Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Equities Fee Schedule To Modify Certain Connectivity and Port Fees, 2671-2687 [2023-00661]

Download as PDF Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices and should be submitted on or before February 7, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–00774 Filed 1–13–23; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–96631; File No. SR– PEARL–2022–61] Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Equities 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, MIAX PEARL, LLC (‘‘MIAX Pearl’’ 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. khammond on DSKJM1Z7X2PROD with NOTICES 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 fee schedule (the ‘‘Fee Schedule’’) applicable to MIAX Pearl Equities, an equities trading facility of the Exchange, 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/pearl at MIAX Pearl’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these 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 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose SECURITIES AND EXCHANGE COMMISSION 20 17 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. The Exchange proposes to amend the Fee Schedule to amend fees for: (1) the 1 gigabit (‘‘Gb’’) and 10Gb ultra-low latency (‘‘ULL’’) fiber connections for Equity Members 3 and non-Members; (2) the Financial Information Exchange (‘‘FIX’’) Ports,4 and the MIAX Express Orders Interface (‘‘MEO’’) Ports.5 The Exchange adopted connectivity and port fees in September 2020,6 and has not changed those fees since they were adopted. Since that time, the Exchange experienced ongoing increases in expenses, particularly internal expenses. As discussed more fully below, the Exchange recently calculated increased annual aggregate costs of $18,331,650 for providing 1Gb and 10Gb ULL connectivity combined and $3,951,993 for providing FIX and MEO 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 and port 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. * * * * * 3 The term ‘‘Equity Member’’ means a Member authorized by the Exchange to transact business on MIAX PEARL Equities. See Exchange Rule 1901. 4 ‘‘FIX Order Interface’’ or ‘‘FOI’’ means the Financial Information Exchange interface for certain order types as set forth in Exchange Rule 2614. See the Definitions section of the Fee Schedule. 5 Each MEO interface will have one Full Service Port (‘‘FSP’’) and one Purge Port. ‘‘Full Service Port’’ or ‘‘FSP’’ means an MEO port that supports all MEO order input message types. See the Definitions section of the Fee Schedule. 6 See Securities Exchange Act Release No. 90651 (December 11, 2020), 85 FR 81971 (December 17, 2020) (SR–PEARL–2020–33). PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 2671 Starting in 2017, following the United States Court of Appeals for the District of Columbia’s Susquehanna Decision 7 and various other developments, the Commission began to undertake a heightened review of exchange filings, including non-transaction fee filings that was substantially and materially different from it prior review process (hereinafter referred to as the ‘‘Revised Review Process’’). In the Susquehanna Decision, the D.C. Circuit Court stated that the Commission could not maintain a practice of ‘‘unquestioning reliance’’ on claims made by a self-regulatory organization (‘‘SRO’’) in the course of filing a rule or fee change with the Commission.8 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.9 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’’).10 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.’’ 11 The Commission denied requests by various exchanges and plan participants for reconsideration of the Remand Order.12 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.’’ 13 Both the Remand Order and the Order Denying Reconsideration were appealed to the D.C. Circuit. 7 See Susquehanna International Group, LLP v. Securities & Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’). 8 Id. 9 See Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ‘‘SIFMA Decision’’). 10 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). 11 Id. at page 2. 12 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ‘‘Order Denying Reconsideration’’). 13 Order Denying Reconsideration, 2019 WL 2022819, at *13. E:\FR\FM\17JAN1.SGM 17JAN1 2672 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices khammond on DSKJM1Z7X2PROD with NOTICES 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.14 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.’’ 15 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.’’ 16 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.’’ 17 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 18 and remanded for 14 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). 15 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’’). 16 Id. 17 Id. 18 NASDAQ Stock Mkt., LLC v. SEC, No 18–1324, ---Fed. App’x ---, 2020 WL 3406123 (D.C. Cir. June VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 further proceedings consistent with its opinion.19 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.’’ 20 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.21 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.’’ 22 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.23 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.’’ 24 As such, all of those fees remained in place and amounted to a baseline set of fees for those exchanges that had the benefit 5, 2020). The court’s mandate was issued on August 6, 2020. 19 Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020). The court’s mandate issued on August 6, 2020. The D.C. Circuit held that Exchange Act ‘‘Section 19(d) is not available as a means to challenge the reasonableness of generallyapplicable fee rules.’’ Id. The court held that ‘‘for a fee rule to be challengeable under Section 19(d), it must, at a minimum, be targeted at specific individuals or entities.’’ Id. Thus, the court held that ‘‘Section 19(d) is not an available means to challenge the fees at issue’’ in the SIFMA Decision. Id. 20 Id. at *2; see also id. (‘‘[T]he sole purpose of the challenged remand has disappeared.’’). 21 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’’). 22 Id. 23 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 90087 (October 5, 2020). 24 See supra note 21, at page 2. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 of getting their fees in place before the Commission Staff’s fee review process materially changed. The net result of this history and lack of resolution in the D.C. Circuit Court resulted in an uneven competitive landscape where the Commission subjects all new nontransaction fee filings, particularly those submitted by new exchanges, to the new Revised Review Process, while allowing the previously challenged fee filings, mostly submitted by incumbent exchanges prior to 2019, to remain in effect and not subject to the ‘‘record’’ or ‘‘review’’ earlier intended by the Commission. While the Exchange appreciates that the Staff Guidance articulates an important policy goal of improving disclosures and requiring exchanges to justify that their market data and access fee proposals are fair and reasonable, the practical effect of the Revised Review Process, Staff Guidance, and the Commission’s related practice of continuous suspension of new fee filings, is anti-competitive, discriminatory, and has put in place an un-level playing field, which has negatively impacted smaller, nascent, non-legacy exchanges (‘‘non-legacy exchanges’’), while favoring larger, incumbent, entrenched, legacy exchanges (‘‘legacy exchanges’’).25 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 26 25 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. 26 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 E:\FR\FM\17JAN1.SGM 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices khammond on DSKJM1Z7X2PROD with NOTICES 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.27 These fees remain in effect today. The net result is that the non-legacy exchanges are effectively now blocked by the Commission Staff from adopting or increasing fees to amounts comparable to the legacy exchanges (which were not subject to the Revised Review Process and Staff Guidance), despite providing enhanced disclosures and rationale to support their proposed fee changes that far exceed any such support provided by legacy exchanges. Simply put, legacy exchanges were able to increase their non-transaction fees during an extended period in which the Commission applied a ‘‘market-based’’ test that only relied upon the assumed presence of significant competitive forces, while exchanges today are subject to a cost-based test requiring extensive cost and revenue disclosures, a process that is complex, inconsistently applied, and rarely results in a successful outcome, i.e., nonsuspension. The Revised Review Process and Staff Guidance changed decades-long Commission Staff standards for review, resulting in unfair discrimination and placing an undue burden on inter-market competition between legacy exchanges and nonlegacy exchanges. Commission Staff now require exchange filings, including from nonlegacy exchanges such as the Exchange, to provide detailed cost-based analysis in place of competition-based arguments to support such changes. However, even with the added detailed cost and expense disclosures, the Commission Staff continues to either suspend such filings and institute disapproval proceedings, or put the exchanges in the unenviable position of having to repeatedly withdraw and re-file with additional detail in order to continue to charge those fees.28 By impeding any was that the 400 rule flings challenged by SIFMA and Bloomberg would need to be justified under revised review standards. 27 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). 28 For example, the options exchange affiliates of MIAX Pearl Equities, Miami International Securities Exchange, LLC (‘‘MIAX’’), MIAX Pearl, and MIAX Emerald, LLC (‘‘MIAX Emerald’’), have filed, and subsequently withdrawn, various forms of VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 path forward for non-legacy exchanges to establish commensurate nontransaction fees, or by failing to provide any alternative means for smaller markets to establish ‘‘fee parity’’ with legacy exchanges, the Commission is stifling competition: non-legacy exchanges are, in effect, being deprived of the revenue necessary to compete on a level playing field with legacy exchanges. This is particularly harmful, given that the costs to maintain exchange systems and operations continue to increase. The Commission Staff’s change in position impedes the ability of nonlegacy 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 29 and $80,383,000 for 2021.30 Cboe C2 Exchange, Inc. (‘‘C2’’) reported ‘‘access and capacity fee’’ revenue of $19,016,000 for 2020 31 and $22,843,000 for 2021.32 Cboe BZX Exchange, Inc. (‘‘BZX’’) reported ‘‘access and capacity fee’’ revenue of $38,387,000 for 2020 33 and $44,800,000 for 2021.34 Cboe EDGX Exchange, Inc. (‘‘EDGX’’) reported ‘‘access and capacity fee’’ revenue of $26,126,000 for 2020 35 and $30,687,000 for 2021.36 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’’ connectivity and port fee changes seven (7) times since August 2021. Each of the proposals contained hundreds of cost and revenue disclosures never previously disclosed by legacy exchanges in their access and market data fee filings prior to 2019. 29 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. 30 See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001155.pdf. 31 See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000469.pdf. 32 See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001156.pdf. 33 See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000465.pdf. 34 See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001152.pdf. 35 See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000467.pdf. 36 See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001154.pdf. PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 2673 revenue of $20,817,000 for 2019.37 The Exchange notes it is unable to compare ‘‘access fee’’ revenues with NASDAQ Phlx (or other affiliated NASDAQ exchanges) because after 2019, the ‘‘Trade Management Services’’ line item was bundled into a much larger line item in PHLX’s Form 1, simply titled ‘‘Market services.’’ 38 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,39 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 . . .’’,40 this is not the reality experienced by exchanges such as MIAX Pearl. As such, non-legacy 37 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. 38 See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000475.pdf. 39 See, e.g., CNBC Debuts New Set on NYSE Floor, available at https://www.cnbc.com/id/46517876. 40 See supra note 15, at note 1. E:\FR\FM\17JAN1.SGM 17JAN1 2674 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices khammond on DSKJM1Z7X2PROD with NOTICES 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. For example, the options facility of MIAX Pearl has attempted to increase similar fees using a cost-based justification numerous times, having submitted over six filings.41 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 42 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 41 See, e.g., Securities Exchange Act Release Nos. 92798 (August 27, 2021), 86 FR 49360 (September 2, 2021) (SR–PEARL–2021–33); 92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR–PEARL– 2021–36); 93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR–PEARL–2021–45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 2021) (SR–PEARL–2021–53); 93774 (December 14, 2021), 86 FR 71952 (December 20, 2021) (SR– PEARL–2021–57); 93894 (January 4, 2022), 87 FR 1203 (January 10, 2022) (SR–PEARL–2021–58); 94258 (February 15, 2022), 87 FR 9659 (February 22, 2022) (SR–PEARL–2022–03); 94286 (February 18, 2022), 87 FR 10860 (February 25, 2022) (SR– PEARL–2022–04); 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022) (SR–PEARL–2022–11); 94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR–PEARL–2022–12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 2022) (SR–PEARL–2022–18). 42 15 U.S.C. 78f(b)(4). VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 and exhaustive articulation of required data and its views on acceptable margins,43 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; 44 or (c) accept that certain competition-based arguments are applicable given the linkage between non-transaction fees and transaction fees, especially where non-transaction fees among exchanges are based upon disparate standards of review, lack parity, and impede fair competition. Considering the absence of any such framework or clarity, the Exchange believes that the Commission does not have a reasonable basis to deny the Exchange this change in fees, where the proposed change would result in fees meaningfully lower than comparable fees at competing exchanges and where the associated nontransaction revenue is meaningfully lower than competing exchanges. In light of the above, disapproval of this would not meet the fairness standard under the Act, would be discriminatory and place a substantial burden on competition. The Exchange would be uniquely disadvantaged by not being able to increase its access fees to comparable levels (or lower levels than current market rates) to those of other 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 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.45 43 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. 44 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. 45 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 PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 Lastly, the Exchange notes that the Commission Staff has allowed similar fee increases by other exchanges to remain in effect by publishing those filings for comment and allowing the exchange to withdraw and re-file numerous times.46 Recently, the Commission Staff has not afforded the Exchange the same flexibility.47 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. * * * * * 1Gb and 10Gb ULL Connectivity Fee Change Sections (2a) and (b) of the Fee Schedule describe network connectivity fees for the 1Gb ULL and 10Gb ULL fiber connections, which are charged to both Equity Members and non-Members for connectivity to the Exchange’s primary and secondary facilities. The Exchange offers its Equity Members the ability to connect to the Exchange in order to transmit orders to and receive information from the Exchange. Equity Members can also choose to connect to the Exchange indirectly through physical connectivity maintained by a third-party extranet. Extranet physical connections may provide access to one or multiple Equity Members on a single connection. The number of physical 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. 46 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). 47 Securities Exchange Act Release Nos. 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022) (SR– PEARL–2022–11) and 94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR–PEARL–2022–12). E:\FR\FM\17JAN1.SGM 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices connections assigned to each User 48 as of November 30, 2022, ranges from one to eleven, depending on the scope and scale of the Equity Member’s trading activity on the Exchange as determined by the Equity Member, including the Equity Member’s determination of the need for redundant connectivity. The Exchange notes that 40% of its Equity Members do not maintain a physical connection directly with the Exchange in the Primary Data Center (though many such Equity Members have connectivity through a third-party provider) and another 46% have either one or two physical ports to connect to the Exchange in the Primary Data Center. Thus, only a limited number of Equity Members, 14%, maintain three or more physical ports to connect to the Exchange in the Primary Data Center. In order to cover the continuous increase in aggregate costs of providing physical connectivity to Equity Members and non-Equity Members and make a modest profit, as described below, the Exchange proposes to amend the monthly connectivity fees as follows: (a) increase the 1Gb ULL connection from $1,000 to $2,500; and (b) increase the 10Gb ULL connection from $3,500 to $8,000.49 khammond on DSKJM1Z7X2PROD with NOTICES FIX and MEO Ports Similar to other exchanges, the Exchange offers its Equity Members application sessions, also known as ports, for order entry and receipt of trade execution reports and order messages. Equity Members can also choose to connect to the Exchange indirectly through a session maintained by a third-party service bureau. Service bureau sessions may provide access to one or multiple Equity Members on a single session. The number of sessions assigned to each User as of November 30, 2022, ranges from one to more than 100, depending on the scope and scale of the Equity Member’s trading activity on the Exchange (either through a direct connection or through a service bureau) as determined by the Equity Member. For example, by using multiple sessions, Equity Members can segregate 48 The term ‘‘User’’ shall mean any Member or Sponsored Participant who is authorized to obtain access to the System pursuant to Exchange Rule 2602. See Exchange Rule 1901. 49 The Exchange notes that while its proposed fee of $8,000 per 10Gb ULL connection is higher than MEMX’s $6,000 monthly fee for its xNet Physical Connection, MEMX does not offer any other physical connectivity, such as a 1Gb connection, for a lower fee. See Securities Exchange Act Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–2022–26). See MEMX Fee Schedule, Connectivity and Application Sessions, available at https:// info.memxtrading.com/fee-schedule/ (last visited December 28, 2022). VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 order flow from different internal desks, business lines, or customers. The Exchange does not impose any minimum or maximum requirements for how many application sessions an Equity Member or service bureau can maintain, and does not propose to impose any minimum or maximum session requirements for its Equity Members or their service bureaus. Section (2d), Port Fees, of the Fee Schedule describes fees for access and services used by Equity Members and non-Members. The Exchange provides the following types of ports: (i) FIX Ports, which allow Equity Members to send orders and other messages using the FIX protocol; and (ii) MEO Ports, which allow Equity Members order entry capabilities to all Exchange matching engines. The Exchange operates a primary and secondary data center as well as a disaster recovery center. Each Port provides access to all Exchange data centers for a single fee. The Exchange currently provides the first twenty-five (25) FIX and MEO Ports free of charge and absorbed all associated costs since the launch of MIAX Pearl Equities. The Exchange charges the following separate monthly fees for FIX and MEO Ports: $450 for ports 26–50, $400 for ports 51– 75, $350 for ports 76–100, and $300 for ports 101 and higher. The Exchange now proposes to provide the first five (5) FIX or MEO Ports free of charge, then charge a flat rate of $450 per port for port six (6) and above.50 Implementation 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 51 in general, and furthers the objectives of Section 6(b)(4) of the Act 52 in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among Equity Members and other persons using any facility or system which the Exchange operates or controls. The Exchange also believes the 50 The Exchange notes that the proposed fee of $450 per port equals the amount charged by MEMX for MEMX’s application sessions (order entry and drop copy ports), but MEMX does not offer any ports free of charge. See MEMX Fee Schedule, Connectivity and Application Sessions, available at https://info.memxtrading.com/fee-schedule/ (last visited December 28, 2022). See Securities Exchange Act Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR–MEMX– 2022–26). Unlike MEMX and other exchanges, the Exchange also continues to provide FXD Ports (i.e., Drop Copy Ports) free of charge. 51 15 U.S.C. 78f(b). 52 15 U.S.C. 78f(b)(4). PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 2675 proposed fees further the objectives of Section 6(b)(5) of the Act 53 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 54 and the Staff Guidance,55 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.’’ 56 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.’’ 57 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 53 15 U.S.C. 78f(b)(5). supra note 14. 55 See supra note 15. 56 Id. 57 Id. 54 See E:\FR\FM\17JAN1.SGM 17JAN1 khammond on DSKJM1Z7X2PROD with NOTICES 2676 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices because it will permit recovery of the SRO’s costs, . . . , specific information, including quantitative information, should be provided to support that argument.’’ 58 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 1Gb and10Gb ULL connectivity as well as FIX and MEO 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 Equity 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. 58 Id. VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 The Proposed Fees Ensure Parity Among Exchange Access Fees, Which Promotes Competition The Exchange commenced operations in September 2020 and adopted its initial fee schedule, with 1Gb ULL connectivity set at $1,000, 10Gb ULL connectivity fees set at $3,500, and provided the first twenty-five (25) FIX and MEO Ports for free.59 As a new exchange entrant, the Exchange chose to offer such services at a discounted rate or 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.60 The Exchange has not amended any of its non-transaction fees since its launch in September 2022. The Exchange 59 See supra note 6. 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). 60 See PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 balanced business and competitive concerns with the need to financially compete with the larger incumbent exchanges that charge higher fees for similar connectivity and use that revenue to invest in their technology and other service offerings. The proposed changes to the Fee Schedule are reasonable in several respects. As a threshold matter, the Exchange is subject to significant competitive forces, which constrains its pricing determinations for transaction fees as well as non-transaction fees. The fact that the market for order flow is competitive has long been recognized by the courts. In NetCoalition v. Securities and Exchange Commission, the D.C. Circuit stated, ‘‘[n]o one disputes that competition for order flow is ‘fierce.’ . . . As the SEC explained, ‘[i]n the U.S. national market system, buyers and sellers of securities, and the brokerdealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution’; [and] ‘no exchange can afford to take its market share percentages for granted’ because ‘no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers’. . . .’’ 61 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.’’ 62 Congress directed the Commission to ‘‘rely on ‘competition, whenever possible, in meeting its regulatory responsibilities for overseeing the SROs and the national market system.’ ’’ 63 As a result, and as evidenced above, the Commission has historically relied on competitive forces to determine whether a fee proposal is equitable, fair, 61 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)). 62 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 63 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.’’). E:\FR\FM\17JAN1.SGM 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices 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.’’ 64 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.’’ 65 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.’’ 66 The Exchange believes the competing exchanges’ 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 exchanges with comparable market shares. As such, the Exchange believes that denying its Exchange Type of connection or port MIAX Pearl Equities (as proposed) (market share of 1.02% for the month of November 2022) 67. 1Gb ULL connection .......... 10Gb ULL connection ........ FIX and MEO Ports ............ MEMX 68 (market share of 3.05% for the month of November 2022) 69. NASDAQ PSX LLC (‘‘PSX’’) 70 (market share of 0.70% for the month of November 2022) 71. khammond on DSKJM1Z7X2PROD with NOTICES NASDAQ BX LLC (‘‘BX’’) 72 (market share of 0.60% for the month of November 2022) 73. FXD Ports (i.e., Drop Copy Ports. 1Gb connection .................. xNet Physical connection ... Order Entry Ports ............... Drop Copy Ports ................ 1Gb connection .................. 10Gb connection ................ Order Entry Ports ............... Drop Copy Ports ................ 1Gb Ultra connection ......... 10Gb Ultra connection ....... Order Entry Ports ............... Drop Copy Ports ................ 2677 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 exchanges with similar market share. Each of the market data rates in place at competing exchanges were filed with the Commission for immediate effectiveness and remain in place today. Monthly fee (per connection or per port) $2,500. $8,000. Ports 1–5: FREE. Ports 6 or more: $450 per port. FREE. Not available. $6,000 per connection. $450 per port. $450 per port. $2,500 per connection (plus $1,500 installation fee). $7,500 per connection (plus $1,500 installation fee). $400 per port. $400 per port. $2,500 per connection (plus $1,500 installation fee). $15,000 (plus $1,500 installation fee). $500 per port. $500 per port. There is no requirement, regulatory or otherwise, that any broker-dealer connect to and access any (or all of) the available equity exchanges. Market participants may choose to become a member of one or more equities 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, one Member of MIAX Pearl’s options facility informed the Exchange that that Member will terminate their membership effective January 1, 2023 as a direct result of the proposed fee changes to the Exchange’s options fee schedule. It is not a requirement for market participants to become members of all equities exchanges, in fact, certain market participants conduct an equities business as a member of only one market.74 A very small number of market participants choose to become a member of all sixteen (16) equities exchanges. Most firms that actively trade on equities markets are not currently Equity Members of the Exchange and do not purchase connectivity or port services at the Exchange. Connectivity and ports are only available to Equity Members or service bureaus, and only an Equity Member may utilize a port.75 BOX 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 64 See Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74,770 (December 9, 2008) (SR–NYSEArca–2006–21). 65 Id. 66 See Staff Guidance, supra note 15. 67 See Market at a Glance, available at https:// www.miaxoptions.com/. 68 See MEMX Fee Schedule, Connectivity and Application Sessions, available at https:// info.memxtrading.com/fee-schedule/. 69 See supra note 67. 70 See PSX Pricing Schedule, available at https:// www.nasdaqtrader.com/Trader.aspx?id=PSX_ Pricing; and PSX Rules, General 8: Connectivity, Section 2, Direct Connectivity. 71 See supra note 67. 72 See BX Pricing Schedule, available at https:// www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; and BX Rules, General 8: Connectivity, Section 2, Direct Connectivity. 73 See supra note 67. 74 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.’’ 75 Service Bureaus may obtain ports on behalf of Equity Members. VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 E:\FR\FM\17JAN1.SGM 17JAN1 khammond on DSKJM1Z7X2PROD with NOTICES 2678 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices only one of the three exchanges.76 For equities, the Exchange currently has 45 Equity Members. Also, MEMX noted in a January 2022 filing that it had only 66 members, and, based on publicly available information regarding a sample of the Exchange’s competitors, NYSE has 142 members, Cboe BZX has 140 members, and Investors Exchange LLC (‘‘IEX’’) has 133 members.77 For options, the Exchange and its affiliates, MIAX and MIAX Emerald, have a total of 47 members. Of those 47 total members, 35 are members of all three affiliated exchanges, four (4) are members of only two (2) affiliated exchanges, and eight (8) are members of only one affiliated exchange. The Exchange believes that significant differences in membership numbers describes by the Exchange, BOX, and MEMX demonstrate that firms can, and do, select which exchanges they wish to access, and, accordingly, exchanges must take competitive considerations into account when setting fees for such access. The Exchange also notes that no firm is an Equity Member of the Exchange only. The above data evidences that a broker-dealer need not have direct connectivity to all exchanges, let alone the Exchange and its 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. Not only is there not an actual regulatory requirement to connect to every equities 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 exchanges discussed above. 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, 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 equities securities; (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 76 See Securities Exchange Act Release No. 94894 (May 11, 2022), 87 FR 29987 (May 17, 2022) (SR– BOX–2022–17). 77 See Securities Exchange Act Release No. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022) (SR–MEMX–2021–19). VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 or diminish the overall competition for exchange services. In lieu of becoming a member at each 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 an Equity Member at—or establish connectivity to—the Exchange.78 If the Exchange is not at the NBBO, the Exchange will route an order to any away market that is at the NBBO to ensure that the order was executed at a superior price and prevent a trade-through.79 With respect to the submission of orders, Equity 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 thirdparty broker-dealer Equity 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,80 or request sponsored access 81 through a member of an exchange in order to submit a trade directly to an equities exchange.82 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-Equity 78 See 17 CFR 242.611. may elect to not route their orders by utilizing the Do Not Route or Post Only order type instructions. See Exchange Rule 2614(c)(1) and (2). 80 Service Bureaus provide access to market participants to submit and execute orders on an exchange. On the Exchange, a Service Bureau may be an Equity Member. Some Equity Members utilize a Service Bureau for connectivity and that Service Bureau may not be an Equity Member. Some market participants utilize a Service Bureau who is an Equity Member to submit orders. 81 Sponsored Access is an arrangement whereby an Equity Member permits its customers to enter orders into an exchange’s system that bypass the Equity Member’s trading system and are routed directly to the Exchange, including routing through a service bureau or other third-party technology provider. 82 This may include utilizing a floor broker and submitting the trade to an equities trading floor. 79 Members PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 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).83 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.84 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 15 equities 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 Equity Members and secure access to its environment. To properly regulate its Equity 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 Equity Members secure access to communicate with the Exchange and exercise trading rights. When a market participant elects to be an Equity Member, and is approved for membership by the Exchange, the Equity 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 an Equity Member of the Exchange, or, if it is an Equity Member, to purchase connectivity beyond the one 83 See, e.g., Nasdaq Price List—U.S. Direct Connection and Extranet Fees, available at, US Direct-Extranet Connection (nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077 (January 16, 2022), 80 FR 3683 (January 23, 2022) (SR–NASDAQ–2015–002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022) (SR– NASDAQ–2017–114). 84 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. E:\FR\FM\17JAN1.SGM 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices connection that is necessary to quote or submit orders on the Exchange. Equity Members may freely choose to rely on one or many connections, depending on their business model. 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 Equity Members—both generally and in relation to other Equity 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 Equity Members and competition among Equity 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,85 and Rule 19b–4 thereunder,86 with respect to the types of information SROs should provide when filing fee changes, and Section 6(b) of the Act,87 which requires, among other things, that exchange fees be reasonable and equitably allocated,88 not designed to permit unfair discrimination,89 and that they not impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act.90 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.91 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 85 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 87 15 U.S.C. 78f(b). 88 15 U.S.C. 78f(b)(4). 89 15 U.S.C. 78f(b)(5). 90 15 U.S.C. 78f(b)(8). 91 See Staff Guidance, supra note 15. 86 17 VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 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 1Gb and 10Gb ULL connectivity to the Exchange at $18,331,650 combined ($17,726,799 for 10Gb ULL connectivity and $604,851 for 1Gb connectivity) (or approximately $1,527,637 per month for combined connectivity costs, rounded to the nearest dollar when dividing the combined annual cost by 12 months). The Exchange also recently calculated its aggregate annual costs for providing FIX and MEO Ports at $3,951,993 combined ($911,998 for FIX Ports and $3,039,995 for MEO Ports) (or approximately $329,333 per month for combined FIX and MEO Port costs, rounded to the nearest dollar when dividing the combined annual cost by 12 months). In order to cover a portion of the aggregate costs of providing connectivity to its Users (both Equity Members and non-Equity Members 92) going forward, as described below, the Exchange proposes to modify its Fee Schedule as described above. In 2020, the Exchange completed a study of its aggregate costs to produce market data and connectivity (the ‘‘Cost Analysis’’).93 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 92 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 application sessions on behalf of one or more Members. Extranets offer physical connectivity services to Members and nonMembers. 93 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 00081 Fmt 4703 Sfmt 4703 2679 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 connectivity (62%), with smaller allocations to FIX Ports (1.2%) and MEO Ports (3.8%), and the remainder to the provision of transaction execution, membership services and market data services (33%). 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 Equity Members and parties that they sponsor to participate directly on the Exchange may submit orders to the Exchange, many Equity Members (but not all) consume market data from the Exchange in order to trade on the Exchange, and the Exchange consumes market data from external sources in order to comply with regulatory obligations. Accordingly, given this interdependence, the allocation of costs to each service or revenue source required judgment of the Exchange and was weighted based on estimates of the Exchange that the Exchange believes are reasonable, as set forth below. While there is no standardized and generally accepted methodology the allocation of an exchange’s costs, the Exchange’s methodology is the result of an extensive review and analysis and will be consistently applied going forward for any other potential fee proposals. Through the Exchange’s extensive updated Cost Analysis, the Exchange analyzed every expense item in the Exchange’s general expense ledger to determine whether each such expense E:\FR\FM\17JAN1.SGM 17JAN1 2680 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices 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 1Gb and10Gb ULL connectivity, as well as FIX and MEO Ports, result in an aggregate combined monthly cost of $1,856,970, as further detailed below. Costs Related To Offering Physical 1Gb and 10Gb ULL Connectivity the Exchange to be related to offering physical dedicated 1Gb and 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 47.6% of its overall Human Resources cost to offering physical 1Gb and 10Gb ULL connectivity. The following charts detail the individual line-item costs considered by 10Gb ULL CONNECTIVITY Annual cost 94 Cost drivers Monthly cost 95 % of all Human Resources ................................................................................................................... Connectivity (external fees, cabling, switches, etc.) ............................................................... Internet Services, including Internet Services ......................................................................... Data Center ............................................................................................................................. Hardware and Software Maintenance and Licenses .............................................................. Depreciation ............................................................................................................................. Allocated Shared Expenses .................................................................................................... $5,936,741 69,451 1,818,808 1,052,797 642,112 3,448,206 4,758,684 $494,728 5,788 151,567 87,733 53,509 287,351 396,557 46.1 60 72.5 60 58 73.6 48.6 Total .................................................................................................................................. 17,726,799 1,477,233 54 1Gb ULL CONNECTIVITY Annual cost 96 Cost drivers % 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 .................................................................................................... $202,566 2,370 62,059 35,922 21,909 117,655 162,370 $16,880 197 5,172 2,993 1,826 9,805 13,531 1.6 2.0 2.5 2.0 2.0 2.5 1.7 Total .................................................................................................................................. 604,851 50,404 1.8 Below are additional details regarding each of the line-item costs considered by the Exchange to be related to offering physical 1Gb and 10Gb ULL connectivity. khammond on DSKJM1Z7X2PROD with NOTICES Monthly cost 97 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 percentages of 58% for 10Gb ULL connectivity and 2.0% for 1Gb connectivity of each employee’s time. The Exchange also allocated Human Resources costs to provide 94 The Annual Cost includes figures rounded to the nearest dollar. VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 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 37%). 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 95 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. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 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 96 See 97 See E:\FR\FM\17JAN1.SGM supra note 94. supra note 95. 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices khammond on DSKJM1Z7X2PROD with NOTICES 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. equities 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 1Gb and 10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity and content service providers to connect to other national securities exchanges, the NASDAQ UTP and CTA/CQ Plans, and to receive market data from other exchanges and market data providers. The Exchange understands that these service providers provide services to most, if not all, of the other U.S. exchanges and other market participants. Connectivity and market data provided these service providers is critical to the Exchanges daily operations and performance of its System Networks to which market participants connect to via 10Gb ULL connectivity. Without these services providers, the Exchange would not be able to connect to other national securities exchanges, market data providers, or the NASDAQ UTP and CTA/CQ Plans 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 1Gb and 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 (62%) to physical 1Gb and 10Gb ULL connectivity because the third-party data centers and the Exchange’s physical equipment VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 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 physical 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., limit order price protection, 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 physical 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 73.6% of all depreciation costs to providing physical 10Gb ULL connectivity and 2.5% of all depreciation costs to providing 1Gb 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 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 2681 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.98 The Exchange notes that the 50% allocation of general shared expenses for physical connectivity is higher than that allocated to general shared expenses for FIX and MEO 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), FIX and MEO Ports do not require as many broad or indirect resources as other Core Services. The total monthly cost for 10Gb ULL connectivity of $1,477,233 was divided by the number of physical 10Gb ULL connections the Exchange maintained at the time that proposed pricing was determined (90), to arrive at a cost of approximately $16,414 per month, per physical 10Gb ULL connection. The total monthly cost for 1Gb connectivity of $50,404 was divided by the number of physical 1Gb connections the Exchange maintained at the time that proposed pricing was determined (8), to arrive at a cost of approximately $6,301 per month, per physical 1Gb connection. Costs Related To Offering FIX and MEO Ports The following chart details the individual line-item costs considered by the Exchange to be related to offering FIX and MEO Ports as well as the 98 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. E:\FR\FM\17JAN1.SGM 17JAN1 2682 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices percentage of the Exchange’s overall costs such costs represent for such area (e.g., as set forth below, the Exchange allocated approximately 22.4% of its overall Human Resources cost to offering FIX and MEO Ports). FIX PORTS Annual cost 99 Cost drivers Monthly cost 100 % 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 .................................................................................................... $665,726 535 11,574 20,262 5,108 92,114 116,679 $55,476 45 965 1,689 426 7,676 9,723 5.2 0.5 0.5 1.2 0.5 2.0 1.2 Total .................................................................................................................................. 911,998 76,000 2.8 MEO PORTS Annual cost 101 Cost drivers % 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 .................................................................................................... $2,219,088 1,782 38,582 67,538 17,026 307,048 388,931 $184,924 149 3,215 5,628 1,419 25,587 32,411 17.2 1.5 1.5 3.8 1.5 6.6 4.0 Total .................................................................................................................................. 3,039,995 253,333 9.3 Human Resources khammond on DSKJM1Z7X2PROD with NOTICES Monthly cost 102 With respect to FIX and MEO Ports, the Exchange calculated Human Resources cost by taking an allocation of employee time for employees whose functions include providing FIX and MEO 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 application sessions 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 application sessions 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 99 See supra note 94 (describing rounding of Annual Costs). 100 See supra note 95 (describing rounding of Monthly Costs based on annual costs). VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 overseeing tasks related to providing application sessions and maintaining performance thereof. The Human Resources cost was again calculated using a blended rate of compensation reflecting salary, equity and bonus compensation, benefits, payroll taxes, and 401(k) matching contributions. Connectivity and Internet Services The Connectivity cost includes external fees paid to connect to other exchanges, cabling and switches, as described above. For purposes of FIX and MEO 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 101 See supra note 94 (describing rounding of Annual Costs). 102 See supra note 95 (describing rounding of Monthly Costs based on annual costs). PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 exchanges, to receive and consume market data from other markets. The Exchange included External Market Data fees to the provision of application sessions as such market data is also necessary here (in addition to physical connectivity) to offer certain services related to such sessions, such as validating orders on entry against the national best bid and national best offer and checking for other conditions (e.g., whether a symbol is halted or subject to a short sale circuit breaker). This allocation was included as part of the internet Services cost described above.103 Thus, as market data from other Exchanges is consumed at the application session 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 application sessions. 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. 103 The Exchange notes that MEMX separately allocated 7.5% of its external market data costs to providing physical connectivity. E:\FR\FM\17JAN1.SGM 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices khammond on DSKJM1Z7X2PROD with NOTICES 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 8.6% of all depreciation costs to providing FIX and MEO Ports. In contrast to physical connectivity, described above, the Exchange did allocate depreciation costs for depreciated software necessary to operate the Exchange to FIX and MEO 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 FIX and MEO Ports costs as without these general shared costs the Exchange would not be able to operate in the manner that it does and provide application sessions. 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 20% of the overall cost for directors was allocated to providing FIX and MEO Ports. The Exchange notes that the 5.2% allocation of general shared expenses for FIX and MEO 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 FIX and MEO Ports have several areas where certain tangible costs are heavily weighted towards providing such service (e.g., Data Centers, as described above), 1Gb and 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 for FIX Ports of $76,000 was divided by the number of FIX Ports VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 the Exchange maintained at the time that proposed pricing was determined (142), to arrive at a cost of approximately $535 per month, per FIX Port (rounded to the nearest dollar when dividing the approximate monthly cost by the number of FIX Ports). The total monthly cost for MEO Ports of $253,333 was divided by the number of MEO Ports the Exchange maintained at the time that proposed pricing was determined (336), to arrive at a cost of approximately $754 per month, per MEO Port (rounded to the nearest dollar when dividing the approximate monthly cost by the number of MEO Ports). 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 FIX and MEO Ports) and did not doublecount any expenses. Instead, as described above, the Exchange allocated applicable cost drivers across its core services and used the same Cost Analysis to form the basis of this proposal and the filings the Exchange submitted proposing fees for proprietary data feeds offered by the Exchange. For instance, in calculating the Human Resources expenses to be allocated to physical connections, the Exchange has a team of employees dedicated to network infrastructure and with respect to such employees the Exchange allocated network infrastructure personnel with a high percentage of the cost of such personnel (60%) to 1Gb and 10Gb ULL connectivity given their focus on functions necessary to provide physical connections. The salaries of those same personnel were allocated only 25% to FIX and MEO Ports and the remaining 15% was allocated to transactions 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 37% for 1Gb and 10Gb ULL connectivity 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 (less than 21%) across a wider range of personnel groups in order to allocate Human Resources costs to providing FIX and MEO Ports. This is because a much wider range of personnel are involved in functions necessary to offer, monitor and maintain FIX and MEO Ports but the tasks necessary to do so are not a primary or full-time function. In total, the Exchange allocated 47.6% of its personnel costs to providing PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 2683 physical connections and 22.4% of its personnel costs to providing FIX and MEO Ports, for a total allocation of 70% Human Resources expense to provide these specific connectivity services. In turn, the Exchange allocated the remaining 30% of its Human Resources expense to membership (less than 1%) and transactions and market data (9.5%). 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 FIX and MEO 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 Equity Members and nonEquity 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 85% of the Exchange’s overall depreciation and amortization expense to connectivity services (76.185% attributed to 1Gb and 10Gb ULL physical connections and 8.6% to FIX and MEO Ports). The Exchange allocated the remaining depreciation and amortization expense (approximately 15%) toward the cost of providing transaction services, membership 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 FIX and MEO 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 E:\FR\FM\17JAN1.SGM 17JAN1 2684 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices khammond on DSKJM1Z7X2PROD with NOTICES anticipated revenue from transaction pricing. The Exchange notes that the Cost Analysis is based on the Exchange’s 2023 fiscal year of operations and projections. As such, the Exchange believes that its costs will remain relatively similar in future years. It is possible however that such costs will either decrease or increase. To the extent the Exchange sees growth in use of connectivity services it will receive additional revenue to offset future cost increases. However, if use of connectivity services is static or decreases, the Exchange might not realize the revenue that it anticipates or needs in order to cover applicable costs. Accordingly, the Exchange is committing to conduct a one-year review after implementation of these fees. The Exchange expects that it may propose to adjust fees at that time, to increase fees in the event that revenues fail to cover costs and a reasonable mark-up of such costs. Similarly, the Exchange would propose to decrease fees in the event that revenue materially exceeds our current projections. In addition, the Exchange will periodically conduct a review to inform its decision making on whether a fee change is appropriate (e.g., to monitor for costs increasing/decreasing or subscribers increasing/decreasing, etc. in ways that suggest the thencurrent fees are becoming dislocated from the prior cost-based analysis) and would propose to increase fees in the event that revenues fail to cover its costs and a reasonable mark-up, or decrease fees in the event that revenue or the mark-up materially exceeds our current projections. In the event that the Exchange determines to propose a fee change, the results of a timely review, including an updated cost estimate, will be included in the rule filing proposing the fee change. More generally, we believe that it is appropriate for an exchange to refresh and update information about its relevant costs and revenues in seeking any future changes to fees, and the Exchange commits to do so. Projected Revenue The proposed fees will allow the Exchange to cover certain costs incurred by the Exchange associated with providing and maintaining necessary hardware and other network infrastructure as well as network monitoring and support services; 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 VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 data and performance of the network via the subscriber’s connection(s). The above cost, namely those associated with hardware, software, and human capital, enable the Exchange to measure network performance with nanosecond granularity. These same costs are also associated with time and money spent seeking to continuously improve the network performance, improving the subscriber’s experience, based on monitoring and analysis activity. The Exchange routinely works to improve the performance of the network’s hardware and software. The costs associated with maintaining and enhancing a state-of-the-art exchange network is a significant expense for the Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those costs by amending fees for connectivity services. Subscribers, particularly those of 10Gb ULL connectivity, expect the Exchange to provide this level of support to connectivity so they continue to receive the performance they expect. This differentiates the Exchange from its competitors. As detailed above, the Exchange has five primary sources of revenue that it can potentially use to fund its operations: transaction fees, fees for connectivity services, membership and regulatory fees, and market data fees. Accordingly, the Exchange must cover its expenses from these five primary sources of revenue. • The Exchange’s Cost Analysis estimates the annual cost to provide 10Gb ULL connectivity services at $17,726,799. Based on current 10Gb ULL connectivity services usage, the Exchange would generate annual revenue of approximately $9,144,000. This represents a negative margin when compared to the cost of providing 10Gb ULL connectivity services. • The Exchange’s Cost Analysis estimates the annual cost to provide 1Gb connectivity services at $604,851. Based on current 1Gb connectivity services usage, the Exchange would generate annual revenue of approximately $312,000. This represents a negative margin when compared to the cost of providing 1Gb connectivity services. • The Exchange’s Cost Analysis estimates the annual cost to provide FIX Port services at $911,998. Based on current FIX Port services usage, the Exchange would generate annual revenue of approximately $388,800. This represents a negative margin when compared to the cost of providing FIX Port services. • The Exchange’s Cost Analysis estimates the annual cost to provide MEO Port services at $3,039,995. Based on current MEO Port services usage, the PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 Exchange would generate annual revenue of approximately $1,296,000. This represents a negative margin when compared to the cost of providing MEO 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 1Gb and 10Gb ULL connectivity and FIX and MEO Port services versus the total projected revenue of the Exchange associated with those services. In fact, the Exchange will generate negative margins on those connectivity and port services even with the proposed fees. * * * * * MIAX Pearl Equities has operated at a cumulative net annual loss since it launched operations in 2020.104 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 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 1Gb and 10Gb ULL connectivity as well as FIX and MEO 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 1Gb and 10Gb ULL connectivity as well as FIX and MEO 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 104 The Exchange has incurred a cumulative loss of $79 million since its inception in 2020. See Exchange’s Form 1/A, Application for Registration or Exemption from Registration as a National Securities Exchange, filed July 28, 2021, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000461.pdf. E:\FR\FM\17JAN1.SGM 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices khammond on DSKJM1Z7X2PROD with NOTICES 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 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, the Exchange will have to be successful in retaining existing clients that wish to utilize 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports and/or obtaining new clients that will purchase such access. To the extent the Exchange is successful in encouraging new clients, 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. 1Gb and 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 VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 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 equities 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.105 Thus, as the number of messages an entity increases, certain other costs incurred by the Exchange that are correlated to, though not directly affected by, connection costs (e.g., storage costs, surveillance costs, service expenses) also increase. Given this difference in network utilization rate, the Exchange believes that it is reasonable, equitable, and not unfairly discriminatory that the 10Gb ULL users pay for the vast majority of the shared network resources from which all market participants’ benefit. FIX and MEO Ports 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 105 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 2685 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.106 Thus, as the number of connections an Equity Member has increases, the related pull on Exchange resources also increases. The Exchange sought to design the proposed pricing structure to set the amount of the fees to relate to the number of connections a firm purchases, while continuing to provide the first five (5) ports for free. The more connections purchased by an Equity Member likely results in greater expenditure of Exchange resources and increased cost to the Exchange. The Exchange further believes that the proposed fees are reasonable, equitably allocated and not unfairly discriminatory because, for the flat fee, the Exchange provides each Equity Member their first five (5) ports for free, unlike other equity exchanges referenced above. 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 1Gb and10Gb ULL connectivity as well as FIX and MEO 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 2020 107 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 106 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). 107 See supra note 104. E:\FR\FM\17JAN1.SGM 17JAN1 khammond on DSKJM1Z7X2PROD with NOTICES 2686 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices 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 industry, which resulted in lower initial revenues. Examples of this are 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, for which the Exchange only now seeks to adopt fees at a level similar to or lower than those of other equity exchanges. Further, the Exchange does not believe that the proposed fee increase for the 1Gb or 10Gb ULL connection change would place certain market participants at the Exchange at a relative disadvantage compared to other market participants or affect the ability of such market participants to compete. The proposed fees 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 Equity Members, non-Equity Members (extranets or service bureaus), thirdparties 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. 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 VerDate Sep<11>2014 18:16 Jan 13, 2023 Jkt 259001 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, market participants are not forced to connect to all exchanges. There is no reason to believe that our proposed price increase will harm another exchange’s ability to compete. There are other markets of which market participants may connect to trade equities at higher rates than the Exchange’s. There is also a range of alternative strategies, including routing to the exchange through another participant or market center or accessing the Exchange indirectly. Market participants are free to choose which exchange or reseller to use to satisfy their business needs. Accordingly, the Exchange does not believe its proposed fee changes impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. * * * * * In conclusion, as discussed thoroughly above, the Exchange regrettably believes that the application of the Revised Review Process and Staff Guidance has adversely affected intermarket competition among legacy and non-legacy exchanges by impeding the PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 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,108 and Rule 19b–4(f)(2) 109 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule 108 15 109 17 E:\FR\FM\17JAN1.SGM U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 17JAN1 Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– PEARL–2022–61 on the subject line. Paper Comments khammond on DSKJM1Z7X2PROD with NOTICES • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–PEARL–2022–61. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–PEARL–2022–61 and should be submitted on or before February 7, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.110 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–00661 Filed 1–13–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meetings [Investment Company Act Release No. 34801; File No. 812–15412] 2:00 p.m. on Thursday, January 19, 2023. Cadre Horizon Fund, Inc., et al. The meeting will be held via remote means and/or at the Commission’s headquarters, 100 F Street NE, Washington, DC 20549. AGENCY: TIME AND DATE: PLACE: This meeting will be closed to the public. STATUS: MATTERS TO BE CONSIDERED: Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the closed meeting. Certain staff members who have an interest in the matters also may be present. In the event that the time, date, or location of this meeting changes, an announcement of the change, along with the new time, date, and/or place of the meeting will be posted on the Commission’s website at https:// www.sec.gov. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B) and (10) and 17 CFR 200.402(a)(3), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and (a)(10), permit consideration of the scheduled matters at the closed meeting. The subject matter of the closed meeting will consist of the following topics: Institution and settlement of injunctive actions; Institution and settlement of administrative proceedings; Resolution of litigation claims; and Other matters relating to examinations and enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting agenda items that may consist of adjudicatory, examination, litigation, or regulatory matters. CONTACT PERSON FOR MORE INFORMATION: For further information; please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. Authority: 5 U.S.C. 552b. Dated: January 12, 2023. Vanessa A. Countryman, Secretary. [FR Doc. 2023–00869 Filed 1–12–23; 4:15 pm] 110 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 18:16 Jan 13, 2023 BILLING CODE 8011–01–P Jkt 259001 2687 PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 January 10, 2023. Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’). ACTION: Notice. Notice of an application under section 6(c) of the Investment Company Act of 1940 (the ‘‘Act’’) for an exemption from sections 18(a)(2), 18(c) and 18(i) of the Act, pursuant to sections 6(c) and 23(c) of the Act for certain exemptions from rule 23c–3 under the Act, and pursuant to section 17(d) of the Act and rule 17d– 1 under the Act. Summary of Application: Applicants request an order to permit certain registered closed-end management investment companies to issue multiple classes of shares and to impose assetbased service and distribution fees, and early withdrawal charges. Applicants: Cadre Horizon Fund, Inc., CCV, LLC, and RealCadre LLC. Filing Dates: The application was filed on November 29, 2022. Hearing or Notification of Hearing: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing on any application by emailing the SEC’s Secretary at Secretarys-Office@sec.gov and serving the Applicants with a copy of the request by email, if an email address is listed for the relevant Applicant below, or personally or by mail, if a physical address is listed for the relevant Applicant below. Hearing requests should be received by the Commission by 5:30 p.m. on, February 6, 2023, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any fact bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by emailing the Commission’s Secretary at Secretarys-Office@sec.gov. ADDRESSES: The Commission: Secretarys-Office@sec.gov. Applicants: Benjamin Wells, bwells@stblaw.com. FOR FURTHER INFORMATION CONTACT: Jennifer O. Palmer, Senior Counsel, or Terri G. Jordan, Branch Chief, at (202) 551–6825 (Division of Investment Management, Chief Counsel’s Office). E:\FR\FM\17JAN1.SGM 17JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 10 (Tuesday, January 17, 2023)]
[Notices]
[Pages 2671-2687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00661]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96631; File No. SR-PEARL-2022-61]

Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Equities 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, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange is filing a proposal to amend the fee schedule (the
``Fee Schedule'') applicable to MIAX Pearl Equities, an equities
trading facility of the Exchange, 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/pearl at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to amend the Fee Schedule to amend fees for:
(1) the 1 gigabit (``Gb'') and 10Gb ultra-low latency (``ULL'') fiber
connections for Equity Members \3\ and non-Members; (2) the Financial
Information Exchange (``FIX'') Ports,\4\ and the MIAX Express Orders
Interface (``MEO'') Ports.\5\ The Exchange adopted connectivity and
port fees in September 2020,\6\ and has not changed those fees since
they were adopted. Since that time, the Exchange experienced ongoing
increases in expenses, particularly internal expenses. As discussed
more fully below, the Exchange recently calculated increased annual
aggregate costs of $18,331,650 for providing 1Gb and 10Gb ULL
connectivity combined and $3,951,993 for providing FIX and MEO Ports.
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\3\ The term ``Equity Member'' means a Member authorized by the
Exchange to transact business on MIAX PEARL Equities. See Exchange
Rule 1901.
\4\ ``FIX Order Interface'' or ``FOI'' means the Financial
Information Exchange interface for certain order types as set forth
in Exchange Rule 2614. See the Definitions section of the Fee
Schedule.
\5\ Each MEO interface will have one Full Service Port (``FSP'')
and one Purge Port. ``Full Service Port'' or ``FSP'' means an MEO
port that supports all MEO order input message types. See the
Definitions section of the Fee Schedule.
\6\ See Securities Exchange Act Release No. 90651 (December 11,
2020), 85 FR 81971 (December 17, 2020) (SR-PEARL-2020-33).
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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 and port
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.
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \7\ and various other
developments, the Commission began to undertake a heightened review of
exchange filings, including non-transaction fee filings that was
substantially and materially different from it prior review process
(hereinafter referred to as the ``Revised Review Process''). In the
Susquehanna Decision, the D.C. Circuit Court stated that the Commission
could not maintain a practice of ``unquestioning reliance'' on claims
made by a self-regulatory organization (``SRO'') in the course of
filing a rule or fee change with the Commission.\8\ 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.\9\
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'').\10\ 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.'' \11\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\12\ 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.'' \13\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
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\7\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\8\ Id.
\9\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\10\ 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).
\11\ Id. at page 2.
\12\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\13\ Order Denying Reconsideration, 2019 WL 2022819, at *13.

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[[Page 2672]]

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.\14\ Despite approving hundreds of access fee filings in the
years prior to the BOX Order (described further below) utilizing a
``market-based'' test, the Commission changed course and disapproved
BOX's proposal to begin charging connectivity at one-fourth the rate of
competing exchanges' pricing.
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\14\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to
Amend the Fee Schedule on the BOX Market LLC Options Facility to
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted
in the BOX Order that it ``historically applied a `market-based'
test in its assessment of market data fees, which [the Commission]
believe[s] present similar issues as the connectivity fees proposed
herein.'' Id. at page 16. Despite this admission, the Commission
disapproved BOX's proposal to begin charging $5,000 per month for
10Gb connections (while allowing legacy exchanges to charge rates
equal to 3-4 times that amount utilizing ``market-based'' fee
filings from years prior).
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Also while the above appeal was pending, on May 21, 2019, the
Commission Staff issued guidance ``to assist the national securities
exchanges and FINRA . . . in preparing Fee Filings that meet their
burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \15\ 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.'' \16\ 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.'' \17\
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\15\ 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'').
\16\ Id.
\17\ Id.
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Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC \18\ and remanded for further proceedings consistent
with its opinion.\19\ 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.'' \20\
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.\21\ 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.''
\22\ 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.\23\
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\18\ 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.
\19\ 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.
\20\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\21\ 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'').
\22\ Id.
\23\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ 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.'' \24\
As such, all of those fees remained in place and amounted to a baseline
set of fees for those exchanges that had the benefit of getting their
fees in place before the Commission Staff's fee review process
materially changed. The net result of this history and lack of
resolution in the D.C. Circuit Court resulted in an uneven competitive
landscape where the Commission subjects all new non-transaction fee
filings, particularly those submitted by new exchanges, to the new
Revised Review Process, while allowing the previously challenged fee
filings, mostly submitted by incumbent exchanges prior to 2019, to
remain in effect and not subject to the ``record'' or ``review''
earlier intended by the Commission.
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\24\ See supra note 21, at page 2.
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While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\25\ 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 \26\

[[Page 2673]]

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.\27\ These fees remain in effect today.
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\25\ 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.
\26\ 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.
\27\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\28\
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.
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\28\ For example, the options exchange affiliates of MIAX Pearl
Equities, Miami International Securities Exchange, LLC (``MIAX''),
MIAX Pearl, and MIAX Emerald, LLC (``MIAX Emerald''), have filed,
and subsequently withdrawn, various forms of connectivity and port
fee changes seven (7) times since August 2021. Each of the proposals
contained hundreds of cost and revenue disclosures never previously
disclosed by legacy exchanges in their access and market data fee
filings prior to 2019.
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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 \29\ and $80,383,000 for 2021.\30\ Cboe C2 Exchange, Inc.
(``C2'') reported ``access and capacity fee'' revenue of $19,016,000
for 2020 \31\ and $22,843,000 for 2021.\32\ Cboe BZX Exchange, Inc.
(``BZX'') reported ``access and capacity fee'' revenue of $38,387,000
for 2020 \33\ and $44,800,000 for 2021.\34\ Cboe EDGX Exchange, Inc.
(``EDGX'') reported ``access and capacity fee'' revenue of $26,126,000
for 2020 \35\ and $30,687,000 for 2021.\36\ 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.\37\ The Exchange notes it
is unable to compare ``access fee'' revenues with NASDAQ Phlx (or other
affiliated NASDAQ exchanges) because after 2019, the ``Trade Management
Services'' line item was bundled into a much larger line item in PHLX's
Form 1, simply titled ``Market services.'' \38\
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\29\ 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.
\30\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\31\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\32\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\33\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\34\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\35\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\36\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\37\ 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.
\38\ 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,\39\ 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.
---------------------------------------------------------------------------

\39\ 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 . . .'',\40\ this is not the reality experienced by
exchanges such as MIAX Pearl. As such, non-legacy

[[Page 2674]]

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. For example, the
options facility of MIAX Pearl has attempted to increase similar fees
using a cost-based justification numerous times, having submitted over
six filings.\41\ 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 \42\ in a manner that is not possible to achieve.
This essentially nullifies the cost-based approach for exchanges as a
legitimate alternative as laid out in the Staff Guidance. By refusing
to accept a reasonable cost-based argument to justify non-transaction
fees (in addition to refusing to accept a competition-based argument as
described above), or by failing to provide the detail required to
achieve that standard, the Commission Staff is effectively preventing
non-legacy exchanges from making any non-transaction fee changes, which
benefits the legacy exchanges and anticompetitive to the non-legacy
exchanges. This does not meet the fairness standard under the Act and
is discriminatory.
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\40\ See supra note 15, at note 1.
\41\ See, e.g., Securities Exchange Act Release Nos. 92798
(August 27, 2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-
33); 92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-
PEARL-2021-36); 93162 (September 28, 2021), 86 FR 54739 (October 4,
2021) (SR-PEARL-2021-45); 93556 (November 10, 2021), 86 FR 64235
(November 17, 2021) (SR-PEARL-2021-53); 93774 (December 14, 2021),
86 FR 71952 (December 20, 2021) (SR-PEARL-2021-57); 93894 (January
4, 2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58); 94258
(February 15, 2022), 87 FR 9659 (February 22, 2022) (SR-PEARL-2022-
03); 94286 (February 18, 2022), 87 FR 10860 (February 25, 2022) (SR-
PEARL-2022-04); 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022)
(SR-PEARL-2022-11); 94722 (April 14, 2022), 87 FR 23660 (April 20,
2022) (SR-PEARL-2022-12); 94888 (May 11, 2022), 87 FR 29892 (May 17,
2022) (SR-PEARL-2022-18).
\42\ 15 U.S.C. 78f(b)(4).
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Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\43\ 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; \44\ or (c) accept that
certain competition-based arguments are applicable given the linkage
between non-transaction fees and transaction fees, especially where
non-transaction fees among exchanges are based upon disparate standards
of review, lack parity, and impede fair competition. Considering the
absence of any such framework or clarity, the Exchange believes that
the Commission does not have a reasonable basis to deny the Exchange
this change in fees, where the proposed change would result in fees
meaningfully lower than comparable fees at competing exchanges and
where the associated non-transaction revenue is meaningfully lower than
competing exchanges.
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\43\ 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.
\44\ 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 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 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.\45\
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\45\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever-increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
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Lastly, the Exchange notes that the Commission Staff has allowed
similar fee increases by other exchanges to remain in effect by
publishing those filings for comment and allowing the exchange to
withdraw and re-file numerous times.\46\ Recently, the Commission Staff
has not afforded the Exchange the same flexibility.\47\ This again is
evidence that the Commission Staff is not treating non-transaction fee
filings in a consistent manner and is holding exchanges to different
levels of scrutiny in reviewing filings.
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\46\ 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).
\47\ Securities Exchange Act Release Nos. 94721 (April 14,
2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11) and 94722
(April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-12).
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* * * * *
1Gb and 10Gb ULL Connectivity Fee Change
Sections (2a) and (b) of the Fee Schedule describe network
connectivity fees for the 1Gb ULL and 10Gb ULL fiber connections, which
are charged to both Equity Members and non-Members for connectivity to
the Exchange's primary and secondary facilities. The Exchange offers
its Equity Members the ability to connect to the Exchange in order to
transmit orders to and receive information from the Exchange. Equity
Members can also choose to connect to the Exchange indirectly through
physical connectivity maintained by a third-party extranet. Extranet
physical connections may provide access to one or multiple Equity
Members on a single connection. The number of physical

[[Page 2675]]

connections assigned to each User \48\ as of November 30, 2022, ranges
from one to eleven, depending on the scope and scale of the Equity
Member's trading activity on the Exchange as determined by the Equity
Member, including the Equity Member's determination of the need for
redundant connectivity. The Exchange notes that 40% of its Equity
Members do not maintain a physical connection directly with the
Exchange in the Primary Data Center (though many such Equity Members
have connectivity through a third-party provider) and another 46% have
either one or two physical ports to connect to the Exchange in the
Primary Data Center. Thus, only a limited number of Equity Members,
14%, maintain three or more physical ports to connect to the Exchange
in the Primary Data Center.
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\48\ The term ``User'' shall mean any Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Exchange Rule 2602. See Exchange Rule 1901.
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In order to cover the continuous increase in aggregate costs of
providing physical connectivity to Equity Members and non-Equity
Members and make a modest profit, as described below, the Exchange
proposes to amend the monthly connectivity fees as follows: (a)
increase the 1Gb ULL connection from $1,000 to $2,500; and (b) increase
the 10Gb ULL connection from $3,500 to $8,000.\49\
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\49\ The Exchange notes that while its proposed fee of $8,000
per 10Gb ULL connection is higher than MEMX's $6,000 monthly fee for
its xNet Physical Connection, MEMX does not offer any other physical
connectivity, such as a 1Gb connection, for a lower fee. See
Securities Exchange Act Release No. 95936 (September 27, 2022), 87
FR 59845 (October 3, 2022) (SR-MEMX-2022-26). See MEMX Fee Schedule,
Connectivity and Application Sessions, available at https://info.memxtrading.com/fee-schedule/ (last visited December 28, 2022).
---------------------------------------------------------------------------

FIX and MEO Ports
Similar to other exchanges, the Exchange offers its Equity Members
application sessions, also known as ports, for order entry and receipt
of trade execution reports and order messages. Equity Members can also
choose to connect to the Exchange indirectly through a session
maintained by a third-party service bureau. Service bureau sessions may
provide access to one or multiple Equity Members on a single session.
The number of sessions assigned to each User as of November 30, 2022,
ranges from one to more than 100, depending on the scope and scale of
the Equity Member's trading activity on the Exchange (either through a
direct connection or through a service bureau) as determined by the
Equity Member. For example, by using multiple sessions, Equity Members
can segregate order flow from different internal desks, business lines,
or customers. The Exchange does not impose any minimum or maximum
requirements for how many application sessions an Equity Member or
service bureau can maintain, and does not propose to impose any minimum
or maximum session requirements for its Equity Members or their service
bureaus.
Section (2d), Port Fees, of the Fee Schedule describes fees for
access and services used by Equity Members and non-Members. The
Exchange provides the following types of ports: (i) FIX Ports, which
allow Equity Members to send orders and other messages using the FIX
protocol; and (ii) MEO Ports, which allow Equity Members order entry
capabilities to all Exchange matching engines.
The Exchange operates a primary and secondary data center as well
as a disaster recovery center. Each Port provides access to all
Exchange data centers for a single fee. The Exchange currently provides
the first twenty-five (25) FIX and MEO Ports free of charge and
absorbed all associated costs since the launch of MIAX Pearl Equities.
The Exchange charges the following separate monthly fees for FIX and
MEO Ports: $450 for ports 26-50, $400 for ports 51-75, $350 for ports
76-100, and $300 for ports 101 and higher. The Exchange now proposes to
provide the first five (5) FIX or MEO Ports free of charge, then charge
a flat rate of $450 per port for port six (6) and above.\50\
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\50\ The Exchange notes that the proposed fee of $450 per port
equals the amount charged by MEMX for MEMX's application sessions
(order entry and drop copy ports), but MEMX does not offer any ports
free of charge. See MEMX Fee Schedule, Connectivity and Application
Sessions, available at https://info.memxtrading.com/fee-schedule/
(last visited December 28, 2022). See Securities Exchange Act
Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3,
2022) (SR-MEMX-2022-26). Unlike MEMX and other exchanges, the
Exchange also continues to provide FXD Ports (i.e., Drop Copy Ports)
free of charge.
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Implementation
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 \51\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \52\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Equity Members and other persons using any facility or system
which the Exchange operates or controls. The Exchange also believes the
proposed fees further the objectives of Section 6(b)(5) of the Act \53\
in that they are designed to promote just and equitable principles of
trade, remove impediments to and perfect the mechanism of a free and
open market and a national market system, and, in general protect
investors and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
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\51\ 15 U.S.C. 78f(b).
\52\ 15 U.S.C. 78f(b)(4).
\53\ 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 \54\ and
the Staff Guidance,\55\ 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.
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\54\ See supra note 14.
\55\ See supra note 15.
---------------------------------------------------------------------------

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.''
\56\ 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.'' \57\ 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

[[Page 2676]]

because it will permit recovery of the SRO's costs, . . . , specific
information, including quantitative information, should be provided to
support that argument.'' \58\
---------------------------------------------------------------------------

\56\ Id.
\57\ Id.
\58\ 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 1Gb and10Gb ULL connectivity as well as FIX and MEO 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 Equity 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 September 2020 and adopted its
initial fee schedule, with 1Gb ULL connectivity set at $1,000, 10Gb ULL
connectivity fees set at $3,500, and provided the first twenty-five
(25) FIX and MEO Ports for free.\59\ As a new exchange entrant, the
Exchange chose to offer such services at a discounted rate or 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.\60\
---------------------------------------------------------------------------

\59\ See supra note 6.
\60\ 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).
---------------------------------------------------------------------------

The Exchange has not amended any of its non-transaction fees since
its launch in September 2022. The Exchange balanced business and
competitive concerns with the need to financially compete with the
larger incumbent exchanges that charge higher fees for similar
connectivity and use that revenue to invest in their technology and
other service offerings.
The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
competitive forces, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. The fact that the
market for order flow is competitive has long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the 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'. . . .'' \61\
---------------------------------------------------------------------------

\61\ 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.'' \62\
---------------------------------------------------------------------------

\62\ 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.' '' \63\ As a
result, and as evidenced above, the Commission has historically relied
on competitive forces to determine whether a fee proposal is equitable,
fair,

[[Page 2677]]

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.'' \64\ 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.'' \65\ 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.'' \66\
---------------------------------------------------------------------------

\63\ 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.'').
\64\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\65\ Id.
\66\ See Staff Guidance, supra note 15.
---------------------------------------------------------------------------

The Exchange believes the competing exchanges' 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 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 exchanges with similar market share. Each of
the market data rates in place at competing exchanges were filed with
the Commission for immediate effectiveness and remain in place today.

------------------------------------------------------------------------
Type of Monthly fee (per
Exchange connection or connection or per
port port)
------------------------------------------------------------------------
MIAX Pearl Equities (as 1Gb ULL $2,500.
proposed) (market share of connection. $8,000.
1.02% for the month of 10Gb ULL Ports 1-5: FREE.
November 2022) \67\. connection. Ports 6 or more: $450
FIX and MEO Ports per port.
FXD Ports (i.e., FREE.
Drop Copy Ports.
MEMX \68\ (market share of 1Gb connection... Not available.
3.05% for the month of xNet Physical $6,000 per
November 2022) \69\. connection. connection.
Order Entry Ports $450 per port.
Drop Copy Ports.. $450 per port.
NASDAQ PSX LLC (``PSX'') \70\ 1Gb connection... $2,500 per connection
(market share of 0.70% for 10Gb connection.. (plus $1,500
the month of November 2022) Order Entry Ports installation fee).
\71\. Drop Copy Ports.. $7,500 per connection
(plus $1,500
installation fee).
$400 per port.
$400 per port.
NASDAQ BX LLC (``BX'') \72\ 1Gb Ultra $2,500 per connection
(market share of 0.60% for connection. (plus $1,500
the month of November 2022) 10Gb Ultra installation fee).
\73\. connection. $15,000 (plus $1,500
Order Entry Ports installation fee).
Drop Copy Ports.. $500 per port.
$500 per port.
------------------------------------------------------------------------

There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available equity
exchanges. Market participants may choose to become a member of one or
more equities 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, one Member of MIAX Pearl's options facility informed the
Exchange that that Member will terminate their membership effective
January 1, 2023 as a direct result of the proposed fee changes to the
Exchange's options fee schedule.
---------------------------------------------------------------------------

\67\ See Market at a Glance, available at https://www.miaxoptions.com/.
\68\ See MEMX Fee Schedule, Connectivity and Application
Sessions, available at https://info.memxtrading.com/fee-schedule/.
\69\ See supra note 67.
\70\ See PSX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing; and PSX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
\71\ See supra note 67.
\72\ See BX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; and BX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
\73\ See supra note 67.
---------------------------------------------------------------------------

It is not a requirement for market participants to become members
of all equities exchanges, in fact, certain market participants conduct
an equities business as a member of only one market.\74\ A very small
number of market participants choose to become a member of all sixteen
(16) equities exchanges. Most firms that actively trade on equities
markets are not currently Equity Members of the Exchange and do not
purchase connectivity or port services at the Exchange. Connectivity
and ports are only available to Equity Members or service bureaus, and
only an Equity Member may utilize a port.\75\
---------------------------------------------------------------------------

\74\ 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.''
\75\ Service Bureaus may obtain ports on behalf of Equity
Members.
---------------------------------------------------------------------------

BOX 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

[[Page 2678]]

only one of the three exchanges.\76\ For equities, the Exchange
currently has 45 Equity Members. Also, MEMX noted in a January 2022
filing that it had only 66 members, and, based on publicly available
information regarding a sample of the Exchange's competitors, NYSE has
142 members, Cboe BZX has 140 members, and Investors Exchange LLC
(``IEX'') has 133 members.\77\ For options, the Exchange and its
affiliates, MIAX and MIAX Emerald, have a total of 47 members. Of those
47 total members, 35 are members of all three affiliated exchanges,
four (4) are members of only two (2) affiliated exchanges, and eight
(8) are members of only one affiliated exchange. The Exchange believes
that significant differences in membership numbers describes by the
Exchange, BOX, and MEMX demonstrate that firms can, and do, select
which exchanges they wish to access, and, accordingly, exchanges must
take competitive considerations into account when setting fees for such
access. The Exchange also notes that no firm is an Equity Member of the
Exchange only. The above data evidences that a broker-dealer need not
have direct connectivity to all exchanges, let alone the Exchange and
its 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.
---------------------------------------------------------------------------

\76\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17).
\77\ See Securities Exchange Act Release No. 93927 (January 7,
2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19).
---------------------------------------------------------------------------

Not only is there not an actual regulatory requirement to connect
to every equities 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 exchanges discussed above. 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, 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 equities securities; (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 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 an Equity Member
at--or establish connectivity to--the Exchange.\78\ If the Exchange is
not at the NBBO, the Exchange will route an order to any away market
that is at the NBBO to ensure that the order was executed at a superior
price and prevent a trade-through.\79\
---------------------------------------------------------------------------

\78\ See 17 CFR 242.611.
\79\ Members may elect to not route their orders by utilizing
the Do Not Route or Post Only order type instructions. See Exchange
Rule 2614(c)(1) and (2).
---------------------------------------------------------------------------

With respect to the submission of orders, Equity 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 Equity 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,\80\ or request sponsored access \81\ through a member of an
exchange in order to submit a trade directly to an equities
exchange.\82\ 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.
---------------------------------------------------------------------------

\80\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be an Equity Member. Some Equity Members utilize a
Service Bureau for connectivity and that Service Bureau may not be
an Equity Member. Some market participants utilize a Service Bureau
who is an Equity Member to submit orders.
\81\ Sponsored Access is an arrangement whereby an Equity Member
permits its customers to enter orders into an exchange's system that
bypass the Equity Member's trading system and are routed directly to
the Exchange, including routing through a service bureau or other
third-party technology provider.
\82\ This may include utilizing a floor broker and submitting
the trade to an equities trading floor.
---------------------------------------------------------------------------

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-Equity 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).\83\ 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.\84\ 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 15 equities markets. Accordingly,
the Exchange believes that the proposed fees are fair and reasonable
and constrained by competitive forces.
---------------------------------------------------------------------------

\83\ See, e.g., Nasdaq Price List--U.S. Direct Connection and
Extranet Fees, available at, US Direct-Extranet Connection
(nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022)
(SR-NASDAQ-2017-114).
\84\ 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 Equity Members and secure
access to its environment. To properly regulate its Equity 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 Equity Members
secure access to communicate with the Exchange and exercise trading
rights. When a market participant elects to be an Equity Member, and is
approved for membership by the Exchange, the Equity 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 an Equity Member of the Exchange, or, if it is an
Equity Member, to purchase connectivity beyond the one

[[Page 2679]]

connection that is necessary to quote or submit orders on the Exchange.
Equity Members may freely choose to rely on one or many connections,
depending on their business model.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
seeks to be especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and also carefully and transparently assessing the
impact on Equity Members--both generally and in relation to other
Equity 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 Equity Members and competition among Equity
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,\85\ and Rule 19b-4 thereunder,\86\ with respect to the
types of information SROs should provide when filing fee changes, and
Section 6(b) of the Act,\87\ which requires, among other things, that
exchange fees be reasonable and equitably allocated,\88\ not designed
to permit unfair discrimination,\89\ and that they not impose a burden
on competition not necessary or appropriate in furtherance of the
purposes of the Act.\90\ 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.\91\ 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.
---------------------------------------------------------------------------

\85\ 15 U.S.C. 78s(b)(1).
\86\ 17 CFR 240.19b-4.
\87\ 15 U.S.C. 78f(b).
\88\ 15 U.S.C. 78f(b)(4).
\89\ 15 U.S.C. 78f(b)(5).
\90\ 15 U.S.C. 78f(b)(8).
\91\ See Staff Guidance, supra note 15.
---------------------------------------------------------------------------

As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 1Gb and 10Gb ULL connectivity to
the Exchange at $18,331,650 combined ($17,726,799 for 10Gb ULL
connectivity and $604,851 for 1Gb connectivity) (or approximately
$1,527,637 per month for combined connectivity costs, rounded to the
nearest dollar when dividing the combined annual cost by 12 months).
The Exchange also recently calculated its aggregate annual costs for
providing FIX and MEO Ports at $3,951,993 combined ($911,998 for FIX
Ports and $3,039,995 for MEO Ports) (or approximately $329,333 per
month for combined FIX and MEO Port costs, rounded to the nearest
dollar when dividing the combined annual cost by 12 months). In order
to cover a portion of the aggregate costs of providing connectivity to
its Users (both Equity Members and non-Equity Members \92\) going
forward, as described below, the Exchange proposes to modify its Fee
Schedule as described above.
---------------------------------------------------------------------------

\92\ 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 application sessions on behalf of one
or more Members. Extranets offer physical connectivity services to
Members and non-Members.
---------------------------------------------------------------------------

In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\93\ 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 connectivity (62%),
with smaller allocations to FIX Ports (1.2%) and MEO Ports (3.8%), and
the remainder to the provision of transaction execution, membership
services and market data services (33%). 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.
---------------------------------------------------------------------------

\93\ 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
Equity Members and parties that they sponsor to participate directly on
the Exchange may submit orders to the Exchange, many Equity Members
(but not all) consume market data from the Exchange in order to trade
on the Exchange, and the Exchange consumes market data from external
sources in order to comply with regulatory obligations. Accordingly,
given this interdependence, the allocation of costs to each service or
revenue source required judgment of the Exchange and was weighted based
on estimates of the Exchange that the Exchange believes are reasonable,
as set forth below. While there is no standardized and generally
accepted methodology the allocation of an exchange's costs, the
Exchange's methodology is the result of an extensive review and
analysis and will be consistently applied going forward for any other
potential fee proposals.
Through the Exchange's extensive updated Cost Analysis, the
Exchange analyzed every expense item in the Exchange's general expense
ledger to determine whether each such expense

[[Page 2680]]

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 1Gb and10Gb ULL connectivity, as well as FIX and MEO
Ports, result in an aggregate combined monthly cost of $1,856,970, as
further detailed below.
Costs Related To Offering Physical 1Gb and 10Gb ULL Connectivity
The following charts detail the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
1Gb and 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 47.6% of its overall Human Resources cost to offering
physical 1Gb and 10Gb ULL connectivity.
---------------------------------------------------------------------------

\94\ The Annual Cost includes figures rounded to the nearest
dollar.
\95\ 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.
\96\ See supra note 94.
\97\ See supra note 95.

10Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \94\ Monthly cost \95\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $5,936,741 $494,728 46.1
Connectivity (external fees, cabling, switches, etc.).......... 69,451 5,788 60
Internet Services, including Internet Services................. 1,818,808 151,567 72.5
Data Center.................................................... 1,052,797 87,733 60
Hardware and Software Maintenance and Licenses................. 642,112 53,509 58
Depreciation................................................... 3,448,206 287,351 73.6
Allocated Shared Expenses...................................... 4,758,684 396,557 48.6
------------------------------------------------
Total...................................................... 17,726,799 1,477,233 54
----------------------------------------------------------------------------------------------------------------

1Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \96\ Monthly cost \97\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $202,566 $16,880 1.6
Connectivity (external fees, cabling, switches, etc.).......... 2,370 197 2.0
Internet Services, including External Market Data.............. 62,059 5,172 2.5
Data Center.................................................... 35,922 2,993 2.0
Hardware and Software Maintenance and Licenses................. 21,909 1,826 2.0
Depreciation................................................... 117,655 9,805 2.5
Allocated Shared Expenses...................................... 162,370 13,531 1.7
------------------------------------------------
Total...................................................... 604,851 50,404 1.8
----------------------------------------------------------------------------------------------------------------

Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 1Gb and
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 percentages of 58%
for 10Gb ULL connectivity and 2.0% for 1Gb connectivity 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 37%). 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

[[Page 2681]]

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. equities
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
1Gb and 10Gb ULL connectivity. Specifically, the Exchange utilizes
connectivity and content service providers to connect to other national
securities exchanges, the NASDAQ UTP and CTA/CQ Plans, and to receive
market data from other exchanges and market data providers. The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity and market data provided these service
providers is critical to the Exchanges daily operations and performance
of its System Networks to which market participants connect to via 10Gb
ULL connectivity. Without these services providers, the Exchange would
not be able to connect to other national securities exchanges, market
data providers, or the NASDAQ UTP and CTA/CQ Plans 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 1Gb and 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 (62%) to
physical 1Gb and 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
physical 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., limit order price protection, 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 physical 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 73.6% of all depreciation costs to providing physical 10Gb
ULL connectivity and 2.5% of all depreciation costs to providing 1Gb
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.\98\ The Exchange notes that the 50%
allocation of general shared expenses for physical connectivity is
higher than that allocated to general shared expenses for FIX and MEO
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), FIX and MEO Ports do not
require as many broad or indirect resources as other Core Services. The
total monthly cost for 10Gb ULL connectivity of $1,477,233 was divided
by the number of physical 10Gb ULL connections the Exchange maintained
at the time that proposed pricing was determined (90), to arrive at a
cost of approximately $16,414 per month, per physical 10Gb ULL
connection. The total monthly cost for 1Gb connectivity of $50,404 was
divided by the number of physical 1Gb connections the Exchange
maintained at the time that proposed pricing was determined (8), to
arrive at a cost of approximately $6,301 per month, per physical 1Gb
connection.
---------------------------------------------------------------------------

\98\ 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 FIX and MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering FIX and MEO Ports
as well as the

[[Page 2682]]

percentage of the Exchange's overall costs such costs represent for
such area (e.g., as set forth below, the Exchange allocated
approximately 22.4% of its overall Human Resources cost to offering FIX
and MEO Ports).
---------------------------------------------------------------------------

\99\ See supra note 94 (describing rounding of Annual Costs).
\100\ See supra note 95 (describing rounding of Monthly Costs
based on annual costs).
\101\ See supra note 94 (describing rounding of Annual Costs).
\102\ See supra note 95 (describing rounding of Monthly Costs
based on annual costs).

FIX Ports
----------------------------------------------------------------------------------------------------------------
Monthly cost
Cost drivers Annual cost \99\ \100\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $665,726 $55,476 5.2
Connectivity (external fees, cabling, switches, etc.).......... 535 45 0.5
Internet Services, including External Market Data.............. 11,574 965 0.5
Data Center.................................................... 20,262 1,689 1.2
Hardware and Software Maintenance and Licenses................. 5,108 426 0.5
Depreciation................................................... 92,114 7,676 2.0
Allocated Shared Expenses...................................... 116,679 9,723 1.2
------------------------------------------------
Total...................................................... 911,998 76,000 2.8
----------------------------------------------------------------------------------------------------------------

MEO Ports
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \101\ \102\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $2,219,088 $184,924 17.2
Connectivity (external fees, cabling, switches, etc.).......... 1,782 149 1.5
Internet Services, including External Market Data.............. 38,582 3,215 1.5
Data Center.................................................... 67,538 5,628 3.8
Hardware and Software Maintenance and Licenses................. 17,026 1,419 1.5
Depreciation................................................... 307,048 25,587 6.6
Allocated Shared Expenses...................................... 388,931 32,411 4.0
------------------------------------------------
Total...................................................... 3,039,995 253,333 9.3
----------------------------------------------------------------------------------------------------------------

Human Resources
With respect to FIX and MEO Ports, the Exchange calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing FIX and MEO 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 application sessions 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 application
sessions 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 application sessions and maintaining performance
thereof. The Human Resources cost was again calculated using a blended
rate of compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges, cabling and switches, as described above. For purposes
of FIX and MEO 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
application sessions as such market data is also necessary here (in
addition to physical connectivity) to offer certain services related to
such sessions, such as validating orders on entry against the national
best bid and national best offer and checking for other conditions
(e.g., whether a symbol is halted or subject to a short sale circuit
breaker). This allocation was included as part of the internet Services
cost described above.\103\ Thus, as market data from other Exchanges is
consumed at the application session 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 application sessions.
---------------------------------------------------------------------------

\103\ 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.

[[Page 2683]]

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 8.6% of
all depreciation costs to providing FIX and MEO Ports. In contrast to
physical connectivity, described above, the Exchange did allocate
depreciation costs for depreciated software necessary to operate the
Exchange to FIX and MEO 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 FIX and MEO Ports costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. 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 20% of the overall cost for
directors was allocated to providing FIX and MEO Ports. The Exchange
notes that the 5.2% allocation of general shared expenses for FIX and
MEO 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 FIX and MEO Ports have several areas where certain
tangible costs are heavily weighted towards providing such service
(e.g., Data Centers, as described above), 1Gb and 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 for FIX Ports of $76,000 was
divided by the number of FIX Ports the Exchange maintained at the time
that proposed pricing was determined (142), to arrive at a cost of
approximately $535 per month, per FIX Port (rounded to the nearest
dollar when dividing the approximate monthly cost by the number of FIX
Ports). The total monthly cost for MEO Ports of $253,333 was divided by
the number of MEO Ports the Exchange maintained at the time that
proposed pricing was determined (336), to arrive at a cost of
approximately $754 per month, per MEO Port (rounded to the nearest
dollar when dividing the approximate monthly cost by the number of MEO
Ports).
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 FIX and MEO Ports) and did not double- count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections, the Exchange has a team of
employees dedicated to network infrastructure and with respect to such
employees the Exchange allocated network infrastructure personnel with
a high percentage of the cost of such personnel (60%) to 1Gb and 10Gb
ULL connectivity given their focus on functions necessary to provide
physical connections. The salaries of those same personnel were
allocated only 25% to FIX and MEO Ports and the remaining 15% was
allocated to transactions 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 37% for 1Gb and 10Gb ULL connectivity 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 (less than 21%) across a
wider range of personnel groups in order to allocate Human Resources
costs to providing FIX and MEO Ports. This is because a much wider
range of personnel are involved in functions necessary to offer,
monitor and maintain FIX and MEO Ports but the tasks necessary to do so
are not a primary or full-time function.
In total, the Exchange allocated 47.6% of its personnel costs to
providing physical connections and 22.4% of its personnel costs to
providing FIX and MEO Ports, for a total allocation of 70% Human
Resources expense to provide these specific connectivity services. In
turn, the Exchange allocated the remaining 30% of its Human Resources
expense to membership (less than 1%) and transactions and market data
(9.5%). 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 FIX and MEO
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 Equity
Members and non-Equity 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 85% of the Exchange's overall depreciation and
amortization expense to connectivity services (76.185% attributed to
1Gb and 10Gb ULL physical connections and 8.6% to FIX and MEO Ports).
The Exchange allocated the remaining depreciation and amortization
expense (approximately 15%) toward the cost of providing transaction
services, membership 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 FIX and MEO 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

[[Page 2684]]

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, we believe that it is appropriate for an exchange to
refresh and update information about its relevant costs and revenues in
seeking any future changes to fees, and the Exchange commits to do so.
Projected Revenue
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity services. Much of the cost relates to monitoring and
analysis of data and performance of the network via the subscriber's
connection(s). The above cost, namely those associated with hardware,
software, and human capital, enable the Exchange to measure network
performance with nanosecond granularity. These same costs are also
associated with time and money spent seeking to continuously improve
the network performance, improving the subscriber's experience, based
on monitoring and analysis activity. The Exchange routinely works to
improve the performance of the network's hardware and software. The
costs associated with maintaining and enhancing a state-of-the-art
exchange network is a significant expense for the Exchange, and thus
the Exchange believes that it is reasonable and appropriate to help
offset those costs by amending fees for connectivity services.
Subscribers, particularly those of 10Gb ULL connectivity, expect the
Exchange to provide this level of support to connectivity so they
continue to receive the performance they expect. This differentiates
the Exchange from its competitors. As detailed above, the Exchange has
five primary sources of revenue that it can potentially use to fund its
operations: transaction fees, fees for connectivity services,
membership and regulatory fees, and market data fees. Accordingly, the
Exchange must cover its expenses from these five primary sources of
revenue.
The Exchange's Cost Analysis estimates the annual cost to
provide 10Gb ULL connectivity services at $17,726,799. Based on current
10Gb ULL connectivity services usage, the Exchange would generate
annual revenue of approximately $9,144,000. This represents a negative
margin when compared to the cost of providing 10Gb ULL connectivity
services.
The Exchange's Cost Analysis estimates the annual cost to
provide 1Gb connectivity services at $604,851. Based on current 1Gb
connectivity services usage, the Exchange would generate annual revenue
of approximately $312,000. This represents a negative margin when
compared to the cost of providing 1Gb connectivity services.
The Exchange's Cost Analysis estimates the annual cost to
provide FIX Port services at $911,998. Based on current FIX Port
services usage, the Exchange would generate annual revenue of
approximately $388,800. This represents a negative margin when compared
to the cost of providing FIX Port services.
The Exchange's Cost Analysis estimates the annual cost to
provide MEO Port services at $3,039,995. Based on current MEO Port
services usage, the Exchange would generate annual revenue of
approximately $1,296,000. This represents a negative margin when
compared to the cost of providing MEO 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 1Gb and 10Gb ULL connectivity and FIX and MEO Port services
versus the total projected revenue of the Exchange associated with
those services. In fact, the Exchange will generate negative margins on
those connectivity and port services even with the proposed fees.
* * * * *
MIAX Pearl Equities has operated at a cumulative net annual loss
since it launched operations in 2020.\104\ 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 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 1Gb and 10Gb ULL
connectivity as well as FIX and MEO 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 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports.
---------------------------------------------------------------------------

\104\ The Exchange has incurred a cumulative loss of $79 million
since its inception in 2020. See Exchange's Form 1/A, Application
for Registration or Exemption from Registration as a National
Securities Exchange, filed July 28, 2021, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
---------------------------------------------------------------------------

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

[[Page 2685]]

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 1Gb and
10Gb ULL connectivity as well as FIX and MEO Ports, the Exchange will
have to be successful in retaining existing clients that wish to
utilize 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports and/
or obtaining new clients that will purchase such access. To the extent
the Exchange is successful in encouraging new clients, 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.
1Gb and 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 equities 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.\105\ Thus, as the number of messages an entity
increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, connection costs (e.g.,
storage costs, surveillance costs, service expenses) also increase.
Given this difference in network utilization rate, the Exchange
believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all market participants' benefit.
---------------------------------------------------------------------------

\105\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

FIX and MEO Ports
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.\106\ Thus, as the number of connections an
Equity Member has increases, the related pull on Exchange resources
also increases. The Exchange sought to design the proposed pricing
structure to set the amount of the fees to relate to the number of
connections a firm purchases, while continuing to provide the first
five (5) ports for free. The more connections purchased by an Equity
Member likely results in greater expenditure of Exchange resources and
increased cost to the Exchange. The Exchange further believes that the
proposed fees are reasonable, equitably allocated and not unfairly
discriminatory because, for the flat fee, the Exchange provides each
Equity Member their first five (5) ports for free, unlike other equity
exchanges referenced above.
---------------------------------------------------------------------------

\106\ 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 1Gb
and10Gb ULL connectivity as well as FIX and MEO 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 2020 \107\ 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

[[Page 2686]]

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 industry, which resulted in lower
initial revenues. Examples of this are 1Gb and 10Gb ULL connectivity as
well as FIX and MEO Ports, for which the Exchange only now seeks to
adopt fees at a level similar to or lower than those of other equity
exchanges.
---------------------------------------------------------------------------

\107\ See supra note 104.
---------------------------------------------------------------------------

Further, the Exchange does not believe that the proposed fee
increase for the 1Gb or 10Gb ULL connection change would place certain
market participants at the Exchange at a relative disadvantage compared
to other market participants or affect the ability of such market
participants to compete. The proposed fees 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 Equity Members, non-Equity 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. 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, market participants are not forced to connect to all
exchanges. There is no reason to believe that our proposed price
increase will harm another exchange's ability to compete. There are
other markets of which market participants may connect to trade
equities at higher rates than the Exchange's. There is also a range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. Market participants are free to choose which exchange or
reseller to use to satisfy their business needs. Accordingly, the
Exchange does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\108\ and Rule 19b-4(f)(2) \109\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

\108\ 15 U.S.C. 78s(b)(3)(A)(ii).
\109\ 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

[[Page 2687]]

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-PEARL-2022-61 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-PEARL-2022-61. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2022-61 and should be submitted on
or before February 7, 2023.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\110\
---------------------------------------------------------------------------

\110\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00661 Filed 1-13-23; 8:45 am]
BILLING CODE 8011-01-P

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