Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule To Modify Certain Connectivity and Port Fees, 2729-2748 [2023-00660]
Download as PDF
<![CDATA[
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.156
Sherry R. Haywood,
Assistant Secretary.
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
[FR Doc. 2023–00662 Filed 1–13–23; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–96629; File No. SR–MIAX–
2022–50]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change 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 December
30, 2022, Miami International Securities
Exchange, LLC (‘‘MIAX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Options Exchange 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/rulefilings, at MIAX’s principal office, and
at the Commission’s Public Reference
Room.
khammond on DSKJM1Z7X2PROD with NOTICES
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
156 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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)
amend the fees for Limited Service
MIAX Express Interface (‘‘MEI’’) Ports 4
available to Market Makers.5 The
Exchange and its affiliate, MIAX
PEARL, LLC (‘‘MIAX Pearl’’) operated
10Gb ULL connectivity (for MIAX
Pearl’s options market) on a single
shared network that provided access to
both exchanges via a single 10Gb ULL
connection. The Exchange last increased
fees for 10Gb ULL connections from
$9,300 to $10,000 per month on January
1, 2021.6 At the same time, MIAX Pearl
also increased its 10Gb ULL
connectivity fee from $9,300 to $10,000
per month.7 The Exchange and MIAX
Pearl shared a combined cost analysis in
those filings due to the single shared
10Gb ULL connectivity network for both
exchanges. In those filings, the
Exchange and MIAX Pearl allocated a
combined total of $17.9 million in
expenses to providing 10Gb ULL
connectivity.8
Beginning in late January 2023, the
Exchange also recently determined a
substantial operational need to no
longer operate 10Gb ULL connectivity
on a single shared network with MIAX
Pearl. The Exchange is bifurcating 10Gb
ULL connectivity due to ever-increasing
capacity constraints and to enable it to
continue to satisfy the anticipated
access needs for Members and other
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 MIAX Express Interface is a connection to MIAX
systems that enables Market Makers to submit
simple and complex electronic quotes to MIAX. See
Fee Schedule, note 26.
5 The term ‘‘Market Makers’’ refers to Lead Market
Makers (‘‘LMMs’’), Primary Lead Market Makers
(‘‘PLMMs’’), and Registered Market Makers
(‘‘RMMs’’) collectively. See Exchange Rule 100.
6 See Securities Exchange Act Release No. 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02).
7 See Securities Exchange Act Release No. 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021)
(SR–PEARL–2021–01).
8 See id.
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
2729
market participants.9 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 $12,034,554 for providing 10Gb
ULL connectivity on a single unshared
network (an overall increase over its
prior cost to provide 10Gb ULL
connectivity on a shared network with
MIAX Pearl) and $2,157,178 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
Service MEI Ports in order to recoup
cost related to bifurcating 10Gb
connectivity to the Exchange and MIAX
Pearl as well as the ongoing costs and
increase in expenses set forth below in
the Exchange’s cost analysis.10
*
*
*
*
*
Starting in 2017, following the United
States Court of Appeals for the District
of Columbia’s Susquehanna Decision 11
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
9 See MIAX Options and MIAX Pearl Options—
Announce planned network changes related to
shared 10G ULL extranet, issued August 12, 2022,
available at https://www.miaxoptions.com/alerts/
2022/08/12/miax-options-and-miax-pearl-optionsannounce-planned-network-changes-related-0. The
Exchange will continue to provide access to both
the Exchange and MIAX Pearl over a single shared
1Gb connection. See Securities Exchange Act
Release Nos. 96553 (December 20, 2022), 87 FR
79379 (December 27, 2022) (SR–PEARL–2022–60);
96545 (December 20, 2022) 87 FR 79393 (December
27, 2022) (SR–MIAX–2022–48).
10 The Exchange notes that MIAX Pearl will make
a similar filing to increase its 10Gb ULL
connectivity fees.
11 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
E:\FR\FM\17JAN1.SGM
17JAN1
2730
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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.12 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.13 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’’).14 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.’’ 15 The Commission denied
requests by various exchanges and plan
participants for reconsideration of the
Remand Order.16 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.’’ 17 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
khammond on DSKJM1Z7X2PROD with NOTICES
12 Id.
13 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84432, 2018 WL 5023228
(October 16, 2018) (the ‘‘SIFMA Decision’’).
14 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).
15 Id. at page 2.
16 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 85802, 2019 WL 2022819
(May 7, 2019) (the ‘‘Order Denying
Reconsideration’’).
17 Order Denying Reconsideration, 2019 WL
2022819, at *13.
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
a fee.18 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.’’ 19 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.’’ 20 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.’’ 21
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 22 and remanded for
further proceedings consistent with its
opinion.23 That same day, the D.C.
18 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).
19 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’’).
20 Id.
21 Id.
22 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.
23 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
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
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.’’ 24 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.25 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.’’ 26 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.27
As a result of the Commission’s loss
of the NASDAQ vs. 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
enable us to perform our review.’’ 28 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,
challenge the fees at issue’’ in the SIFMA Decision.
Id.
24 Id. at *2; see also id. (‘‘[T]he sole purpose of
the challenged remand has disappeared.’’).
25 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’’).
26 Id.
27 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 90087 (October 5, 2020).
28 See supra note 14, at page 2.
E:\FR\FM\17JAN1.SGM
17JAN1
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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’’).29 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 30
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.31 These fees remain
in effect today.
khammond on DSKJM1Z7X2PROD with NOTICES
29 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.
30 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.
31 See, e.g., Securities Exchange Act Release Nos.
74417 (March 3, 2015), 80 FR 12534 (March 9,
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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
charge those fees.32 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
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).
32 The Exchange has filed, and subsequently
withdrawn, various forms of this proposed fee
change 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.
PO 00000
Frm 00133
Fmt 4703
Sfmt 4703
2731
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 33
and $80,383,000 for 2021.34 Cboe C2
Exchange, Inc. (‘‘C2’’) reported ‘‘access
and capacity fee’’ revenue of
$19,016,000 for 2020 35 and $22,843,000
for 2021.36 Cboe BZX Exchange, Inc.
(‘‘BZX’’) reported ‘‘access and capacity
fee’’ revenue of $38,387,000 for 2020 37
and $44,800,000 for 2021.38 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
‘‘access and capacity fee’’ revenue of
$26,126,000 for 2020 39 and $30,687,000
for 2021.40 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,
LLC (‘‘NASDAQ Phlx’’) reported ‘‘Trade
Management Services’’ revenue of
$20,817,000 for 2019.41 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
33 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.
34 See Cboe 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001155.pdf.
35 See C2 2021 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000469.pdf.
36 See C2 2022 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2200/
22001156.pdf.
37 See BZX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000465.pdf.
38 See BZX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001152.pdf.
39 See EDGX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000467.pdf.
40 See EDGX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001154.pdf.
41 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.
E:\FR\FM\17JAN1.SGM
17JAN1
khammond on DSKJM1Z7X2PROD with NOTICES
2732
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
bundled into a much larger line item in
PHLX’s Form 1, simply titled ‘‘Market
services.’’ 42
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,43 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
. . .’’,44 this is not the reality
experienced by exchanges such as
MIAX. As such, non-legacy exchanges
are forced to rely on an opaque costbased 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 goodfaith 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.45 However,
42 See PHLX Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf.
43 See, e.g., CNBC Debuts New Set on NYSE Floor,
available at https://www.cnbc.com/id/46517876.
44 See supra note 19, at note 1.
45 See Securities Exchange Act Release Nos.
94890 (May 11, 2022), 87 FR 29945 (May 17, 2022)
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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 46 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
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,47 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; 48 or (c)
(SR–MIAX–2022–20); 94720 (April 14, 2022), 87 FR
23586 (April 20, 2022) (SR–MIAX–2022–16); 94719
(April 14, 2022), 87 FR 23600 (April 20, 2022) (SR–
MIAX–2022–14); 94259 (February 15, 2022), 87 FR
9747 (February 22, 2022) (SR–MIAX–2022–08);
94256 (February 15, 2022), 87 FR9711 (February 22,
2022) (SR–MIAX–2022–07); 93771 (December 14,
2021), 86 FR 71940 (December 20, 2021) (SR–
MIAX–2021–60); 93775 (December 14, 2021), 86 FR
71996 (December 20, 2021) (SR–MIAX–2021–59);
93185 (September 29, 2021), 86 FR 55093 (October
5, 2021) (SR–MIAX–2021–43); 93165 (September
28, 2021), 86 FR 54750 (October 4, 2021) (SR–
MIAX–2021–41); 92661 (August 13, 2021), 86 FR
46737 (August 19, 2021) (SR–MIAX–2021–37);
92643 (August 11, 2021), 86 FR 46034 (August 17,
2021) (SR–MIAX–2021–35).
46 15 U.S.C. 78f(b)(4).
47 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.
48 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
PO 00000
Frm 00134
Fmt 4703
Sfmt 4703
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
significantly enhanced arguments and
cost disclosures.49
Lastly, the Exchange notes that the
Commission Staff has allowed similar
fee increases by other exchanges to
remain in effect by publishing those
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.
49 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.
E:\FR\FM\17JAN1.SGM
17JAN1
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
filings for comment and allowing the
exchange to withdraw and re-file
numerous times.50 Recently, the
Commission Staff has not afforded the
Exchange the same flexibility.51 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.
*
*
*
*
*
khammond on DSKJM1Z7X2PROD with NOTICES
10Gb ULL Connectivity Fee Change
The Exchange recently filed a
proposal to no longer operate 10Gb
connectivity to the Exchange on a single
shared network with its affiliate, MIAX
Pearl. This change is an operational
necessity due to ever-increasing
capacity constraints and to
accommodate anticipated access needs
for Members and other market
participants.52 This proposal: (i) sets
forth the applicable fees for the
bifurcated 10Gb ULL network; and (ii)
removes provisions in the Fee Schedule
that provides for a shared 10Gb ULL
network; and (iii) specifies that market
participants may continue to connect to
both the Exchange and MIAX Pearl via
the 1Gb network.
The Exchange plans to bifurcate the
Exchange and MIAX Pearl 10Gb ULL
networks in the first quarter of 2023,
currently anticipated to be effective on
January 23, 2023. The Exchange issued
an alert on August 12, 2022 publicly
announcing the planned network
change and implementation plan and
dates to provide market participants
adequate time to prepare.53 Upon
bifurcation of the 10Gb ULL network,
subscribers would need to purchase
separate connections to the Exchange
50 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).
51 See Securities Exchange Act Release Nos.
94719 (April 14, 2022), 87 FR 23600 (April 20,
2022) (SR–MIAX–2022–14) and 94720 (April 14,
2022), 87 FR 23586 (April 20, 2022) (SR–MIAX–
2022–16).
52 See supra note 9.
53 Id.
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
and MIAX at the applicable rate. The
Exchange’s proposed amended rate for
10Gb ULL connectivity is described
below. Until the 10Gb ULL network is
bifurcated, subscribers to 10Gb ULL
connectivity would be able to connect to
both the Exchange and MIAX Pearl at
the applicable rate set forth below.
The Exchange, therefore, proposes to
amend the Fee Schedule to increase the
fees for Members and non-Members to
access the Exchange’s system
networks 54 via a 10Gb ULL fiber
connection and to specify that this fee
is for a dedicated connection to the
Exchange and no longer provides access
to MIAX Pearl. 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’’).55 The
Exchange also proposes to amend the
Fee Schedule to reflect the bifurcation
of the 10Gb ULL network and specify
that only the 1Gb network provides
access to both the Exchange and MIAX
Pearl.
The Exchange proposes to make the
following changes to reflect the
bifurcated 10Gb ULL network for the
Exchange and MIAX Pearl. The
Exchange proposes to amend the
explanatory paragraphs below the
network connectivity fee tables in
Sections 5(a)–(b) of the Fee Schedule to
specify that, with the bifurcated 10Gb
ULL network, Members (and nonMembers) utilizing the MENI to connect
to the trading platforms, market data
systems, test systems, and disaster
recovery facilities of the Exchange and
MIAX Pearl via a single, can only do so
via a shared 1Gb connection.
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
54 The Exchange’s system networks consist of the
Exchange’s extranet, internal network, and external
network.
55 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.’’).
PO 00000
Frm 00135
Fmt 4703
Sfmt 4703
2733
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.
Implementation of 10Gb ULL Fee. The
proposed 10Gb ULL fee will be effective
January 1, 2023. From January 1, 2023
until January 22, 2023, subscribers to
10Gb ULL connectivity will continue to
receive access to both the Exchange and
MIAX Pearl via a single 10Gb ULL
connection. Upon bifurcation of the
10Gb ULL network on January 23, 2023,
subscribers that elect to continue to
access both the Exchange and MIAX
Pearl via a 10Gb ULL connection will
need to purchase separate 10Gb ULL
connections from each exchange.
Existing subscribers of 10Gb ULL
connections on the Exchange that also
purchase a new 10Gb ULL connection to
access MIAX Pearl would pay a prorated portion of the monthly fee for the
added connection for the remainder of
the month.
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 56 and
two (2) Limited Service MEI Ports 57 per
matching engine 58 to which each
56 Full Service MEI Ports provide Market Makers
with the ability to send Market Maker quotes,
eQuotes, and quote purge messages to the MIAX
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 Fee Schedule, Section
(5)(d)(ii), note 27.
57 Limited Service MEI Ports provide Market
Makers with the ability to send eQuotes and quote
purge messages only, but not Market Maker Quotes,
to the MIAX 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
Fee Schedule, Section (5)(d)(ii), note 28.
58 A ‘‘matching engine’’ is a part of the MIAX
electronic system that processes options quotes and
trades on a symbol-by-symbol basis. Some matching
engines will process option classes with multiple
root symbols, and other matching engines will be
dedicated to one single option root symbol (for
example, options on SPY will be processed by one
E:\FR\FM\17JAN1.SGM
Continued
17JAN1
2734
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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. This fee
was unchanged since 2016.59
Limited Service MEI Port Fee Changes
khammond on DSKJM1Z7X2PROD with NOTICES
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 $150 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
$200 per port; and (iii) the seventh or
more Limited Service MEI Ports will
increase from the current monthly flat
fee of $100 to $250 per port. 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
capacity and headroom in the System 60
in accordance with its fair access
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 Fee Schedule,
Section (5)(d)(ii), note 29.
59 See Securities Exchange Act Release No. 79666
(December 22, 2016), 81 FR 96133 (December 29,
2016) (SR–MIAX–2016–47).
60 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.
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
requirements under Section 6(b)(5) of
the Act.61
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 8.8 billion
quotes, and more than 185 billion
quotes over the entire month. Of that
total, Market Makers with the maximum
amount of Limited Service MEI Ports
generate approximately 5 billion quotes,
and Market Makers who utilize the two
free Limited Service MEI Ports generate
approximately 1.5 billion quotes. Also
for November 2022, Market Makers who
utilized 3 to 4 Limited Service MEI
ports submitted an average of
1,152,654,133 quotes per day and
Market Makers who utilized 5 to 9
Limited Service MEI ports submitted an
average of 1,172,105,181 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
61 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.
PO 00000
Frm 00136
Fmt 4703
Sfmt 4703
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.62 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
since it has not done so since 2016,63
which is designed to recover a portion
of the costs associated with directly
accessing the Exchange.
Implementation of Limited Service
MEI Port fees. This proposed fee
changes will be effective January 1,
2023.
2. Statutory Basis
The Exchange believes that the
proposed fees are consistent with
Section 6(b) of the Act 64 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 65 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
62 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
63 See Securities Exchange Act Release No. 79666
(December 22, 2016), 81 FR 96133 (December 29,
2016) (SR–MIAX–2016–47).
64 15 U.S.C. 78f(b).
65 15 U.S.C. 78f(b)(4).
E:\FR\FM\17JAN1.SGM
17JAN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
Exchange also believes the proposed
fees further the objectives of Section
6(b)(5) of the Act 66 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 67 and the Staff Guidance 68,
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.’’ 69 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.’’ 70
In the Staff Guidance, the Commission
Staff further states that, ‘‘[i]f an SRO
seeks to support its claims that a
66 15
U.S.C. 78f(b)(5).
supra note 18.
68 See supra note 19.
69 Id.
70 Id.
67 See
VerDate Sep<11>2014
18:16 Jan 13, 2023
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.’’ 71
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 (driven by the bifurcation
of the 10Gb ULL network) and Limited
Service MEI Ports. As discussed above,
the Revised Review Process and Staff
Guidance have created an uneven
playing field between legacy and nonlegacy 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 nontransaction revenue that may be used to
fund areas other than the nontransaction 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.
71 Id.
Jkt 259001
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
2735
The Proposed Fees Ensure Parity
Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations
in 2012 and adopted its initial fee
schedule, with all connectivity and port
fees set at $0.00 (the Exchange originally
had a non-ULL 10Gb connectivity
option, which it has since removed).72
As a new exchange entrant, the
Exchange chose to offer connectivity
and ports free of charge 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.73
72 See Securities Exchange Act Release No. 68415
(December 12, 2012), 77 FR 74905 (December 18,
2012) (SR–MIAX–2012–01).
73 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).
E:\FR\FM\17JAN1.SGM
17JAN1
2736
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
Later in 2013, as the Exchange’s
market share increased,74 the Exchange
adopted a nominal $10 fee for each
additional Limited Service MEI Port.75
The Exchange last increased the fees for
its 10Gb ULL fiber connections from
$9,300 to $10,000 per month on January
1, 2021.76 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.
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’. . . ’’ 77
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
broader forms that are most important to
investors and listed companies.’’ 78
Congress directed the Commission to
‘‘rely on ‘competition, whenever
possible, in meeting its regulatory
responsibilities for overseeing the SROs
and the national market system.’ ’’ 79 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.’’ 80 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.’’ 81 In the Revised
Exchange
Type of connection or port
MIAX (as proposed) (equity options market share of
5.64% for the month of November 2022) 83.
10Gb ULL connection ...............
Limited Service MEI Ports ........
NASDAQ 84 (equity options market share of 6.61% for
the month of November 2022) 85.
10Gb Ultra fiber connection. .....
SQF Port ...................................
NASDAQ ISE LLC (‘‘ISE’’) 86 (equity options market
share of 5.76% for the month of November 2022) 87.
10Gb Ultra fiber connection ......
SQF Port ...................................
74 The Exchange experienced a monthly average
equity options trading volume of 1.87% for the
month of November 2013. See Market at a Glance,
available at www.miaxoptions.com.
75 See Securities Exchange Act Release No. 70903
(November 20, 2013), 78 FR 70615 (November 26,
2013) (SR–MIAX–2013–52).
76 See Securities Exchange Act Release No. 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02).
77 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)).
78 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
Monthly fee
(per connection or per port)
$13,500.
1–2 ports: FREE (not changed in this proposal).
3–4 ports: $150 each.
5–6 ports: $200 each.
7 or more ports: $250 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.
79 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.’’).
80 See Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74,770 (December 9,
2008) (SR–NYSEArca–2006–21).
81 Id.
82 See Staff Guidance, supra note 19.
83 See supra note 74.
84 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services.
PO 00000
Frm 00138
Fmt 4703
Sfmt 4703
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.’’ 82
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.
85 See
supra note 74.
ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8:
Connectivity.
87 See supra note 74.
88 See NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. CoLocation Fees.
89 See supra note 74.
90 See GEMX Pricing Schedule, Options 7,
Section 6, Connectivity Fees and GEMX Rules,
General 8: Connectivity.
91 See supra note 74.
86 See
E:\FR\FM\17JAN1.SGM
17JAN1
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
Exchange
Type of connection or port
NYSE American LLC (‘‘NYSE American’’) 88 (equity
options market share of 6.41% for the month of November 2022) 89.
NASDAQ GEMX, LLC (‘‘GEMX’’) 90 (equity options
market share of 1.79% for the month of November
2022) 91.
10Gb LX LCN connection .........
Order/Quote Entry Port .............
khammond on DSKJM1Z7X2PROD with NOTICES
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.92
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
options market.93 A very small number
92 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.
93 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,
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
10Gb Ultra connection ..............
SQF Portection ..........................
Monthly fee
(per connection or 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.
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.94
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.95 The Exchange and its
affiliates, MIAX Pearl and MIAX
Emerald, 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 brokerdealer 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
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.’’
94 Service Bureaus may obtain ports on behalf of
Members.
95 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.
PO 00000
Frm 00139
Fmt 4703
Sfmt 4703
2737
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.96 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
96 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.
E:\FR\FM\17JAN1.SGM
17JAN1
2738
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
was executed at a superior price and
prevent a trade-through.97
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,98 or
request sponsored access 99 through a
member of an exchange in order to
submit a trade directly to an options
exchange.100 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).101 Indeed, the Exchange does not
97 Members may elect to not route their orders by
utilizing the Do Not Route order type. See Exchange
Rule 516(g).
98 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.
99 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.
100 This may include utilizing a floor broker and
submitting the trade to one of the five options
trading floors.
101 See, e.g., Nasdaq Price List—U.S. Direct
Connection and Extranet Fees, available at, U.S.
Direct-Extranet Connection (nasdaqtrader.com); and
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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
customers of their own.102 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.
Bifurcation of 10Gb ULL Connectivity
and Related Fees
The Exchange stresses that bifurcating
the 10Gb ULL connectivity between the
Exchange and MIAX Pearl was not
designed with the objective to generate
an overall increase in access fee
revenue. Rather, the proposed change is
necessitated by 10Gb ULL connectivity
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).
102 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.
PO 00000
Frm 00140
Fmt 4703
Sfmt 4703
experiencing a significant decrease in
port availability mostly driven by
connectivity demands of latency
sensitive Members that seek to maintain
multiple 10Gb ULL connections on
every switch in the network. Due to the
ever-increasing connectivity demands,
the Exchange found it necessary to
bifurcate 10Gb ULL connectivity to the
Exchange’s and MIAX Pearl’s Systems
and networks to continue to meet
ongoing and future 10Gb ULL
connectivity and access demands. Such
changes accordingly necessitated a
review of the Exchange’s previous 10Gb
ULL connectivity fees and related costs.
The proposed fees are reasonable as
they are intended to allow the Exchange
to cover ongoing costs related to
providing and maintaining such
connectivity, described more fully
below. The ever increasing connectivity
demands that necessitated this change
also proves that the proposed fees are
reasonable because this demand reflects
that Members and non-Members believe
they are getting value from the 10Gb
ULL connections they purchase.
The Exchange announced on August
12, 2022 the planned network change
and January 23, 2023 implementation
date to provide market participants
adequate time to prepare.103 Since
August 12, 2022, the Exchange has
worked with current 10Gb ULL
subscribers to address their connectivity
needs ahead of the January 23, 2023
date. Based on those interactions and
subscriber feedback, the Exchange
expects a minimal net increase of
approximately six (6) overall 10Gb ULL
connectivity subscriptions across the
Exchange and MIAX Pearl. This
anticipated immaterial increase in
overall connections reflect a minimal
fee impact for all types of subscribers
and reflects that subscribers elected to
reallocate existing 10Gb ULL
connectivity directly to the Exchange or
MIAX Pearl, or chose to decrease or
cease connectivity as a result of the
change.
Should the Commission Staff
disapprove such fees, it would
effectively dictate how an exchange
manages its technology and would
hamper the Exchange’s ability to
continue to invest in and fund access
services in a manner that allows it to
meet existing and anticipated access
demands of market participants.
Disapproval could also have the adverse
effect of discouraging exchanges from
innovating technology to the benefit of
market participants if it believes the
Commission would later prevent that
exchange from monetizing its
103 See
E:\FR\FM\17JAN1.SGM
supra note 9.
17JAN1
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
innovation, thus adversely impacting
competition. Also, as noted above, the
economic consequences of not being
able to better establish fee parity with
other exchanges for non-transaction fees
hampers the Exchange’s ability to
compete as aggressively on transaction
fees.
khammond on DSKJM1Z7X2PROD with NOTICES
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,104 and Rule 19b–4
thereunder,105 with respect to the types
of information SROs should provide
when filing fee changes, and Section
6(b) of the Act,106 which requires,
among other things, that exchange fees
be reasonable and equitably
allocated,107 not designed to permit
unfair discrimination,108 and that they
not impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.109 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.110 The Exchange notes that the
legacy exchanges with whom the
Exchange vigorously competes for order
104 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
106 15 U.S.C. 78f(b).
107 15 U.S.C. 78f(b)(4).
108 15 U.S.C. 78f(b)(5).
109 15 U.S.C. 78f(b)(8).
110 See Staff Guidance, supra note 19.
105 17
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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
$12,034,554 (or approximately
$1,002,880 per month, rounded up to
the nearest dollar when dividing the
annual cost by 12 months) and its
aggregate annual costs for providing
Limited Service MEI Ports at $2,157,178
(or approximately $179,765 per month,
rounded down 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 nonMembers 111) 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 and to remove language
providing for a shared 10Gb ULL
network between the Exchange and
MIAX Pearl. The Exchange also
proposes to modify its Fee Schedule to
charge tiered rates for additional
Limited Service MEI Ports.
In 2019, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).112 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
111 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.
112 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.
PO 00000
Frm 00141
Fmt 4703
Sfmt 4703
2739
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 (15%),
and the remainder to the provision of
transaction execution, membership
services and market data services (23%).
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
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
E:\FR\FM\17JAN1.SGM
17JAN1
2740
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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
$1,182,645 (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.
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
25.6% of its overall Human Resources
cost to offering physical connectivity).
Annual cost 113
Cost drivers
Monthly cost 114
% 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 ..................................................................................................
$3,867,297
70,163
424,584
718,950
727,734
2,310,898
3,914,928
$322,275
5,847
35,382
59,912
60,645
192,575
326,244
25
60.6
73.3
60.6
49.8
61.6
49.1
Total ................................................................................................................................
12,034,554
1,002,880
39.4
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
khammond on DSKJM1Z7X2PROD with NOTICES
Costs Related To Offering Physical 10Gb
ULL Connectivity
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%
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 18%). The Exchange notes
that it has 184 employees and each
department leader has direct knowledge
of the time spent by those spent by each
113 The Annual Cost includes figures rounded to
the nearest dollar.
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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
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
114 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.
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
PO 00000
Frm 00142
Fmt 4703
Sfmt 4703
E:\FR\FM\17JAN1.SGM
17JAN1
2741
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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 (60.6%) 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
61.6% 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
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 5.8% of its
overall Human Resources cost to
offering Limited Service MEI Ports).
Annual cost 116
Cost drivers
khammond on DSKJM1Z7X2PROD with NOTICES
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.115
The Exchange notes that the 49.1%
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 $1,002,880 was divided
by the number of physical 10Gb ULL
connections the Exchange maintained at
the time that proposed pricing was
determined (93), to arrive at a cost of
approximately $10,784 per month, per
physical 10Gb ULL connection.
Monthly cost 117
% 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 ......................................................................................................
$898,480
4,435
41,601
85,214
104,859
237,335
785,254
$74,873
370
3,467
7,101
8,738
19,778
65,438
5.8%
3.8
7.2
7.2
7.2
6.3
9.8
Total ....................................................................................................................................
2,157,178
179,765
7.1
115 The Exchange notes that MEMX allocated a
precise amount of 10% of the overall cost for
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
directors to providing physical connectivity. The
Exchange does not calculate is expenses at that
PO 00000
Frm 00143
Fmt 4703
Sfmt 4703
granular a level. Instead, director costs are included
as part of the overall general allocation.
E:\FR\FM\17JAN1.SGM
17JAN1
2742
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
Human Resources
Withrespect 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.
khammond on DSKJM1Z7X2PROD with NOTICES
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).
116 See supra note 113 (describing rounding of
Annual Costs).
117 See supra note 114 (describing rounding of
Monthly Costs based on Annual Costs).
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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 also necessary here (in addition to
physical connectivity) to offer certain
services related to such ports, 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.118 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,
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 6.3% 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
118 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
providing physical connectivity.
PO 00000
Frm 00144
Fmt 4703
Sfmt 4703
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 10% of the overall cost for
directors was allocated to providing
Limited Service MEI Ports. The
Exchange notes that the 9.8% 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 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
$179,765 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 (1303), to arrive
at a cost of approximately $138 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
E:\FR\FM\17JAN1.SGM
17JAN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
personnel with a high percentage of the
cost of such personnel (42%) given their
focus on functions necessary to provide
physical connections. The salaries of
those same personnel were allocated
only 8.4% 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 17.8% for 10Gb ULL
connectivity or 18.2% 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 25.6%
of its personnel costs to providing
physical connections and 5.8% of its
personnel costs to providing Limited
Service MEI Ports, for a total allocation
of 31.4% Human Resources expense to
provide these specific connectivity
services. In turn, the Exchange allocated
the remaining 68.6% 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,
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing
connectivity services, but instead
allocated approximately 67.9% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (61.6% attributed to 10Gb ULL
physical connections and 6.3% to
Limited Service MEI Ports). The
Exchange allocated the remaining
depreciation and amortization expense
(approximately 32.1%) 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,
PO 00000
Frm 00145
Fmt 4703
Sfmt 4703
2743
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 119
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;
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
119 For purposes of calculating revenue for 10Gb
ULL connectivity, the Exchange used projected
revenues for February 2023, the first full month for
which it will provide dedicated 10Gb ULL
connectivity to the Exchange and cease operating a
shared 10Gb ULL network with MIAX Pearl.
E:\FR\FM\17JAN1.SGM
17JAN1
khammond on DSKJM1Z7X2PROD with NOTICES
2744
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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
$12,034,554. Based on current 10Gb
ULL connectivity services usage, the
Exchange would generate annual
revenue of approximately $15,066,000.
This represents a modest profit of 20%
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 $2,157,178. Based
on current Limited Service MEI Port
services usage, the Exchange would
generate annual revenue of
approximately $3,300,600. This
represents a modest profit of 35% 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
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 2012.120 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
120 The Exchange has incurred a cumulative loss
of $121 million since its inception in 2012 through
full year 2021. 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/2200/22001163.pdf.
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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
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
PO 00000
Frm 00146
Fmt 4703
Sfmt 4703
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
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.121 Thus, as the number of messages
an entity increases, certain other costs
incurred by the Exchange that are
correlated to, though not directly
121 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
E:\FR\FM\17JAN1.SGM
17JAN1
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
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.
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 8.8 billion
quotes, and more than 185 billion
quotes over the entire month. Of that
total, Market Makers with the maximum
amount of Limited Service MEI Ports
generate approximately 5 billion quotes,
and Market Makers who utilize the two
free Limited Service MEI Ports generate
approximately 1.5 billion quotes. Also
for November 2022, Market Makers who
utilized 3 to 4 Limited Service MEI
ports submitted an average of
1,152,654,133 quotes per day and
Market Makers who utilized 5 to 9
Limited Service MEI ports submitted an
average of 1,172,105,181 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
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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.122 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.
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.123 Thus, as the number of
122 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
123 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
PO 00000
Frm 00147
Fmt 4703
Sfmt 4703
2745
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.
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 has
operated at a cumulative net annual loss
since it launched operations in 2012 124
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.
Further, the Exchange does not
believe that the proposed fee increase
for the 10Gb ULL connection change
would place certain market participants
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
124 See supra note 120.
E:\FR\FM\17JAN1.SGM
17JAN1
khammond on DSKJM1Z7X2PROD with NOTICES
2746
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
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.
The Exchange also believes that the
proposed fees for 10Gb connectivity are
appropriate and warranted in light of it
bifurcating 10Gb connectivity between
the Exchange and MIAX Pearl and
would not impose any burden on
competition because this is a technology
driven change that would assist the
Exchange in recovering costs related to
providing dedicating 10Gb connectivity
to the Exchange while enabling it to
continue to meet current and
anticipated demands for connectivity by
its Members and other market
participants. Separating its 10Gb
network from MIAX Pearl would enable
the Exchange to better compete with
other exchanges by ensuring it can
continue to provide adequate
connectivity to existing and new
Members, which may increase in ability
PO 00000
Frm 00148
Fmt 4703
Sfmt 4703
to compete for order flow and deepen its
liquidity pool, improving the overall
quality of its market.
The proposed rates for 10Gb ULL
connectivity are also driven by the
Exchange’s need to bifurcate its 10Gb
ULL network shared with MIAX Pearl
so that it can continue to meet current
and anticipated connectivity demands
of all market participants. Similarly, and
also in connection with a technology
change, Cboe Exchange, Inc. (‘‘Cboe’’)
amended access and connectivity fees,
including port fees.125 Specifically,
Cboe adopted certain logical ports to
allow for the delivery and/or receipt of
trading messages—i.e., orders, accepts,
cancels, transactions, etc. Cboe
established tiered pricing for BOE and
FIX logical ports, tiered pricing for BOE
Bulk ports, and flat prices for DROP,
Purge Ports, GRP Ports and Multicast
PITCH/Top Spin Server Ports. Cboe
argued in its fee proposal that the
proposed pricing more closely aligned
its access fees to those of its affiliated
exchanges, and reasonably so, as the
affiliated exchanges offer substantially
similar connectivity and functionality
and are on the same platform that Cboe
migrated to.126 Cboe also justified its
proposal by stating that, ‘‘. . .the
Exchange believes substitutable
products and services are in fact
available to market participants,
including, among other things, other
options exchanges a market participant
may connect to in lieu of the Exchange,
indirect connectivity to the Exchange
via a third-party reseller of connectivity
and/or trading of any options product,
including proprietary products, in the
Over- the-Counter (OTC) markets.’’ 127
Cboe stated in its proposal that,
The rule structure for options
exchanges are also fundamentally
different from those of equities
exchanges. In particular, options market
participants are not forced to connect to
(and purchase market data from) all
options exchanges. For example, there
are many order types that are available
in the equities markets that are not
utilized in the options markets, which
relate to mid-point pricing and pegged
pricing which require connection to the
SIPs and each of the equities exchanges
in order to properly execute those
orders in compliance with best
execution obligations. Additionally, in
the options markets, the linkage routing
and trade through protection are
125 See Securities Exchange Act Release No.
90333 (November 4, 2020), 85 FR 71666 (November
10, 2020) (SR–CBOE–2020–105). The Exchange
notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
126 Id. at 71676.
127 Id.
E:\FR\FM\17JAN1.SGM
17JAN1
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
handled by the exchanges, not by the
individual members. Thus not
connecting to an options exchange or
disconnecting from an options exchange
does not potentially subject a brokerdealer to violate order protection
requirements. Gone are the days when
the retail brokerage firms (such as
Fidelity, Schwab, and eTrade) were
members of the options exchanges—
they are not members of the Exchange
or its affiliates, they do not purchase
connectivity to the Exchange, and they
do not purchase market data from the
Exchange. Accordingly, 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 recent
significant reduction in the number of
broker-dealers that are members of all
options exchanges.128
The proposal also referenced the
National Market System Plan Governing
the Consolidated Audit Trail (‘‘CAT
NMS Plan’’),129 wherein the
Commission discussed the existence of
competition in the marketplace
generally, and particularly for
exchanges with unique business
models. The Commission acknowledged
that, even if an exchange were to exit
the marketplace due to its proposed feerelated change, it would not
significantly impact competition in the
market for exchange trading services
because these markets are served by
multiple competitors.130 Further, the
Commission explicitly stated that
‘‘[c]onsequently, demand for these
services in the event of the exit of a
competitor is likely to be swiftly met by
existing competitors.’’ 131 Finally, the
Commission recognized that while some
exchanges may have a unique business
model that is not currently offered by
competitors, a competitor could create
similar business models if demand were
adequate, and if a competitor did not do
so, the Commission believes it would be
likely that new entrants would do so if
the exchange with that unique business
model was otherwise profitable.132
Cboe also filed to establish a monthly
fee for Certification Logical Ports of
$250 per Certification Logical Port.133
128 Id.
at 71676.
Securities Exchange Act Release No.
86901 (September 9, 2019), 84 FR 48458 (September
13, 2019) (File No. S7–13–19).
130 Id.
131 Id.
132 Id.
133 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
2022) (SR–Cboe–2022–011). Cboe offers BOE and
FIX Logical Ports, BOE Bulk Logical Ports, DROP
Logical Ports, Purge Ports, GRP Ports and Multicast
khammond on DSKJM1Z7X2PROD with NOTICES
129 See
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
Cboe reasoned that purchasing
additional Certification Logical Ports,
beyond the one Certification Logical
Port per logical port type offered in the
production environment free of charge,
is voluntary and not required in order
to participate in the production
environment, including live production
trading on the Exchange.134
In its statutory basis, Cboe justified
the new port fee by stating that it
believed the Certification Logical Port
fee were reasonable because while such
ports were no longer completely free,
TPHs and non-TPHs would continue to
be entitled to receive free of charge one
Certification Logical Port for each type
of logical port that is currently offered
in the production environment.135 Cboe
noted that other exchanges assess
similar fees and cited to NASDAQ LLC
and MIAX.136 Cboe also noted that the
decision to purchase additional ports is
optional and no market participant is
required or under any regulatory
obligation to purchase excess
Certification Logical Ports in order to
access the Exchange’s certification
environment.137 Finally, similar
proposals to adopt a Certification
Logical Port monthly fee were filed by
Cboe BYX Exchange, Inc.,138 BZX,139
and Cboe EDGA Exchange, Inc.140
The Cboe fee proposals described
herein were filed subsequent to the D.C.
Circuit decision in Susquehanna Int’l
Grp., LLC v. SEC, 866 F.3d 442 (D.C. Cir.
2017), meaning that such fee filings
were subject to the same (and current)
standard for SEC review and approval as
this proposal. In summary, the
Exchange requests the Commission
apply the same standard of review to
this proposal which was applied to the
various Cboe and Cboe affiliated
markets’ filings with respect to nontransaction fees. If the Commission were
to apply a different standard of review
PITCH/Top Spin Server Ports. For each type of the
aforementioned logical ports that are used in the
production environment, the Exchange also offers
corresponding ports which provide Trading Permit
Holders and non-TPHs access to the Exchange’s
certification environment to test proprietary
systems and applications (i.e., ‘‘Certification Logical
Ports’’).
134 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
2022) (SR–Cboe–2022–011).
135 Id. at 18426.
136 Id.
137 Id.
138 See Securities Exchange Act Release No.
94507 (March 24, 2002), 87 FR 18439 (March 30,
2022) (SR–CboeBYX–2022–004).
139 See Securities Exchange Act Release No.
94511 (March 24, 2002), 87 FR 18411 (March 30,
2022) (SR–CboeBZX–2022–021).
140 See Securities Exchange Act Release No.
94517 (March 25, 2002), 87 FR 18848 (March 31,
2022) (SR–CboeEDGA–2022–004).
PO 00000
Frm 00149
Fmt 4703
Sfmt 4703
2747
to this proposal than it applied to other
exchange fee filings it would create a
burden on competition such that it
would impair the Exchange’s ability to
make necessary technology driven
changes, such as bifurcating its 10Gb
ULL network, because it would be
unable to monetize or recoup costs
related to that change and compete with
larger, non-legacy exchanges.
*
*
*
*
*
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,141 and Rule
19b–4(f)(2) 142 thereunder. At any time
141 15
142 17
E:\FR\FM\17JAN1.SGM
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
17JAN1
2748
Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
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–
MIAX–2022–50 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2022–50. 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
VerDate Sep<11>2014
18:16 Jan 13, 2023
Jkt 259001
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–MIAX–2022–50 and should
be submitted on or before February 7,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.143
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–00660 Filed 1–13–23; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
Privacy Act of 1974 System of Records
Notice
U.S. Small Business
Administration.
ACTION: Notice of a modified system of
records.
AGENCY:
The U.S. Small Business
Administration (SBA) proposes to
modify its system of records titled,
Government Contracting and Business
Development System (SBA 30), to its
inventory of records systems subject to
the Privacy Act of 1974, as amended.
Publication of this notice complies with
the Privacy Act and the Office of
Management and Budget (OMB)
Circulars A–108 and A–130 requirement
for agencies to publish a notice in the
Federal Register whenever the agency
establishes a new, modified or rescinds
a system of records. System of Records
Notice (SORN) Government Contracting
and Business Development System,
(SBA 30), includes modifying authority,
categories of individuals, categories of
records, record source categories, and
routine use. SBA 30 has expanded the
scope of its system of records with
additional applications serving a unique
purpose for carrying out the mission of
the SBA Office of Government
Contracting and Business Development.
SBA 30 collects personal, business,
veteran status, and financial information
to determine if applicants qualify and if
current participants certify or are
compliant with statutory and regulatory
requirements for continued eligibility
for participation in the following
government programs: 8(a) Business
Development Program, Mentor Prote´ge´
Program (MPP) formerly known as All
Small Mentor Prote´ge´ Program
(ASMPP), Women Owned Small
Business (WOSB) Federal Contracting
Program, Historically Underutilized
SUMMARY:
143 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00150
Fmt 4703
Sfmt 4703
Business Zone (HUBZone) Program,
Veteran Owned Small Business (VOSB)
Program and any future certification
programs deemed necessary by congress
or statute.
DATES: Submit comments on or before
February 16, 2023. This revised system
will be effective upon publication.
ADDRESSES: You may submit comments
on this notice by any of the following
methods:
Federal e-Rulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
Mail/Hand Delivery/Courier: Submit
written comments to: Ms. Beatrice
Hidalgo, Office of Government
Contracting and Business Development,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6300,
Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT:
General questions, please contact Ms.
Hilary F. Cronin, Office of Government
Contracting and Business Development,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6300,
Washington, DC 20416 or via email
Hilary.Cronin@sba.gov, telephone (202)
205–7055. For Privacy related matters,
please contact Stephen Kucharski,
(Acting) Chief Information Officer/
Senior Agency Official for Privacy,
Office of the Chief Information Officer,
U.S. Small Business Administration,
409 3rd Street SW, Suite 4000,
Washington, DC 20416 or via email to
Privacyofficer@sba.gov.
SUPPLEMENTARY INFORMATION: The
Privacy Act of 1974 (5 U.S.C. 552a), as
amended, embodies fair information
practice principles in a statutory
framework governing the means by
which Federal agencies collect,
maintain, use, and disseminate
individuals’ personal information. The
Privacy Act applies to records about
individuals that are maintained in a
‘‘system of records.’’ A system of
records is a group of any records under
the control of a Federal agency from
which information is retrieved by the
name of an individual or by a number,
symbol or another identifier assigned to
the individual. The Privacy Act requires
each Federal agency to publish in the
Federal Register a System of Records
Notice (SORN) identifying and
describing each system of records the
agency maintains, the purposes for
which the Agency uses the Personally
Identifiable Information (PII) in the
system, the routine uses for which the
Agency discloses such information
outside the Agency, and how
individuals can exercise their rights
related to their PII information.
E:\FR\FM\17JAN1.SGM
17JAN1
]]>Agencies
[Federal Register Volume 88, Number 10 (Tuesday, January 17, 2023)]
[Notices]
[Pages 2729-2748]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00660]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96629; File No. SR-MIAX-2022-50]
Self-Regulatory Organizations; Miami International Securities
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change 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 December 30, 2022, Miami International Securities Exchange, LLC
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change as described in
Items I, 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 Options
Exchange 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, 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) amend the
fees for Limited Service MIAX Express Interface (``MEI'') Ports \4\
available to Market Makers.\5\ The Exchange and its affiliate, MIAX
PEARL, LLC (``MIAX Pearl'') operated 10Gb ULL connectivity (for MIAX
Pearl's options market) on a single shared network that provided access
to both exchanges via a single 10Gb ULL connection. The Exchange last
increased fees for 10Gb ULL connections from $9,300 to $10,000 per
month on January 1, 2021.\6\ At the same time, MIAX Pearl also
increased its 10Gb ULL connectivity fee from $9,300 to $10,000 per
month.\7\ The Exchange and MIAX Pearl shared a combined cost analysis
in those filings due to the single shared 10Gb ULL connectivity network
for both exchanges. In those filings, the Exchange and MIAX Pearl
allocated a combined total of $17.9 million in expenses to providing
10Gb ULL connectivity.\8\
---------------------------------------------------------------------------
\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\ MIAX Express Interface is a connection to MIAX systems that
enables Market Makers to submit simple and complex electronic quotes
to MIAX. See Fee Schedule, note 26.
\5\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See Exchange Rule 100.
\6\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
\7\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
\8\ See id.
---------------------------------------------------------------------------
Beginning in late January 2023, the Exchange also recently
determined a substantial operational need to no longer operate 10Gb ULL
connectivity on a single shared network with MIAX Pearl. The Exchange
is bifurcating 10Gb ULL connectivity due to ever-increasing capacity
constraints and to enable it to continue to satisfy the anticipated
access needs for Members and other market participants.\9\ 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 $12,034,554 for providing 10Gb ULL connectivity on a
single unshared network (an overall increase over its prior cost to
provide 10Gb ULL connectivity on a shared network with MIAX Pearl) and
$2,157,178 for providing Limited Service MEI Ports.
---------------------------------------------------------------------------
\9\ See MIAX Options and MIAX Pearl Options--Announce planned
network changes related to shared 10G ULL extranet, issued August
12, 2022, available at https://www.miaxoptions.com/alerts/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-related-0. The Exchange will continue to provide access to
both the Exchange and MIAX Pearl over a single shared 1Gb
connection. See Securities Exchange Act Release Nos. 96553 (December
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
---------------------------------------------------------------------------
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 Service MEI Ports in order
to recoup cost related to bifurcating 10Gb connectivity to the Exchange
and MIAX Pearl as well as the ongoing costs and increase in expenses
set forth below in the Exchange's cost analysis.\10\
---------------------------------------------------------------------------
\10\ The Exchange notes that MIAX Pearl will make a similar
filing to increase its 10Gb ULL connectivity fees.
---------------------------------------------------------------------------
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \11\ 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
[[Page 2730]]
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.\12\ 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.\13\ 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'').\14\ 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.'' \15\ The Commission denied requests by various
exchanges and plan participants for reconsideration of the Remand
Order.\16\ 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.'' \17\ Both the Remand Order and the
Order Denying Reconsideration were appealed to the D.C. Circuit.
---------------------------------------------------------------------------
\11\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\12\ Id.
\13\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\14\ 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).
\15\ Id. at page 2.
\16\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\17\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
---------------------------------------------------------------------------
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.\18\ 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.
---------------------------------------------------------------------------
\18\ 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).
---------------------------------------------------------------------------
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.'' \19\ 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.'' \20\ 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.'' \21\
---------------------------------------------------------------------------
\19\ 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'').
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
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 \22\ and remanded for further proceedings consistent
with its opinion.\23\ 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.'' \24\
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.\25\ 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.''
\26\ 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.\27\
---------------------------------------------------------------------------
\22\ 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.
\23\ 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.
\24\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\25\ 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'').
\26\ Id.
\27\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
---------------------------------------------------------------------------
As a result of the Commission's loss of the NASDAQ vs. 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 enable us to perform our review.'' \28\
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,
[[Page 2731]]
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.
---------------------------------------------------------------------------
\28\ See supra note 14, at page 2.
---------------------------------------------------------------------------
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'').\29\ 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 \30\ 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.\31\ These fees
remain in effect today.
---------------------------------------------------------------------------
\29\ 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.
\30\ 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.
\31\ 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).
---------------------------------------------------------------------------
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.\32\
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 \33\ and $80,383,000 for
2021.\34\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \35\ and $22,843,000 for
2021.\36\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \37\ and $44,800,000 for
2021.\38\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \39\ and $30,687,000 for
2021.\40\ 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, LLC (``NASDAQ
Phlx'') reported ``Trade Management Services'' revenue of $20,817,000
for 2019.\41\ 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
[[Page 2732]]
bundled into a much larger line item in PHLX's Form 1, simply titled
``Market services.'' \42\
---------------------------------------------------------------------------
\32\ The Exchange has filed, and subsequently withdrawn, various
forms of this proposed fee change 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.
\33\ 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.
\34\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\35\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\36\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\37\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\38\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\39\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\40\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\41\ 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.
\42\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf.
---------------------------------------------------------------------------
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,\43\ 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.
---------------------------------------------------------------------------
\43\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
---------------------------------------------------------------------------
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 . . .'',\44\ this is not the reality experienced by
exchanges such as MIAX. 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.\45\ 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 \46\ 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.
---------------------------------------------------------------------------
\44\ See supra note 19, at note 1.
\45\ See Securities Exchange Act Release Nos. 94890 (May 11,
2022), 87 FR 29945 (May 17, 2022) (SR-MIAX-2022-20); 94720 (April
14, 2022), 87 FR 23586 (April 20, 2022) (SR-MIAX-2022-16); 94719
(April 14, 2022), 87 FR 23600 (April 20, 2022) (SR-MIAX-2022-14);
94259 (February 15, 2022), 87 FR 9747 (February 22, 2022) (SR-MIAX-
2022-08); 94256 (February 15, 2022), 87 FR9711 (February 22, 2022)
(SR-MIAX-2022-07); 93771 (December 14, 2021), 86 FR 71940 (December
20, 2021) (SR-MIAX-2021-60); 93775 (December 14, 2021), 86 FR 71996
(December 20, 2021) (SR-MIAX-2021-59); 93185 (September 29, 2021),
86 FR 55093 (October 5, 2021) (SR-MIAX-2021-43); 93165 (September
28, 2021), 86 FR 54750 (October 4, 2021) (SR-MIAX-2021-41); 92661
(August 13, 2021), 86 FR 46737 (August 19, 2021) (SR-MIAX-2021-37);
92643 (August 11, 2021), 86 FR 46034 (August 17, 2021) (SR-MIAX-
2021-35).
\46\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
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,\47\ 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; \48\ 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.
---------------------------------------------------------------------------
\47\ 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.
\48\ 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.
---------------------------------------------------------------------------
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 significantly enhanced arguments and cost
disclosures.\49\
---------------------------------------------------------------------------
\49\ 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.
---------------------------------------------------------------------------
Lastly, the Exchange notes that the Commission Staff has allowed
similar fee increases by other exchanges to remain in effect by
publishing those
[[Page 2733]]
filings for comment and allowing the exchange to withdraw and re-file
numerous times.\50\ Recently, the Commission Staff has not afforded the
Exchange the same flexibility.\51\ 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.
---------------------------------------------------------------------------
\50\ 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).
\51\ See Securities Exchange Act Release Nos. 94719 (April 14,
2022), 87 FR 23600 (April 20, 2022) (SR-MIAX-2022-14) and 94720
(April 14, 2022), 87 FR 23586 (April 20, 2022) (SR-MIAX-2022-16).
---------------------------------------------------------------------------
* * * * *
10Gb ULL Connectivity Fee Change
The Exchange recently filed a proposal to no longer operate 10Gb
connectivity to the Exchange on a single shared network with its
affiliate, MIAX Pearl. This change is an operational necessity due to
ever-increasing capacity constraints and to accommodate anticipated
access needs for Members and other market participants.\52\ This
proposal: (i) sets forth the applicable fees for the bifurcated 10Gb
ULL network; and (ii) removes provisions in the Fee Schedule that
provides for a shared 10Gb ULL network; and (iii) specifies that market
participants may continue to connect to both the Exchange and MIAX
Pearl via the 1Gb network.
---------------------------------------------------------------------------
\52\ See supra note 9.
---------------------------------------------------------------------------
The Exchange plans to bifurcate the Exchange and MIAX Pearl 10Gb
ULL networks in the first quarter of 2023, currently anticipated to be
effective on January 23, 2023. The Exchange issued an alert on August
12, 2022 publicly announcing the planned network change and
implementation plan and dates to provide market participants adequate
time to prepare.\53\ Upon bifurcation of the 10Gb ULL network,
subscribers would need to purchase separate connections to the Exchange
and MIAX at the applicable rate. The Exchange's proposed amended rate
for 10Gb ULL connectivity is described below. Until the 10Gb ULL
network is bifurcated, subscribers to 10Gb ULL connectivity would be
able to connect to both the Exchange and MIAX Pearl at the applicable
rate set forth below.
---------------------------------------------------------------------------
\53\ Id.
---------------------------------------------------------------------------
The Exchange, therefore, proposes to amend the Fee Schedule to
increase the fees for Members and non-Members to access the Exchange's
system networks \54\ via a 10Gb ULL fiber connection and to specify
that this fee is for a dedicated connection to the Exchange and no
longer provides access to MIAX Pearl. 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'').\55\ The Exchange also
proposes to amend the Fee Schedule to reflect the bifurcation of the
10Gb ULL network and specify that only the 1Gb network provides access
to both the Exchange and MIAX Pearl.
---------------------------------------------------------------------------
\54\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\55\ 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.'').
---------------------------------------------------------------------------
The Exchange proposes to make the following changes to reflect the
bifurcated 10Gb ULL network for the Exchange and MIAX Pearl. The
Exchange proposes to amend the explanatory paragraphs below the network
connectivity fee tables in Sections 5(a)-(b) of the Fee Schedule to
specify that, with the bifurcated 10Gb ULL network, Members (and non-
Members) utilizing the MENI to connect to the trading platforms, market
data systems, test systems, and disaster recovery facilities of the
Exchange and MIAX Pearl via a single, can only do so via a shared 1Gb
connection.
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.
Implementation of 10Gb ULL Fee. The proposed 10Gb ULL fee will be
effective January 1, 2023. From January 1, 2023 until January 22, 2023,
subscribers to 10Gb ULL connectivity will continue to receive access to
both the Exchange and MIAX Pearl via a single 10Gb ULL connection. Upon
bifurcation of the 10Gb ULL network on January 23, 2023, subscribers
that elect to continue to access both the Exchange and MIAX Pearl via a
10Gb ULL connection will need to purchase separate 10Gb ULL connections
from each exchange. Existing subscribers of 10Gb ULL connections on the
Exchange that also purchase a new 10Gb ULL connection to access MIAX
Pearl would pay a pro-rated portion of the monthly fee for the added
connection for the remainder of the month.
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 \56\ and two (2) Limited Service MEI Ports \57\ per
matching engine \58\ to which each
[[Page 2734]]
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. This fee was unchanged since 2016.\59\
---------------------------------------------------------------------------
\56\ Full Service MEI Ports provide Market Makers with the
ability to send Market Maker quotes, eQuotes, and quote purge
messages to the MIAX 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 Fee Schedule,
Section (5)(d)(ii), note 27.
\57\ Limited Service MEI Ports provide Market Makers with the
ability to send eQuotes and quote purge messages only, but not
Market Maker Quotes, to the MIAX 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 Fee Schedule, Section (5)(d)(ii), note 28.
\58\ A ``matching engine'' is a part of the MIAX electronic
system that processes options quotes and trades on a symbol-by-
symbol basis. Some matching engines will process option classes with
multiple root symbols, and other matching engines will be dedicated
to one single option root symbol (for example, options on SPY will
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 Fee Schedule, Section
(5)(d)(ii), note 29.
\59\ See Securities Exchange Act Release No. 79666 (December 22,
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47).
---------------------------------------------------------------------------
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 $150 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 $200 per port; and (iii) the seventh or more
Limited Service MEI Ports will increase from the current monthly flat
fee of $100 to $250 per port. 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 capacity and headroom in the System \60\ in
accordance with its fair access requirements under Section 6(b)(5) of
the Act.\61\
---------------------------------------------------------------------------
\60\ 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.
\61\ 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 8.8 billion
quotes, and more than 185 billion quotes over the entire month. Of that
total, Market Makers with the maximum amount of Limited Service MEI
Ports generate approximately 5 billion quotes, and Market Makers who
utilize the two free Limited Service MEI Ports generate approximately
1.5 billion quotes. Also for November 2022, Market Makers who utilized
3 to 4 Limited Service MEI ports submitted an average of 1,152,654,133
quotes per day and Market Makers who utilized 5 to 9 Limited Service
MEI ports submitted an average of 1,172,105,181 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.\62\ 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.
---------------------------------------------------------------------------
\62\ 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 since it has not done so since 2016,\63\ which is designed to
recover a portion of the costs associated with directly accessing the
Exchange.
---------------------------------------------------------------------------
\63\ See Securities Exchange Act Release No. 79666 (December 22,
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47).
---------------------------------------------------------------------------
Implementation of Limited Service MEI Port fees. This proposed fee
changes will be effective January 1, 2023.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \64\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \65\ 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
[[Page 2735]]
Exchange also believes the proposed fees further the objectives of
Section 6(b)(5) of the Act \66\ 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.
---------------------------------------------------------------------------
\64\ 15 U.S.C. 78f(b).
\65\ 15 U.S.C. 78f(b)(4).
\66\ 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 \67\ and
the Staff Guidance \68\, 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.
---------------------------------------------------------------------------
\67\ See supra note 18.
\68\ See supra note 19.
---------------------------------------------------------------------------
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.''
\69\ 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.'' \70\ In the Staff Guidance, the Commission Staff further states
that, ``[i]f an SRO seeks to support its claims that a proposed fee is
fair and reasonable because it will permit recovery of the SRO's costs,
. . . , specific information, including quantitative information,
should be provided to support that argument.'' \71\
---------------------------------------------------------------------------
\69\ Id.
\70\ Id.
\71\ 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 (driven by the bifurcation of the 10Gb ULL
network) 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 commenced operations in 2012 and adopted its initial
fee schedule, with all connectivity and port fees set at $0.00 (the
Exchange originally had a non-ULL 10Gb connectivity option, which it
has since removed).\72\ As a new exchange entrant, the Exchange chose
to offer connectivity and ports free of charge 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.\73\
---------------------------------------------------------------------------
\72\ See Securities Exchange Act Release No. 68415 (December 12,
2012), 77 FR 74905 (December 18, 2012) (SR-MIAX-2012-01).
\73\ 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).
---------------------------------------------------------------------------
[[Page 2736]]
Later in 2013, as the Exchange's market share increased,\74\ the
Exchange adopted a nominal $10 fee for each additional Limited Service
MEI Port.\75\ The Exchange last increased the fees for its 10Gb ULL
fiber connections from $9,300 to $10,000 per month on January 1,
2021.\76\ 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.
---------------------------------------------------------------------------
\74\ The Exchange experienced a monthly average equity options
trading volume of 1.87% for the month of November 2013. See Market
at a Glance, available at www.miaxoptions.com.
\75\ See Securities Exchange Act Release No. 70903 (November 20,
2013), 78 FR 70615 (November 26, 2013) (SR-MIAX-2013-52).
\76\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
---------------------------------------------------------------------------
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.
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'. . . '' \77\
---------------------------------------------------------------------------
\77\ 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 broader forms that are most
important to investors and listed companies.'' \78\
---------------------------------------------------------------------------
\78\ 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.' '' \79\ 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.'' \80\ 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.'' \81\ 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.'' \82\
---------------------------------------------------------------------------
\79\ 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.'').
\80\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\81\ Id.
\82\ See Staff Guidance, supra note 19.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\83\ See supra note 74.
\84\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\85\ See supra note 74.
\86\ See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8: Connectivity.
\87\ See supra note 74.
\88\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
\89\ See supra note 74.
\90\ See GEMX Pricing Schedule, Options 7, Section 6,
Connectivity Fees and GEMX Rules, General 8: Connectivity.
\91\ See supra note 74.
------------------------------------------------------------------------
Type of Monthly fee (per
Exchange connection or connection or per
port port)
------------------------------------------------------------------------
MIAX (as proposed) (equity 10Gb ULL $13,500.
options market share of 5.64% connection. 1-2 ports: FREE (not
for the month of November Limited Service changed in this
2022) \83\. MEI Ports. proposal).
3-4 ports: $150 each.
5-6 ports: $200 each.
7 or more ports: $250
each.
NASDAQ \84\ (equity options 10Gb Ultra fiber $15,000 per
market share of 6.61% for the connection.. connection.
month of November 2022) \85\. SQF Port......... 1-5 ports: $1,500 per
port.
6-20 ports: $1,000
per port.
21 or more ports:
$500 per port.
NASDAQ ISE LLC (``ISE'') \86\ 10Gb Ultra fiber $15,000 per
(equity options market share connection. connection.
of 5.76% for the month of SQF Port......... $1,100 per port.
November 2022) \87\.
[[Page 2737]]
NYSE American LLC (``NYSE 10Gb LX LCN $22,000 per
American'') \88\ (equity connection. connection.
options market share of 6.41% Order/Quote Entry Ports 1-40. $450 per
for the month of November Port. port.
2022) \89\. Ports 41 and greater.
$150 per port.
NASDAQ GEMX, LLC (``GEMX'') 10Gb Ultra $15,000 per
\90\ (equity options market connection. connection.
share of 1.79% for the month SQF Portection... $1,250 per port.
of November 2022) \91\.
------------------------------------------------------------------------
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.\92\
---------------------------------------------------------------------------
\92\ 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 options market.\93\ 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.\94\
---------------------------------------------------------------------------
\93\ 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.''
\94\ 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.\95\ The Exchange and its affiliates,
MIAX Pearl and MIAX Emerald, 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.
---------------------------------------------------------------------------
\95\ 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.\96\ 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
[[Page 2738]]
was executed at a superior price and prevent a trade-through.\97\
---------------------------------------------------------------------------
\96\ 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.
\97\ 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,\98\ or request
sponsored access \99\ through a member of an exchange in order to
submit a trade directly to an options exchange.\100\ 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.
---------------------------------------------------------------------------
\98\ 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.
\99\ 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.
\100\ 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).\101\ 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 customers of their own.\102\ 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.
---------------------------------------------------------------------------
\101\ See, e.g., Nasdaq Price List--U.S. Direct Connection and
Extranet Fees, available at, U.S. 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).
\102\ 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.
Bifurcation of 10Gb ULL Connectivity and Related Fees
The Exchange stresses that bifurcating the 10Gb ULL connectivity
between the Exchange and MIAX Pearl was not designed with the objective
to generate an overall increase in access fee revenue. Rather, the
proposed change is necessitated by 10Gb ULL connectivity experiencing a
significant decrease in port availability mostly driven by connectivity
demands of latency sensitive Members that seek to maintain multiple
10Gb ULL connections on every switch in the network. Due to the ever-
increasing connectivity demands, the Exchange found it necessary to
bifurcate 10Gb ULL connectivity to the Exchange's and MIAX Pearl's
Systems and networks to continue to meet ongoing and future 10Gb ULL
connectivity and access demands. Such changes accordingly necessitated
a review of the Exchange's previous 10Gb ULL connectivity fees and
related costs. The proposed fees are reasonable as they are intended to
allow the Exchange to cover ongoing costs related to providing and
maintaining such connectivity, described more fully below. The ever
increasing connectivity demands that necessitated this change also
proves that the proposed fees are reasonable because this demand
reflects that Members and non-Members believe they are getting value
from the 10Gb ULL connections they purchase.
The Exchange announced on August 12, 2022 the planned network
change and January 23, 2023 implementation date to provide market
participants adequate time to prepare.\103\ Since August 12, 2022, the
Exchange has worked with current 10Gb ULL subscribers to address their
connectivity needs ahead of the January 23, 2023 date. Based on those
interactions and subscriber feedback, the Exchange expects a minimal
net increase of approximately six (6) overall 10Gb ULL connectivity
subscriptions across the Exchange and MIAX Pearl. This anticipated
immaterial increase in overall connections reflect a minimal fee impact
for all types of subscribers and reflects that subscribers elected to
reallocate existing 10Gb ULL connectivity directly to the Exchange or
MIAX Pearl, or chose to decrease or cease connectivity as a result of
the change.
---------------------------------------------------------------------------
\103\ See supra note 9.
---------------------------------------------------------------------------
Should the Commission Staff disapprove such fees, it would
effectively dictate how an exchange manages its technology and would
hamper the Exchange's ability to continue to invest in and fund access
services in a manner that allows it to meet existing and anticipated
access demands of market participants. Disapproval could also have the
adverse effect of discouraging exchanges from innovating technology to
the benefit of market participants if it believes the Commission would
later prevent that exchange from monetizing its
[[Page 2739]]
innovation, thus adversely impacting competition. Also, as noted above,
the economic consequences of not being able to better establish fee
parity with other exchanges for non-transaction fees hampers the
Exchange's ability to compete as aggressively on transaction fees.
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,\104\ and Rule 19b-4
thereunder,\105\ with respect to the types of information SROs should
provide when filing fee changes, and Section 6(b) of the Act,\106\
which requires, among other things, that exchange fees be reasonable
and equitably allocated,\107\ not designed to permit unfair
discrimination,\108\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\109\ 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.\110\ 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.
---------------------------------------------------------------------------
\104\ 15 U.S.C. 78s(b)(1).
\105\ 17 CFR 240.19b-4.
\106\ 15 U.S.C. 78f(b).
\107\ 15 U.S.C. 78f(b)(4).
\108\ 15 U.S.C. 78f(b)(5).
\109\ 15 U.S.C. 78f(b)(8).
\110\ See Staff Guidance, supra note 19.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $12,034,554 (or approximately $1,002,880 per month, rounded
up to the nearest dollar when dividing the annual cost by 12 months)
and its aggregate annual costs for providing Limited Service MEI Ports
at $2,157,178 (or approximately $179,765 per month, rounded down 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 \111\) 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 and to remove language providing for a shared 10Gb ULL
network between the Exchange and MIAX Pearl. The Exchange also proposes
to modify its Fee Schedule to charge tiered rates for additional
Limited Service MEI Ports.
---------------------------------------------------------------------------
\111\ 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 2019, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\112\ 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 (15%), and
the remainder to the provision of transaction execution, membership
services and market data services (23%). 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.
---------------------------------------------------------------------------
\112\ 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 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
[[Page 2740]]
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 $1,182,645 (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 25.6%
of its overall Human Resources cost to offering physical connectivity).
---------------------------------------------------------------------------
\113\ The Annual Cost includes figures rounded to the nearest
dollar.
\114\ 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.
----------------------------------------------------------------------------------------------------------------
Monthly cost
Cost drivers Annual cost \113\ \114\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources............................................... $3,867,297 $322,275 25
Connectivity (external fees, cabling, switches, etc.)......... 70,163 5,847 60.6
Internet Services, including External Market Data............. 424,584 35,382 73.3
Data Center................................................... 718,950 59,912 60.6
Hardware and Software Maintenance and Licenses................ 727,734 60,645 49.8
Depreciation.................................................. 2,310,898 192,575 61.6
Allocated Shared Expenses..................................... 3,914,928 326,244 49.1
-------------------------------------------------
Total..................................................... 12,034,554 1,002,880 39.4
----------------------------------------------------------------------------------------------------------------
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
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%
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 18%). 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 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
[[Page 2741]]
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 (60.6%) 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 61.6% 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.\115\ The Exchange notes that the
49.1% 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 $1,002,880 was divided by the number of physical 10Gb
ULL connections the Exchange maintained at the time that proposed
pricing was determined (93), to arrive at a cost of approximately
$10,784 per month, per physical 10Gb ULL connection.
---------------------------------------------------------------------------
\115\ 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 5.8% of its overall Human Resources
cost to offering Limited Service MEI Ports).
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \116\ \117\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $898,480 $74,873 5.8%
Connectivity (external fees, cabling, switches, etc.)........... 4,435 370 3.8
Internet Services, including External Market Data............... 41,601 3,467 7.2
Data Center..................................................... 85,214 7,101 7.2
Hardware and Software Maintenance and Licenses.................. 104,859 8,738 7.2
Depreciation.................................................... 237,335 19,778 6.3
Allocated Shared Expenses....................................... 785,254 65,438 9.8
-----------------------------------------------
Total....................................................... 2,157,178 179,765 7.1
----------------------------------------------------------------------------------------------------------------
[[Page 2742]]
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.
---------------------------------------------------------------------------
\116\ See supra note 113 (describing rounding of Annual Costs).
\117\ See supra note 114 (describing rounding of Monthly Costs
based on Annual Costs).
---------------------------------------------------------------------------
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 also necessary here
(in addition to physical connectivity) to offer certain services
related to such ports, 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.\118\
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.
---------------------------------------------------------------------------
\118\ 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 6.3% 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 10% of the overall cost for
directors was allocated to providing Limited Service MEI Ports. The
Exchange notes that the 9.8% 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 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 $179,765 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 (1303), to arrive at a cost of
approximately $138 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
[[Page 2743]]
personnel with a high percentage of the cost of such personnel (42%)
given their focus on functions necessary to provide physical
connections. The salaries of those same personnel were allocated only
8.4% 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 17.8% for 10Gb
ULL connectivity or 18.2% 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 25.6% of its personnel costs to
providing physical connections and 5.8% of its personnel costs to
providing Limited Service MEI Ports, for a total allocation of 31.4%
Human Resources expense to provide these specific connectivity
services. In turn, the Exchange allocated the remaining 68.6% 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 67.9% of the Exchange's overall depreciation and
amortization expense to connectivity services (61.6% attributed to 10Gb
ULL physical connections and 6.3% to Limited Service MEI Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 32.1%) 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 \119\
---------------------------------------------------------------------------
\119\ For purposes of calculating revenue for 10Gb ULL
connectivity, the Exchange used projected revenues for February
2023, the first full month for which it will provide dedicated 10Gb
ULL connectivity to the Exchange and cease operating a shared 10Gb
ULL network with MIAX Pearl.
---------------------------------------------------------------------------
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; 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
[[Page 2744]]
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 $12,034,554. Based on current 10Gb
ULL connectivity services usage, the Exchange would generate annual
revenue of approximately $15,066,000. This represents a modest profit
of 20% 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 $2,157,178. Based on
current Limited Service MEI Port services usage, the Exchange would
generate annual revenue of approximately $3,300,600. This represents a
modest profit of 35% 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 2012.\120\ 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.
---------------------------------------------------------------------------
\120\ The Exchange has incurred a cumulative loss of $121
million since its inception in 2012 through full year 2021. 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/2200/22001163.pdf.
---------------------------------------------------------------------------
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 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.\121\ Thus, as the number of messages an entity
increases, certain other costs incurred by the Exchange that are
correlated to, though not directly
[[Page 2745]]
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.
---------------------------------------------------------------------------
\121\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
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 8.8 billion quotes, and more than 185 billion quotes over
the entire month. Of that total, Market Makers with the maximum amount
of Limited Service MEI Ports generate approximately 5 billion quotes,
and Market Makers who utilize the two free Limited Service MEI Ports
generate approximately 1.5 billion quotes. Also for November 2022,
Market Makers who utilized 3 to 4 Limited Service MEI ports submitted
an average of 1,152,654,133 quotes per day and Market Makers who
utilized 5 to 9 Limited Service MEI ports submitted an average of
1,172,105,181 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.\122\ 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.
---------------------------------------------------------------------------
\122\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
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.\123\ 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.
---------------------------------------------------------------------------
\123\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
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 has operated at a cumulative net annual
loss since it launched operations in 2012 \124\ 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.
---------------------------------------------------------------------------
\124\ See supra note 120.
---------------------------------------------------------------------------
Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection change would place certain market
participants
[[Page 2746]]
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.
The Exchange also believes that the proposed fees for 10Gb
connectivity are appropriate and warranted in light of it bifurcating
10Gb connectivity between the Exchange and MIAX Pearl and would not
impose any burden on competition because this is a technology driven
change that would assist the Exchange in recovering costs related to
providing dedicating 10Gb connectivity to the Exchange while enabling
it to continue to meet current and anticipated demands for connectivity
by its Members and other market participants. Separating its 10Gb
network from MIAX Pearl would enable the Exchange to better compete
with other exchanges by ensuring it can continue to provide adequate
connectivity to existing and new Members, which may increase in ability
to compete for order flow and deepen its liquidity pool, improving the
overall quality of its market.
The proposed rates for 10Gb ULL connectivity are also driven by the
Exchange's need to bifurcate its 10Gb ULL network shared with MIAX
Pearl so that it can continue to meet current and anticipated
connectivity demands of all market participants. Similarly, and also in
connection with a technology change, Cboe Exchange, Inc. (``Cboe'')
amended access and connectivity fees, including port fees.\125\
Specifically, Cboe adopted certain logical ports to allow for the
delivery and/or receipt of trading messages--i.e., orders, accepts,
cancels, transactions, etc. Cboe established tiered pricing for BOE and
FIX logical ports, tiered pricing for BOE Bulk ports, and flat prices
for DROP, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server
Ports. Cboe argued in its fee proposal that the proposed pricing more
closely aligned its access fees to those of its affiliated exchanges,
and reasonably so, as the affiliated exchanges offer substantially
similar connectivity and functionality and are on the same platform
that Cboe migrated to.\126\ Cboe also justified its proposal by stating
that, ``. . .the Exchange believes substitutable products and services
are in fact available to market participants, including, among other
things, other options exchanges a market participant may connect to in
lieu of the Exchange, indirect connectivity to the Exchange via a
third-party reseller of connectivity and/or trading of any options
product, including proprietary products, in the Over- the-Counter (OTC)
markets.'' \127\ Cboe stated in its proposal that,
---------------------------------------------------------------------------
\125\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105). The
Exchange notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
\126\ Id. at 71676.
\127\ Id.
---------------------------------------------------------------------------
The rule structure for options exchanges are also fundamentally
different from those of equities exchanges. In particular, options
market participants are not forced to connect to (and purchase market
data from) all options exchanges. For example, there are many order
types that are available in the equities markets that are not utilized
in the options markets, which relate to mid-point pricing and pegged
pricing which require connection to the SIPs and each of the equities
exchanges in order to properly execute those orders in compliance with
best execution obligations. Additionally, in the options markets, the
linkage routing and trade through protection are
[[Page 2747]]
handled by the exchanges, not by the individual members. Thus not
connecting to an options exchange or disconnecting from an options
exchange does not potentially subject a broker-dealer to violate order
protection requirements. Gone are the days when the retail brokerage
firms (such as Fidelity, Schwab, and eTrade) were members of the
options exchanges--they are not members of the Exchange or its
affiliates, they do not purchase connectivity to the Exchange, and they
do not purchase market data from the Exchange. Accordingly, 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 recent
significant reduction in the number of broker-dealers that are members
of all options exchanges.\128\
---------------------------------------------------------------------------
\128\ Id. at 71676.
---------------------------------------------------------------------------
The proposal also referenced the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\129\ wherein
the Commission discussed the existence of competition in the
marketplace generally, and particularly for exchanges with unique
business models. The Commission acknowledged that, even if an exchange
were to exit the marketplace due to its proposed fee-related change, it
would not significantly impact competition in the market for exchange
trading services because these markets are served by multiple
competitors.\130\ Further, the Commission explicitly stated that
``[c]onsequently, demand for these services in the event of the exit of
a competitor is likely to be swiftly met by existing competitors.''
\131\ Finally, the Commission recognized that while some exchanges may
have a unique business model that is not currently offered by
competitors, a competitor could create similar business models if
demand were adequate, and if a competitor did not do so, the Commission
believes it would be likely that new entrants would do so if the
exchange with that unique business model was otherwise profitable.\132\
---------------------------------------------------------------------------
\129\ See Securities Exchange Act Release No. 86901 (September
9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
\130\ Id.
\131\ Id.
\132\ Id.
---------------------------------------------------------------------------
Cboe also filed to establish a monthly fee for Certification
Logical Ports of $250 per Certification Logical Port.\133\ Cboe
reasoned that purchasing additional Certification Logical Ports, beyond
the one Certification Logical Port per logical port type offered in the
production environment free of charge, is voluntary and not required in
order to participate in the production environment, including live
production trading on the Exchange.\134\
---------------------------------------------------------------------------
\133\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011). Cboe offers
BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical
Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server
Ports. For each type of the aforementioned logical ports that are
used in the production environment, the Exchange also offers
corresponding ports which provide Trading Permit Holders and non-
TPHs access to the Exchange's certification environment to test
proprietary systems and applications (i.e., ``Certification Logical
Ports'').
\134\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011).
---------------------------------------------------------------------------
In its statutory basis, Cboe justified the new port fee by stating
that it believed the Certification Logical Port fee were reasonable
because while such ports were no longer completely free, TPHs and non-
TPHs would continue to be entitled to receive free of charge one
Certification Logical Port for each type of logical port that is
currently offered in the production environment.\135\ Cboe noted that
other exchanges assess similar fees and cited to NASDAQ LLC and
MIAX.\136\ Cboe also noted that the decision to purchase additional
ports is optional and no market participant is required or under any
regulatory obligation to purchase excess Certification Logical Ports in
order to access the Exchange's certification environment.\137\ Finally,
similar proposals to adopt a Certification Logical Port monthly fee
were filed by Cboe BYX Exchange, Inc.,\138\ BZX,\139\ and Cboe EDGA
Exchange, Inc.\140\
---------------------------------------------------------------------------
\135\ Id. at 18426.
\136\ Id.
\137\ Id.
\138\ See Securities Exchange Act Release No. 94507 (March 24,
2002), 87 FR 18439 (March 30, 2022) (SR-CboeBYX-2022-004).
\139\ See Securities Exchange Act Release No. 94511 (March 24,
2002), 87 FR 18411 (March 30, 2022) (SR-CboeBZX-2022-021).
\140\ See Securities Exchange Act Release No. 94517 (March 25,
2002), 87 FR 18848 (March 31, 2022) (SR-CboeEDGA-2022-004).
---------------------------------------------------------------------------
The Cboe fee proposals described herein were filed subsequent to
the D.C. Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866
F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject
to the same (and current) standard for SEC review and approval as this
proposal. In summary, the Exchange requests the Commission apply the
same standard of review to this proposal which was applied to the
various Cboe and Cboe affiliated markets' filings with respect to non-
transaction fees. If the Commission were to apply a different standard
of review to this proposal than it applied to other exchange fee
filings it would create a burden on competition such that it would
impair the Exchange's ability to make necessary technology driven
changes, such as bifurcating its 10Gb ULL network, because it would be
unable to monetize or recoup costs related to that change and compete
with larger, non-legacy exchanges.
* * * * *
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,\141\ and Rule 19b-4(f)(2) \142\ thereunder.
At any time
[[Page 2748]]
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.
---------------------------------------------------------------------------
\141\ 15 U.S.C. 78s(b)(3)(A)(ii).
\142\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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-MIAX-2022-50 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MIAX-2022-50. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MIAX-2022-50 and should be submitted on
or before February 7, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\143\
---------------------------------------------------------------------------
\143\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00660 Filed 1-13-23; 8:45 am]
BILLING CODE 8011-01-P
