the
pricing of non-transaction fees are
subject to the same market forces as
transaction fees, there is little doubt that
subjecting one exchange to a materially
different standard than that applied to
other exchanges for non-transaction fees
leaves that exchange at a disadvantage
in its ability to compete with its pricing
of transaction fees.
66 Id.
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The Proposed Fees Ensure Parity
Among Exchange Access Fees, Which
Promotes Competition
The Exchange initially adopted a fee
of $50 per port, after the first two
Limited Service MEI Ports that are
provided free of charge, and the
Exchange incurred all the costs
associated to provide those first two
Limited Service MEI Ports since it
commenced operations in March 2019.
At that same time, the Exchange only
charged $6,000 per month for each 10Gb
ULL connection. As a new exchange
entrant, the Exchange chose to offer
connectivity and ports at very low fees
to encourage market participants to
trade on the Exchange and experience,
among things, the quality of the
Exchange’s technology and trading
functionality. This practice is not
uncommon. New exchanges often do
not charge fees or charge lower fees for
certain services such as memberships/
trading permits to attract order flow to
an exchange, and later amend their fees
to reflect the true value of those
services, absorbing all costs to provide
those services in the meantime.
Allowing new exchange entrants time to
build and sustain market share through
various pricing incentives before
increasing non-transaction fees
encourages market entry and fee parity,
which promotes competition among
exchanges. It also enables new
exchanges to mature their markets and
allow market participants to trade on
the new exchanges without fees serving
as a potential barrier to attracting
memberships and order flow.67
67 See Securities Exchange Act Release No. 94894
(May 11, 2022), 87 FR 29987 (May 17, 2022) (SR–
BOX–2022–17) (stating, ‘‘[t]he Exchange established
this lower (when compared to other options
exchanges in the industry) Participant Fee in order
to encourage market participants to become
Participants of BOX. . .’’). See also Securities
Exchange Act Release No. 90076 (October 2, 2020),
85 FR 63620 (October 8, 2020) (SR–MEMX–2020–
10) (proposing to adopt the initial fee schedule and
stating that ‘‘[u]nder the initial proposed Fee
Schedule, the Exchange proposes to make clear that
it does not charge any fees for membership, market
data products, physical connectivity or application
sessions.’’). MEMX’s market share has increased
and recently proposed to adopt numerous nontransaction fees, including fees for membership,
market data, and connectivity. See Securities
Exchange Act Release Nos. 93927 (January 7, 2022),
87 FR 2191 (January 13, 2022) (SR–MEMX–2021–
19) (proposing to adopt membership fees); 96430
(December 1, 2022), 87 FR 75083 (December 7,
2022) (SR–MEMX–2022–32) and 95936 (September
27, 2022), 87 FR 59845 (October 3, 2022) (SR–
MEMX–2022–26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange
Act Release No. 88211 (February 14, 2020), 85 FR
9847 (February 20, 2020) (SR–NYSENAT–2020–05),
available at https://www.nyse.com/publicdocs/
nyse/markets/nyse-national/rule-filings/filings/
2020/SR-NYSENat-2020-05.pdf (initiating market
data fees for the NYSE National exchange after
initially setting such fees at zero).
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2657
Later in 2020, as the Exchange’s
market share increased,68 the Exchange
then increased the fee by $50 to a
modest $100 fee per Limited Service
MEI Port and increased the fee for 10Gb
ULL fiber connections from $6,000 to
$10,000 per month.69 The Exchange
balanced business and competitive
concerns with the need to financially
compete with the larger incumbent
exchanges that charge higher fees for
similar connectivity and use that
revenue to invest in their technology
and other service offerings.
The proposed changes to the Fee
Schedule are reasonable in several
respects. As a threshold matter, the
Exchange is subject to significant
competitive forces, which constrains its
pricing determinations for transaction
fees as well as non-transaction fees. The
fact that the market for order flow is
competitive has long been recognized by
the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C.
Circuit stated, ‘‘[n]o one disputes that
competition for order flow is ‘fierce.’
. . . As the SEC explained, ‘[i]n the U.S.
national market system, buyers and
sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’. . .’’ 70
The Commission and the courts have
repeatedly expressed their preference
for competition over regulatory
intervention to determine prices,
products, and services in the securities
markets. In Regulation NMS, while
adopting a series of steps to improve the
current market model, the Commission
highlighted the importance of market
forces in determining prices and SRO
revenues, and also recognized that
current regulation of the market system
‘‘has been remarkably successful in
promoting market competition in its
68 The Exchange experienced a monthly average
trading volume of 3.43% for the month of October
2020. See Market at a Glance, available at
www.miaxoptions.com.
69 See Securities Exchange Act Release Nos.
91460 (April 1, 2021), 86 FR 18349 (April 8, 2021)
(SR–EMERALD–2021–11); 90184 (October 14,
2020), 85 FR 66636 (October 20, 2020) (SR–
EMERALD–2020–12); 90600 (December 8, 2020), 85
FR 80831 (December 14, 2020) (SR–EMERALD–
2020–17); 91032 (February 1, 2021), 86 FR 8428
(February 5, 2021) (SR–EMERALD–2021–02); and
91200 (February 24, 2021), 86 FR 12221 (March 2,
2021) (SR–EMERALD–2021–07).
70 See NetCoalition, 615 F.3d at 539 (D.C. Cir.
2010) (quoting Securities Exchange Act Release No.
59039 (December 2, 2008), 73 FR 74770, 74782–83
(December 9, 2008) (SR–NYSEArca–2006–21)).
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broader forms that are most important to
investors and listed companies.’’ 71
Congress directed the Commission to
‘‘rely on ‘competition, whenever
possible, in meeting its regulatory
responsibilities for overseeing the SROs
and the national market system.’ ’’ 72 As
a result, and as evidenced above, the
Commission has historically relied on
competitive forces to determine whether
a fee proposal is equitable, fair,
reasonable, and not unreasonably or
unfairly discriminatory. ‘‘If competitive
forces are operative, the self-interest of
the exchanges themselves will work
powerfully to constrain unreasonable or
unfair behavior.’’ 73 Accordingly, ‘‘the
existence of significant competition
provides a substantial basis for finding
that the terms of an exchange’s fee
proposal are equitable, fair, reasonable,
and not unreasonably or unfairly
discriminatory.’’ 74 In the Revised
Review Process and Staff Guidance,
Commission Staff indicated that they
would look at factors beyond the
competitive environment, such as cost,
only if a ‘‘proposal lacks persuasive
evidence that the proposed fee is
constrained by significant competitive
forces.’’ 75
The Exchange believes the competing
exchanges’ 10Gb connectivity and port
fees are useful examples of alternative
approaches to providing and charging
for access and demonstrating how such
fees are competitively set and
constrained. To that end, the Exchange
believes the proposed fees are
reasonable because the proposed fees
are similar to or less than fees charged
for similar connectivity and port access
Exchange
Type of connection or port
MIAX Emerald (as proposed) (equity options market
share of 2.88% for the month of November 2022) 76.
10Gb ULL connection ...............
Limited Service MEI Ports ........
NASDAQ 77 (equity options market share of 6.61% for
the month of November 2022) 78.
10Gb Ultra fiber connection ......
SQF Port ...................................
NASDAQ ISE LLC (‘‘ISE’’) 79 (equity options market
share of 5.76% for the month of November 2022) 80.
NYSE American LLC (‘‘NYSE American’’) 81 (equity options market share of 6.41% for the month of November 2022) 82.
NASDAQ GEMX, LLC (‘‘GEMX’’) 83 (equity options market share of 1.79% for the month of November
2022) 84.
10Gb Ultra fiber connection ......
SQF Port ...................................
10Gb LX LCN connection .........
Order/Quote Entry Port .............
10Gb Ultra connection ..............
SQF Port ...................................
provided by other options exchanges
with comparable market shares. As
such, the Exchange believes that
denying its ability to institute fees that
are closer to parity with legacy
exchanges, in effect, impedes its ability
to compete, including in its pricing of
transaction fees and ability to invest in
competitive infrastructure.
The following table shows how the
Exchange’s proposed fees remain
similar to or less than fees charged for
similar connectivity and port access
provided by other options exchanges
with similar market share. Each of the
market data rates in place at competing
options exchanges were filed with the
Commission for immediate effectiveness
and remain in place today.
Monthly fee
(per connection or per port)
$13,500.
1–2 ports: FREE (not changed in this proposal).
3–4 ports: $200 each.
5–6 ports: $300 each.
7 or more ports: $400 each.
$15,000 per connection.
1–5 ports: $1,500 per port.
6–20 ports: $1,000 per port.
21 or more ports: $500 per port.
$15,000 per connection.
$1,100 per port.
$22,000 per connection.
Ports 1–40. $450 per port.
Ports 41 and greater. $150 per port.
$15,000 per connection.
$1,250 per port.
The Exchange notes that, in regard to
Limited Service MEI Ports, other
exchanges charge on a per port basis
and require firms to connect to multiple
matching engines, thereby multiplying
the cost to access their full market.85
There is no requirement, regulatory or
otherwise, that any broker-dealer
connect to and access any (or all of) the
available options exchanges. Market
participants may choose to become a
member of one or more options
exchanges based on the market
participant’s assessment of the business
opportunity relative to the costs of the
Exchange. With this, there is elasticity
of demand for exchange membership.
As an example, the Exchange’s affiliate,
MIAX PEARL, LLC (‘‘MIAX Pearl’’),
experienced a decrease in membership
as the result of similar fees proposed
herein. One MIAX Pearl Member
notified MIAX Pearl that it will
terminate their MIAX Pearl membership
effective January 1, 2023, as a direct
result of the proposed connectivity and
port fee changes on MIAX Pearl.
It is not a requirement for market
participants to become members of all
options exchanges, in fact, certain
market participants conduct an options
business as a member of only one
71 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
72 See NetCoalition, 615 F.3d at 534–35; see also
H.R. Rep. No. 94–229 at 92 (1975) (‘‘[I]t is the intent
of the conferees that the national market system
evolve through the interplay of competitive forces
as unnecessary regulatory restrictions are
removed.’’).
73 See Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74,770 (December 9,
2008) (SR–NYSEArca–2006–21).
74 Id.
75 See Staff Guidance, supra note 17.
76 See supra note 68.
77 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services.
78 See supra note 68.
79 See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8:
Connectivity.
80 See supra note 68.
81 See NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. CoLocation Fees.
82 See supra note 68.
83 See GEMX Pricing Schedule, Options 7,
Section 6, Connectivity Fees and GEMX Rules,
General 8: Connectivity.
84 See supra note 68.
85 See Specialized Quote Interface Specification,
Nasdaq PHLX, Nasdaq Options Market, Nasdaq BX
Options, Version 6.5a, Section 2, Architecture
(revised August 16, 2019), available at https://
www.nasdaqtrader.com/content/technicalsupport/
specifications/TradingProducts/SQF6.5a-2019Aug.pdf. The Exchange notes that it is unclear
whether the NASDAQ exchanges include
connectivity to each matching engine for the single
fee or charge per connection, per matching engine.
See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines
are used by each exchange?) (September 2020). The
Exchange notes that NYSE provides a link to an
Excel file detailing the number of matching engines
per options exchange, with Arca and Amex having
19 and 17 matching engines, respectively.
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options market.86 A very small number
of market participants choose to become
a member of all sixteen options
exchanges. Most firms that actively
trade on options markets are not
currently Members of the Exchange and
do not purchase connectivity or port
services at the Exchange. Connectivity
and ports are only available to Members
or service bureaus, and only a Member
may utilize a port.87
One other exchange recently noted in
a proposal to amend their own trading
permit fees that of the 62 market making
firms that are registered as Market
Makers across Cboe, MIAX, and BOX,
42 firms access only one of the three
exchanges.88 The Exchange and its
affiliates, MIAX Pearl and MIAX, have
a total of 47 members. Of those 47 total
members, 35 are members of all three
affiliated exchanges, four are members
of only two (2) affiliated exchanges, and
eight (8) are members of only one
affiliated exchange. The Exchange also
notes that no firm is a Member of the
Exchange only. The above data
evidences that a broker-dealer need not
have direct connectivity to all options
exchanges, let alone the Exchange and
its two affiliates, and broker-dealers may
elect to do so based on their own
86 BOX recently adopted an electronic market
maker trading permit fee. See Securities Exchange
Release No. 94894 (May 11, 2022), 87 FR 29987
(May 17, 2022) (SR–BOX–2022–17). In that
proposal, BOX stated that, ‘‘. . . it is not aware of
any reason why Market Makers could not simply
drop their access to an exchange (or not initially
access an exchange) if an exchange were to
establish prices for its non-transaction fees that, in
the determination of such Market Maker, did not
make business or economic sense for such Market
Maker to access such exchange. [BOX] again notes
that no market makers are required by rule,
regulation, or competitive forces to be a Market
Maker on [BOX].’’ Also in 2022, MEMX established
a monthly membership fee. See Securities Exchange
Act Release No. 93927 (January 7, 2022), 87 FR
2191 (January 13, 2022) (SR–MEMX–2021–19). In
that proposal, MEMX reasoned that that there is
value in becoming a member of the exchange and
stated that it believed that the proposed
membership fee ‘‘is not unfairly discriminatory
because no broker-dealer is required to become a
member of the Exchange’’ and that ‘‘neither the
trade-through requirements under Regulation NMS
nor broker-dealers’ best execution obligations
require a broker-dealer to become a member of
every exchange.’’
87 Service Bureaus may obtain ports on behalf of
Members.
88 See Securities Exchange Act Release No. 94894
(May 11, 2022), 87 FR 29987 (May 17, 2022) (SR–
BOX–2022–17) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to Amend
the Fee Schedule on the BOX Options Market LLC
Facility To Adopt Electronic Market Maker Trading
Permit Fees). The Exchange believes that BOX’s
observation demonstrates that market making firms
can, and do, select which exchanges they wish to
access, and, accordingly, options exchanges must
take competitive considerations into account when
setting fees for such access.
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business decisions and need to directly
access each exchange’s liquidity pool.
Not only is there not an actual
regulatory requirement to connect to
every options exchange, the Exchange
believes there is also no ‘‘de facto’’ or
practical requirement as well, as further
evidenced by the broker-dealer
membership analysis of the options
exchanges discussed above. As noted
above, this is evidenced by the fact that
one MIAX Pearl Member will terminate
their MIAX Pearl membership effective
January 1, 2023 as a direct result of the
proposed connectivity and port fee
changes on MIAX Pearl (which are
similar to the changes proposed herein).
Indeed, broker-dealers choose if and
how to access a particular exchange and
because it is a choice, the Exchange
must set reasonable pricing, otherwise
prospective members would not connect
and existing members would disconnect
from the Exchange. The decision to
become a member of an exchange,
particularly for registered market
makers, is complex, and not solely
based on the non-transactional costs
assessed by an exchange. As noted
herein, specific factors include, but are
not limited to: (i) an exchange’s
available liquidity in options series; (ii)
trading functionality offered on a
particular market; (iii) product offerings;
(iv) customer service on an exchange;
and (v) transactional pricing. Becoming
a member of the exchange does not
‘‘lock’’ a potential member into a market
or diminish the overall competition for
exchange services.
In lieu of becoming a member at each
options exchange, a market participant
may join one exchange and elect to have
their orders routed in the event that a
better price is available on an away
market. Nothing in the Order Protection
Rule requires a firm to become a
Member at—or establish connectivity
to—the Exchange.89 If the Exchange is
not at the NBBO, the Exchange will
route an order to any away market that
is at the NBBO to ensure that the order
was executed at a superior price and
prevent a trade-through.90
With respect to the submission of
orders, Members may also choose not to
purchase any connection at all from the
Exchange, and instead rely on the port
of a third party to submit an order. For
example, a third-party broker-dealer
Member of the Exchange may be
89 See Options Order Protection and Locked/
Crossed Market Plan (August 14, 2009), available at
https://www.theocc.com/getmedia/7fc629d9-4e544b99-9f11-c0e4db1a2266/options_order_protection_
plan.pdf.
90 Members may elect to not route their orders by
utilizing the Do Not Route order type. See Exchange
Rule 516(g).
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2659
utilized by a retail investor to submit
orders into an Exchange. An
institutional investor may utilize a
broker-dealer, a service bureau,91 or
request sponsored access 92 through a
member of an exchange in order to
submit a trade directly to an options
exchange.93 A market participant may
either pay the costs associated with
becoming a member of an exchange or,
in the alternative, a market participant
may elect to pay commissions to a
broker-dealer, pay fees to a service
bureau to submit trades, or pay a
member to sponsor the market
participant in order to submit trades
directly to an exchange.
Non-Member third-parties, such as
service bureaus and extranets, resell the
Exchange’s connectivity. This indirect
connectivity is another viable
alternative for market participants to
trade on the Exchange without
connecting directly to the Exchange
(and thus not pay the Exchange’s
connectivity fees), which alternative is
already being used by non-Members and
further constrains the price that the
Exchange is able to charge for
connectivity and other access fees to its
market. The Exchange notes that it
could, but chooses not to, preclude
market participants from reselling its
connectivity. Unlike other exchanges,
the Exchange also does not currently
assess fees on third-party resellers on a
per customer basis (i.e., fees based on
the number of firms that connect to the
Exchange indirectly via the thirdparty).94 Indeed, the Exchange does not
receive any connectivity revenue when
connectivity is resold by a third-party,
which often is resold to multiple
customers, some of whom are agency
broker-dealers that have numerous
91 Service Bureaus provide access to market
participants to submit and execute orders on an
exchange. On the Exchange, a Service Bureau may
be a Member. Some Members utilize a Service
Bureau for connectivity and that Service Bureau
may not be a Member. Some market participants
utilize a Service Bureau who is a Member to submit
orders.
92 Sponsored Access is an arrangement whereby
a Member permits its customers to enter orders into
an exchange’s system that bypass the Member’s
trading system and are routed directly to the
Exchange, including routing through a service
bureau or other third-party technology provider.
93 This may include utilizing a floor broker and
submitting the trade to one of the five options
trading floors.
94 See, e.g., Nasdaq Price List—U.S. Direct
Connection and Extranet Fees, available at, US
Direct-Extranet Connection (nasdaqtrader.com); and
Securities Exchange Act Release Nos. 74077
(January 16, 2022), 80 FR 3683 (January 23, 2022)
(SR–NASDAQ–2015–002); and 82037 (November 8,
2022), 82 FR 52953 (November 15, 2022) (SR–
NASDAQ–2017–114).
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customers of their own.95 Particularly,
in the event that a market participant
views the Exchange’s direct
connectivity and access fees as more or
less attractive than competing markets,
that market participant can choose to
connect to the Exchange indirectly or
may choose not to connect to the
Exchange and connect instead to one or
more of the other 16 options markets.
Accordingly, the Exchange believes that
the proposed fees are fair and
reasonable and constrained by
competitive forces.
The Exchange is obligated to regulate
its Members and secure access to its
environment. In order to properly
regulate its Members and secure the
trading environment, the Exchange
takes measures to ensure access is
monitored and maintained with various
controls. Connectivity and ports are
methods utilized by the Exchange to
grant Members secure access to
communicate with the Exchange and
exercise trading rights. When a market
participant elects to be a Member, and
is approved for membership by the
Exchange, the Member is granted
trading rights to enter orders and/or
quotes into Exchange through secure
connections.
Again, there is no legal or regulatory
requirement that a market participant
become a Member of the Exchange, or,
if it is a Member, to purchase
connectivity beyond the one connection
that is necessary to quote or submit
orders on the Exchange. Members may
freely choose to rely on one or many
connections, depending on their
business model.
Cost Analysis
In general, 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
Exchange Act requirements that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
members and markets. In particular, the
Exchange believes that each exchange
should take extra care to be able to
demonstrate that these fees are based on
its costs and reasonable business needs.
In proposing to charge fees for
connectivity services, the Exchange
seeks to be especially diligent in
95 The
Exchange notes that resellers, such as
SFTI, are not required to publicize, let alone justify
or file with the Commission their fees, and as such
could charge the market participant any fees it
deems appropriate (including connectivity fees
higher than the Exchange’s connectivity fees), even
if such fees would otherwise be considered
potentially unreasonable or uncompetitive fees.
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assessing those fees in a transparent way
against its own aggregate costs of
providing the related service, and also
carefully and transparently assessing the
impact on Members—both generally and
in relation to other Members, i.e., to
assure the fee will not create a financial
burden on any participant and will not
have an undue impact in particular on
smaller Members and competition
among Members in general. The
Exchange believes that this level of
diligence and transparency is called for
by the requirements of Section 19(b)(1)
under the Act,96 and Rule 19b–4
thereunder,97 with respect to the types
of information SROs should provide
when filing fee changes, and Section
6(b) of the Act,98 which requires, among
other things, that exchange fees be
reasonable and equitably allocated,99
not designed to permit unfair
discrimination,100 and that they not
impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.101 This rule
change proposal addresses those
requirements, and the analysis and data
in each of the sections that follow are
designed to clearly and
comprehensively show how they are
met.102 The Exchange notes that the
legacy exchanges with whom the
Exchange vigorously competes for order
flow and market share, were not subject
to any such diligence or transparency in
setting their baseline non-transaction
fees, most of which were put in place
before the Revised Review Process and
Staff Guidance.
As detailed below, the Exchange
recently calculated its aggregate annual
costs for providing physical 10Gb ULL
connectivity to the Exchange at
$11,361,586 (or approximately $946,799
per month, rounded to the nearest dollar
when dividing the annual cost by 12
months) and its aggregate annual costs
for providing Limited Service MEI Ports
at $1,799,066 (or approximately
$148,255 per month, rounded to the
nearest dollar when dividing the annual
cost by 12 months). In order to cover the
aggregate costs of providing
connectivity to its Users (both Members
and non-Members 103) going forward
96 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
98 15 U.S.C. 78f(b).
99 15 U.S.C. 78f(b)(4).
100 15 U.S.C. 78f(b)(5).
101 15 U.S.C. 78f(b)(8).
102 See Staff Guidance, supra note 17.
103 Types of market participants that obtain
connectivity services from the Exchange but are not
Members include service bureaus and extranets.
Service bureaus offer technology-based services to
other companies for a fee, including order entry
services, and thus, may access Limited Service MEI
97 17
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and to make a modest profit, as
described below, the Exchange proposes
to modify its Fee Schedule to charge a
fee of $13,500 per month for each
physical 10Gb ULL connection. The
Exchange also proposes to modify its
Fee Schedule to charge tiered rates for
additional Limited Service MEI Ports.
In 2020, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).104 The Cost Analysis
required a detailed analysis of the
Exchange’s aggregate baseline costs,
including a determination and
allocation of costs for core services
provided by the Exchange—transaction
execution, market data, membership
services, physical connectivity, and port
access (which provide order entry,
cancellation and modification
functionality, risk functionality, the
ability to receive drop copies, and other
functionality). The Exchange separately
divided its costs between those costs
necessary to deliver each of these core
services, including infrastructure,
software, human resources (i.e.,
personnel), and certain general and
administrative expenses (‘‘cost
drivers’’). Next, the Exchange adopted
an allocation methodology with various
principles to guide how much of a
particular cost should be allocated to
each core service. For instance, fixed
costs that are not driven by client
activity (e.g., message rates), such as
data center costs, were allocated more
heavily to the provision of physical 1Gb
and 10Gb ULL connectivity (62%), with
smaller allocations to all ports (10%),
and the remainder to the provision of
transaction execution, membership
services and market data services (28%).
The allocation methodology was
developed through conversations with
senior management familiar with each
area of the Exchange’s operations. After
adopting this allocation methodology,
the Exchange then applied an estimated
allocation of each cost driver to each
core service, resulting in the cost
allocations described below.
By allocating segmented costs to each
core service, the Exchange was able to
estimate by core service the potential
margin it might earn based on different
fee models. The Exchange notes that as
a non-listing venue it has five primary
sources of revenue that it can
Ports on behalf of one or more Members. Extranets
offer physical connectivity services to Members and
non-Members.
104 The Exchange frequently updates it Cost
Analysis as strategic initiatives change, costs
increase or decrease, and market participant needs
and trading activity changes. The Exchange’s most
recent Cost Analysis was conducted ahead of this
filing.
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potentially use to fund its operations:
transaction fees, fees for connectivity
and port services, membership fees,
regulatory fees, and market data fees.
Accordingly, the Exchange must cover
its expenses from these five primary
sources of revenue. The Exchange also
notes that as a general matter each of
these sources of revenue is based on
services that are interdependent. For
instance, the Exchange’s system for
executing transactions is dependent on
physical hardware and connectivity,
only Members and parties that they
sponsor to participate directly on the
Exchange may submit orders to the
Exchange, many Members (but not all)
consume market data from the Exchange
in order to trade on the Exchange, and
the Exchange consumes market data
from external sources in order to
comply with regulatory obligations.
Accordingly, given this
interdependence, the allocation of costs
to each service or revenue source
required judgment of the Exchange and
was weighted based on estimates of the
Exchange that the Exchange believes are
reasonable, as set forth below. While
there is no standardized and generally
accepted methodology the allocation of
an exchange’s costs, the Exchange’s
methodology is the result of an
extensive review and analysis and will
be consistently applied going forward
for any other potential fee proposals.
Through the Exchange’s extensive
updated Cost Analysis, the Exchange
analyzed every expense item in the
Exchange’s general expense ledger to
determine whether each such expense
relates to the provision of connectivity
services, and, if such expense did so
relate, what portion (or percentage) of
such expense actually supports the
provision of connectivity services, and
thus bears a relationship that is, ‘‘in
nature and closeness,’’ directly related
to network connectivity services. In
turn, the Exchange allocated certain
costs more to physical connectivity and
others to ports, while certain costs were
only allocated to such services at a very
low percentage or not at all, using
consistent allocation methodologies as
described above. Based on this analysis,
Costs Related To Offering Physical 10Gb
ULL Connectivity
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
physical dedicated 10Gb ULL
connectivity via an unshared network as
well as the percentage of the Exchange’s
overall costs that such costs represent
for such area (e.g., as set forth below, the
Exchange allocated approximately
28.1% of its overall Human Resources
cost to offering physical connectivity).
Annual cost 105
Cost drivers
Monthly cost 106
% of all
Human Resources ...................................................................................................................
Connectivity (external fees, cabling, switches, etc.) ...............................................................
Internet Services, including External Market Data ..................................................................
Data Center .............................................................................................................................
Hardware and Software Maintenance and Licenses ..............................................................
Depreciation .............................................................................................................................
Allocated Shared Expenses ....................................................................................................
$3,520,856
71,675
373,249
752,545
666,208
1,929,118
4,047,935
$293,405
5,973
31,104
62,712
55,517
160,760
337,328
28
61.9
84.8
61.9
50.9
63.8
51.3
Total ..................................................................................................................................
11,361,586
946,799
42.8
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
physical 10Gb ULL connectivity.
Human Resources
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the Exchange estimates that the cost
drivers to provide 10Gb ULL
connectivity and Limited Service MEI
Port services, including both physical
10Gb connections and Limited Service
MEI Ports, result in an aggregate
monthly cost of approximately
$1,095,054 (utilizing the rounded
numbers when dividing the annual cost
for 10Gb ULL connectivity and annual
cost for Limited Service MEI Ports by 12
months, then adding both numbers
together), as further detailed below.
For personnel costs (Human
Resources), the Exchange calculated an
allocation of employee time for
employees whose functions include
providing and maintaining physical
connectivity and performance thereof
(primarily the Exchange’s network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity) and for which the
Exchange allocated a percentage of
42.4% of each employee’s time. The
Exchange also allocated Human
Resources costs to provide physical
105 The Annual Cost includes figures rounded to
the nearest dollar.
106 The Monthly Cost was determined by dividing
the Annual Cost for each line item by twelve (12)
months and rounding up or down to the nearest
dollar.
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connectivity to a limited subset of
personnel with ancillary functions
related to establishing and maintaining
such connectivity (such as information
security and finance personnel), for
which the Exchange allocated cost on an
employee-by-employee basis (i.e., only
including those personnel who do
support functions related to providing
physical connectivity) and then applied
a smaller allocation to such employees
(less than 20%). The Exchange notes
that it has 184 employees and each
department leader has direct knowledge
of the time spent by those spent by each
employee with respect to the various
tasks necessary to operate the Exchange.
The estimates of Human Resources cost
were therefore determined by consulting
with such department leaders,
determining which employees are
involved in tasks related to providing
physical connectivity, and confirming
that the proposed allocations were
reasonable based on an understanding
of the percentage of their time such
employees devote to tasks related to
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providing physical connectivity. The
Exchange notes that senior level
executives were only allocated Human
Resources costs to the extent the
Exchange believed they are involved in
overseeing tasks related to providing
physical connectivity. The Human
Resources cost was calculated using a
blended rate of compensation reflecting
salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity and Internet Services
The Connectivity cost includes
external fees paid to connect to other
exchanges and third parties, cabling and
switches required to operate the
Exchange. The Connectivity line-item is
more narrowly focused on technology
used to complete connections to the
Exchange and to connect to external
markets. The Exchange notes that its
connectivity to external markets is
required in order to receive market data
to run the Exchange’s matching engine
and basic operations compliant with
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existing regulations, primarily
Regulation NMS.
The Exchange relies on various
connectivity and content service
providers for connectivity and data
feeds for the entire U.S. options
industry, as well as content,
connectivity, and infrastructure services
for critical components of the network
that are necessary to provide and
maintain its System Networks and
access to its System Networks via 10Gb
ULL connectivity. Specifically, the
Exchange utilizes connectivity and
content service providers to connect to
other national securities exchanges, the
Options Price Reporting Authority
(‘‘OPRA’’), and to receive market data
from other exchanges and market data
providers. The Exchange understands
that these service providers provide
services to most, if not all, of the other
U.S. exchanges and other market
participants. Connectivity and market
data provided these service providers is
critical to the Exchanges daily
operations and performance of its
System Networks to which market
participants connect to via 10Gb ULL
connectivity. Without these services
providers, the Exchange would not be
able to connect to other national
securities exchanges, market data
providers, or OPRA and, therefore,
would not be able to operate and
support its System Networks. The
Exchange does not employ a separate
fee to cover its connectivity and content
service provider expense and recoups
that expense, in part, by charging for
10Gb ULL connectivity.
turn, if the Exchange did not maintain
such a presence then physical
connectivity would be of no value to
market participants.
Data Center
Monthly Depreciation
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment (such as
dedicated space, security services,
cooling and power). The Exchange notes
that it does not own the Primary Data
Center or the Secondary Data Center,
but instead, leases space in data centers
operated by third parties. The Exchange
has allocated a high percentage of the
Data Center cost (61.9%) to physical
10Gb ULL connectivity because the
third-party data centers and the
Exchange’s physical equipment
contained therein is the most direct cost
in providing physical access to the
Exchange. In other words, for the
Exchange to operate in a dedicated
space with connectivity of participants
to a physical trading platform, the data
centers are a very tangible cost, and in
All physical assets and software,
which also includes assets used for
testing and monitoring of Exchange
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which are owned by
the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
As noted above, the Exchange allocated
63.8% of all depreciation costs to
providing physical 10Gb ULL
connectivity. The Exchange notes,
however, that it did not allocate
depreciation costs for any depreciated
software necessary to operate the
Exchange to physical connectivity, as
such software does not impact the
provision of physical connectivity.
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External Market Data
External Market Data includes fees
paid to third parties, including other
exchanges, to receive and consume
market data from other markets. The
Exchange included External Market
Data fees to the provision of 10Gb ULL
connectivity as such market data is
necessary here to offer certain services
related to such connectivity, such as
certain risk checks that are performed
prior to execution, and checking for
other conditions (e.g., re-pricing of
orders to avoid lock or crossed markets,
trading collars). This allocation was
included as part of the Internet Services
cost described above. Thus, as market
data from other exchanges is consumed
at the matching engine level, (to which
10Gb ULL connectivity provides access
to) in order to validate orders before
additional entering the matching engine
or being executed, the Exchange
believes it is reasonable to allocate a
small amount of such costs to 10Gb ULL
connectivity.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to operate and monitor physical
assets necessary to offer physical
connectivity to the Exchange.
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Allocated Shared Expenses
Finally, a limited portion of general
shared expenses was allocated to overall
physical connectivity costs as without
these general shared costs the Exchange
would not be able to operate in the
manner that it does and provide
physical connectivity. The costs
included in general shared expenses
include general expenses of the
Exchange, including office space and
office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting
and training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange notes that the cost of paying
directors to serve on its Board of
Directors is also included in the
Exchange’s general shared expenses.107
The Exchange notes that the 51.3%
allocation of general shared expenses for
physical 10Gb ULL connectivity is
higher than that allocated to general
shared expenses for Limited Service
MEI Ports based on its allocation
methodology that weighted costs
attributable to each Core Service based
on an understanding of each area. While
physical connectivity has several areas
where certain tangible costs are heavily
weighted towards providing such
service (e.g., Data Centers, as described
above), Limited Service MEI Ports do
not require as many broad or indirect
resources as other Core Services. The
total monthly cost for 10Gb ULL
connectivity of $946,799 was divided by
the number of physical 10Gb ULL
connections the Exchange maintained at
the time that proposed pricing was
determined (102), to arrive at a cost of
approximately $9,282 per month, per
physical 10Gb ULL connection.
Costs Related To Offering Limited
Service MEI Ports
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
Limited Service MEO Ports as well as
the percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 5.9% of its
overall Human Resources cost to
offering Limited Service MEI Ports).
107 The Exchange notes that MEMX allocated a
precise amount of 10% of the overall cost for
directors to providing physical connectivity. The
Exchange does not calculate is expenses at that
granular a level. Instead, director costs are included
as part of the overall general allocation.
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Annual cost 108
Cost drivers
% of all
Human Resources ...................................................................................................................
Connectivity (external fees, cabling, switches, etc.) ...............................................................
Internet Services ......................................................................................................................
Data Center .............................................................................................................................
Hardware and Software Maintenance and Licenses ..............................................................
Depreciation .............................................................................................................................
Allocated Shared Expenses ....................................................................................................
$737,784
3,713
14,102
55,686
41,951
112,694
813,136
$61,482
309
1,175
4,641
3,496
9,391
67,761
5.9
3.2
3.2
4.6
3.2
3.7
10.3
Total ..................................................................................................................................
1,779,066
148,255
6.7
Human Resources
With respect to Limited Service MEI
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing Limited
Service MEI Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). The estimates of Human
Resources cost were again determined
by consulting with department leaders,
determining which employees are
involved in tasks related to providing
Limited Service MEI Ports and
maintaining performance thereof, and
confirming that the proposed allocations
were reasonable based on an
understanding of the percentage of their
time such employees devote to tasks
related to providing Limited Service
MEI Ports and maintaining performance
thereof. The Exchange notes that senior
level executives were only allocated
Human Resources costs to the extent the
Exchange believed they are involved in
overseeing tasks related to providing
Limited Service MEI Ports and
maintaining performance thereof. The
Human Resources cost was again
calculated using a blended rate of
compensation reflecting salary, equity
and bonus compensation, benefits,
payroll taxes, and 401(k) matching
contributions.
Connectivity and Internet Services
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Monthly cost 109
The Connectivity cost includes
external fees paid to connect to other
exchanges, cabling and switches, as
described above. For purposes of
Limited Service MEI Ports, the
Exchange also includes a portion of its
108 See supra note 105 (describing rounding of
Annual Costs).
109 See supra note 106 (describing rounding of
Monthly Costs based on Annual Costs).
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costs related to External Market Data, as
described below.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment as well as
related costs (the Exchange does not
own the Primary Data Center or the
Secondary Data Center, but instead,
leases space in data centers operated by
third parties).
External Market Data
External Market Data includes fees
paid to third parties, including other
exchanges, to receive and consume
market data from other markets. The
Exchange included External Market
Data fees to the provision of Limited
Service MEI Ports as such market data
is necessary to offer certain services
related to such sessions, such as
validating orders on entry against the
national best bid and national best offer
and checking for other conditions (e.g.,
whether a symbol is halted). This
allocation was included as part of the
Internet Services cost described
above.110 Thus, as market data from
other Exchanges is consumed at the
Limited Service MEI Port level in order
to validate orders before additional
processing occurs with respect to such
orders, the Exchange believes it is
reasonable to allocate a small amount of
such costs to Limited Service MEI Ports.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
Monthly Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of order entry
infrastructure, were valued at cost,
110 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
providing physical connectivity.
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depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which is owned by
the Exchange and some of which is
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange allocated 3.7% of all
depreciation costs to providing Limited
Service MEI Ports. In contrast to
physical connectivity, described above,
the Exchange did allocate depreciation
costs for depreciated software necessary
to operate the Exchange to Limited
Service MEI Ports because such software
is related to the provision of such
connectivity.
Allocated Shared Expenses
Finally, a limited portion of general
shared expenses was allocated to overall
Limited Service MEI Ports costs as
without these general shared costs the
Exchange would not be able to operate
in the manner that it does and provide
Limited Service MEI Ports. The costs
included in general shared expenses
include general expenses of the
Exchange, including office space and
office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting
and training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange again notes that the cost of
paying directors to serve on its Board of
Directors is included in the calculation
of Allocated Shared Expenses, and thus
a portion of such overall cost amounting
to less than 11% of the overall cost for
directors was allocated to providing
Limited Service MEI Ports. The
Exchange notes that the 10.3%
allocation of general shared expenses for
Limited Service MEI Ports is lower than
that allocated to general shared
expenses for physical connectivity
based on its allocation methodology that
weighted costs attributable to each Core
Service based on an understanding of
each area. While Limited Service MEI
Ports have several areas where certain
tangible costs are heavily weighted
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towards providing such service (e.g.,
Data Centers, as described above), 10Gb
ULL connectivity requires a broader
level of support from Exchange
personnel in different areas, which in
turn leads to a broader general level of
cost to the Exchange. The total monthly
cost of $148,255 was divided by the
number of chargeable Limited Service
MEI Ports (excluding the two free
Limited Service MEI Ports per matching
engine that each Member receives) the
Exchange maintained at the time that
proposed pricing was determined (706),
to arrive at a cost of approximately $210
per month, per charged Limited Service
MEI Port.
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Cost Analysis—Additional Discussion
In conducting its Cost Analysis, the
Exchange did not allocate any of its
expenses in full to any core services
(including physical connectivity or
Limited Service MEI Ports) and did not
double-count any expenses. Instead, as
described above, the Exchange allocated
applicable cost drivers across its core
services and used the same Cost
Analysis to form the basis of this
proposal and the filings the Exchange
submitted proposing fees for proprietary
data feeds offered by the Exchange. For
instance, in calculating the Human
Resources expenses to be allocated to
physical connections, the Exchange has
a team of employees dedicated to
network infrastructure and with respect
to such employees the Exchange
allocated network infrastructure
personnel with a high percentage of the
cost of such personnel (42.4%) given
their focus on functions necessary to
provide physical connections. The
salaries of those same personnel were
allocated only 8.0% to Limited Service
MEI Ports and the remaining 49.6% was
allocated to 1Gb connectivity, other port
services, transaction services,
membership services and market data.
The Exchange did not allocate any other
Human Resources expense for providing
physical connections to any other
employee group, outside of a smaller
allocation of 19.8% for 10Gb ULL
connectivity or 19.9% for the entire
network, of the cost associated with
certain specified personnel who work
closely with and support network
infrastructure personnel. In contrast, the
Exchange allocated much smaller
percentages of costs (5% or less) across
a wider range of personnel groups in
order to allocate Human Resources costs
to providing Limited Service MEI Ports.
This is because a much wider range of
personnel are involved in functions
necessary to offer, monitor and maintain
Limited Service MEI Ports but the tasks
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necessary to do so are not a primary or
full-time function.
In total, the Exchange allocated 28.1%
of its personnel costs to providing
physical connections and 5.9% of its
personnel costs to providing Limited
Service MEI Ports, for a total allocation
of 34% Human Resources expense to
provide these specific connectivity
services. In turn, the Exchange allocated
the remaining 66% of its Human
Resources expense to membership
services, transaction services, other port
services and market data. Thus, again,
the Exchange’s allocations of cost across
core services were based on real costs of
operating the Exchange and were not
double-counted across the core services
or their associated revenue streams.
As another example, the Exchange
allocated depreciation expense to all
core services, including physical
connections and Limited Service MEI
Ports, but in different amounts. 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.
Without this equipment, the Exchange
would not be able to operate the
network and provide connectivity
services to its Members and nonMembers and their customers. However,
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing
connectivity services, but instead
allocated approximately 67.5% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (63.8% attributed to 10Gb ULL
physical connections and 3.7% to
Limited Service MEI Ports). The
Exchange allocated the remaining
depreciation and amortization expense
(approximately 32.5%) toward the cost
of providing transaction services,
membership services, other port
services and market data
The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated. The Exchange does
not yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
connectivity, the Exchange will have to
be successful in retaining existing
clients that wish to maintain physical
connectivity and/or Limited Service
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MEI Ports or in obtaining new clients
that will purchase such services.
Similarly, the Exchange will have to be
successful in retaining a positive net
capture on transaction fees in order to
realize the anticipated revenue from
transaction pricing.
The Exchange notes that the Cost
Analysis is based on the Exchange’s
2023 fiscal year of operations and
projections. As such, the Exchange
believes that its costs will remain
relatively similar in future years. It is
possible however that such costs will
either decrease or increase. To the
extent the Exchange sees growth in use
of connectivity services it will receive
additional revenue to offset future cost
increases.
However, if use of connectivity
services is static or decreases, the
Exchange might not realize the revenue
that it anticipates or needs in order to
cover applicable costs. Accordingly, the
Exchange is committing to conduct a
one-year review after implementation of
these fees. The Exchange expects that it
may propose to adjust fees at that time,
to increase fees in the event that
revenues fail to cover costs and a
reasonable mark-up of such costs.
Similarly, the Exchange would propose
to decrease fees in the event that
revenue materially exceeds our current
projections. In addition, the Exchange
will periodically conduct a review to
inform its decision making on whether
a fee change is appropriate (e.g., to
monitor for costs increasing/decreasing
or subscribers increasing/decreasing,
etc. in ways that suggest the thencurrent fees are becoming dislocated
from the prior cost-based analysis) and
would propose to increase fees in the
event that revenues fail to cover its costs
and a reasonable mark-up, or decrease
fees in the event that revenue or the
mark-up materially exceeds our current
projections. In the event that the
Exchange determines to propose a fee
change, the results of a timely review,
including an updated cost estimate, will
be included in the rule filing proposing
the fee change. More generally, the
Exchange believes that it is appropriate
for an exchange to refresh and update
information about its relevant costs and
revenues in seeking any future changes
to fees, and the Exchange commits to do
so.
Projected Revenue
The proposed fees will allow the
Exchange to cover certain costs incurred
by the Exchange associated with
providing and maintaining necessary
hardware and other network
infrastructure as well as network
monitoring and support services;
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without such hardware, infrastructure,
monitoring and support the Exchange
would be unable to provide the
connectivity services. Much of the cost
relates to monitoring and analysis of
data and performance of the network via
the subscriber’s connection(s). The
above cost, namely those associated
with hardware, software, and human
capital, enable the Exchange to measure
network performance with nanosecond
granularity. These same costs are also
associated with time and money spent
seeking to continuously improve the
network performance, improving the
subscriber’s experience, based on
monitoring and analysis activity. The
Exchange routinely works to improve
the performance of the network’s
hardware and software. The costs
associated with maintaining and
enhancing a state-of-the-art exchange
network is a significant expense for the
Exchange, and thus the Exchange
believes that it is reasonable and
appropriate to help offset those costs by
amending fees for connectivity services.
Subscribers, particularly those of 10Gb
ULL connectivity, expect the Exchange
to provide this level of support to
connectivity so they continue to receive
the performance they expect. This
differentiates the Exchange from its
competitors. As detailed above, the
Exchange has five primary sources of
revenue that it can potentially use to
fund its operations: transaction fees,
fees for connectivity services,
membership and regulatory fees, and
market data fees. Accordingly, the
Exchange must cover its expenses from
these five primary sources of revenue.
The Exchange’s Cost Analysis
estimates the annual cost to provide
10Gb ULL connectivity services at
$11,361,586. Based on current 10Gb
ULL connectivity services usage, the
Exchange would generate annual
revenue of approximately $16,524,000.
This represents a modest profit of 31%
when compared to the cost of providing
10Gb ULL connectivity services. The
Exchange’s Cost Analysis estimates the
annual cost to provide Limited Service
MEI Port services at $1,779,066. Based
on current Limited Service MEI Port
services usage, the Exchange would
generate annual revenue of
approximately $2,809,200. This
represents a modest profit of 37% when
compared to the cost of providing
Limited Service MEI Port services. Even
if the Exchange earns those amounts or
incrementally more, the Exchange
believes the proposed fees are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit, when comparing the
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total expense of the Exchange associated
with providing 10Gb ULL connectivity
and Limited Service MEI Port services
versus the total projected revenue of the
Exchange associated with network 10Gb
ULL connectivity and Limited Service
MEI Port services.
*
*
*
*
*
The Exchange has operated at a
cumulative net annual loss since it
launched operations in 2019.111 The
Exchange has operated at a net loss due
to a number of factors, one of which is
choosing to forgo revenue by offering
certain products, such as connectivity,
at lower rates than other options
exchanges to attract order flow and
encourage market participants to
experience the high determinism, low
latency, and resiliency of the Exchange’s
trading systems. The Exchange should
not now be penalized for seeking to
raise its fees in light of necessary
technology changes and its increased
costs after offering such products as
discounted prices. Therefore, the
Exchange believes the proposed fees are
reasonable because they are based on
both relative costs to the Exchange to
provide dedicated 10Gb ULL
connectivity and Limited Service MEI
Ports, the extent to which the product
drives the Exchange’s overall costs and
the relative value of the product, as well
as the Exchange’s objective to make
access to its Systems broadly available
to market participants. The Exchange
also believes the proposed fees are
reasonable because they are designed to
generate annual revenue to recoup the
Exchange’s costs of providing dedicated
10Gb ULL connectivity and Limited
Service MEI Ports.
The Exchange notes that its revenue
estimate is based on projections and
will only be realized to the extent
customer activity actually produces the
revenue estimated. As a competitor in
the hyper-competitive exchange
environment, and an exchange focused
on driving competition, the Exchange
does not yet know whether such
projections will be realized. For
instance, in order to generate the
revenue expected from 10Gb ULL
connectivity and Limited Service MEI
Ports, the Exchange will have to be
successful in retaining existing clients
that wish to utilize 10Gb ULL
connectivity and Limited Service MEI
Ports and/or obtaining new clients that
will purchase such access. To the extent
111 The Exchange has incurred a cumulative loss
of $9 million since its inception in 2019. See
Exchange’s Form 1/A, Application for Registration
or Exemption from Registration as a National
Securities Exchange, filed June 29, 2022, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001164.pdf.
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2665
the Exchange is successful in
encouraging new clients to utilize 10Gb
ULL connectivity and Limited Service
MEI Ports, the Exchange does not
believe it should be penalized for such
success. The Exchange, like other
exchanges, is, after all, a for-profit
business, which provides economic
value to its Members. To the extent the
Exchange has mispriced and
experiences a net loss in clients, the
Exchange could experience a net
reduction in revenue. While the
Exchange believes in transparency
around costs and potential revenue, the
Exchange does not believe that these
estimates should form the sole basis of
whether or not a proposed fee is
reasonable or can be adopted.
Further, the proposal reflects the
Exchange’s efforts to control its costs,
which the Exchange does on an ongoing
basis as a matter of good business
practice. A potential profit margin
should not be judged alone based on its
size, but is also indicative of costs
management and whether the ultimate
fee reflects the value of the services
provided. For example, a profit margin
on one exchange should not be deemed
excessive where that exchange has been
successful in controlling its costs, but
not excessive where on another
exchange where that exchange is
charging comparable fees but has a
lower profit margin due to higher costs.
Doing so could have the perverse effect
of not incentivizing cost control where
higher costs alone could be used to
justify fees increases.
The Proposed Pricing Is Not Unfairly
Discriminatory and Provides for the
Equitable Allocation of Fees, Dues, and
Other Charges
The Exchange believes that the
proposed fees are reasonable, fair,
equitable, and not unfairly
discriminatory because they are
designed to align fees with services
provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the
proposed fees are equitably allocated
among users of the network connectivity
and port alternatives, as the users of
10Gb ULL connections consume
substantially more bandwidth and
network resources than users of 1Gb
ULL connection. Specifically, the
Exchange notes that 10Gb ULL
connection users account for more than
99% of message traffic over the network,
driving other costs that are linked to
capacity utilization, as described above,
while the users of the 1Gb ULL
connections account for less than 1% of
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rate, the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that Market Makers who
take the most Limited Service MEI Ports
pay for the vast majority of the shared
network resources from which all
Member and non-Member users benefit,
but is designed and maintained from a
capacity standpoint to specifically
handle the message rate and
performance requirements of those
Market Makers.
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. Billions of
messages per day consume the
Exchange’s resources and significantly
contribute to the overall network
connectivity expense for storage and
network transport capabilities. The
Exchange must also purchase additional
storage capacity on an ongoing basis to
ensure it has sufficient capacity to store
these messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.114 Thus, as the number of
connections a Market Maker has
increases, the related pull on Exchange
resources also increases. The Exchange
sought to design the proposed tieredpricing structure to set the amount of
the fees to relate to the number of
connections a firm purchases. The more
connections purchased by a Market
Maker likely results in greater
expenditure of Exchange resources and
increased cost to the Exchange.
The Exchange believes that the
proposed fees are equitably allocated
among users of the network connectivity
alternatives, as the users of the Limited
Service MEI Ports consume the most
bandwidth and resources of the
network. Specifically, like above for the
10Gb ULL connectivity, the Exchange
notes that the Market Makers who take
the maximum amount of Limited
Service MEI Ports account for
approximately greater than 99% of
message traffic over the network, while
Market Makers with fewer Limited
Service MEI Ports account for
approximately less than 1% of message
traffic over the network. In the
Exchange’s experience, Market Makers
who only utilize the two free Limited
Service MEI Ports do not have a
business need for the high performance
network solutions required by Market
Makers who take the maximum amount
of Limited Service MEI Ports. The
Exchange’s high performance network
solutions and supporting infrastructure
(including employee support), provides
unparalleled system throughput and the
capacity to handle approximately 18
million quote messages per second.
Based on November 2022 trading
results, on an average day, the Exchange
handles over approximately 6.9 billion
quotes, and more than 146 billion
quotes over the entire month. Of that
total, Market Makers with the maximum
amount of Limited Service MEI Ports
generate over 4 billion quotes, and
Market Makers who utilize the two free
Limited Service MEI Ports generate
approximately 1.6 billion quotes. Also
for November 2022, Market Makers who
utilized 7 to 9 Limited Service MEI
ports submitted an average of
1,264,703,600 quotes per day. 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 network connectivity
expense for storage and network
transport capabilities. The Exchange
must also purchase additional storage
capacity on an ongoing basis to ensure
it has sufficient capacity to store these
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.113 Thus, as the number of
connections a Market Maker has
increases, certain other costs incurred
by the Exchange that are correlated to,
though not directly affected by,
connection costs (e.g., storage costs,
surveillance costs, service expenses)
also increase. The Exchange sought to
design the proposed tiered-pricing
structure to set the amount of the fees
to relate to the number of connections
a firm purchases. The more connections
purchased by a Market Maker likely
results in greater expenditure of
Exchange resources and increased cost
to the Exchange. With this in mind, the
Exchange proposes no fee or lower fees
for those Market Makers who receive
fewer Limited Service MEI Ports since
those Market Makers generally tend to
send the least amount of orders and
messages over those connections. Given
this difference in network utilization
112 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
113 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
114 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
message traffic over the network. In the
Exchange’s experience, users of the 1Gb
connections do not have the same
business needs for the high-performance
network as 10Gb ULL users.
The Exchange’s high-performance
network and supporting infrastructure
(including employee support), provides
unparalleled system throughput with
the network ability to support access to
several distinct options markets. 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 network connectivity
expense for storage and network
transport capabilities. The Exchange
must also purchase additional storage
capacity on an ongoing basis to ensure
it has sufficient capacity to store these
messages to satisfy its record keeping
requirements under the Exchange
Act.112 Thus, as the number of messages
an entity increases, certain other costs
incurred by the Exchange that are
correlated to, though not directly
affected by, connection costs (e.g.,
storage costs, surveillance costs, service
expenses) also increase. Given this
difference in network utilization rate,
the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users
pay for the vast majority of the shared
network resources from which all
market participants’ benefit.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed
fees will not result in any burden on
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
proposed fees will allow the Exchange
to recoup some of its costs in providing
10Gb ULL connectivity and Limited
Service MEI Ports at below market rates
to market participants since the
Exchange launched operations. As
described above, the Exchange operated
at a cumulative net annual loss since its
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launch in 2019 115 due to providing a
low-cost alternative to attract order flow
and encourage market participants to
experience the high determinism and
resiliency of the Exchange’s trading
Systems. To do so, the Exchange chose
to waive the fees for some nontransaction related services and
Exchange products or provide them at a
very lower fee, which was not profitable
to the Exchange. This resulted in the
Exchange forgoing revenue it could have
generated from assessing any fees or
higher fees. The Exchange could have
sought to charge higher fees at the
outset, but that could have served to
discourage participation on the
Exchange. Instead, the Exchange chose
to provide a low-cost exchange
alternative to the options industry,
which resulted in lower initial
revenues. Examples of this are 10Gb
ULL connectivity and Limited Service
MEI Ports, for which the Exchange only
now seeks to adopt fees at a level
similar to or lower than those of other
options exchanges.
Further, the Exchange does not
believe that the proposed fee increase
for the 10Gb ULL connection change
would place certain market participants
at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. As is
the case with the current proposed flat
fee, the proposed fee would apply
uniformly to all market participants
regardless of the number of connections
they choose to purchase. The proposed
fee does not favor certain categories of
market participants in a manner that
would impose an undue 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. In particular,
Exchange personnel has been informally
discussing potential fees for
connectivity services with a diverse
group of market participants that are
connected to the Exchange (including
large and small firms, firms with large
connectivity service footprints and
small connectivity service footprints, as
well as extranets and service bureaus)
for several months leading up to that
time. The Exchange does not believe the
proposed fees for connectivity services
would negatively impact the ability of
Members, non-Members (extranets or
service bureaus), third-parties that
purchase the Exchange’s connectivity
115 See
supra note 111.
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and resell it, and customers of those
resellers to compete with other market
participants or that they are placed at a
disadvantage.
The Exchange does anticipate,
however, that some market participants
may reduce or discontinue use of
connectivity services provided directly
by the Exchange in response to the
proposed fees. In fact, as mentioned
above, one MIAX Pearl Member will
terminate their MIAX Pearl membership
on January 1, 2023 as a direct result of
the similar proposed fee changes by
MIAX Pearl. The Exchange does not
believe that the proposed fees for
connectivity services place certain
market participants at a relative
disadvantage to other market
participants because the proposed
connectivity pricing is associated with
relative usage of the Exchange by each
market participant and does not impose
a barrier to entry to smaller participants.
The Exchange believes its proposed
pricing is reasonable and, when coupled
with the availability of third-party
providers that also offer connectivity
solutions, that participation on the
Exchange is affordable for all market
participants, including smaller trading
firms. As described above, the
connectivity services purchased by
market participants typically increase
based on their additional message traffic
and/or the complexity of their
operations. The market participants that
utilize more connectivity services
typically utilize the most bandwidth,
and those are the participants that
consume the most resources from the
network. Accordingly, the proposed fees
for connectivity services do not favor
certain categories of market participants
in a manner that would impose a
burden on competition; rather, the
allocation of the proposed connectivity
fees reflects the network resources
consumed by the various size of market
participants and the costs to the
Exchange of providing such
connectivity services.
Inter-Market Competition
The Exchange also does not believe
that the proposed rule change will result
in any burden on inter-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. As discussed
above, options market participants are
not forced to connect to all options
exchanges. There is no reason to believe
that our proposed price increase will
harm another exchange’s ability to
compete. There are other options
markets of which market participants
may connect to trade options at higher
rates than the Exchange’s. There is also
PO 00000
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Fmt 4703
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2667
a range of alternative strategies,
including routing to the exchange
through another participant or market
center or accessing the Exchange
indirectly. Market participants are free
to choose which exchange or reseller to
use to satisfy their business needs.
Accordingly, the Exchange does not
believe its proposed fee changes impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
*
*
*
*
*
In conclusion, as discussed
thoroughly above, the Exchange
regrettably believes that the application
of the Revised Review Process and Staff
Guidance has adversely affected intermarket competition among legacy and
non-legacy exchanges by impeding the
ability of non-legacy exchanges to adopt
or increase fees for their market data
and access services (including
connectivity and port products and
services) that are on parity or
commensurate with fee levels
previously established by legacy
exchanges. Since the adoption of the
Revised Review Process and Staff
Guidance, and even more so recently, it
has become extraordinarily difficult 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 non-legacy
exchanges’ market participants.
Although the Staff Guidance served an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable, it
has also negatively impacted non-legacy
exchanges in particular in their efforts
to adopt or increase fees that would
enable them to more fairly compete with
legacy exchanges, despite providing
enhanced disclosures and rationale
under both competitive and cost basis
approaches provided for by the Revised
Review Process and Staff Guidance to
support their proposed fee changes.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. 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,116 and Rule
116 15
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17JAN1
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Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
19b–4(f)(2) 117 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:
khammond on DSKJM1Z7X2PROD with NOTICES
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–2023–01 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–2023–01. 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
117 17
CFR 240.19b–4(f)(2).
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18:16 Jan 13, 2023
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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–2023–01 and
should be submitted on or before
February 7, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.118
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–00659 Filed 1–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96634; File No. SR–ICEEU–
2022–027]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
of Proposed Rule Change Relating to
the Capital Replenishment Plan
January 11, 2023.
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 December
29, 2022, ICE Clear Europe Limited
(‘‘ICE Clear Europe’’ or the ‘‘Clearing
House’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule changes described in
Items I, II and III below, which Items
have been prepared primarily by ICE
Clear Europe. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
ICE Clear Europe Limited (‘‘ICE Clear
Europe’’ or the ‘‘Clearing House’’)
proposes to adopt a new Capital
Replenishment Plan to document
certain tools, procedures and
arrangements to replenish its financial
resources in the event of Clearing
Member default and in the event of
losses not caused by Clearing Member
default.3
118 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Capitalized terms used but not defined herein
have the meanings specified in the Capital
Replenishment Plan or, if not defined therein, the
ICE Clear Europe Clearing Rules.
1 15
PO 00000
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Fmt 4703
Sfmt 4703
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, ICE
Clear Europe included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. ICE
Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C)
below, of the most significant aspects of
such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(a) Purpose
ICE Clear Europe is proposing to
adopt a new Capital Replenishment
Plan (the ‘‘Plan’’) to document certain
tools, procedures and arrangements that
the Clearing House may use to replenish
its capital, when necessary. The Plan 4
would address replenishment of both
ICE Clear Europe’s own resources
contribution to its guaranty funds and
capital required under applicable law,
including the capital requirement under
EMIR as incorporated into UK law
following the Brexit transition (the
‘‘EMIR capital requirement’’).5 The Plan
would recognize that a need to
replenish capital may arise because of a
Clearing Member default, the
occurrence of sudden extraordinary oneoff losses, net losses resulting from
custody or investment risks, or from
recurring losses which may arise from
general business risks.6
The Plan would set out the overall
purposes of the Plan and the Clearing
House’s overall approach to capital
management and maintaining capital
resources. The Plan is intended, among
other purposes, to set out for senior
management, the audit committee and
the Board actions they may consider to
replenish capital and to identify
stakeholders and their respective
responsibilities with respect to ICE
Clear Europe’s continued compliance
with relevant laws and regulations
4 The Plan would consolidate and replace a preexisting capital requirement framework and related
practices.
5 Commission Delegated Regulation (EU) No. 152/
2013 of 19 December 2012 supplementing
Regulation (EU) No. 648/2012 of the European
Parliament and of the Council with regard to
regulatory technical standards on capital
requirements for central counterparties, as onshored into UK law following the end of the Brexit
transition period.
6 The Plan would also serve as a recovery tool and
would be part of ICE Clear Europe’s overall
Recovery Plan.
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17JAN1
]]>Agencies
[Federal Register Volume 88, Number 10 (Tuesday, January 17, 2023)]
[Notices]
[Pages 2651-2668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00659]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96628; File No. SR-EMERALD-2023-01]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX
Emerald, LLC To Amend the Fee Schedule To Modify Certain Connectivity
and Port Fees
January 10, 2023.
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 January 9, 2023, MIAX Emerald, LLC (``MIAX Emerald'' or
``Exchange''), filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Emerald Fee
Schedule (the ``Fee Schedule'') to amend its Fee Schedule (the ``Fee
Schedule'') to amend certain connectivity and port fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/emerald, at MIAX's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule as follows: (1)
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'')
fiber connection for Members \3\ and non-Members; and (2) adopt a
tiered-pricing structure for Limited Service MIAX Emerald Express
Interface (``MEI'') Ports \4\ available to Market Makers.\5\ The
Exchange last increased the fees for both 10Gb ULL fiber connections
and Limited Service MEI Ports beginning with a series of filings on
October 1, 2020 (with the final filing made on March 24, 2021).\6\
Prior to that fee change, the Exchange provided Limited Service MEI
Ports for $50 per port, after the first two Limited Service MEI Ports
that are provided free of charge, and the Exchange incurred all the
costs associated to provide those first two Limited Service MEI Ports
since it commenced operations in March 2019. The Exchange then
increased the fee by $50 to a modest $100 fee per Limited Service MEI
Port and increased the fee for 10Gb ULL fiber connections from $6,000
to $10,000 per month.
---------------------------------------------------------------------------
\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule.
\5\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
\6\ See Securities Exchange Act Release Nos. 91460 (April 1,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR
12221 (March 2, 2021) (SR-EMERALD-2021-07).
---------------------------------------------------------------------------
Also, in that fee change, the Exchange adopted fees for providing
five different types of ports for the first time. These ports were FIX
Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and
Purge Ports.\7\ Again, the Exchange absorbed all costs associated with
providing these ports since its launch in March 2019. As explained in
that filing, expenditures, as well as research and development
(``R&D'') in numerous areas resulted in a material increase in expense
to the Exchange and were the primary drivers for that proposed fee
change. In that filing, the Exchange allocated a total of $9.3 million
in expenses to providing 10Gb ULL fiber connectivity, additional
Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop
Ports, FIX Drop Copy Ports, and Purge Ports.\8\
---------------------------------------------------------------------------
\7\ See id. for a description of each of these ports.
\8\ Id.
---------------------------------------------------------------------------
Since the time of 2021 increase discussed above, the Exchange
experienced ongoing increases in expenses, particularly internal
expenses. As discussed more fully below, the Exchange recently
calculated increased annual aggregate costs of $11,361,586 for
providing 10Gb ULL connectivity and $1,779,066 for providing Limited
Service MEI Ports.
Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity services.
Subscribers expect the Exchange to provide this level of support so
they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and Limited
[[Page 2652]]
Service MEI Ports in order to recoup ongoing costs and increase in
expenses set forth below in the Exchange's cost analysis.
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \9\ and various other
developments, the Commission began to undertake a heightened review of
exchange filings, including non-transaction fee filings that was
substantially and materially different from it prior review process
(hereinafter referred to as the ``Revised Review Process''). In the
Susquehanna Decision, the D.C. Circuit Court stated that the Commission
could not maintain a practice of ``unquestioning reliance'' on claims
made by a self-regulatory organization (``SRO'') in the course of
filing a rule or fee change with the Commission.\10\ Then, on October
16, 2018, the Commission issued an opinion in Securities Industry and
Financial Markets Association finding that exchanges failed both to
establish that the challenged fees were constrained by significant
competitive forces and that these fees were consistent with the
Act.\11\ On that same day, the Commission issued an order remanding to
various exchanges and national market system (``NMS'') plans challenges
to over 400 rule changes and plan amendments that were asserted in 57
applications for review (the ``Remand Order'').\12\ The Remand Order
directed the exchanges to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review.'' \13\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\14\ However, the Commission did
extend the deadlines in the Remand Order ``so that they d[id] not begin
to run until the resolution of the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the court's mandate.'' \15\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
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\9\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\10\ Id.
\11\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\12\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84433, 2018 WL 5023230 (Oct. 16, 2018). See 15 U.S.C.
78k-1, 78s; see also Rule 608(d) of Regulation NMS, 17 CFR
242.608(d) (asserted as an alternative basis of jurisdiction in some
applications).
\13\ Id. at page 2.
\14\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\15\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased the level of
information needed for the Commission to believe that an exchange's
filing satisfied its obligations under the Act with respect to changing
a fee.\16\ Despite approving hundreds of access fee filings in the
years prior to the BOX Order (described further below) utilizing a
``market-based'' test, the Commission changed course and disapproved
BOX's proposal to begin charging connectivity at one-fourth the rate of
competing exchanges' pricing.
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\16\ 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). The Commission noted
in the BOX Order that it ``historically applied a `market-based'
test in its assessment of market data fees, which [the Commission]
believe[s] present similar issues as the connectivity fees proposed
herein.'' Id. at page 16. Despite this admission, the Commission
disapproved BOX's proposal to begin charging $5,000 per month for
10Gb connections (while allowing legacy exchanges to charge rates
equal to 3-4 times that amount utilizing ``market-based'' fee
filings from years prior).
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Also while the above appeal was pending, 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.'' \17\ In the Staff
Guidance, the Commission Staff states that, ``[a]s an initial step in
assessing the reasonableness of a fee, staff considers whether the fee
is constrained by significant competitive forces.'' \18\ The Staff
Guidance also 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.'' \19\
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\17\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Staff Guidance'').
\18\ Id.
\19\ Id.
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Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC \20\ and remanded for further proceedings consistent
with its opinion.\21\ That same day, the D.C. Circuit issued an order
remanding the Remand Order to the Commission for reconsideration in
light of NASDAQ. The court noted that the Remand Order required the
exchanges and NMS plan participants to consider the challenges that the
Commission had remanded in light of the SIFMA Decision. The D.C.
Circuit concluded that because the SIFMA Decision ``has now been
vacated, the basis for the [Remand Order] has evaporated.'' \22\
Accordingly, on August 7, 2020, the Commission vacated the Remand Order
and ordered the parties to file briefs addressing whether the holding
in NASDAQ v. SEC that Exchange Act Section 19(d) does not permit
challenges to generally applicable fee rules requiring dismissal of the
challenges the Commission previously remanded.\23\ The Commission
further invited ``the parties to submit briefing stating whether the
challenges asserted in the applications for review . . . should be
dismissed, and specifically identifying any challenge that they contend
should not be dismissed pursuant to the holding of Nasdaq v. SEC.''
\24\ Without resolving the above issues, on October 5, 2020, the
Commission issued an order granting SIFMA and Bloomberg's request to
withdraw their applications for review and dismissed the
proceedings.\25\
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\20\ NASDAQ Stock Mkt., LLC v. SEC, No 18-1324, --- Fed. App'x -
---, 2020 WL 3406123 (D.C. Cir. June 5, 2020). The court's mandate
was issued on August 6, 2020.
\21\ Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020).
The court's mandate issued on August 6, 2020. The D.C. Circuit held
that Exchange Act ``Section 19(d) is not available as a means to
challenge the reasonableness of generally-applicable fee rules.''
Id. The court held that ``for a fee rule to be challengeable under
Section 19(d), it must, at a minimum, be targeted at specific
individuals or entities.'' Id. Thus, the court held that ``Section
19(d) is not an available means to challenge the fees at issue'' in
the SIFMA Decision. Id.
\22\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\23\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 89504, 2020 WL 4569089 (August 7, 2020) (the ``Order
Vacating Prior Order and Requesting Additional Briefs'').
\24\ Id.
\25\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ v. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to
[[Page 2653]]
enable us to perform our review.'' \26\ As such, all of those fees
remained in place and amounted to a baseline set of fees for those
exchanges that had the benefit of getting their fees in place before
the Commission Staff's fee review process materially changed. The net
result of this history and lack of resolution in the D.C. Circuit Court
resulted in an uneven competitive landscape where the Commission
subjects all new non-transaction fee filings, particularly those
submitted by new exchanges, to the new Revised Review Process, while
allowing the previously challenged fee filings, mostly submitted by
incumbent exchanges prior to 2019, to remain in effect and not subject
to the ``record'' or ``review'' earlier intended by the Commission.
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\26\ See supra note 12, at page 2.
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While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\27\ The legacy exchanges all
established a significantly higher baseline for access and market data
fees prior to the Revised Review Process. From 2011 until the issuance
of the Staff Guidance in 2019, national securities exchanges filed, and
the Commission Staff did not abrogate or suspend (allowing such fees to
become effective), at least 92 filings \28\ to amend exchange
connectivity or port fees (or similar access fees). The support for
each of those filings was a simple statement by the relevant exchange
that the fees were constrained by competitive forces.\29\ These fees
remain in effect today.
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\27\ Commission Chair Gary Gensler recently reiterated the
Commission's mandate to ensure competition in the equities markets.
See ``Statement on Minimum Price Increments, Access Fee Caps, Round
Lots, and Odd-Lots'', by Chair Gary Gensler, dated December 14, 2022
(stating ``[i]n 1975, Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the establishment of
the national market system and enhance competition in the securities
markets, including the equity markets'' (emphasis added)). In that
same statement, Chair Gary Gensler cited the five objectives laid
out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1),
including ensuring ``fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets. . . .'' (emphasis added). Id. at note
1. See also Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249.
\28\ This timeframe also includes challenges to over 400 rule
filings by SIFMA and Bloomberg discussed above. Sec. Indus. & Fin.
Mkts. Ass'n, Securities Exchange Act Release No. 84433, 2018 WL
5023230 (Oct. 16, 2018). Those filings were left to stand, while at
the same time, blocking newer exchanges from the ability to
establish competitive access and market data fees. See The Nasdaq
Stock Market, LLC v. SEC, Case No. 18-1292 (D.C. Cir. June 5, 2020).
The expectation at the time of the litigation was that the 400 rule
flings challenged by SIFMA and Bloomberg would need to be justified
under revised review standards.
\29\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\30\
By impeding any path forward for non-legacy exchanges to establish
commensurate non-transaction fees, or by failing to provide any
alternative means for smaller markets to establish ``fee parity'' with
legacy exchanges, the Commission is stifling competition: non-legacy
exchanges are, in effect, being deprived of the revenue necessary to
compete on a level playing field with legacy exchanges. This is
particularly harmful, given that the costs to maintain exchange systems
and operations continue to increase. The Commission Staff's change in
position impedes the ability of non-legacy exchanges to raise revenue
to invest in their systems to compete with the legacy exchanges who
already enjoy disproportionate non-transaction fee based revenue. For
example, the Cboe Exchange, Inc. (``Cboe'') reported ``access and
capacity fee'' revenue of $70,893,000 for 2020 \31\ and $80,383,000 for
2021.\32\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \33\ and $22,843,000 for
2021.\34\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \35\ and $44,800,000 for
2021.\36\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \37\ and $30,687,000 for
2021.\38\ For 2021, the affiliated Cboe, C2, BZX, and EDGX (the four
largest exchanges of the Cboe exchange group) reported $178,712,000 in
``access and capacity fees'' in 2021. NASDAQ Phlx,
[[Page 2654]]
LLC (``NASDAQ Phlx'') reported ``Trade Management Services'' revenue of
$20,817,000 for 2019.\39\ The Exchange notes it is unable to compare
``access fee'' revenues with NASDAQ Phlx (or other affiliated NASDAQ
exchanges) because after 2019, the ``Trade Management Services'' line
item was bundled into a much larger line item in PHLX's Form 1, simply
titled ``Market services.'' \40\
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\30\ The Exchange has filed, and subsequently withdrawn, various
forms of this proposed fee numerous times since August 2021 with
each proposal containing hundreds of cost and revenue disclosures
never previously disclosed by legacy exchanges in their access and
market data fee filings prior to 2019.
\31\ According to Cboe's 2021 Form 1 Amendment, access and
capacity fees represent fees assessed for the opportunity to trade,
including fees for trading-related functionality. See Cboe 2021 Form
1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\32\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\33\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\34\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\35\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\36\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\37\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\38\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\39\ According to PHLX, ``Trade Management Services'' includes
``a wide variety of alternatives for connectivity to and accessing
[the PHLX] markets for a fee. These participants are charged monthly
fees for connectivity and support in accordance with [PHLX's]
published fee schedules.'' See PHLX 2020 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
\40\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf.
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The much higher non-transaction fees charged by the legacy
exchanges provides them with two significant competitive advantages.
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing
and advertising on major media outlets,\41\ new products and other
innovations. Second, higher non-transaction fees provide the legacy
exchanges with greater flexibility to lower their transaction fees (or
use the revenue from the higher non-transaction fees to subsidize
transaction fee rates), which are more immediately impactful in
competition for order flow and market share, given the variable nature
of this cost on member firms. The prohibition of a reasonable path
forward denies the Exchange (and other non-legacy exchanges) this
flexibility, eliminates the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share with legacy exchanges. While one could debate whether the
pricing of non-transaction fees are subject to the same market forces
as transaction fees, there is little doubt that subjecting one exchange
to a materially different standard than that historically applied to
legacy exchanges for non-transaction fees leaves that exchange at a
disadvantage in its ability to compete with its pricing of transaction
fees.
---------------------------------------------------------------------------
\41\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
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While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its content. . .'',\42\ this is not the reality experienced by
exchanges such as MIAX Emerald. As such, non-legacy exchanges are
forced to rely on an opaque cost-based justification standard. However,
because the Staff Guidance is devoid of detail on what must be
contained in cost-based justification, this standard is nearly
impossible to meet despite good-faith efforts by the Exchange to
provide substantial amount of cost-related details. The Exchange has
attempted to increase fees using a cost-based justification numerous
times, having submitted over six filings.\43\ However, despite
providing 100+ page filings describing in extensive detail its costs
associated with providing the services described in the filings,
Commission Staff continues to suspend such filings, with the rationale
that the Exchange has not provided sufficient detail of its costs. The
Commission Staff appears to be interpreting the reasonableness standard
set forth in Section 6(b)(4) of the Act \44\ in a manner that is not
possible to achieve. This essentially nullifies the cost-based approach
for exchanges as a legitimate alternative as laid out in the Staff
Guidance. By refusing to accept a reasonable cost-based argument to
justify non-transaction fees (in addition to refusing to accept a
competition-based argument as described above), or by failing to
provide the detail required to achieve that standard, the Commission
Staff is effectively preventing non-legacy exchanges from making any
non-transaction fee changes, which benefits the legacy exchanges and
anticompetitive to the non-legacy exchanges. This does not meet the
fairness standard under the Act and is discriminatory.
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\42\ See supra note 17, at note 1.
\43\ See Securities Exchange Act Release Nos. 94889 (May 11,
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15); 94717
(April 14, 2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13);
94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-
EMERALD-2022-05); 94257 (February 15, 2022), 87 FR 9678 (February
22, 2022) (SR-EMERALD-2022-04); 93772 (December 14, 2021), 86 FR
71965 (December 20, 2021) (SR-EMERALD-2021-43); 93776 (December 14,
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42); 93188
(September 29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-
2021-31); (SR-EMERALD-2021-30) (withdrawn without being noticed by
the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4,
2021) (SR-EMERALD-2021-29); 92662 (August 13, 2021), 86 FR 46726
(August 19, 2021) (SR-EMERALD-2021-25); 92645 (August 11, 2021), 86
FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
\44\ 15 U.S.C. 78f(b)(4).
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Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\45\ to the extent that this is pertinent; (b) establish a
framework to provide for commensurate non-transaction based fees among
competing exchanges to ensure fee parity; \46\ or (c) accept that
certain competition-based arguments are applicable given the linkage
between non-transaction fees and transaction fees, especially where
non-transaction fees among exchanges are based upon disparate standards
of review, lack parity, and impede fair competition. Considering the
absence of any such framework or clarity, the Exchange believes that
the Commission does not have a reasonable basis to deny the Exchange
this change in fees, where the proposed change would result in fees
meaningfully lower than comparable fees at competing exchanges and
where the associated non-transaction revenue is meaningfully lower than
competing exchanges.
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\45\ To the extent that the cost-based standard includes
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Exchange believes that Staff should be
clear as to what they determine is an appropriate profit margin.
\46\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
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In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and place a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other options exchanges for connectivity. If the Commission Staff
were to disapprove this proposal, that action, and not market forces,
would substantially affect whether the Exchange can be successful in
its competition with other options exchanges. Disapproval of this
filing could also be viewed as an arbitrary and capricious decision
should the Commission Staff continue to ignore its past treatment of
non-transaction fee filings before implementation of the Revised Review
Process and Staff Guidance and refuse to allow such filings to be
approved despite
[[Page 2655]]
significantly enhanced arguments and cost disclosures.\47\
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\47\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever-increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
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Lastly, the Exchange notes that the Commission Staff has allowed
similar fee increases by other exchanges to remain in effect by
publishing those filings for comment and allowing the exchange to
withdraw and re-file numerous times.\48\ Recently, the Commission Staff
has not afforded the Exchange the same flexibility.\49\ This again is
evidence that the Commission Staff is not treating non-transaction fee
filings in a consistent manner and is holding exchanges to different
levels of scrutiny in reviewing filings.
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\48\ See, e.g., Securities Exchange Act Release Nos. 93937
(January 10, 2022), 87 FR 2466 (January 14, 2022) (SR-MEMX-2021-22);
94419 (March 15, 2022), 87 FR 16046 (March 21, 2022) (SR-MEMX-2022-
02); SR-MEMX-2022-12 (withdrawn before being noticed); 94924 (May
16, 2022), 87 FR 31026 (May 20, 2022) (SR-MEMX-2022-13); 95299 (July
15, 2022), 87 FR 43563 (July 21, 2022) (SR-MEMX-2022-17); SR-MEMX-
2022-24 (withdrawn before being noticed); 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26); 94901 (May
12, 2022), 87 FR 30305 (May 18, 2022) (SR-MRX-2022-04); SR-MRX-2022-
06 (withdrawn before being noticed); 95262 (July 12, 2022), 87 FR
42780 (July 18, 2022) (SR-MRX-2022-09); 95710 (September 8, 2022),
87 FR 56464 (September 14, 2022) (SR-MRX-2022-12); 96046 (October
12, 2022), 87 FR 63119 (October 18, 2022) (SR-MRX-2022-20); 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26); and 96430 (December 1, 2022), 87 FR 75083 (December 7, 2022)
(SR-MEMX-2022-32).
\49\ See Securities Exchange Act Release Nos. 94889 (May 11,
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15).
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* * * * *
10Gb ULL Connectivity Fee Change
The Exchange proposes to amend the Fee Schedule to increase the
fees for Members and non-Members to access the Exchange's system
networks \50\ via a 10Gb ULL fiber connection. Specifically, the
Exchange proposes to amend Sections (5)(a)-(b) of the Fee Schedule to
increase the 10Gb ULL connectivity fee for Members and non-Members from
$10,000 per month to $13,500 per month (``10Gb ULL Fee'').\51\
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\50\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\51\ Market participants that purchase additional 10Gb ULL
connections as a result of this change will not be subject to the
Exchange's Member Network Connectivity Testing and Certification Fee
under Section (4)(c) of the Exchange's fee schedule. See Section
(4)(c) of the Exchange's fee schedule available at https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10192022.pdf (providing that ``Network
Connectivity Testing and Certification Fees will not be assessed in
situations where the Exchange initiates a mandatory change to the
Exchange's system that requires testing and certification. Member
Network Connectivity Testing and Certification Fees will not be
assessed for testing and certification of connectivity to the
Exchange's Disaster Recovery Facility.'').
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The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange will continue to pro-rate the fees when a
Member or non-Member makes a change to the connectivity (by adding or
deleting connections) with such pro-rated fees based on the number of
trading days that the Member or non-Member has been credentialed to
utilize any of the Exchange APIs or market data feeds in the production
environment through such connection, divided by the total number of
trading days in such month multiplied by the applicable monthly rate.
Limited Service MEI Ports
Background
The Exchange also proposes to amend Section 5)(d) of the Fee
Schedule to adopt a tiered-pricing structure for Limited Service MEI
Ports available to Market Makers. The Exchange allocates two (2) Full
Service MEI Ports \52\ and two (2) Limited Service MEI Ports \53\ per
matching engine \54\ to which each Market Maker connects. Market Makers
may also request additional Limited Service MEI Ports for each matching
engine to which they connect. The Full Service MEI Ports and Limited
Service MEI Ports all include access to the Exchange's primary and
secondary data centers and its disaster recovery center. Market Makers
may request additional Limited Service MEI Ports. Currently, Market
Makers are assessed a $100 monthly fee for each Limited Service MEI
Port for each matching engine above the first two Limited Service MEI
Ports that are included for free.
---------------------------------------------------------------------------
\52\ The term ``Full Service MEI Ports'' means a port which
provides Market Makers with the ability to send Market Maker simple
and complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\53\ The term ``Limited Service MEI Ports'' means a port which
provides Market Makers with the ability to send simple and complex
eQuotes and quote purge messages only, but not Market Maker Quotes,
to the MIAX Emerald System. Limited Service MEI Ports are also
capable of receiving administrative information. Market Makers
initially receive two Limited Service MEI Ports per Matching Engine.
See the Definitions Section of the Fee Schedule.
\54\ The term ``Matching Engine'' means a part of the MIAX
Emerald electronic system that processes options orders and trades
on a symbol-by-symbol basis. Some Matching Engines will process
option classes with multiple root symbols, and other Matching
Engines may be dedicated to one single option root symbol (for
example, options on SPY may be processed by one single Matching
Engine that is dedicated only to SPY). A particular root symbol may
only be assigned to a single designated Matching Engine. A
particular root symbol may not be assigned to multiple Matching
Engines. See the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
Limited Service MEI Port Fee Changes
The Exchange now proposes to move from a flat monthly fee per
Limited Service MEI Port for each matching engine to a tiered-pricing
structure for Limited Service MEI Ports for each matching engine under
which the monthly fee would vary depending on the number of Limited
Service MEI Ports each Market Maker elects to purchase. Specifically,
the Exchange will continue to provide the first and second Limited
Service MEI Ports for each matching engine free of charge. For Limited
Service MEI Ports, the Exchange proposes to adopt the following tiered-
pricing structure: (i) the third and fourth Limited Service MEI Ports
for each matching engine will increase from the current flat monthly
fee of $100 to $200 per port; (ii) the fifth and sixth Limited Service
MEI Ports for each matching engine will increase from the current flat
monthly fee of $100 to $300 per port; and (iii) the seventh or more
Limited Service MEI Ports will increase from the current monthly flat
fee of $100 to $400 per port.\55\ The Exchange believes a tiered-
pricing structure will encourage Market Makers to be more efficient
when determining how to connect to the Exchange. This should also
enable the Exchange to better monitor and provide access to the
Exchange's network to ensure sufficient
[[Page 2656]]
capacity and headroom in the System \56\ in accordance with its fair
access requirements under Section 6(b)(5) of the Act.\57\
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\55\ As noted in the Fee Schedule, Market Makers will continue
to be limited to fourteen Limited Service MEI Ports per Matching
Engine. The Exchange also proposes to make a ministerial clarifying
change to remove the defined term ``Additional Limited Service MEI
Ports'' as a result of moving to a tiered pricing structure where
the first two Limited Service MEI Ports continue to be provided free
of charge. The Exchange proposes to make a related change to add the
term ``Limited Service MEI Ports'' after the word ``fourteen'' in
the Fee Schedule.
\56\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
\57\ See 15 U.S.C. 78f(b). The Exchange may offer access on
terms that are not unfairly discriminatory among its Members, and
ensure sufficient capacity and headroom in the System. The Exchange
monitors the System's performance and makes adjustments to its
System based on market conditions and Member demand.
---------------------------------------------------------------------------
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, Market Makers who take the maximum amount of Limited
Service MEI Ports account for approximately greater than 99% of message
traffic over the network, while Market Makers with fewer Limited
Service MEI Ports account for approximately less than 1% of message
traffic over the network. In the Exchange's experience, Market Makers
who only utilize the two free Limited Service MEI Ports do not have a
business need for the high performance network solutions required by
Market Makers who take the maximum amount of Limited Service MEI Ports.
The Exchange's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput and the capacity to handle approximately 18 million
quote messages per second. Based on November 2022 trading results, on
an average day, the Exchange handles over approximately 6.9 billion
quotes, and more than 146 billion quotes over the entire month. Of that
total, Market Makers with the maximum amount of Limited Service MEI
Ports generate over 4 billion quotes, and Market Makers who utilize the
two free Limited Service MEI Ports generate approximately 1.6 billion
quotes. Also for November 2022, Market Makers who utilized 7 to 9
Limited Service MEI ports submitted an average of 1,264,703,600 quotes
per day. 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 network
connectivity expense for storage and network transport capabilities.
The Exchange must also purchase additional storage capacity on an
ongoing basis to ensure it has sufficient capacity to store these
messages as part of it surveillance program and to satisfy its record
keeping requirements under the Exchange Act.\58\ Thus, as the number of
connections a Market Maker has increases, certain other costs incurred
by the Exchange that are correlated to, though not directly affected
by, connection costs (e.g., storage costs, surveillance costs, service
expenses) also increase. The Exchange sought to design the proposed
tiered-pricing structure to set the amount of the fees to relate to the
number of connections a firm purchases. The more connections purchased
by a Market Maker likely results in greater expenditure of Exchange
resources and increased cost to the Exchange. With this in mind, the
Exchange proposes no fee or lower fees for those Market Makers who
receive fewer Limited Service MEI Ports since those Market Makers
generally tend to send the least amount of orders and messages over
those connections. Given this difference in network utilization rate,
the Exchange believes that it is reasonable, equitable, and not
unfairly discriminatory that Market Makers who take the most Limited
Service MEI Ports pay for the vast majority of the shared network
resources from which all Member and non-Member users benefit, but is
designed and maintained from a capacity standpoint to specifically
handle the message rate and performance requirements of those Market
Makers.
---------------------------------------------------------------------------
\58\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange proposes to increase its monthly Limited Service MEI
Port fees to recover a portion of the costs associated with directly
accessing the Exchange.
Implementation
The Exchange initially filed this proposal on December 30, 2022 as
SR-EMERALD-2022-38. On January 9, 2023, the Exchange withdrew SR-
EMERALD-2022-38 and resubmitted this proposal. The proposed fee changes
are immediately effective.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \59\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \60\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of Section 6(b)(5) of the Act \61\ in that
they are designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general protect investors
and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
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\59\ 15 U.S.C. 78f(b).
\60\ 15 U.S.C. 78f(b)(4).
\61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes under the Revised Review Process and as set
forth in recent Staff Guidance. Based on both the BOX Order \62\ and
the Staff Guidance,\63\ the Exchange believes that the proposed fees
are consistent with the Act because they are: (i) reasonable, equitably
allocated, not unfairly discriminatory, and not an undue burden on
competition; (ii) comply with the BOX Order and the Staff Guidance; and
(iii) supported by evidence (including comprehensive revenue and cost
data and analysis) that they are fair and reasonable and will not
result in excessive pricing or supra-competitive profit.
---------------------------------------------------------------------------
\62\ See supra note 16.
\63\ See supra note 17.
---------------------------------------------------------------------------
The Exchange believes that exchanges, in setting fees of all types,
should meet high standards of transparency to demonstrate why each new
fee or fee amendment meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various fees for market participants to access an
exchange's marketplace.
In the Staff Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\64\ The Staff 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.'' \65\ In the Staff Guidance, the Commission
[[Page 2657]]
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, . . . , specific information, including
quantitative information, should be provided to support that
argument.'' \66\
---------------------------------------------------------------------------
\64\ Id.
\65\ Id.
\66\ Id.
---------------------------------------------------------------------------
The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed
above, the Revised Review Process and Staff Guidance have created an
uneven playing field between legacy and non-legacy exchanges by
severely restricting non-legacy exchanges from being able to increase
non-transaction relates fees to provide them with additional necessary
revenue to better compete. The much higher non-transaction fees charged
by the legacy exchanges provides them with two significant competitive
advantages: (i) additional non-transaction revenue that may be used to
fund areas other than the non-transaction service related to the fee,
such as investments in infrastructure, advertising, new products and
other innovations; and (ii) greater flexibility to lower their
transaction fees (or use the revenue from the higher non-transaction
fees to subsidize transaction fee rates). The latter is more
immediately impactful in competition for order flow and market share,
given the variable nature of this cost on Member firms. The absence of
a reasonable path forward to increase non-transaction fees to
comparable (or lower rates) limits the Exchange's flexibility to, among
other things, make additional investments in infrastructure and
advertising, diminishes the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share. Again, while one could debate whether the pricing of non-
transaction fees are subject to the same market forces as transaction
fees, there is little doubt that subjecting one exchange to a
materially different standard than that applied to other exchanges for
non-transaction fees leaves that exchange at a disadvantage in its
ability to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which
Promotes Competition
The Exchange initially adopted a fee of $50 per port, after the
first two Limited Service MEI Ports that are provided free of charge,
and the Exchange incurred all the costs associated to provide those
first two Limited Service MEI Ports since it commenced operations in
March 2019. At that same time, the Exchange only charged $6,000 per
month for each 10Gb ULL connection. As a new exchange entrant, the
Exchange chose to offer connectivity and ports at very low fees to
encourage market participants to trade on the Exchange and experience,
among things, the quality of the Exchange's technology and trading
functionality. This practice is not uncommon. New exchanges often do
not charge fees or charge lower fees for certain services such as
memberships/trading permits to attract order flow to an exchange, and
later amend their fees to reflect the true value of those services,
absorbing all costs to provide those services in the meantime. Allowing
new exchange entrants time to build and sustain market share through
various pricing incentives before increasing non-transaction fees
encourages market entry and fee parity, which promotes competition
among exchanges. It also enables new exchanges to mature their markets
and allow market participants to trade on the new exchanges without
fees serving as a potential barrier to attracting memberships and order
flow.\67\
---------------------------------------------------------------------------
\67\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX. . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
---------------------------------------------------------------------------
Later in 2020, as the Exchange's market share increased,\68\ the
Exchange then increased the fee by $50 to a modest $100 fee per Limited
Service MEI Port and increased the fee for 10Gb ULL fiber connections
from $6,000 to $10,000 per month.\69\ The Exchange balanced business
and competitive concerns with the need to financially compete with the
larger incumbent exchanges that charge higher fees for similar
connectivity and use that revenue to invest in their technology and
other service offerings.
---------------------------------------------------------------------------
\68\ The Exchange experienced a monthly average trading volume
of 3.43% for the month of October 2020. See Market at a Glance,
available at www.miaxoptions.com.
\69\ See Securities Exchange Act Release Nos. 91460 (April 1,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR
12221 (March 2, 2021) (SR-EMERALD-2021-07).
---------------------------------------------------------------------------
The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
competitive forces, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. The fact that the
market for order flow is competitive has long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . .'' \70\
---------------------------------------------------------------------------
\70\ See NetCoalition, 615 F.3d at 539 (D.C. Cir. 2010) (quoting
Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR
74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------
The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention to determine
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues, and also recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its
[[Page 2658]]
broader forms that are most important to investors and listed
companies.'' \71\
---------------------------------------------------------------------------
\71\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting
Release'').
---------------------------------------------------------------------------
Congress directed the Commission to ``rely on `competition,
whenever possible, in meeting its regulatory responsibilities for
overseeing the SROs and the national market system.' '' \72\ As a
result, and as evidenced above, the Commission has historically relied
on competitive forces to determine whether a fee proposal is equitable,
fair, reasonable, and not unreasonably or unfairly discriminatory. ``If
competitive forces are operative, the self-interest of the exchanges
themselves will work powerfully to constrain unreasonable or unfair
behavior.'' \73\ Accordingly, ``the existence of significant
competition provides a substantial basis for finding that the terms of
an exchange's fee proposal are equitable, fair, reasonable, and not
unreasonably or unfairly discriminatory.'' \74\ In the Revised Review
Process and Staff Guidance, Commission Staff indicated that they would
look at factors beyond the competitive environment, such as cost, only
if a ``proposal lacks persuasive evidence that the proposed fee is
constrained by significant competitive forces.'' \75\
---------------------------------------------------------------------------
\72\ See NetCoalition, 615 F.3d at 534-35; see also H.R. Rep.
No. 94-229 at 92 (1975) (``[I]t is the intent of the conferees that
the national market system evolve through the interplay of
competitive forces as unnecessary regulatory restrictions are
removed.'').
\73\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\74\ Id.
\75\ See Staff Guidance, supra note 17.
---------------------------------------------------------------------------
The Exchange believes the competing exchanges' 10Gb connectivity
and port fees are useful examples of alternative approaches to
providing and charging for access and demonstrating how such fees are
competitively set and constrained. To that end, the Exchange believes
the proposed fees are reasonable because the proposed fees are similar
to or less than fees charged for similar connectivity and port access
provided by other options exchanges with comparable market shares. As
such, the Exchange believes that denying its ability to institute fees
that are closer to parity with legacy exchanges, in effect, impedes its
ability to compete, including in its pricing of transaction fees and
ability to invest in competitive infrastructure.
The following table shows how the Exchange's proposed fees remain
similar to or less than fees charged for similar connectivity and port
access provided by other options exchanges with similar market share.
Each of the market data rates in place at competing options exchanges
were filed with the Commission for immediate effectiveness and remain
in place today.
------------------------------------------------------------------------
Type of
Exchange connection or Monthly fee (per
port connection or per port)
------------------------------------------------------------------------
MIAX Emerald (as proposed) 10Gb ULL $13,500.
(equity options market share connection. 1-2 ports: FREE (not
of 2.88% for the month of Limited Service changed in this
November 2022) \76\. MEI Ports. proposal).
3-4 ports: $200 each.
5-6 ports: $300 each.
7 or more ports: $400
each.
NASDAQ \77\ (equity options 10Gb Ultra $15,000 per connection.
market share of 6.61% for fiber 1-5 ports: $1,500 per
the month of November 2022) connection. port.
\78\. SQF Port....... 6-20 ports: $1,000 per
port.
21 or more ports: $500
per port.
NASDAQ ISE LLC (``ISE'') \79\ 10Gb Ultra $15,000 per connection.
(equity options market share fiber $1,100 per port.
of 5.76% for the month of connection.
November 2022) \80\. SQF Port.......
NYSE American LLC (``NYSE 10Gb LX LCN $22,000 per connection.
American'') \81\ (equity connection. Ports 1-40. $450 per
options market share of Order/Quote port.
6.41% for the month of Entry Port. Ports 41 and greater.
November 2022) \82\. $150 per port.
NASDAQ GEMX, LLC (``GEMX'') 10Gb Ultra $15,000 per connection.
\83\ (equity options market connection. $1,250 per port.
share of 1.79% for the month SQF Port.......
of November 2022) \84\.
------------------------------------------------------------------------
\\
---------------------------------------------------------------------------
\76\ See supra note 68.
\77\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\78\ See supra note 68.
\79\ See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8: Connectivity.
\80\ See supra note 68.
\81\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
\82\ See supra note 68.
\83\ See GEMX Pricing Schedule, Options 7, Section 6,
Connectivity Fees and GEMX Rules, General 8: Connectivity.
\84\ See supra note 68.
---------------------------------------------------------------------------
The Exchange notes that, in regard to Limited Service MEI Ports,
other exchanges charge on a per port basis and require firms to connect
to multiple matching engines, thereby multiplying the cost to access
their full market.\85\
---------------------------------------------------------------------------
\85\ See Specialized Quote Interface Specification, Nasdaq PHLX,
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2,
Architecture (revised August 16, 2019), available at https://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------
There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options
exchanges. Market participants may choose to become a member of one or
more options exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, the Exchange's affiliate, MIAX PEARL, LLC (``MIAX Pearl''),
experienced a decrease in membership as the result of similar fees
proposed herein. One MIAX Pearl Member notified MIAX Pearl that it will
terminate their MIAX Pearl membership effective January 1, 2023, as a
direct result of the proposed connectivity and port fee changes on MIAX
Pearl.
It is not a requirement for market participants to become members
of all options exchanges, in fact, certain market participants conduct
an options business as a member of only one
[[Page 2659]]
options market.\86\ A very small number of market participants choose
to become a member of all sixteen options exchanges. Most firms that
actively trade on options markets are not currently Members of the
Exchange and do not purchase connectivity or port services at the
Exchange. Connectivity and ports are only available to Members or
service bureaus, and only a Member may utilize a port.\87\
---------------------------------------------------------------------------
\86\ BOX recently adopted an electronic market maker trading
permit fee. See Securities Exchange Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17). In that
proposal, BOX stated that, ``. . . it is not aware of any reason why
Market Makers could not simply drop their access to an exchange (or
not initially access an exchange) if an exchange were to establish
prices for its non-transaction fees that, in the determination of
such Market Maker, did not make business or economic sense for such
Market Maker to access such exchange. [BOX] again notes that no
market makers are required by rule, regulation, or competitive
forces to be a Market Maker on [BOX].'' Also in 2022, MEMX
established a monthly membership fee. See Securities Exchange Act
Release No. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022)
(SR-MEMX-2021-19). In that proposal, MEMX reasoned that that there
is value in becoming a member of the exchange and stated that it
believed that the proposed membership fee ``is not unfairly
discriminatory because no broker-dealer is required to become a
member of the Exchange'' and that ``neither the trade-through
requirements under Regulation NMS nor broker-dealers' best execution
obligations require a broker-dealer to become a member of every
exchange.''
\87\ Service Bureaus may obtain ports on behalf of Members.
---------------------------------------------------------------------------
One other exchange recently noted in a proposal to amend their own
trading permit fees that of the 62 market making firms that are
registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access
only one of the three exchanges.\88\ The Exchange and its affiliates,
MIAX Pearl and MIAX, have a total of 47 members. Of those 47 total
members, 35 are members of all three affiliated exchanges, four are
members of only two (2) affiliated exchanges, and eight (8) are members
of only one affiliated exchange. The Exchange also notes that no firm
is a Member of the Exchange only. The above data evidences that a
broker-dealer need not have direct connectivity to all options
exchanges, let alone the Exchange and its two affiliates, and broker-
dealers may elect to do so based on their own business decisions and
need to directly access each exchange's liquidity pool.
---------------------------------------------------------------------------
\88\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change to Amend the
Fee Schedule on the BOX Options Market LLC Facility To Adopt
Electronic Market Maker Trading Permit Fees). The Exchange believes
that BOX's observation demonstrates that market making firms can,
and do, select which exchanges they wish to access, and,
accordingly, options exchanges must take competitive considerations
into account when setting fees for such access.
---------------------------------------------------------------------------
Not only is there not an actual regulatory requirement to connect
to every options exchange, the Exchange believes there is also no ``de
facto'' or practical requirement as well, as further evidenced by the
broker-dealer membership analysis of the options exchanges discussed
above. As noted above, this is evidenced by the fact that one MIAX
Pearl Member will terminate their MIAX Pearl membership effective
January 1, 2023 as a direct result of the proposed connectivity and
port fee changes on MIAX Pearl (which are similar to the changes
proposed herein). Indeed, broker-dealers choose if and how to access a
particular exchange and because it is a choice, the Exchange must set
reasonable pricing, otherwise prospective members would not connect and
existing members would disconnect from the Exchange. The decision to
become a member of an exchange, particularly for registered market
makers, is complex, and not solely based on the non-transactional costs
assessed by an exchange. As noted herein, specific factors include, but
are not limited to: (i) an exchange's available liquidity in options
series; (ii) trading functionality offered on a particular market;
(iii) product offerings; (iv) customer service on an exchange; and (v)
transactional pricing. Becoming a member of the exchange does not
``lock'' a potential member into a market or diminish the overall
competition for exchange services.
In lieu of becoming a member at each options exchange, a market
participant may join one exchange and elect to have their orders routed
in the event that a better price is available on an away market.
Nothing in the Order Protection Rule requires a firm to become a Member
at--or establish connectivity to--the Exchange.\89\ If the Exchange is
not at the NBBO, the Exchange will route an order to any away market
that is at the NBBO to ensure that the order was executed at a superior
price and prevent a trade-through.\90\
---------------------------------------------------------------------------
\89\ See Options Order Protection and Locked/Crossed Market Plan
(August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
\90\ Members may elect to not route their orders by utilizing
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------
With respect to the submission of orders, Members may also choose
not to purchase any connection at all from the Exchange, and instead
rely on the port of a third party to submit an order. For example, a
third-party broker-dealer Member of the Exchange may be utilized by a
retail investor to submit orders into an Exchange. An institutional
investor may utilize a broker-dealer, a service bureau,\91\ or request
sponsored access \92\ through a member of an exchange in order to
submit a trade directly to an options exchange.\93\ A market
participant may either pay the costs associated with becoming a member
of an exchange or, in the alternative, a market participant may elect
to pay commissions to a broker-dealer, pay fees to a service bureau to
submit trades, or pay a member to sponsor the market participant in
order to submit trades directly to an exchange.
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\91\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be a Member. Some Members utilize a Service Bureau for
connectivity and that Service Bureau may not be a Member. Some
market participants utilize a Service Bureau who is a Member to
submit orders.
\92\ Sponsored Access is an arrangement whereby a Member permits
its customers to enter orders into an exchange's system that bypass
the Member's trading system and are routed directly to the Exchange,
including routing through a service bureau or other third-party
technology provider.
\93\ This may include utilizing a floor broker and submitting
the trade to one of the five options trading floors.
---------------------------------------------------------------------------
Non-Member third-parties, such as service bureaus and extranets,
resell the Exchange's connectivity. This indirect connectivity is
another viable alternative for market participants to trade on the
Exchange without connecting directly to the Exchange (and thus not pay
the Exchange's connectivity fees), which alternative is already being
used by non-Members and further constrains the price that the Exchange
is able to charge for connectivity and other access fees to its market.
The Exchange notes that it could, but chooses not to, preclude market
participants from reselling its connectivity. Unlike other exchanges,
the Exchange also does not currently assess fees on third-party
resellers on a per customer basis (i.e., fees based on the number of
firms that connect to the Exchange indirectly via the third-party).\94\
Indeed, the Exchange does not receive any connectivity revenue when
connectivity is resold by a third-party, which often is resold to
multiple customers, some of whom are agency broker-dealers that have
numerous
[[Page 2660]]
customers of their own.\95\ Particularly, in the event that a market
participant views the Exchange's direct connectivity and access fees as
more or less attractive than competing markets, that market participant
can choose to connect to the Exchange indirectly or may choose not to
connect to the Exchange and connect instead to one or more of the other
16 options markets. Accordingly, the Exchange believes that the
proposed fees are fair and reasonable and constrained by competitive
forces.
---------------------------------------------------------------------------
\94\ See, e.g., Nasdaq Price List--U.S. Direct Connection and
Extranet Fees, available at, US Direct-Extranet Connection
(nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022)
(SR-NASDAQ-2017-114).
\95\ The Exchange notes that resellers, such as SFTI, are not
required to publicize, let alone justify or file with the Commission
their fees, and as such could charge the market participant any fees
it deems appropriate (including connectivity fees higher than the
Exchange's connectivity fees), even if such fees would otherwise be
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------
The Exchange is obligated to regulate its Members and secure access
to its environment. In order to properly regulate its Members and
secure the trading environment, the Exchange takes measures to ensure
access is monitored and maintained with various controls. Connectivity
and ports are methods utilized by the Exchange to grant Members secure
access to communicate with the Exchange and exercise trading rights.
When a market participant elects to be a Member, and is approved for
membership by the Exchange, the Member is granted trading rights to
enter orders and/or quotes into Exchange through secure connections.
Again, there is no legal or regulatory requirement that a market
participant become a Member of the Exchange, or, if it is a Member, to
purchase connectivity beyond the one connection that is necessary to
quote or submit orders on the Exchange. Members may freely choose to
rely on one or many connections, depending on their business model.
Cost Analysis
In general, 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 Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
seeks to be especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and also carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level of diligence and transparency is called for by the
requirements of Section 19(b)(1) under the Act,\96\ and Rule 19b-4
thereunder,\97\ with respect to the types of information SROs should
provide when filing fee changes, and Section 6(b) of the Act,\98\ which
requires, among other things, that exchange fees be reasonable and
equitably allocated,\99\ not designed to permit unfair
discrimination,\100\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\101\ This rule change proposal addresses those requirements, and
the analysis and data in each of the sections that follow are designed
to clearly and comprehensively show how they are met.\102\ The Exchange
notes that the legacy exchanges with whom the Exchange vigorously
competes for order flow and market share, were not subject to any such
diligence or transparency in setting their baseline non-transaction
fees, most of which were put in place before the Revised Review Process
and Staff Guidance.
---------------------------------------------------------------------------
\96\ 15 U.S.C. 78s(b)(1).
\97\ 17 CFR 240.19b-4.
\98\ 15 U.S.C. 78f(b).
\99\ 15 U.S.C. 78f(b)(4).
\100\ 15 U.S.C. 78f(b)(5).
\101\ 15 U.S.C. 78f(b)(8).
\102\ See Staff Guidance, supra note 17.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $11,361,586 (or approximately $946,799 per month, rounded
to the nearest dollar when dividing the annual cost by 12 months) and
its aggregate annual costs for providing Limited Service MEI Ports at
$1,799,066 (or approximately $148,255 per month, rounded to the nearest
dollar when dividing the annual cost by 12 months). In order to cover
the aggregate costs of providing connectivity to its Users (both
Members and non-Members \103\) going forward and to make a modest
profit, as described below, the Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per month for each physical 10Gb
ULL connection. The Exchange also proposes to modify its Fee Schedule
to charge tiered rates for additional Limited Service MEI Ports.
---------------------------------------------------------------------------
\103\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services, and thus, may access Limited Service MEI Ports on behalf
of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
---------------------------------------------------------------------------
In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\104\ The
Cost Analysis required a detailed analysis of the Exchange's aggregate
baseline costs, including a determination and allocation of costs for
core services provided by the Exchange--transaction execution, market
data, membership services, physical connectivity, and port access
(which provide order entry, cancellation and modification
functionality, risk functionality, the ability to receive drop copies,
and other functionality). The Exchange separately divided its costs
between those costs necessary to deliver each of these core services,
including infrastructure, software, human resources (i.e., personnel),
and certain general and administrative expenses (``cost drivers'').
Next, the Exchange adopted an allocation methodology with various
principles to guide how much of a particular cost should be allocated
to each core service. For instance, fixed costs that are not driven by
client activity (e.g., message rates), such as data center costs, were
allocated more heavily to the provision of physical 1Gb and 10Gb ULL
connectivity (62%), with smaller allocations to all ports (10%), and
the remainder to the provision of transaction execution, membership
services and market data services (28%). The allocation methodology was
developed through conversations with senior management familiar with
each area of the Exchange's operations. After adopting this allocation
methodology, the Exchange then applied an estimated allocation of each
cost driver to each core service, resulting in the cost allocations
described below.
---------------------------------------------------------------------------
\104\ The Exchange frequently updates it Cost Analysis as
strategic initiatives change, costs increase or decrease, and market
participant needs and trading activity changes. The Exchange's most
recent Cost Analysis was conducted ahead of this filing.
---------------------------------------------------------------------------
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can
[[Page 2661]]
potentially use to fund its operations: transaction fees, fees for
connectivity and port services, membership fees, regulatory fees, and
market data fees. Accordingly, the Exchange must cover its expenses
from these five primary sources of revenue. The Exchange also notes
that as a general matter each of these sources of revenue is based on
services that are interdependent. For instance, the Exchange's system
for executing transactions is dependent on physical hardware and
connectivity, only Members and parties that they sponsor to participate
directly on the Exchange may submit orders to the Exchange, many
Members (but not all) consume market data from the Exchange in order to
trade on the Exchange, and the Exchange consumes market data from
external sources in order to comply with regulatory obligations.
Accordingly, given this interdependence, the allocation of costs to
each service or revenue source required judgment of the Exchange and
was weighted based on estimates of the Exchange that the Exchange
believes are reasonable, as set forth below. While there is no
standardized and generally accepted methodology the allocation of an
exchange's costs, the Exchange's methodology is the result of an
extensive review and analysis and will be consistently applied going
forward for any other potential fee proposals.
Through the Exchange's extensive updated Cost Analysis, the
Exchange analyzed every expense item in the Exchange's general expense
ledger to determine whether each such expense relates to the provision
of connectivity services, and, if such expense did so relate, what
portion (or percentage) of such expense actually supports the provision
of connectivity services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to network connectivity
services. In turn, the Exchange allocated certain costs more to
physical connectivity and others to ports, while certain costs were
only allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the cost drivers to provide
10Gb ULL connectivity and Limited Service MEI Port services, including
both physical 10Gb connections and Limited Service MEI Ports, result in
an aggregate monthly cost of approximately $1,095,054 (utilizing the
rounded numbers when dividing the annual cost for 10Gb ULL connectivity
and annual cost for Limited Service MEI Ports by 12 months, then adding
both numbers together), as further detailed below.
Costs Related To Offering Physical 10Gb ULL Connectivity
The following chart details the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
10Gb ULL connectivity via an unshared network as well as the percentage
of the Exchange's overall costs that such costs represent for such area
(e.g., as set forth below, the Exchange allocated approximately 28.1%
of its overall Human Resources cost to offering physical connectivity).
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \105\ \106\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $3,520,856 $293,405 28
Connectivity (external fees, cabling, switches, etc.).......... 71,675 5,973 61.9
Internet Services, including External Market Data.............. 373,249 31,104 84.8
Data Center.................................................... 752,545 62,712 61.9
Hardware and Software Maintenance and Licenses................. 666,208 55,517 50.9
Depreciation................................................... 1,929,118 160,760 63.8
Allocated Shared Expenses...................................... 4,047,935 337,328 51.3
------------------------------------------------
Total...................................................... 11,361,586 946,799 42.8
----------------------------------------------------------------------------------------------------------------
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 10Gb ULL
connectivity.
---------------------------------------------------------------------------
\105\ The Annual Cost includes figures rounded to the nearest
dollar.
\106\ The Monthly Cost was determined by dividing the Annual
Cost for each line item by twelve (12) months and rounding up or
down to the nearest dollar.
---------------------------------------------------------------------------
Human Resources
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity) and for which the Exchange allocated a percentage of
42.4% of each employee's time. The Exchange also allocated Human
Resources costs to provide physical connectivity to a limited subset of
personnel with ancillary functions related to establishing and
maintaining such connectivity (such as information security and finance
personnel), for which the Exchange allocated cost on an employee-by-
employee basis (i.e., only including those personnel who do support
functions related to providing physical connectivity) and then applied
a smaller allocation to such employees (less than 20%). The Exchange
notes that it has 184 employees and each department leader has direct
knowledge of the time spent by those spent by each employee with
respect to the various tasks necessary to operate the Exchange. The
estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing physical connectivity, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of their time such employees devote to
tasks related to providing physical connectivity. The Exchange notes
that senior level executives were only allocated Human Resources costs
to the extent the Exchange believed they are involved in overseeing
tasks related to providing physical connectivity. The Human Resources
cost was calculated using a blended rate of compensation reflecting
salary, equity and bonus compensation, benefits, payroll taxes, and
401(k) matching contributions.
Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges and third parties, cabling and switches required to
operate the Exchange. The Connectivity line-item is more narrowly
focused on technology used to complete connections to the Exchange and
to connect to external markets. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with
[[Page 2662]]
existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity and content service
providers for connectivity and data feeds for the entire U.S. options
industry, as well as content, connectivity, and infrastructure services
for critical components of the network that are necessary to provide
and maintain its System Networks and access to its System Networks via
10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity
and content service providers to connect to other national securities
exchanges, the Options Price Reporting Authority (``OPRA''), and to
receive market data from other exchanges and market data providers. The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity and market data provided these service
providers is critical to the Exchanges daily operations and performance
of its System Networks to which market participants connect to via 10Gb
ULL connectivity. Without these services providers, the Exchange would
not be able to connect to other national securities exchanges, market
data providers, or OPRA and, therefore, would not be able to operate
and support its System Networks. The Exchange does not employ a
separate fee to cover its connectivity and content service provider
expense and recoups that expense, in part, by charging for 10Gb ULL
connectivity.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (61.9%) to
physical 10Gb ULL connectivity because the third-party data centers and
the Exchange's physical equipment contained therein is the most direct
cost in providing physical access to the Exchange. In other words, for
the Exchange to operate in a dedicated space with connectivity of
participants to a physical trading platform, the data centers are a
very tangible cost, and in turn, if the Exchange did not maintain such
a presence then physical connectivity would be of no value to market
participants.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
10Gb ULL connectivity as such market data is necessary here to offer
certain services related to such connectivity, such as certain risk
checks that are performed prior to execution, and checking for other
conditions (e.g., re-pricing of orders to avoid lock or crossed
markets, trading collars). This allocation was included as part of the
Internet Services cost described above. Thus, as market data from other
exchanges is consumed at the matching engine level, (to which 10Gb ULL
connectivity provides access to) in order to validate orders before
additional entering the matching engine or being executed, the Exchange
believes it is reasonable to allocate a small amount of such costs to
10Gb ULL connectivity.
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of Exchange infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 63.8% of all depreciation costs to providing physical 10Gb
ULL connectivity. The Exchange notes, however, that it did not allocate
depreciation costs for any depreciated software necessary to operate
the Exchange to physical connectivity, as such software does not impact
the provision of physical connectivity.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall physical connectivity costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide physical connectivity. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange notes that the cost of paying
directors to serve on its Board of Directors is also included in the
Exchange's general shared expenses.\107\ The Exchange notes that the
51.3% allocation of general shared expenses for physical 10Gb ULL
connectivity is higher than that allocated to general shared expenses
for Limited Service MEI Ports based on its allocation methodology that
weighted costs attributable to each Core Service based on an
understanding of each area. While physical connectivity has several
areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Centers, as described above),
Limited Service MEI Ports do not require as many broad or indirect
resources as other Core Services. The total monthly cost for 10Gb ULL
connectivity of $946,799 was divided by the number of physical 10Gb ULL
connections the Exchange maintained at the time that proposed pricing
was determined (102), to arrive at a cost of approximately $9,282 per
month, per physical 10Gb ULL connection.
---------------------------------------------------------------------------
\107\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors to providing physical
connectivity. The Exchange does not calculate is expenses at that
granular a level. Instead, director costs are included as part of
the overall general allocation.
---------------------------------------------------------------------------
Costs Related To Offering Limited Service MEI Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Limited Service
MEO Ports as well as the percentage of the Exchange's overall costs
such costs represent for such area (e.g., as set forth below, the
Exchange allocated approximately 5.9% of its overall Human Resources
cost to offering Limited Service MEI Ports).
[[Page 2663]]
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \108\ \109\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $737,784 $61,482 5.9
Connectivity (external fees, cabling, switches, etc.).......... 3,713 309 3.2
Internet Services.............................................. 14,102 1,175 3.2
Data Center.................................................... 55,686 4,641 4.6
Hardware and Software Maintenance and Licenses................. 41,951 3,496 3.2
Depreciation................................................... 112,694 9,391 3.7
Allocated Shared Expenses...................................... 813,136 67,761 10.3
------------------------------------------------
Total...................................................... 1,779,066 148,255 6.7
----------------------------------------------------------------------------------------------------------------
Human Resources
---------------------------------------------------------------------------
\108\ See supra note 105 (describing rounding of Annual Costs).
\109\ See supra note 106 (describing rounding of Monthly Costs
based on Annual Costs).
---------------------------------------------------------------------------
With respect to Limited Service MEI Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Limited Service MEI Ports
and maintaining performance thereof (including a broader range of
employees such as technical operations personnel, market operations
personnel, and software engineering personnel) as well as a limited
subset of personnel with ancillary functions related to maintaining
such connectivity (such as sales, membership, and finance personnel).
The estimates of Human Resources cost were again determined by
consulting with department leaders, determining which employees are
involved in tasks related to providing Limited Service MEI Ports and
maintaining performance thereof, and confirming that the proposed
allocations were reasonable based on an understanding of the percentage
of their time such employees devote to tasks related to providing
Limited Service MEI Ports and maintaining performance thereof. The
Exchange notes that senior level executives were only allocated Human
Resources costs to the extent the Exchange believed they are involved
in overseeing tasks related to providing Limited Service MEI Ports and
maintaining performance thereof. The Human Resources cost was again
calculated using a blended rate of compensation reflecting salary,
equity and bonus compensation, benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges, cabling and switches, as described above. For purposes
of Limited Service MEI Ports, the Exchange also includes a portion of
its costs related to External Market Data, as described below.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
Limited Service MEI Ports as such market data is necessary to offer
certain services related to such sessions, such as validating orders on
entry against the national best bid and national best offer and
checking for other conditions (e.g., whether a symbol is halted). This
allocation was included as part of the Internet Services cost described
above.\110\ Thus, as market data from other Exchanges is consumed at
the Limited Service MEI Port level in order to validate orders before
additional processing occurs with respect to such orders, the Exchange
believes it is reasonable to allocate a small amount of such costs to
Limited Service MEI Ports.
---------------------------------------------------------------------------
\110\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of order entry infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 3.7% of
all depreciation costs to providing Limited Service MEI Ports. In
contrast to physical connectivity, described above, the Exchange did
allocate depreciation costs for depreciated software necessary to
operate the Exchange to Limited Service MEI Ports because such software
is related to the provision of such connectivity.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall Limited Service MEI Ports costs as without these general
shared costs the Exchange would not be able to operate in the manner
that it does and provide Limited Service MEI Ports. The costs included
in general shared expenses include general expenses of the Exchange,
including office space and office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 11% of the overall cost for
directors was allocated to providing Limited Service MEI Ports. The
Exchange notes that the 10.3% allocation of general shared expenses for
Limited Service MEI Ports is lower than that allocated to general
shared expenses for physical connectivity based on its allocation
methodology that weighted costs attributable to each Core Service based
on an understanding of each area. While Limited Service MEI Ports have
several areas where certain tangible costs are heavily weighted
[[Page 2664]]
towards providing such service (e.g., Data Centers, as described
above), 10Gb ULL connectivity requires a broader level of support from
Exchange personnel in different areas, which in turn leads to a broader
general level of cost to the Exchange. The total monthly cost of
$148,255 was divided by the number of chargeable Limited Service MEI
Ports (excluding the two free Limited Service MEI Ports per matching
engine that each Member receives) the Exchange maintained at the time
that proposed pricing was determined (706), to arrive at a cost of
approximately $210 per month, per charged Limited Service MEI Port.
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or Limited Service MEI Ports) and did not double-count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections, the Exchange has a team of
employees dedicated to network infrastructure and with respect to such
employees the Exchange allocated network infrastructure personnel with
a high percentage of the cost of such personnel (42.4%) given their
focus on functions necessary to provide physical connections. The
salaries of those same personnel were allocated only 8.0% to Limited
Service MEI Ports and the remaining 49.6% was allocated to 1Gb
connectivity, other port services, transaction services, membership
services and market data. The Exchange did not allocate any other Human
Resources expense for providing physical connections to any other
employee group, outside of a smaller allocation of 19.8% for 10Gb ULL
connectivity or 19.9% for the entire network, of the cost associated
with certain specified personnel who work closely with and support
network infrastructure personnel. In contrast, the Exchange allocated
much smaller percentages of costs (5% or less) across a wider range of
personnel groups in order to allocate Human Resources costs to
providing Limited Service MEI Ports. This is because a much wider range
of personnel are involved in functions necessary to offer, monitor and
maintain Limited Service MEI Ports but the tasks necessary to do so are
not a primary or full-time function.
In total, the Exchange allocated 28.1% of its personnel costs to
providing physical connections and 5.9% of its personnel costs to
providing Limited Service MEI Ports, for a total allocation of 34%
Human Resources expense to provide these specific connectivity
services. In turn, the Exchange allocated the remaining 66% of its
Human Resources expense to membership services, transaction services,
other port services and market data. Thus, again, the Exchange's
allocations of cost across core services were based on real costs of
operating the Exchange and were not double-counted across the core
services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and Limited Service
MEI Ports, but in different amounts. 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. Without this equipment, the Exchange would not
be able to operate the network and provide connectivity services to its
Members and non-Members and their customers. However, the Exchange did
not allocate all of the depreciation and amortization expense toward
the cost of providing connectivity services, but instead allocated
approximately 67.5% of the Exchange's overall depreciation and
amortization expense to connectivity services (63.8% attributed to 10Gb
ULL physical connections and 3.7% to Limited Service MEI Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 32.5%) toward the cost of providing transaction
services, membership services, other port services and market data
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or Limited Service MEI Ports or in obtaining new
clients that will purchase such services. Similarly, the Exchange will
have to be successful in retaining a positive net capture on
transaction fees in order to realize the anticipated revenue from
transaction pricing.
The Exchange notes that the Cost Analysis is based on the
Exchange's 2023 fiscal year of operations and projections. As such, the
Exchange believes that its costs will remain relatively similar in
future years. It is possible however that such costs will either
decrease or increase. To the extent the Exchange sees growth in use of
connectivity services it will receive additional revenue to offset
future cost increases.
However, if use of connectivity services is static or decreases,
the Exchange might not realize the revenue that it anticipates or needs
in order to cover applicable costs. Accordingly, the Exchange is
committing to conduct a one-year review after implementation of these
fees. The Exchange expects that it may propose to adjust fees at that
time, to increase fees in the event that revenues fail to cover costs
and a reasonable mark-up of such costs. Similarly, the Exchange would
propose to decrease fees in the event that revenue materially exceeds
our current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, the Exchange believes that it is appropriate for an
exchange to refresh and update information about its relevant costs and
revenues in seeking any future changes to fees, and the Exchange
commits to do so.
Projected Revenue
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services;
[[Page 2665]]
without such hardware, infrastructure, monitoring and support the
Exchange would be unable to provide the connectivity services. Much of
the cost relates to monitoring and analysis of data and performance of
the network via the subscriber's connection(s). The above cost, namely
those associated with hardware, software, and human capital, enable the
Exchange to measure network performance with nanosecond granularity.
These same costs are also associated with time and money spent seeking
to continuously improve the network performance, improving the
subscriber's experience, based on monitoring and analysis activity. The
Exchange routinely works to improve the performance of the network's
hardware and software. The costs associated with maintaining and
enhancing a state-of-the-art exchange network is a significant expense
for the Exchange, and thus the Exchange believes that it is reasonable
and appropriate to help offset those costs by amending fees for
connectivity services. Subscribers, particularly those of 10Gb ULL
connectivity, expect the Exchange to provide this level of support to
connectivity so they continue to receive the performance they expect.
This differentiates the Exchange from its competitors. As detailed
above, the Exchange has five primary sources of revenue that it can
potentially use to fund its operations: transaction fees, fees for
connectivity services, membership and regulatory fees, and market data
fees. Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue.
The Exchange's Cost Analysis estimates the annual cost to provide
10Gb ULL connectivity services at $11,361,586. Based on current 10Gb
ULL connectivity services usage, the Exchange would generate annual
revenue of approximately $16,524,000. This represents a modest profit
of 31% when compared to the cost of providing 10Gb ULL connectivity
services. The Exchange's Cost Analysis estimates the annual cost to
provide Limited Service MEI Port services at $1,779,066. Based on
current Limited Service MEI Port services usage, the Exchange would
generate annual revenue of approximately $2,809,200. This represents a
modest profit of 37% when compared to the cost of providing Limited
Service MEI Port services. Even if the Exchange earns those amounts or
incrementally more, the Exchange believes the proposed fees are fair
and reasonable because they will not result in excessive pricing or
supra-competitive profit, when comparing the total expense of the
Exchange associated with providing 10Gb ULL connectivity and Limited
Service MEI Port services versus the total projected revenue of the
Exchange associated with network 10Gb ULL connectivity and Limited
Service MEI Port services.
* * * * *
The Exchange has operated at a cumulative net annual loss since it
launched operations in 2019.\111\ The Exchange has operated at a net
loss due to a number of factors, one of which is choosing to forgo
revenue by offering certain products, such as connectivity, at lower
rates than other options exchanges to attract order flow and encourage
market participants to experience the high determinism, low latency,
and resiliency of the Exchange's trading systems. The Exchange should
not now be penalized for seeking to raise its fees in light of
necessary technology changes and its increased costs after offering
such products as discounted prices. Therefore, the Exchange believes
the proposed fees are reasonable because they are based on both
relative costs to the Exchange to provide dedicated 10Gb ULL
connectivity and Limited Service MEI Ports, the extent to which the
product drives the Exchange's overall costs and the relative value of
the product, as well as the Exchange's objective to make access to its
Systems broadly available to market participants. The Exchange also
believes the proposed fees are reasonable because they are designed to
generate annual revenue to recoup the Exchange's costs of providing
dedicated 10Gb ULL connectivity and Limited Service MEI Ports.
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\111\ The Exchange has incurred a cumulative loss of $9 million
since its inception in 2019. See Exchange's Form 1/A, Application
for Registration or Exemption from Registration as a National
Securities Exchange, filed June 29, 2022, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001164.pdf.
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The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 10Gb ULL connectivity and Limited Service MEI Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports
and/or obtaining new clients that will purchase such access. To the
extent the Exchange is successful in encouraging new clients to utilize
10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does
not believe it should be penalized for such success. The Exchange, like
other exchanges, is, after all, a for-profit business, which provides
economic value to its Members. To the extent the Exchange has mispriced
and experiences a net loss in clients, the Exchange could experience a
net reduction in revenue. While the Exchange believes in transparency
around costs and potential revenue, the Exchange does not believe that
these estimates should form the sole basis of whether or not a proposed
fee is reasonable or can be adopted.
Further, the proposal reflects the Exchange's efforts to control
its costs, which the Exchange does on an ongoing basis as a matter of
good business practice. A potential profit margin should not be judged
alone based on its size, but is also indicative of costs management and
whether the ultimate fee reflects the value of the services provided.
For example, a profit margin on one exchange should not be deemed
excessive where that exchange has been successful in controlling its
costs, but not excessive where on another exchange where that exchange
is charging comparable fees but has a lower profit margin due to higher
costs. Doing so could have the perverse effect of not incentivizing
cost control where higher costs alone could be used to justify fees
increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of
[[Page 2666]]
message traffic over the network. In the Exchange's experience, users
of the 1Gb connections do not have the same business needs for the
high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct options markets. 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
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages to satisfy its record keeping requirements under
the Exchange Act.\112\ Thus, as the number of messages an entity
increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, connection costs (e.g.,
storage costs, surveillance costs, service expenses) also increase.
Given this difference in network utilization rate, the Exchange
believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all market participants' benefit.
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\112\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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Limited Service MEI Ports
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity alternatives, as the
users of the Limited Service MEI Ports consume the most bandwidth and
resources of the network. Specifically, like above for the 10Gb ULL
connectivity, the Exchange notes that the Market Makers who take the
maximum amount of Limited Service MEI Ports account for approximately
greater than 99% of message traffic over the network, while Market
Makers with fewer Limited Service MEI Ports account for approximately
less than 1% of message traffic over the network. In the Exchange's
experience, Market Makers who only utilize the two free Limited Service
MEI Ports do not have a business need for the high performance network
solutions required by Market Makers who take the maximum amount of
Limited Service MEI Ports. The Exchange's high performance network
solutions and supporting infrastructure (including employee support),
provides unparalleled system throughput and the capacity to handle
approximately 18 million quote messages per second. Based on November
2022 trading results, on an average day, the Exchange handles over
approximately 6.9 billion quotes, and more than 146 billion quotes over
the entire month. Of that total, Market Makers with the maximum amount
of Limited Service MEI Ports generate over 4 billion quotes, and Market
Makers who utilize the two free Limited Service MEI Ports generate
approximately 1.6 billion quotes. Also for November 2022, Market Makers
who utilized 7 to 9 Limited Service MEI ports submitted an average of
1,264,703,600 quotes per day. 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
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages as part of it surveillance program and to satisfy
its record keeping requirements under the Exchange Act.\113\ Thus, as
the number of connections a Market Maker has increases, certain other
costs incurred by the Exchange that are correlated to, though not
directly affected by, connection costs (e.g., storage costs,
surveillance costs, service expenses) also increase. The Exchange
sought to design the proposed tiered-pricing structure to set the
amount of the fees to relate to the number of connections a firm
purchases. The more connections purchased by a Market Maker likely
results in greater expenditure of Exchange resources and increased cost
to the Exchange. With this in mind, the Exchange proposes no fee or
lower fees for those Market Makers who receive fewer Limited Service
MEI Ports since those Market Makers generally tend to send the least
amount of orders and messages over those connections. Given this
difference in network utilization rate, the Exchange believes that it
is reasonable, equitable, and not unfairly discriminatory that Market
Makers who take the most Limited Service MEI Ports pay for the vast
majority of the shared network resources from which all Member and non-
Member users benefit, but is designed and maintained from a capacity
standpoint to specifically handle the message rate and performance
requirements of those Market Makers.
---------------------------------------------------------------------------
\113\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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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.
Billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. The Exchange must also
purchase additional storage capacity on an ongoing basis to ensure it
has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\114\ Thus, as the number of connections a
Market Maker has increases, the related pull on Exchange resources also
increases. The Exchange sought to design the proposed tiered-pricing
structure to set the amount of the fees to relate to the number of
connections a firm purchases. The more connections purchased by a
Market Maker likely results in greater expenditure of Exchange
resources and increased cost to the Exchange.
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\114\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Limited Service MEI Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange operated at a cumulative net annual loss
since its
[[Page 2667]]
launch in 2019 \115\ due to providing a low-cost alternative to attract
order flow and encourage market participants to experience the high
determinism and resiliency of the Exchange's trading Systems. To do so,
the Exchange chose to waive the fees for some non-transaction related
services and Exchange products or provide them at a very lower fee,
which was not profitable to the Exchange. This resulted in the Exchange
forgoing revenue it could have generated from assessing any fees or
higher fees. The Exchange could have sought to charge higher fees at
the outset, but that could have served to discourage participation on
the Exchange. Instead, the Exchange chose to provide a low-cost
exchange alternative to the options industry, which resulted in lower
initial revenues. Examples of this are 10Gb ULL connectivity and
Limited Service MEI Ports, for which the Exchange only now seeks to
adopt fees at a level similar to or lower than those of other options
exchanges.
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\115\ See supra note 111.
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Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As is the case with the current proposed flat
fee, the proposed fee would apply uniformly to all market participants
regardless of the number of connections they choose to purchase. The
proposed fee does not favor certain categories of market participants
in a manner that would impose an undue 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. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and
customers of those resellers to compete with other market participants
or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Member will terminate their
MIAX Pearl membership on January 1, 2023 as a direct result of the
similar proposed fee changes by MIAX Pearl. The Exchange does not
believe that the proposed fees for connectivity services place certain
market participants at a relative disadvantage to other market
participants because the proposed connectivity pricing is associated
with relative usage of the Exchange by each market participant and does
not impose a barrier to entry to smaller participants. The Exchange
believes its proposed pricing is reasonable and, when coupled with the
availability of third-party providers that also offer connectivity
solutions, that participation on the Exchange is affordable for all
market participants, including smaller trading firms. As described
above, the connectivity services purchased by market participants
typically increase based on their additional message traffic and/or the
complexity of their operations. The market participants that utilize
more connectivity services typically utilize the most bandwidth, and
those are the participants that consume the most resources from the
network. Accordingly, the proposed fees for connectivity services do
not favor certain categories of market participants in a manner that
would impose a burden on competition; rather, the allocation of the
proposed connectivity fees reflects the network resources consumed by
the various size of market participants and the costs to the Exchange
of providing such connectivity services.
Inter-Market Competition
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. There is no reason to believe that our
proposed price increase will harm another exchange's ability to
compete. There are other options markets of which market participants
may connect to trade options at higher rates than the Exchange's. There
is also a range of alternative strategies, including routing to the
exchange through another participant or market center or accessing the
Exchange indirectly. Market participants are free to choose which
exchange or reseller to use to satisfy their business needs.
Accordingly, the Exchange does not believe its proposed fee changes
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult 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 non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. 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,\116\ and Rule
[[Page 2668]]
19b-4(f)(2) \117\ 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.
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\116\ 15 U.S.C. 78s(b)(3)(A)(ii).
\117\ 17 CFR 240.19b-4(f)(2).
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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 [email protected]. Please include
File Number SR-EMERALD-2023-01 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-2023-01. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-EMERALD-2023-01 and should be submitted
on or before February 7, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\118\
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\118\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00659 Filed 1-13-23; 8:45 am]
BILLING CODE 8011-01-P
