Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Options Fee Schedule To Modify Certain Connectivity and Port Fees, 2707-2729 [2023-00662]
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Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–MIAX–2022–49 and should
be submitted on or before February 7,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–00658 Filed 1–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96624; File No. SR–NSCC–
2022–802]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Extension of
Review Period of Advance Notice
Related to Certain Enhancements to
the Gap Risk Measure and the VaR
Charge
January 10, 2023.
On December 2, 2022, the National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
advance notice SR–NSCC–2022–802
(‘‘Advance Notice’’) pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act, entitled Payment,
Clearing and Settlement Supervision
Act of 2010 (‘‘Clearing Supervision
Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’) 3 to amend NSCC’s
Rules and Procedures to enhance the
calculation of the volatility component
of the Clearing Fund formula that
utilizes a parametric Value-at-Risk
(‘‘VaR’’) model (‘‘VaR Charge’’),
specifically with respect to the Gap Risk
Measure thereof.4 The Advance Notice
was published for public comment in
the Federal Register on December 21,
2022.5 The Commission received a
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50 17
CFR 200.30–3(a)(12).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
4 See Notice of Filing, infra note 5.
5 Securities Exchange Act Release No. 96513 (Dec.
15, 2022), 87 FR 78175 (Dec. 21, 2022) (File No. SR–
NSCC–2022–802) (‘‘Notice of Filing’’). On
December 2, 2022, NSCC also filed a related
proposed rule change (SR–NSCC–2022–015) with
the Commission pursuant to Section 19(b)(1) of the
1 12
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comment regarding the changes
proposed in the Advance Notice.6
Section 806(e)(1)(G) of the Clearing
Supervision Act provides that NSCC
may implement the changes if it has not
received an objection to the proposed
changes within 60 days of the later of (i)
the date that the Commission receives
the Advance Notice or (ii) the date that
any additional information requested by
the Commission is received,7 unless
extended as described below.
Pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act, the
Commission may extend the review
period of an advance notice for an
additional 60 days, if the changes
proposed in the advance notice raise
novel or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension.8
Here, as the Commission has not
requested any additional information,
the date that is 60 days after NSCC filed
the Advance Notice with the
Commission is January 31, 2023.
However, the Commission finds the
issues raised by the Advance Notice
complex because the proposal would
revise the methodology by which NSCC
determines the appropriate margin to
capture the gap risk posed by a
member’s portfolio, including by
making the gap risk measure additive as
opposed to substitutive, expanding its
application to the two largest positions
instead of only the largest position,
amending the scope of products subject
to the gap risk measure, and changing
the haircuts and methodology for
determining the applicable haircuts.9
Therefore, the Commission finds it
appropriate to extend the review period
of the Advance Notice for an additional
60 days under Section 806(e)(1)(H) of
the Clearing Supervision Act.10
Accordingly, the Commission,
pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act,11 extends the
review period for an additional 60 days
so that the Commission shall have until
April 1, 2023 to issue an objection or
non-objection to advance notice SR–
NSCC–2022–802.
Exchange Act and Rule 19b–4 thereunder
(‘‘Proposed Rule Change’’). 15 U.S.C. 78s(b)(1) and
17 CFR 240.19b–4, respectively. In the Proposed
Rule Change, which was published in the Federal
Register on December 21, 2022, NSCC seeks
approval of proposed changes to its rules necessary
to implement the Advance Notice. Securities
Exchange Act Release No. 96511 (Dec. 15, 2022), 87
FR 78157 (Dec. 21, 2022) (File No. SR–NSCC–2022–
015). The comment period for the related Proposed
Rule Change filing will close on January 11, 2023.
6 https://www.sec.gov/comments/sr-nscc-2022802/srnscc2022802.htm. Since the proposal
contained in the Advance Notice was also filed as
a proposed rule change, all public comments
received on the proposal are considered regardless
of whether the comments are submitted on the
Proposed Rule Change or the Advance Notice.
Comments on the Proposed Rule Change are
available at https://www.sec.gov/comments/sr-nscc2022-015/srnscc2022015.htm.
7 12 U.S.C. 5465(e)(1)(G).
8 12 U.S.C. 5465(e)(1)(H).
9 See Notice of Filing, infra note 5.
10 12 U.S.C. 5465(e)(1)(H).
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–00656 Filed 1–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96632; File No. SR–
PEARL–2022–62]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX Pearl
Options 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.
The Exchange is filing a proposal to
amend the MIAX Pearl Options Fee
Schedule (the ‘‘Fee Schedule’’) to
amend certain connectivity and port
fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX Pearl’s principal
office, and at the Commission’s Public
Reference Room.
11 Id.
12 17
CFR 200.30–3(a)(94).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 88, No. 10 / Tuesday, January 17, 2023 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
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
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1. Purpose
The Exchange proposes to amend the
Fee Schedule as follows: (1) increase the
fees for a 10 gigabit (‘‘Gb’’) ultra-low
latency (‘‘ULL’’) fiber connection for
Members 3 and non-Members; (2) amend
the calculation of fees for MIAX Express
Network Full Service (‘‘MEO’’) 4 Ports
(Bulk and Single); and (3) amend the
fees for Full Service MEO Ports (Bulk
and Single). The Exchange and its
affiliate, Miami International Securities
Exchange, LLC (‘‘MIAX’’) operated 10Gb
ULL connectivity on a single shared
network that provided access to both
exchanges via a single 10Gb ULL
connection. The Exchange last increased
fees for 10Gb ULL connections from
$9,300 to $10,000 per month on January
1, 2021.5 At the same time, MIAX also
increased its 10Gb ULL connectivity fee
from $9,300 to $10,000 per month.6 The
Exchange and MIAX shared a combined
cost analysis in those filings due to the
single shared 10Gb ULL connectivity
network for both exchanges. In those
filings, the Exchange and MIAX
allocated a combined total of $17.9
million in expenses to providing 10Gb
ULL connectivity.7
Beginning in late January 2023, the
Exchange also recently determined a
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 The term ‘‘MEO Interface’’ or ‘‘MEO’’ means a
binary order interface for certain order types as set
forth in Rule 516 into the MIAX Pearl System. See
the Definitions Section of the Fee Schedule and
Exchange Rule 100.
5 See Securities Exchange Act Release No. 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021)
(SR–PEARL–2021–01).
6 See Securities Exchange Act Release No. 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02).
7 See id.
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substantial operational need to no
longer operate 10Gb ULL connectivity
on a single shared network with MIAX.
The Exchange is bifurcating 10Gb ULL
connectivity due to ever-increasing
capacity constraints and to enable it to
continue to satisfy the anticipated
access needs for Members and other
market participants.8 Since the time of
2021 increase discussed above, the
Exchange experienced ongoing
increases in expenses, particularly
internal expenses.9 As discussed more
fully below, the Exchange recently
calculated increased annual aggregate
costs of $11,567,509 for providing 10Gb
ULL connectivity on a single unshared
network (an overall increase over its
prior cost to provide 10Gb ULL
connectivity on a shared network with
MIAX) and $1,644,132 for providing
Full Service 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 services.
Subscribers expect the Exchange to
provide this level of support so they
continue to receive the performance
they expect. This differentiates the
Exchange from its competitors.
The Exchange now proposes to amend
the Fee Schedule to amend the fees for
10Gb ULL connectivity and Full Service
MEO Ports (Bulk and Single) in order to
recoup cost related to bifurcating 10Gb
connectivity to the Exchange and MIAX
as well as the ongoing costs and
increase in expenses set forth below in
the Exchange’s cost analysis.10
*
*
*
*
*
Starting in 2017, following the United
States Court of Appeals for the District
of Columbia’s Susquehanna Decision 11
and various other developments, the
Commission began to undertake a
heightened review of exchange filings,
including non-transaction fee filings
that was substantially and materially
different from it prior review process
(hereinafter referred to as the ‘‘Revised
Review Process’’). In the Susquehanna
Decision, the D.C. Circuit Court stated
that the Commission could not maintain
a practice of ‘‘unquestioning reliance’’
on claims made by a self-regulatory
organization (‘‘SRO’’) in the course of
filing a rule or fee change with the
Commission.12 Then, on October 16,
2018, the Commission issued an
opinion in Securities Industry and
Financial Markets Association finding
that exchanges failed both to establish
that the challenged fees were
constrained by significant competitive
forces and that these fees were
consistent with the Act.13 On that same
day, the Commission issued an order
remanding to various exchanges and
national market system (‘‘NMS’’) plans
challenges to over 400 rule changes and
plan amendments that were asserted in
57 applications for review (the ‘‘Remand
Order’’).14 The Remand Order directed
the exchanges to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based
on that record, in a written decision that
is sufficient to enable us to perform our
review.’’ 15 The Commission denied
requests by various exchanges and plan
participants for reconsideration of the
Remand Order.16 However, the
Commission did extend the deadlines in
the Remand Order ‘‘so that they d[id]
not begin to run until the resolution of
the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the
8 See MIAX Options and MIAX Pearl Options—
Announce planned network changes related to
shared 10G ULL extranet, issued August 12, 2022,
available at https://www.miaxoptions.com/alerts/
2022/08/12/miax-options-and-miax-pearl-optionsannounce-planned-network-changes-related-0. The
Exchange will continue to provide access to both
the Exchange and MIAX over a single shared 1Gb
connection. See Securities Exchange Act Release
Nos. 96553 (December 20, 2022), 87 FR 79379
(December 27, 2022) (SR–PEARL–2022–60); 96545
(December 20, 2022) 87 FR 79393 (December 27,
2022) (SR–MIAX–2022–48).
9 The Exchange notes it last filed to amend the
fees for Full Service MEO Ports in 2018 (excluding
filings made in July 2021 through early 2022), prior
to which the Exchange provided Full Service MEO
Ports free of charge since the it launched operations
in 2017 and absorbed all costs since that time. See
Securities Exchange Act Release No. 82867 (March
13, 2018), 83 FR 12044 (March 19, 2018) (SR–
PEARL–2018–07).
10 The Exchange notes that MIAX will make a
similar filing to increase its 10Gb ULL connectivity
fees.
11 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
12 Id.
13 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84432, 2018 WL 5023228
(October 16, 2018) (the ‘‘SIFMA Decision’’).
14 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84433, 2018 WL 5023230
(Oct. 16, 2018). See 15 U.S.C. 78k–1, 78s; see also
Rule 608(d) of Regulation NMS, 17 CFR 242.608(d)
(asserted as an alternative basis of jurisdiction in
some applications).
15 Id. at page 2.
16 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 85802, 2019 WL 2022819
(May 7, 2019) (the ‘‘Order Denying
Reconsideration’’).
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court’s mandate.’’ 17 Both the Remand
Order and the Order Denying
Reconsideration were appealed to the
D.C. Circuit.
While the above appeal to the D.C.
Circuit was pending, on March 29, 2019,
the Commission issued an order
disapproving a proposed fee change by
BOX Exchange LLC (‘‘BOX’’) to
establish connectivity fees (the ‘‘BOX
Order’’), which significantly increased
the level of information needed for the
Commission to believe that an
exchange’s filing satisfied its obligations
under the Act with respect to changing
a fee.18 Despite approving hundreds of
access fee filings in the years prior to
the BOX Order (described further
below) utilizing a ‘‘market-based’’ test,
the Commission changed course and
disapproved BOX’s proposal to begin
charging connectivity at one-fourth the
rate of competing exchanges’ pricing.
Also while the above appeal was
pending, on May 21, 2019, the
Commission Staff issued guidance ‘‘to
assist the national securities exchanges
and FINRA . . . in preparing Fee Filings
that meet their burden to demonstrate
that proposed fees are consistent with
the requirements of the Securities
Exchange Act.’’ 19 In the Staff Guidance,
the Commission Staff states that, ‘‘[a]s
an initial step in assessing the
reasonableness of a fee, staff considers
whether the fee is constrained by
significant competitive forces.’’ 20 The
Staff Guidance also states that, ‘‘. . .
even where an SRO cannot demonstrate,
or does not assert, that significant
competitive forces constrain the fee at
issue, a cost-based discussion may be an
alternative basis upon which to show
consistency with the Exchange Act.’’ 21
Following the BOX Order and Staff
Guidance, on August 6, 2020, the D.C.
17 Order Denying Reconsideration, 2019 WL
2022819, at *13.
18 See Securities Exchange Act Release No. 85459
(March 29, 2019), 84 FR 13363 (April 4, 2019) (SR–
BOX–2018–24, SR–BOX–2018–37, and SR–BOX–
2019–04) (Order Disapproving Proposed Rule
Changes to Amend the Fee Schedule on the BOX
Market LLC Options Facility to Establish BOX
Connectivity Fees for Participants and NonParticipants Who Connect to the BOX Network).
The Commission noted in the BOX Order that it
‘‘historically applied a ‘market-based’ test in its
assessment of market data fees, which [the
Commission] believe[s] present similar issues as the
connectivity fees proposed herein.’’ Id. at page 16.
Despite this admission, the Commission
disapproved BOX’s proposal to begin charging
$5,000 per month for 10Gb connections (while
allowing legacy exchanges to charge rates equal to
3–4 times that amount utilizing ‘‘market-based’’ fee
filings from years prior).
19 See Staff Guidance on SRO Rule Filings
Relating to Fees (May 21, 2019), available at https://
www.sec.gov/tm/staff-guidance-sro-rule-filings-fees
(the ‘‘Staff Guidance’’).
20 Id.
21 Id.
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Circuit vacated the Commission’s
SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC 22 and remanded for
further proceedings consistent with its
opinion.23 That same day, the D.C.
Circuit issued an order remanding the
Remand Order to the Commission for
reconsideration in light of NASDAQ.
The court noted that the Remand Order
required the exchanges and NMS plan
participants to consider the challenges
that the Commission had remanded in
light of the SIFMA Decision. The D.C.
Circuit concluded that because the
SIFMA Decision ‘‘has now been
vacated, the basis for the [Remand
Order] has evaporated.’’ 24 Accordingly,
on August 7, 2020, the Commission
vacated the Remand Order and ordered
the parties to file briefs addressing
whether the holding in NASDAQ v. SEC
that Exchange Act Section 19(d) does
not permit challenges to generally
applicable fee rules requiring dismissal
of the challenges the Commission
previously remanded.25 The
Commission further invited ‘‘the parties
to submit briefing stating whether the
challenges asserted in the applications
for review . . . should be dismissed,
and specifically identifying any
challenge that they contend should not
be dismissed pursuant to the holding of
Nasdaq v. SEC.’’ 26 Without resolving
the above issues, on October 5, 2020, the
Commission issued an order granting
SIFMA and Bloomberg’s request to
withdraw their applications for review
and dismissed the proceedings.27
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
22 NASDAQ Stock Mkt., LLC v. SEC, No 18–1324,
--- Fed. App’x ----, 2020 WL 3406123 (D.C. Cir. June
5, 2020). The court’s mandate was issued on August
6, 2020.
23 Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C.
Cir. 2020). The court’s mandate issued on August
6, 2020. The D.C. Circuit held that Exchange Act
‘‘Section 19(d) is not available as a means to
challenge the reasonableness of generallyapplicable fee rules.’’ Id. The court held that ‘‘for
a fee rule to be challengeable under Section 19(d),
it must, at a minimum, be targeted at specific
individuals or entities.’’ Id. Thus, the court held
that ‘‘Section 19(d) is not an available means to
challenge the fees at issue’’ in the SIFMA Decision.
Id.
24 Id. at *2; see also id. (‘‘[T]he sole purpose of
the challenged remand has disappeared.’’).
25 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 89504, 2020 WL 4569089
(August 7, 2020) (the ‘‘Order Vacating Prior Order
and Requesting Additional Briefs’’).
26 Id.
27 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 90087 (October 5, 2020).
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2709
enable us to perform our review.’’ 28 As
such, all of those fees remained in place
and amounted to a baseline set of fees
for those exchanges that had the benefit
of getting their fees in place before the
Commission Staff’s fee review process
materially changed. The net result of
this history and lack of resolution in the
D.C. Circuit Court resulted in an uneven
competitive landscape where the
Commission subjects all new nontransaction fee filings, particularly those
submitted by new exchanges, to the new
Revised Review Process, while allowing
the previously challenged fee filings,
mostly submitted by incumbent
exchanges prior to 2019, to remain in
effect and not subject to the ‘‘record’’ or
‘‘review’’ earlier intended by the
Commission.
While the Exchange appreciates that
the Staff Guidance articulates an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable,
the practical effect of the Revised
Review Process, Staff Guidance, and the
Commission’s related practice of
continuous suspension of new fee
filings, is anti-competitive,
discriminatory, and has put in place an
un-level playing field, which has
negatively impacted smaller, nascent,
non-legacy exchanges (‘‘non-legacy
exchanges’’), while favoring larger,
incumbent, entrenched, legacy
exchanges (‘‘legacy exchanges’’).29 The
legacy exchanges all established a
significantly higher baseline for access
and market data fees prior to the
Revised Review Process. From 2011
until the issuance of the Staff Guidance
in 2019, national securities exchanges
filed, and the Commission Staff did not
abrogate or suspend (allowing such fees
to become effective), at least 92 filings 30
28 See
supra note 14, at page 2.
Chair Gary Gensler recently
reiterated the Commission’s mandate to ensure
competition in the equities markets. See ‘‘Statement
on Minimum Price Increments, Access Fee Caps,
Round Lots, and Odd-Lots’’, by Chair Gary Gensler,
dated December 14, 2022 (stating ‘‘[i]n 1975,
Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the
establishment of the national market system and
enhance competition in the securities markets,
including the equity markets’’ (emphasis added)).
In that same statement, Chair Gary Gensler cited the
five objectives laid out by Congress in 11A of the
Exchange Act (15 U.S.C. 78k–1), including ensuring
‘‘fair competition among brokers and dealers,
among exchange markets, and between exchange
markets and markets other than exchange
markets. . . .’’ (emphasis added). Id. at note 1. See
also Securities Acts Amendments of 1975, available
at https://www.govtrack.us/congress/bills/94/s249.
30 This timeframe also includes challenges to over
400 rule filings by SIFMA and Bloomberg discussed
above. Sec. Indus. & Fin. Mkts. Ass’n, Securities
29 Commission
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to amend exchange connectivity or port
fees (or similar access fees). The support
for each of those filings was a simple
statement by the relevant exchange that
the fees were constrained by
competitive forces.31 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 MIAX Pearl, 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
Exchange Act Release No. 84433, 2018 WL 5023230
(Oct. 16, 2018). Those filings were left to stand,
while at the same time, blocking newer exchanges
from the ability to establish competitive access and
market data fees. See The Nasdaq Stock Market,
LLC v. SEC, Case No. 18–1292 (D.C. Cir. June 5,
2020). The expectation at the time of the litigation
was that the 400 rule flings challenged by SIFMA
and Bloomberg would need to be justified under
revised review standards.
31 See, e.g., Securities Exchange Act Release Nos.
74417 (March 3, 2015), 80 FR 12534 (March 9,
2015) (SR–ISE–2015–06); 83016 (April 9, 2018), 83
FR 16157 (April 13, 2018) (SR–PHLX–2018–26);
70285 (August 29, 2013), 78 FR 54697 (September
5, 2013) (SR–NYSEMKT–2013–71); 76373
(November 5, 2015), 80 FR 70024 (November 12,
2015) (SR–NYSEMKT–2015–90); 79729 (January 4,
2017), 82 FR 3061 (January 10, 2017) (SR–
NYSEARCA–2016–172).
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additional detail in order to continue to
charge those fees.32 By impeding any
path forward for non-legacy exchanges
to establish commensurate nontransaction fees, or by failing to provide
any alternative means for smaller
markets to establish ‘‘fee parity’’ with
legacy exchanges, the Commission is
stifling competition: non-legacy
exchanges are, in effect, being deprived
of the revenue necessary to compete on
a level playing field with legacy
exchanges. This is particularly harmful,
given that the costs to maintain
exchange systems and operations
continue to increase. The Commission
Staff’s change in position impedes the
ability of non-legacy exchanges to raise
revenue to invest in their systems to
compete with the legacy exchanges who
already enjoy disproportionate nontransaction fee based revenue. For
example, the Cboe Exchange, Inc.
(‘‘Cboe’’) reported ‘‘access and capacity
fee’’ revenue of $70,893,000 for 2020 33
and $80,383,000 for 2021.34 Cboe C2
Exchange, Inc. (‘‘C2’’) reported ‘‘access
and capacity fee’’ revenue of
$19,016,000 for 2020 35 and $22,843,000
for 2021.36 Cboe BZX Exchange, Inc.
(‘‘BZX’’) reported ‘‘access and capacity
fee’’ revenue of $38,387,000 for 2020 37
and $44,800,000 for 2021.38 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
‘‘access and capacity fee’’ revenue of
$26,126,000 for 2020 39 and $30,687,000
for 2021.40 For 2021, the affiliated Cboe,
C2, BZX, and EDGX (the four largest
exchanges of the Cboe exchange group)
reported $178,712,000 in ‘‘access and
32 The Exchange has filed, and subsequently
withdrew, various forms of this proposed fee
change numerous times since August 2021 with
each proposal containing hundreds of cost and
revenue disclosures never previously disclosed by
legacy exchanges in their access and market data fee
filings prior to 2019.
33 According to Cboe’s 2021 Form 1 Amendment,
access and capacity fees represent fees assessed for
the opportunity to trade, including fees for tradingrelated functionality. See Cboe 2021 Form 1
Amendment, available at https://www.sec.gov/
Archives/edgar/vprr/2100/21000465.pdf.
34 See Cboe 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001155.pdf.
35 See C2 2021 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000469.pdf.
36 See C2 2022 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2200/
22001156.pdf.
37 See BZX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000465.pdf.
38 See BZX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001152.pdf.
39 See EDGX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000467.pdf.
40 See EDGX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001154.pdf.
PO 00000
Frm 00112
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Sfmt 4703
capacity fees’’ in 2021. NASDAQ Phlx,
LLC (‘‘NASDAQ Phlx’’) reported ‘‘Trade
Management Services’’ revenue of
$20,817,000 for 2019.41 The Exchange
notes it is unable to compare ‘‘access
fee’’ revenues with NASDAQ Phlx (or
other affiliated NASDAQ exchanges)
because after 2019, the ‘‘Trade
Management Services’’ line item was
bundled into a much larger line item in
PHLX’s Form 1, simply titled ‘‘Market
services.’’ 42
The much higher non-transaction fees
charged by the legacy exchanges
provides them with two significant
competitive advantages. First, legacy
exchanges are able to use their
additional non-transaction revenue for
investments in infrastructure, vast
marketing and advertising on major
media outlets,43 new products and other
innovations. Second, higher nontransaction fees provide the legacy
exchanges with greater flexibility to
lower their transaction fees (or use the
revenue from the higher non-transaction
fees to subsidize transaction fee rates),
which are more immediately impactful
in competition for order flow and
market share, given the variable nature
of this cost on member firms. The
prohibition of a reasonable path forward
denies the Exchange (and other nonlegacy exchanges) this flexibility,
eliminates the ability to remain
competitive on transaction fees, and
hinders the ability to compete for order
flow and market share with legacy
exchanges. While one could debate
whether the pricing of non-transaction
fees are subject to the same market
forces as transaction fees, there is little
doubt that subjecting one exchange to a
materially different standard than that
historically applied to legacy exchanges
for non-transaction fees leaves that
exchange at a disadvantage in its ability
to compete with its pricing of
transaction fees.
While the Commission has clearly
noted that the Staff Guidance is merely
guidance and ‘‘is not a rule, regulation
or statement of the . . . Commission
. . . the Commission has neither
approved nor disapproved its
41 According to PHLX, ‘‘Trade Management
Services’’ includes ‘‘a wide variety of alternatives
for connectivity to and accessing [the PHLX]
markets for a fee. These participants are charged
monthly fees for connectivity and support in
accordance with [PHLX’s] published fee
schedules.’’ See PHLX 2020 Form 1 Amendment,
available at https://www.sec.gov/Archives/edgar/
vprr/2001/20012246.pdf.
42 See PHLX Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf.
43 See, e.g., CNBC Debuts New Set on NYSE Floor,
available at https://www.cnbc.com/id/46517876.
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content. . .’’,44 this is not the reality
experienced by exchanges such as
MIAX Pearl. As such, non-legacy
exchanges are forced to rely on an
opaque cost-based justification
standard. However, because the Staff
Guidance is devoid of detail on what
must be contained in cost-based
justification, this standard is nearly
impossible to meet despite good-faith
efforts by the Exchange to provide
substantial amount of cost-related
details. The Exchange has attempted to
increase fees using a cost-based
justification numerous times, having
submitted over six filings.45 However,
despite providing 100+ page filings
describing in extensive detail its costs
associated with providing the services
described in the filings, Commission
Staff continues to suspend such filings,
with the rationale that the Exchange has
not provided sufficient detail of its
costs. The Commission Staff appears to
be interpreting the reasonableness
standard set forth in Section 6(b)(4) of
the Act 46 in a manner that is not
possible to achieve. This essentially
nullifies the cost-based approach for
exchanges as a legitimate alternative as
laid out in the Staff Guidance. By
refusing to accept a reasonable 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
44 See
supra note 19, at note 1.
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).
46 15 U.S.C. 78f(b)(4).
sufficient clarity on how its cost-based
standard can be met, including a clear
and exhaustive articulation of required
data and its views on acceptable
margins,47 to the extent that this is
pertinent; (b) establish a framework to
provide for commensurate nontransaction based fees among competing
exchanges to ensure fee parity; 48 or (c)
accept that certain competition-based
arguments are applicable given the
linkage between non-transaction fees
and transaction fees, especially where
non-transaction fees among exchanges
are based upon disparate standards of
review, lack parity, and impede fair
competition. Considering the absence of
any such framework or clarity, the
Exchange believes that the Commission
does not have a reasonable basis to deny
the Exchange this change in fees, where
the proposed change would result in
fees meaningfully lower than
comparable fees at competing exchanges
and where the associated nontransaction revenue is meaningfully
lower than competing exchanges.
In light of the above, disapproval of
this would not meet the fairness
standard under the Act, would be
discriminatory and place a substantial
burden on competition. The Exchange
would be uniquely disadvantaged by
not being able to increase its access fees
to comparable levels (or lower levels
than current market rates) to those of
other options exchanges for
connectivity. If the Commission Staff
were to disapprove this proposal, that
action, and not market forces, would
substantially affect whether the
Exchange can be successful in its
competition with other options
exchanges. Disapproval of this filing
could also be viewed as an arbitrary and
capricious decision should the
Commission Staff continue to ignore its
past treatment of non-transaction fee
filings before implementation of the
Revised Review Process and Staff
Guidance and refuse to allow such
filings to be approved despite
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45 See
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47 To the extent that the cost-based standard
includes Commission Staff making determinations
as to the appropriateness of certain profit margins,
the Exchange believes that Staff should be clear as
to what they determine is an appropriate profit
margin.
48 In light of the arguments above regarding
disparate standards of review for historical legacy
non-transaction fees and current non-transaction
fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the
current unfair and discriminatory effect of the Staff
Guidance and Revised Review Process. See, e.g.,
CSA Staff Consultation Paper 21–401, Real-Time
Market Data Fees, available at https://
www.bcsc.bc.ca/-/media/PWS/Resources/
Securities_Law/Policies/Policy2/21401_Market_
Data_Fee_CSA_Staff_Consulation_Paper.pdf.
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2711
significantly enhanced arguments and
cost disclosures.49
Lastly, the Exchange notes that the
Commission Staff has allowed similar
fee increases by other exchanges to
remain in effect by publishing those
filings for comment and allowing the
exchange to withdraw and re-file
numerous times.50 Recently, the
Commission Staff has not afforded the
Exchange the same flexibility.51 This
again is evidence that the Commission
Staff is not treating non-transaction fee
filings in a consistent manner and is
holding exchanges to different levels of
scrutiny in reviewing filings.
*
*
*
*
*
10Gb ULL Connectivity Fee Change
The Exchange recently filed a
proposal to no longer operate 10Gb
connectivity to the Exchange on a single
shared network with its affiliate, MIAX.
This change is an operational necessity
due to ever-increasing capacity
constraints and to accommodate
anticipated access needs for Members
and other market participants.52 This
proposal: (i) sets forth the applicable
fees for the bifurcated 10Gb ULL
network; and (ii) removes provisions in
the Fee Schedule that provides for a
shared 10Gb ULL network; and (iii)
49 The Exchange’s costs have clearly increased
and continue to increase, particularly regarding
capital expenditures, as well as employee benefits
provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed
by the Exchange to cover its ever increasing costs
has been acceptable to the Commission Staff since
2021. The only other fair and reasonable alternative
would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance
and Revised Review Process to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based on that
record, in a written decision that is sufficient to
enable us to perform our review,’’ and to ensure a
comparable review process with the Exchange’s
filing.
50 See, e.g., Securities Exchange Act Release Nos.
93937 (January 10, 2022), 87 FR 2466 (January 14,
2022) (SR–MEMX–2021–22); 94419 (March 15,
2022), 87 FR 16046 (March 21, 2022) (SR–MEMX–
2022–02); SR–MEMX–2022–12 (withdrawn before
being noticed); 94924 (May 16, 2022), 87 FR 31026
(May 20, 2022) (SR–MEMX–2022–13); 95299 (July
15, 2022), 87 FR 43563 (July 21, 2022) (SR–MEMX–
2022–17); SR–MEMX–2022–24 (withdrawn before
being noticed); 95936 (September 27, 2022), 87 FR
59845 (October 3, 2022) (SR–MEMX–2022–26);
94901 (May 12, 2022), 87 FR 30305 (May 18, 2022)
(SR–MRX–2022–04); SR–MRX–2022–06
(withdrawn before being noticed); 95262 (July 12,
2022), 87 FR 42780 (July 18, 2022) (SR–MRX–2022–
09); 95710 (September 8, 2022), 87 FR 56464
(September 14, 2022) (SR–MRX–2022–12); 96046
(October 12, 2022), 87 FR 63119 (October 18, 2022)
(SR–MRX–2022–20); 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR–MEMX–2022–
26); and 96430 (December 1, 2022), 87 FR 75083
(December 7, 2022) (SR–MEMX–2022–32).
51 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).
52 See supra note 8.
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specifies that market participants may
continue to connect to both the
Exchange and MIAX via the 1Gb
network.
The Exchange plans to bifurcate the
Exchange and MIAX 10Gb ULL
networks in the first quarter of 2023,
currently anticipated to be effective on
January 23, 2023. The Exchange issued
an alert on August 12, 2022 publicly
announcing the planned network
change and implementation plan and
dates to provide market participants
adequate time to prepare.53 Upon
bifurcation of the 10Gb ULL network,
subscribers would need to purchase
separate connections to the Exchange
and MIAX at the applicable rate. The
Exchange’s proposed amended rate for
10Gb ULL connectivity is described
below. Until the 10Gb ULL network is
bifurcated, subscribers to 10Gb ULL
connectivity would be able to connect to
both the Exchange and MIAX at the
applicable rate set forth below.
The Exchange, therefore, proposes to
amend the Fee Schedule to increase the
fees for Members and non-Members to
access the Exchange’s system
networks 54 via a 10Gb ULL fiber
connection and to specify that this fee
is for a dedicated connection to the
Exchange and no longer provides access
to MIAX. Specifically, the Exchange
proposes to amend Sections (5)(a)–(b) of
the Fee Schedule to increase the 10Gb
ULL connectivity fee for Members and
non-Members from $10,000 per month
to $13,500 per month (‘‘10Gb ULL
Fee’’).55 The Exchange also proposes to
amend the Fee Schedule to reflect the
bifurcation of the 10Gb ULL network
and specify that only the 1Gb network
provides access to both the Exchange
and MIAX.
The Exchange proposes to make the
following changes to reflect the
bifurcated 10Gb ULL network for the
Exchange and MIAX. First, in the
Definitions section of the Fee Schedule,
the Exchange proposes to amend the last
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53 Id.
54 The Exchange’s system networks consist of the
Exchange’s extranet, internal network, and external
network.
55 Market participants that purchase additional
10Gb ULL connections as a result of this change
will not be subject to the Exchange’s Member
Network Connectivity Testing and Certification Fee
under Section (4)(c) of the Exchange’s fee schedule.
See Section (4)(c) of the Exchange’s fee schedule
available at https://www.miaxoptions.com/sites/
default/files/fee_schedule-files/MIAX_Options_Fee_
Schedule_10192022.pdf (providing that ‘‘Network
Connectivity Testing and Certification Fees will not
be assessed in situations where the Exchange
initiates a mandatory change to the Exchange’s
system that requires testing and certification.
Member Network Connectivity Testing and
Certification Fees will not be assessed for testing
and certification of connectivity to the Exchange’s
Disaster Recovery Facility.’’).
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sentence in the definition of ‘‘MENI’’ to
specify that the MENI can be configured
to provide network connectivity to the
trading platforms, market data systems,
test systems, and disaster recovery
facilities of the Exchange’s affiliate,
MIAX, via a single, shared 1Gb
connection. Next, the Exchange
proposes to amend the explanatory
paragraphs below the network
connectivity fee tables in Sections
(5)(a)–(b) of the Fee Schedule to specify
that, with the bifurcated 10Gb ULL
network, Members (and non-Members)
utilizing the MENI to connect to the
trading platforms, market data systems,
test systems, and disaster recovery
facilities of the Exchange and MIAX via
a single, can only do so via a shared 1Gb
connection.
The Exchange will continue to assess
monthly Member and non-Member
network connectivity fees for
connectivity to the primary and
secondary facilities in any month the
Member or non-Member is credentialed
to use any of the Exchange APIs or
market data feeds in the production
environment. The Exchange will
continue to pro-rate the fees when a
Member or non-Member makes a change
to the connectivity (by adding or
deleting connections) with such prorated fees based on the number of
trading days that the Member or nonMember has been credentialed to utilize
any of the Exchange APIs or market data
feeds in the production environment
through such connection, divided by the
total number of trading days in such
month multiplied by the applicable
monthly rate.
Implementation of 10Gb ULL Fee. The
proposed 10Gb ULL fee will be effective
January 1, 2023. From January 1, 2023
until January 22, 2023, subscribers to
10Gb ULL connectivity will continue to
receive access to both the Exchange and
MIAX via a single 10Gb ULL
connection. Upon bifurcation of the
10Gb ULL network on January 23, 2023,
subscribers that elect to continue to
access both the Exchange and MIAX via
a 10Gb ULL connection will need to
purchase separate 10Gb ULL
connections from each exchange.
Existing subscribers of 10Gb ULL
connections on the Exchange that also
purchase a new 10Gb ULL connection to
access MIAX would pay a pro-rated
portion of the monthly fee for the added
connection for the remainder of the
month.
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Full Service MEO Ports—Bulk and
Single
Background
The Exchange also proposes to amend
Section (5)(d) of the Fee Schedule to
amend the calculation and amount of
fees for Full Service MEO Ports. The
Exchange currently offers different types
of MEO Ports depending on the services
required by the Member, including a
Full Service MEO Port-Bulk,56 a Full
Service MEO Port-Single,57 and a
Limited Service MEO Port.58 For one
monthly price, a Member may be
allocated two (2) Full-Service MEO
Ports of either type per matching
engine 59 and may request Limited
Service MEO Ports for which MIAX
Pearl will assess Members Limited
Service MEO Port fees based on a
sliding scale for the number of Limited
Service MEO Ports utilized each month.
The two (2) Full-Service MEO Ports that
may be allocated per matching engine to
a Member may consist of: (a) two (2)
Full Service MEO Ports—Bulk; (b) two
(2) Full Service MEO Ports—Single; or
(c) one (1) Full Service MEO Port—Bulk
and one (1) Full Service MEO Port—
Single.
Currently, the Exchange assesses
Members Full Service MEO Port Fees,
either for a Full Service MEO Port—
Bulk and/or for a Full Service MEO
Port—Single, based upon the monthly
total volume executed by a Member and
its Affiliates 60 on the Exchange, across
all origin types, not including Excluded
Contracts, 61 as compared to the Total
Consolidated Volume (‘‘TCV’’),62 in all
56 ‘‘Full Service MEO Port—Bulk’’ means an MEO
port that supports all MEO input message types and
binary bulk order entry. See the Definitions Section
of the Fee Schedule.
57 ‘‘Full Service MEO Port—Single’’ means an
MEO port that supports all MEO input message
types and binary order entry on a single order-byorder basis, but not bulk orders. See the Definitions
Section of the Fee Schedule.
58 ‘‘Limited Service MEO Port’’ means an MEO
port that supports all MEO input message types, but
does not support bulk order entry and only
supports limited order types, as specified by the
Exchange via Regulatory Circular. See the
Definitions Section of the Fee Schedule.
59 A ‘‘Matching Engine’’ is a part of the
Exchange’s electronic system that processes options
orders and trades on a symbol-by-symbol basis. See
the Definitions Section of the Fee Schedule.
60 ‘‘Affiliate’’ means (i) an affiliate of a Member
of at least 75% common ownership between the
firms as reflected on each firm’s Form BD, Schedule
A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed
EEM of an Appointed Market Maker). See the
Definitions Section of the Fee Schedule.
61 ‘‘Excluded Contracts’’ means any contracts
routed to an away market for execution. See the
Definitions Section of the Fee Schedule.
62 ‘‘TCV’’ means total consolidated volume
calculated as the total national volume in those
classes listed on MIAX Pearl for the month for
which the fees apply, excluding consolidated
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MIAX Pearl-listed options. The
Exchange adopted a tier-based fee
structure based upon the volume-based
tiers detailed in the definition of ‘‘NonTransaction Fees Volume-Based Tiers’’
described in the Definitions section of
the Fee Schedule. The Exchange
assesses these and other monthly Port
fees to Members in each month the
market participant is credentialed to use
a Port in the production environment.
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Full Service MEO Port (Bulk) Fee
Changes
Current Full Service MEO Port (Bulk)
Fees. The Exchange currently assesses
all Members (Market Makers 63 and
Electronic Exchange Members 64
(‘‘EEMs’’)) monthly Full Service MEO
Port—Bulk fees as follows:
(i) if its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $3,000;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$4,500; and
(iii) if its volume falls within the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $5,000.
Proposed Full Service MEO Port
(Bulk) Fees. The Exchange proposes to
amend the calculation and amount of
Full Service MEO Port (Bulk) fees for
EEMs and Market Makers. In particular,
for EEMs, the Exchange proposes to
move away from the above-described
volume tier-based fee structure and
instead charge all EEMs that utilize Full
Service MEO Ports (Bulk) a flat monthly
fee of $7,500. For this flat monthly fee,
EEMs will continue to be entitled to two
(2) Full Service MEO Ports (Bulk) for
each Matching Engine for the single
monthly fee of $7,500. The Exchange
now proposes to amend the calculation
and amount of Full Service MEO Port
(Bulk) fees for Market Makers by moving
volume executed during the period of time in
which the Exchange experiences an Exchange
System Disruption (solely in the option classes of
the affected Matching Engine). See the Definitions
Section of the Fee Schedule.
63 The term ‘‘Market Maker’’ means a Member
registered with the Exchange for the purpose of
making markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange
Rules. See the Definitions Section of the Fee
Schedule and Exchange Rule 100.
64 The term ‘‘Electronic Exchange Member’’ or
‘‘EEM’’ means the holder of a Trading Permit who
is a Member representing as agent Public Customer
Orders or Non-Customer Orders on the Exchange
and those non-Market Maker Members conducting
proprietary trading. Electronic Exchange Members
are deemed ‘‘members’’ under the Exchange Act.
See the Definitions Section of the Fee Schedule and
Exchange Rule 100.
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away from the above-described volume
tier-based fee structure to harmonize the
Full Service MEO Port (Bulk) fee
structure for Market Makers with that of
the Exchange’s affiliates, MIAX and
MIAX Emerald.65 The Exchange
proposes that the amount of the
monthly Full Service MEO Port (Bulk)
fees for Market Makers would be based
on the lesser of either the per class
traded or percentage of total national
average daily volume (‘‘ADV’’)
measurement based on classes traded by
volume. The amount of monthly Market
Maker Full Service MEO Port (Bulk) fee
would be based upon the number of
classes in which the Market Maker was
registered to quote on any given day
within the calendar month, or upon the
class volume percentages. This change
in how Full Service MEO Port (Bulk)
fees are calculated is identical to how
the Exchange assesses Market Makers
Trading Permit fees, which is in line
with how numerous exchanges charge
similar membership fees.
Specifically, the Exchange proposes to
adopt the following Full Service MEO
Port (Bulk) fees for Market Makers: (i)
$5,000 for Market Maker registrations in
up to 10 option classes or up to 20% of
option classes by national ADV; (ii)
$7,500 for Market Maker registrations in
up to 40 option classes or up to 35% of
option classes by ADV; (iii) $10,000 for
Market Maker registrations in up to 100
option classes or up to 50% of option
classes by ADV; and (iv) $12,000 for
Market Maker registrations in over 100
option classes or over 50% of option
classes by ADV up to all option classes
listed on MIAX Pearl. For example, if
Market Maker 1 elects to quote the top
40 option classes which consist of 58%
of the total national average daily
volume in the prior calendar quarter,
the Exchange would assess $7,500 to
Market Maker 1 for the month which is
the lesser of ‘up to 40 classes’ and ‘over
50% of classes by volume up to all
classes listed on MIAX Pearl’. If Market
Maker 2 elects to quote the bottom 1000
option classes which consist of 10% of
the total national average daily volume
in the prior quarter, the Exchange would
assess $5,000 to Market Maker 2 for the
month which is the lesser of ‘over 100
classes’ and ‘up to 20% of classes by
volume. The Exchange notes that the
proposed tiers (ranging from $5,000 to
$12,000) are lower than the tiers that the
Exchange’s affiliates charge for their
comparable ports (ranging from $5,000
to $20,500) for similar per class tier
thresholds.66
With the proposed changes, a Market
Maker would be determined to be
registered in a class if that Market Maker
has been registered in one or more series
in that class.67 The Exchange will assess
MIAX Pearl Market Makers the monthly
Market Maker Full Service MEO Port
(Bulk) fee based on the greatest number
of classes listed on MIAX Pearl that the
MIAX Pearl Market Maker registered to
quote in on any given day within a
calendar month. Therefore, with the
proposed changes to the calculation of
Market Maker Full Service MEO Port
(Bulk) fees, the Exchange’s Market
Makers would be encouraged to quote in
more series in each class they are
registered in because each additional
series in that class would not count
against their total classes for purposes of
the Full Service MEO Port (Bulk) fee
tiers. The class volume percentage is
based on the total national ADV in
classes listed on MIAX Pearl in the prior
calendar quarter. Newly listed option
classes are excluded from the
calculation of the monthly Market
Maker Full Service MEO Port (Bulk) fee
until the calendar quarter following
their listing, at which time the newly
listed option classes will be included in
both the per class count and the
percentage of total national ADV.
The Exchange also proposes to adopt
an alternative lower Full Service MEO
Port (Bulk) fee for Market Makers who
fall within the 2nd, 3rd and 4th levels
of the proposed Market Maker Full
Service MEO Port (Bulk) fee table: (i)
Market Maker registrations in up to 40
option classes or up to 35% of option
classes by volume; (ii) Market Maker
registrations in up to 100 option classes
or up to 50% of option classes by
volume; and (iii) Market Maker
registrations in over 100 option classes
or over 50% of option classes by volume
up to all option classes listed on MIAX
Pearl. In particular, the Exchange
proposes to adopt footnote ‘‘**’’
following the Market Maker Full Service
MEO Port (Bulk) fee table for these
Monthly Full Service MEO Port (Bulk)
tier levels. New proposed footnote ‘‘**’’
will provide that if the Market Maker’s
total monthly executed volume during
the relevant month is less than 0.040%
of the total monthly TCV for MIAX
Pearl–listed option classes for that
month, then the fee will be $6,000
instead of the fee otherwise applicable
to such level.
The purpose of the alternative lower
fee designated in proposed footnote
‘‘**’’ is to provide a lower fixed fee to
65 See MIAX Fee Schedule, Section (5)(d)(ii) and
MIAX Emerald Fee Schedule, Section (5)(d)(ii).
66 See id.
67 Pursuant to Exchange Rule 602(a), a Member
that has qualified as a Market Maker may register
to make markets in individual series of options.
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those Market Makers who are willing to
quote the entire Exchange market (or
substantial amount of the Exchange
market), as objectively measured by
either number of classes assigned or
national ADV, but who do not otherwise
execute a significant amount of volume
on the Exchange. The Exchange believes
that, by offering lower fixed fees to
Market Makers that execute less volume,
the Exchange will retain and attract
smaller-scale Market Makers, which are
an integral component of the option
marketplace, but have been decreasing
in number in recent years, due to
industry consolidation. Since these
smaller-scale Market Makers utilize less
Exchange capacity due to lower overall
volume executed, the Exchange believes
it is reasonable and equitable to offer
such Market Makers a lower fixed fee.
The Exchange notes that the Exchange’s
affiliates, MIAX and MIAX Emerald,
also provide lower MIAX Express
Interface (‘‘MEI’’) Port fees (the
comparable ports on those exchanges)
for Market Makers who quote the entire
MIAX and MIAX Emerald markets (or
substantial amount of those markets), as
objectively measured by either number
of classes assigned or national ADV, but
who do not otherwise execute a
significant amount of volume on MIAX
or MIAX Emerald.68 The proposed
changes to the Full Service MEO Port
(Bulk) fees for Market Makers who fall
within the 2nd, 3rd and 4th levels of the
fee table are based upon a business
determination of current Market Maker
assignments and trading volume.
Unlike other options exchanges that
provide similar port functionality and
charge fees on a per port basis,69 the
Exchange offers Full Service MEO Ports
as a package and provides Members
with the option to receive up to two Full
Service MEO Ports (described above)
per matching engine to which that
Member connects. The Exchange
currently has twelve (12) matching
engines, which means Market Makers
may receive up to twenty-four (24) Full
Service MEO Ports for a single monthly
fee, that can vary based on the lesser of
either the per class traded or percentage
of total national ADV measurement
based on classes traded by volume, as
described above. For illustrative
purposes, the Exchange currently
assesses a fee of $5,000 per month for
Market Makers that reach the highest
Full Service MEO Port (Bulk) tier,
regardless of the number of Full Service
MEO Ports allocated to the Market
Maker. For example, assuming a Market
Maker connects to all twelve (12)
matching engines during a month, with
two Full Service MEO Ports (Bulk) per
matching engine, this results in an
effective fee of $208.33 per Full Service
MEO Port ($5,000 divided by 24) for the
month, as compared to other exchanges
that charge over $1,000 per port and
require multiple ports to connect to all
of their matching engines.70 This fee
had been unchanged since the Exchange
adopted Full Service MEO Port fees in
2018.71 The Exchange proposes to
increase Full Service MEO Port fees,
with the highest monthly fee of $12,000
for the Full Service MEO Ports (Bulk).
Market Makers will continue to receive
two (2) Full Service MEO Ports to each
matching engine to which they connect
for the single flat monthly fee.
Assuming a Market Maker connects to
all twelve (12) matching engines during
the month, with two Full Service MEO
Ports per matching engine, this would
result in an effective fee of $500 per Full
Service MEO Port ($12,000 divided by
24).
FULL SERVICE MEO PORTS
[Bulk]
Number of
match engines
Pricing Based on Market Maker Being Charged the Highest Tier (Current) ......................................................................................................
Pricing Based on Market Maker Being Charged the Highest Tier (as
proposed) .............................................................................................
Full Service MEO Port (Single) Fee
Changes
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Current Full Service MEO Port
(Single) Fees. The Exchange currently
assesses all Members (Market Makers
and EEMs) monthly Full Service MEO
Port (Single) fees as follows:
68 See MIAX Fee Schedule, Section (5)(d)(ii), note
‘‘*’’ and MIAX Emerald Fee Schedule, Section
(5)(d)(ii), note ‘‘‘‘.
69 See NYSE American Options Fee Schedule,
Section V.A., Port Fees (each port charged on a per
matching engine basis, with NYSE American having
17 match engines). See NYSE Technology FAQ and
Best Practices: Options, Section 5.1 (How many
matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file
detailing the number of matching engines per
options exchange); NYSE Arca Options Fee
Schedule, Port Fees (each port charged on a per
matching engine basis, NYSE Arca having 19 match
engines); and NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many
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Jkt 259001
Total number
of ports for
market maker to
connect to all
match engines
Total fee
(monthly)
Effective
per port fee
12
24
$5,000
$208.33
12
24
12,000
500
(i) if its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $2,000;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$3,375; and
(iii) if its volume falls within the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $3,750.
Proposed Full Service MEO Port
(Single) Fees. The Exchange proposes to
matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file
detailing the number of matching engines per
options exchange). See NASDAQ Fee Schedule,
NASDAQ Options 7 Pricing Schedule, Section 3,
Nasdaq Options Market—Ports and Other Services
(each port charged on a per matching engine basis,
with Nasdaq having multiple matching engines).
See NASDAQ Specialized Quote Interface (SQF)
Specification, Version 6.5b (updated February 13,
2020), Section 2, Architecture, available at https://
www.nasdaq.com/docs/2020/02/18/SpecializedQuote-Interface-SQI-6.5b.pdf (the ‘‘NASDAQ SQF
Interface Specification’’). The NASDAQ SQF
Interface Specification also provides that
NASDAQ’s affiliates, NASDAQ Phlx and NASDAQ
BX, Inc. (‘‘BX’’), have trading infrastructures that
may consist of multiple matching engines with each
matching engine trading only a range of option
classes. Further, the NASDAQ SQF Interface
Specification provides that the SQF infrastructure
is such that the firms connect to one or more servers
residing directly on the matching engine
infrastructure. Since there may be multiple
matching engines, firms will need to connect to
each engine’s infrastructure in order to establish the
ability to quote the symbols handled by that engine.
70 Id. See also infra notes 95 to 102 and
accompanying text.
71 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
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amend the calculation and amount of
Full Service MEO Port (Single) fees for
EEMs and Market Makers. In particular,
the Exchange proposes to move away
from the above-described volume tierbased fee structure and instead charge
all Members that utilize Full Service
MEO Ports (Single) a flat monthly fee of
$4,000. For this flat monthly fee, all
Members will continue to be entitled to
two (2) Full Service MEO Ports (Single)
for each Matching Engine for the single
monthly fee of $4,000.
The Exchange offers various types of
ports with differing prices because each
port accomplishes different tasks, are
suited to different types of Members,
and consume varying capacity amounts
of the network. For instance, MEO ports
allow for a higher throughput and can
handle much higher quote/order rates
than FIX ports. Members that are Market
Makers or high frequency trading firms
utilize these ports (typically coupled
with 10Gb ULL connectivity) because
they transact in significantly higher
amounts of messages being sent to and
from the Exchange, versus FIX port
users, who are traditionally customers
sending only orders to the Exchange
(typically coupled with 1Gb
connectivity). The different types of
ports cater to the different types of
Exchange Memberships and different
capabilities of the various Exchange
Members. Certain Members need ports
and connections that can handle using
far more of the network’s capacity for
message throughput, risk protections,
and the amount of information that the
System has to assess. Those Members
account for the vast majority of network
capacity utilization and volume
executed on the Exchange, as discussed
throughout. For example, three (3)
Members account for 64% of all 10Gb
ULL connections and Full Service MEO
Ports purchased.
The Exchange proposes to increase its
monthly Full Service MEO Port fees
since it has not done so since the fees
were adopted in 2018,72 which are
designed to recover a portion of the
costs associated with directly accessing
the Exchange. As described above, the
Exchange’s affiliates, MIAX and MIAX
Emerald, also charge fees for their high
throughput, low latency ports in a
similar fashion as the Exchange
proposes to charge for its MEO Ports—
generally, the more active user the
Member (i.e., the greater number/greater
national ADV of classes assigned to
quote on MIAX and MIAX Emerald), the
72 See
id.
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higher the MEI Port fee.73 This concept
is, therefore, not new or novel.
Implementation of Full Service MEO
Port Fees. This proposed fee change 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 74 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 75 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among Members and other persons
using any facility or system which the
Exchange operates or controls. The
Exchange also believes the proposed
fees further the objectives of Section
6(b)(5) of the Act 76 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 77 and the Staff Guidance, 78
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
73 See Exchange Fee Schedule, Section (5)d)ii);
MIAX Emerald Fee Schedule, Section (5)(d)(ii).
74 15 U.S.C. 78f(b).
75 15 U.S.C. 78f(b)(4).
76 15 U.S.C. 78f(b)(5).
77 See supra note 18.
78 See supra note 19.
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2715
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.’’ 79 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.’’ 80
In the Staff Guidance, the Commission
Staff further states that, ‘‘[i]f an SRO
seeks to support its claims that a
proposed fee is fair and reasonable
because it will permit recovery of the
SRO’s costs, . . . , specific information,
including quantitative information,
should be provided to support that
argument.’’ 81
The proposed fees are reasonable
because they promote parity among
exchange pricing for access, which
promotes competition, including in the
Exchanges’ ability to competitively
price transaction fees, invest in
infrastructure, new products and other
innovations, all while allowing the
Exchange to recover its costs to provide
dedicated access via 10Gb ULL
connectivity (driven by the bifurcation
of the 10Gb ULL network) and Full
Service MEO Ports. As discussed above,
the Revised Review Process and Staff
Guidance have created an uneven
playing field between legacy and nonlegacy exchanges by severely restricting
non-legacy exchanges from being able to
increase non-transaction relates fees to
provide them with additional necessary
revenue to better compete. The much
higher non-transaction fees charged by
the legacy exchanges provides them
with two significant competitive
advantages: (i) additional nontransaction revenue that may be used to
fund areas other than the nontransaction service related to the fee,
such as investments in infrastructure,
advertising, new products and other
innovations; and (ii) greater flexibility to
lower their transaction fees (or use the
revenue from the higher non-transaction
fees to subsidize transaction fee rates).
The latter is more immediately
impactful in competition for order flow
and market share, given the variable
nature of this cost on Member firms.
The absence of a reasonable path
forward to increase non-transaction fees
to comparable (or lower rates) limits the
79 Id.
80 Id.
81 Id.
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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.
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The Proposed Fees Ensure Parity
Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations
in February 2017 82 and adopted its
initial fee schedule, with 10Gb ULL
connectivity fees set at $8,500 (the
Exchange originally had a non-ULL
10Gb connectivity option, which it has
since removed) and a fee waiver for all
Full Service MEO Port fees.83 As a new
exchange entrant, the Exchange chose to
offer Full Service MEO Ports free of
charge to encourage market participants
to trade on the Exchange and
experience, among things, the quality of
the Exchange’s technology and trading
functionality. This practice is not
uncommon. New exchanges often do
not charge fees or charge lower fees for
certain services such as memberships/
trading permits to attract order flow to
an exchange, and later amend their fees
to reflect the true value of those
services, absorbing all costs to provide
those services in the meantime.
Allowing new exchange entrants time to
build and sustain market share through
various pricing incentives before
increasing non-transaction fees
encourages market entry and fee parity,
which promotes competition among
exchanges. It also enables new
exchanges to mature their markets and
allow market participants to trade on
the new exchanges without fees serving
as a potential barrier to attracting
memberships and order flow.84
82 See MIAX PEARL Successfully Launches
Trading Operations, dated February 6, 2017,
available at https://www.miaxoptions.com/sites/
default/files/alert-files/MIAX_Press_Release_
02062017.pdf.
83 See Securities Exchange Act Release No. 80061
(February 17, 2017), 82 FR 11676 (February 24,
2017) (SR–PEARL–2017–10).
84 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
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Later in 2018, as the Exchange’s
market share increased,85 the Exchange
adopted nominal fees for Full Service
MEO Ports.86 The Exchange last
increased the fees for its 10Gb ULL fiber
connections from $9,300 to $10,000 per
month on January 1, 2021.87 The
Exchange balanced business and
competitive concerns with the need to
financially compete with the larger
incumbent exchanges that charge higher
fees for similar connectivity and use
that revenue to invest in their
technology and other service offerings.
The proposed changes to the Fee
Schedule are reasonable in several
respects. As a threshold matter, the
Exchange is subject to significant
competitive forces, which constrains its
pricing determinations for transaction
fees as well as non-transaction fees. The
fact that the market for order flow is
competitive has long been recognized by
the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C.
Circuit stated, ‘‘[n]o one disputes that
competition for order flow is ‘fierce.’
. . . As the SEC explained, ‘[i]n the U.S.
national market system, buyers and
sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
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).
85 The Exchange experienced a monthly average
trading volume of 3.94% for the month of March
2018. See Market at a Glance, available at
www.miaxoptions.com.
86 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
87 See Securities Exchange Act Release No. 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021)
(SR–PEARL–2021–01).
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the execution of order flow from broker
dealers’. . ..’’ 88
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.’’ 89
Congress directed the Commission to
‘‘rely on ‘competition, whenever
possible, in meeting its regulatory
responsibilities for overseeing the SROs
and the national market system.’’’ 90 As
a result, and as evidenced above, the
Commission has historically relied on
competitive forces to determine whether
a fee proposal is equitable, fair,
reasonable, and not unreasonably or
unfairly discriminatory. ‘‘If competitive
forces are operative, the self-interest of
the exchanges themselves will work
powerfully to constrain unreasonable or
unfair behavior.’’ 91 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.’’ 92 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.’’ 93
The Exchange believes the competing
exchanges’ 10Gb connectivity and port
fees are useful examples of alternative
approaches to providing and charging
for access and demonstrating how such
fees are competitively set and
88 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)).
89 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
90 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.’’).
91 See Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74,770 (December 9,
2008) (SR–NYSEArca–2006–21).
92 Id.
93 See Staff Guidance, supra note 19.
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constrained. To that end, the Exchange
believes the proposed fees are
reasonable because the proposed fees
are similar to or less than fees charged
for similar connectivity and port access
provided by other options exchanges
with comparable market shares. As
such, the Exchange believes that
denying its ability to institute fees that
are closer to parity with legacy
exchanges, in effect, impedes its ability
to compete, including in its pricing of
transaction fees and ability to invest in
competitive infrastructure.
The following table shows how the
Exchange’s proposed fees remain
similar to or less than fees charged for
similar connectivity and port access
provided by other options exchanges
with similar market share. Each of the
market data rates in place at competing
options exchanges were filed with the
Commission for immediate effectiveness
and remain in place today.
Exchange
Type of connection or port
Monthly fee
(per connection or per port)
MIAX Pearl (as proposed) (equity options
market share of 4.45% for the month of
November 2022) 94.
10Gb ULL connection ...............
Full Service MEO Port (Bulk) for
Market Makers.
$13,500.
Lesser of either the per class basis or percentage of total national ADV by the Market Maker, as follows:
$5,000–up to 10 classes or up to 20% of classes by volume.
$7,500 **–up to 40 classes or up to 35% of classes by volume.
$10,000 **–up to 100 classes or up to 50% of classes by volume.
$12,000 **–over 100 classes or over 50% of all classes by volume up to all classes (or $500 per port per matching engine).
** A lower rate of $6,000 will apply to these tiers if the Market
Maker’s total monthly executed volume is less than 0.040% of
total monthly TCV for MIAX Pearl options.
$7,500 (or $312.50 per port per matching engine).
NASDAQ 95 (equity options market share of
7.14% for the month of November
2022) 96.
NASDAQ ISE LLC (‘‘ISE’’) 97 (equity options market share of 6.19% for the
month of November 2022) 98.
NYSE American LLC (‘‘NYSE American’’) 99
(equity options market share of 6.93% for
the month of November 2022) 100.
NASDAQ GEMX, LLC (‘‘GEMX’’) 101 (equity
options market share of 1.93% for the
month of November 2022) 102.
The Exchange acknowledges that,
without additional contextual
information, the above table may lead
someone to believe that the Exchange’s
proposed fees for Full Service MEO
Ports is higher than other exchanges
when in fact, that is not true. The
Exchange provides each Member or
non-Member access to two (2) ports on
all twelve (12) matching engines for a
single fee and a vast majority choose to
connect to all twelve (12) matching
94 See
supra note 85.
NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services.
96 See supra note 85.
97 See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8:
Connectivity.
98 See supra note 85.
99 See NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. CoLocation Fees.
100 See supra note 85.
101 See GEMX Pricing Schedule, Options 7,
Section 6, Connectivity Fees and GEMX Rules,
General 8: Connectivity.
102 See supra note 85.
Full Service MEO Port (Bulk) for
EEMs.
Full Service MEO Port (Single)
for Market Makers and EEMs.
10Gb Ultra fiber connection ......
SQF Port ...................................
10Gb Ultra fiber connection ......
SQF Port ...................................
10Gb LX LCN connection .........
Order/Quote Entry Port .............
10Gb Ultra connection ..............
SQF Port ...................................
$4,000 (or $166.66 per port per matching engine).
$15,000 per connection.
1–5 ports: $1,500 per port.
6–20 ports: $1,000 per port.
21 or more ports: $500 per port.
$15,000 per connection.
$1,100 per port.
$22,000 per connection.
Ports 1–40. $450 per port.
Ports 41 and greater. $150 per port.
$15,000 per connection.
$1,250 per port.
engines and utilize both ports for a total
of 24 ports. Other exchanges charge on
a per port basis and require firms to
connect to multiple matching engines,
thereby multiplying the cost to access
their full market.103
There is no requirement, regulatory or
otherwise, that any broker-dealer
connect to and access any (or all of) the
available options exchanges. Market
participants may choose to become a
member of one or more options
exchanges based on the market
participant’s assessment of the business
95 See
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103 See
Specialized Quote Interface Specification,
Nasdaq PHLX, Nasdaq Options Market, Nasdaq BX
Options, Version 6.5a, Section 2, Architecture
(revised August 16, 2019), available at https://
www.nasdaqtrader.com/content/technicalsupport/
specifications/TradingProducts/SQF6.5a-2019Aug.pdf. The Exchange notes that it is unclear
whether the NASDAQ exchanges include
connectivity to each matching engine for the single
fee or charge per connection, per matching engine.
See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines
are used by each exchange?) (September 2020). The
Exchange notes that NYSE provides a link to an
Excel file detailing the number of matching engines
per options exchange, with Arca and Amex having
19 and 17 matching engines, respectively.
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
opportunity relative to the costs of the
Exchange. With this, there is elasticity
of demand for exchange membership.
As an example, one Member will
terminate their membership effective
January 1, 2023 as a direct result of the
proposed fee changes.
It is not a requirement for market
participants to become members of all
options exchanges, in fact, certain
market participants conduct an options
business as a member of only one
options market.104 A very small number
104 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
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of market participants choose to become
a member of all sixteen options
exchanges. Most firms that actively
trade on options markets are not
currently Members of the Exchange and
do not purchase connectivity or port
services at the Exchange. Connectivity
and ports are only available to Members
or service bureaus, and only a Member
may utilize a port.105
One other exchange recently noted in
a proposal to amend their own trading
permit fees that of the 62 market making
firms that are registered as Market
Makers across Cboe, MIAX, and BOX,
42 firms access only one of the three
exchanges.106 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 are
members of only two (2) affiliated
exchanges, and eight (8) are members of
only one affiliated exchange. The
Exchange also notes that no firm is a
Member of the Exchange only. The
above data evidences that a brokerdealer need not have direct connectivity
to all options exchanges, let alone the
Exchange and its two affiliates, and
broker-dealers may elect to do so based
on their own business decisions and
need to directly access each exchange’s
liquidity pool.
Not only is there not an actual
regulatory requirement to connect to
every options exchange, the Exchange
believes there is also no ‘‘de facto’’ or
practical requirement as well, as further
evidenced by the broker-dealer
membership analysis of the options
exchanges discussed above. As noted
above, this is evidenced by the fact that
one Member will terminate their
membership effective January 1, 2023 as
a direct result of the proposed fee
changes. Indeed, broker-dealers choose
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.’’
105 Service Bureaus may obtain ports on behalf of
Members.
106 See Securities Exchange Act Release No.
94894 (May 11, 2022), 87 FR 29987 (May 17, 2022)
(SR–BOX–2022–17) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Amend the Fee Schedule on the BOX Options
Market LLC Facility To Adopt Electronic Market
Maker Trading Permit Fees). The Exchange believes
that BOX’s observation demonstrates that market
making firms can, and do, select which exchanges
they wish to access, and, accordingly, options
exchanges must take competitive considerations
into account when setting fees for such access.
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if and how to access a particular
exchange and because it is a choice, the
Exchange must set reasonable pricing,
otherwise prospective members would
not connect and existing members
would disconnect from the Exchange.
The decision to become a member of an
exchange, particularly for registered
market makers, is complex, and not
solely based on the non-transactional
costs assessed by an exchange. As noted
herein, specific factors include, but are
not limited to: (i) an exchange’s
available liquidity in options series; (ii)
trading functionality offered on a
particular market; (iii) product offerings;
(iv) customer service on an exchange;
and (v) transactional pricing. Becoming
a member of the exchange does not
‘‘lock’’ a potential member into a market
or diminish the overall competition for
exchange services.
In lieu of becoming a member at each
options exchange, a market participant
may join one exchange and elect to have
their orders routed in the event that a
better price is available on an away
market. Nothing in the Order Protection
Rule requires a firm to become a
Member at—or establish connectivity
to—the Exchange.107 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.108
With respect to the submission of
orders, Members may also choose not to
purchase any connection at all from the
Exchange, and instead rely on the port
of a third party to submit an order. For
example, a third-party broker-dealer
Member of the Exchange may be
utilized by a retail investor to submit
orders into an Exchange. An
institutional investor may utilize a
broker-dealer, a service bureau,109 or
request sponsored access 110 through a
member of an exchange in order to
submit a trade directly to an options
107 See Options Order Protection and Locked/
Crossed Market Plan (August 14, 2009), available at
https://www.theocc.com/getmedia/7fc629d9-4e544b99-9f11-c0e4db1a2266/options_order_protection_
plan.pdf.
108 Members may elect to not route their orders
by utilizing the Do Not Route order type. See
Exchange Rule 516(g).
109 Service Bureaus provide access to market
participants to submit and execute orders on an
exchange. On the Exchange, a Service Bureau may
be a Member. Some Members utilize a Service
Bureau for connectivity and that Service Bureau
may not be a Member. Some market participants
utilize a Service Bureau who is a Member to submit
orders.
110 Sponsored Access is an arrangement whereby
a Member permits its customers to enter orders into
an exchange’s system that bypass the Member’s
trading system and are routed directly to the
Exchange, including routing through a service
bureau or other third-party technology provider.
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
exchange.111 A market participant may
either pay the costs associated with
becoming a member of an exchange or,
in the alternative, a market participant
may elect to pay commissions to a
broker-dealer, pay fees to a service
bureau to submit trades, or pay a
member to sponsor the market
participant in order to submit trades
directly to an exchange.
Non-Member third-parties, such as
service bureaus and extranets, resell the
Exchange’s connectivity. This indirect
connectivity is another viable
alternative for market participants to
trade on the Exchange without
connecting directly to the Exchange
(and thus not pay the Exchange’s
connectivity fees), which alternative is
already being used by non-Members and
further constrains the price that the
Exchange is able to charge for
connectivity and other access fees to its
market. The Exchange notes that it
could, but chooses not to, preclude
market participants from reselling its
connectivity. Unlike other exchanges,
the Exchange also does not currently
assess fees on third-party resellers on a
per customer basis (i.e., fees based on
the number of firms that connect to the
Exchange indirectly via the thirdparty).112 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.113 Particularly,
in the event that a market participant
views the Exchange’s direct
connectivity and access fees as more or
less attractive than competing markets,
that market participant can choose to
connect to the Exchange indirectly or
may choose not to connect to the
Exchange and connect instead to one or
more of the other 16 options markets.
Accordingly, the Exchange believes that
the proposed fees are fair and
111 This may include utilizing a floor broker and
submitting the trade to one of the five options
trading floors.
112 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).
113 The Exchange notes that resellers, such as
SFTI, are not required to publicize, let alone justify
or file with the Commission their fees, and as such
could charge the market participant any fees it
deems appropriate (including connectivity fees
higher than the Exchange’s connectivity fees), even
if such fees would otherwise be considered
potentially unreasonable or uncompetitive fees.
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reasonable and constrained by
competitive forces.
The Exchange is obligated to regulate
its Members and secure access to its
environment. In order to properly
regulate its Members and secure the
trading environment, the Exchange
takes measures to ensure access is
monitored and maintained with various
controls. Connectivity and ports are
methods utilized by the Exchange to
grant Members secure access to
communicate with the Exchange and
exercise trading rights. When a market
participant elects to be a Member, and
is approved for membership by the
Exchange, the Member is granted
trading rights to enter orders and/or
quotes into Exchange through secure
connections.
Again, there is no legal or regulatory
requirement that a market participant
become a Member of the Exchange, or,
if it is a Member, to purchase
connectivity beyond the one connection
that is necessary to quote or submit
orders on the Exchange. Members may
freely choose to rely on one or many
connections, depending on their
business model.
Bifurcation of 10Gb ULL Connectivity
and Related Fees
The Exchange stresses that bifurcating
the 10Gb ULL connectivity between the
Exchange and MIAX was not designed
with the objective to generate an overall
increase in access fee revenue. Rather,
the proposed change is necessitated by
10Gb ULL connectivity experiencing a
significant decrease in port availability
mostly driven by connectivity demands
of latency sensitive Members that seek
to maintain multiple 10Gb ULL
connections on every switch in the
network. Due to the ever-increasing
connectivity demands, the Exchange
found it necessary to bifurcate 10Gb
ULL connectivity to the Exchange’s and
MIAX Pearl’s Systems and networks to
continue to meet ongoing and future
10Gb ULL connectivity and access
demands. Such changes accordingly
necessitated a review of the Exchange’s
previous 10Gb ULL connectivity fees
and related costs. The proposed fees are
reasonable as they are intended to allow
the Exchange to cover ongoing costs
related to providing and maintaining
such connectivity, described more fully
below. The ever increasing connectivity
demands that necessitated this change
also proves that the proposed fees are
reasonable because this demand reflects
that Members and non-Members believe
they are getting value from the 10Gb
ULL connections they purchase.
The Exchange announced on August
12, 2022 the planned network change
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and January 23, 2023 implementation
date to provide market participants
adequate time to prepare.114 Since
August 12, 2022, the Exchange has
worked with current 10Gb ULL
subscribers to address their connectivity
needs ahead of the January 23, 2023
date. Based on those interactions and
subscriber feedback, the Exchange
expects a minimal net increase of
approximately six (6) overall 10Gb ULL
connectivity subscriptions across the
Exchange and MIAX. This anticipated
immaterial increase in overall
connections reflect a minimal fee
impact for all types of subscribers and
reflects that subscribers elected to
reallocate existing 10Gb ULL
connectivity directly to the Exchange or
MIAX, or chose to decrease or cease
connectivity as a result of the change.
Should the Commission Staff
disapprove such fees, it would
effectively dictate how an exchange
manages its technology and would
hamper the Exchange’s ability to
continue to invest in and fund access
services in a manner that allows it to
meet existing and anticipated access
demands of market participants.
Disapproval could also have the adverse
effect of discouraging exchanges from
innovating technology to the benefit of
market participants if it believes the
Commission would later prevent that
exchange from monetizing its
innovation, thus adversely impacting
competition. Also, as noted above, the
economic consequences of not being
able to better establish fee parity with
other exchanges for non-transaction fees
hampers the Exchange’s ability to
compete as aggressively on transaction
fees.
Cost Analysis
In general, the Exchange believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
Exchange Act requirements that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
members and markets. In particular, the
Exchange believes that each exchange
should take extra care to be able to
demonstrate that these fees are based on
its costs and reasonable business needs.
In proposing to charge fees for
connectivity services, the Exchange
seeks to be especially diligent in
assessing those fees in a transparent way
against its own aggregate costs of
providing the related service, and also
carefully and transparently assessing the
114 See
PO 00000
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Frm 00121
Fmt 4703
Sfmt 4703
2719
impact on Members—both generally and
in relation to other Members, i.e., to
assure the fee will not create a financial
burden on any participant and will not
have an undue impact in particular on
smaller Members and competition
among Members in general. The
Exchange believes that this level of
diligence and transparency is called for
by the requirements of Section 19(b)(1)
under the Act,115 and Rule 19b–4
thereunder,116 with respect to the types
of information SROs should provide
when filing fee changes, and Section
6(b) of the Act,117 which requires,
among other things, that exchange fees
be reasonable and equitably
allocated,118 not designed to permit
unfair discrimination,119 and that they
not impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.120 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.121 The Exchange notes that the
legacy exchanges with whom the
Exchange vigorously competes for order
flow and market share, were not subject
to any such diligence or transparency in
setting their baseline non-transaction
fees, most of which were put in place
before the Revised Review Process and
Staff Guidance.
As detailed below, the Exchange
recently calculated its aggregate annual
costs for providing physical 10Gb ULL
connectivity to the Exchange at
$11,567,509 (or approximately $963,959
per month, rounded to the nearest dollar
when dividing the annual cost by 12
months) and its aggregate annual costs
for providing Full Service MEO Ports at
$1,644,132 (or approximately $137,012
per month, rounded to the nearest dollar
when dividing the annual cost by 12
months). In order to cover the aggregate
costs of providing connectivity to its
Users (both Members and nonMembers 122) going forward and to make
a modest profit, as described below, the
Exchange proposes to modify its Fee
115 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
117 15 U.S.C. 78f(b).
118 15 U.S.C. 78f(b)(4).
119 15 U.S.C. 78f(b)(5).
120 15 U.S.C. 78f(b)(8).
121 See Staff Guidance, supra note 19.
122 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.
116 17
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Schedule to charge a fee of $13,500 per
month for each physical 10Gb ULL
connection and to remove language
providing for a shared 10Gb ULL
network between the Exchange and
MIAX. The Exchange also proposes to
modify its Fee Schedule to charge tiered
rates for Full Service MEO Ports (Bulk)
depending on the number of classes
assigned or the percentage of national
ADV, which is in line with how the
Exchange’s affiliates, MIAX and MIAX
Emerald, assess fees for their
comparable MEI Ports.
In 2019, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).123 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 1Gb and
10Gb ULL physical connectivity (62%),
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123 The Exchange frequently updates it Cost
Analysis as strategic initiatives change, costs
increase or decrease, and market participant needs
and trading activity changes. The Exchange’s most
recent Cost Analysis was conducted ahead of this
filing.
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with smaller allocations to all ports
(5%), 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 Members and parties that they
sponsor to participate directly on the
Exchange may submit orders to the
Exchange, many Members (but not all)
consume market data from the Exchange
in order to trade on the Exchange, and
the Exchange consumes market data
from external sources in order to
comply with regulatory obligations.
Accordingly, given this
interdependence, the allocation of costs
to each service or revenue source
required judgment of the Exchange and
was weighted based on estimates of the
Exchange that the Exchange believes are
reasonable, as set forth below. While
there is no standardized and generally
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
accepted methodology the allocation of
an exchange’s costs, the Exchange’s
methodology is the result of an
extensive review and analysis and will
be consistently applied going forward
for any other potential fee proposals.
Through the Exchange’s extensive
updated Cost Analysis, the Exchange
analyzed every expense item in the
Exchange’s general expense ledger to
determine whether each such expense
relates to the provision of connectivity
services, and, if such expense did so
relate, what portion (or percentage) of
such expense actually supports the
provision of connectivity services, and
thus bears a relationship that is, ‘‘in
nature and closeness,’’ directly related
to network connectivity services. In
turn, the Exchange allocated certain
costs more to physical connectivity and
others to ports, while certain costs were
only allocated to such services at a very
low percentage or not at all, using
consistent allocation methodologies as
described above. Based on this analysis,
the Exchange estimates that the cost
drivers to provide 10Gb ULL
connectivity and Full Service MEO Port
services, results in an aggregate monthly
cost of approximately $1,106,971
(utilizing the rounded numbers when
dividing the annual cost for 10Gb ULL
connectivity and annual cost for Full
Service MEO Ports by 12 months, then
adding both numbers together), as
further detailed below.
Costs Related To Offering Physical 10Gb
ULL Connectivity
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
physical dedicated 10Gb ULL
connectivity via an unshared network as
well as the percentage of the Exchange’s
overall costs that such costs represent
for such area (e.g., as set forth below, the
Exchange allocated approximately
26.9% of its overall Human Resources
cost to offering physical connectivity).
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Annual cost 124
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 ....................................................................................................
$3,675,098
70,163
322,388
739,983
959,157
1,885,969
3,914,751
$306,258
5,847
26,866
61,665
79,930
157,164
326,229
26.3
60.6
73.3
60.6
58.6
58.2
49.2
Total ..................................................................................................................................
11,567,509
963,959
40.5
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
physical 10Gb ULL connectivity.
khammond on DSKJM1Z7X2PROD with NOTICES
Monthly cost 125
Human Resources
For personnel costs (Human
Resources), the Exchange calculated an
allocation of employee time for
employees whose functions include
providing and maintaining physical
connectivity and performance thereof
(primarily the Exchange’s network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity) and for which the
Exchange allocated a percentage of
42.9% 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 17%). 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
124 The Annual Cost includes figures rounded to
the nearest dollar.
125 The Monthly Cost was determined by dividing
the Annual Cost for each line item by twelve (12)
months and rounding up or down to the nearest
dollar.
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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.
able to connect to other national
securities exchanges, market data
providers, or OPRA and, therefore,
would not be able to operate and
support its System Networks. The
Exchange does not employ a separate
fee to cover its connectivity and content
service provider expense and recoups
that expense, in part, by charging for
10Gb ULL connectivity.
Connectivity and Internet Services
Data Center
The Connectivity cost includes
external fees paid to connect to other
exchanges and third parties, cabling and
switches required to operate the
Exchange. The Connectivity line-item is
more narrowly focused on technology
used to complete connections to the
Exchange and to connect to external
markets. The Exchange notes that its
connectivity to external markets is
required in order to receive market data
to run the Exchange’s matching engine
and basic operations compliant with
existing regulations, primarily
Regulation NMS.
The Exchange relies on various
connectivity and content service
providers for connectivity and data
feeds for the entire U.S. options
industry, as well as content,
connectivity, and infrastructure services
for critical components of the network
that are necessary to provide and
maintain its System Networks and
access to its System Networks via 10Gb
ULL connectivity. Specifically, the
Exchange utilizes connectivity and
content service providers to connect to
other national securities exchanges, the
Options Price Reporting Authority
(‘‘OPRA’’), and to receive market data
from other exchanges and market data
providers. The Exchange understands
that these service providers provide
services to most, if not all, of the other
U.S. exchanges and other market
participants. Connectivity and market
data provided these service providers is
critical to the Exchanges daily
operations and performance of its
System Networks to which market
participants connect to via 10Gb ULL
connectivity. Without these services
providers, the Exchange would not be
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment (such as
dedicated space, security services,
cooling and power). The Exchange notes
that it does not own the Primary Data
Center or the Secondary Data Center,
but instead, leases space in data centers
operated by third parties. The Exchange
has allocated a high percentage of the
Data Center cost (60.6%) to physical
10Gb ULL connectivity because the
third-party data centers and the
Exchange’s physical equipment
contained therein is the most direct cost
in providing physical access to the
Exchange. In other words, for the
Exchange to operate in a dedicated
space with connectivity of participants
to a physical trading platform, the data
centers are a very tangible cost, and in
turn, if the Exchange did not maintain
such a presence then physical
connectivity would be of no value to
market participants.
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External Market Data
External Market Data includes fees
paid to third parties, including other
exchanges, to receive and consume
market data from other markets. The
Exchange included External Market
Data fees to the provision of 10Gb ULL
connectivity as such market data is
necessary here to offer certain services
related to such connectivity, such as
certain risk checks that are performed
prior to execution, and checking for
other conditions (e.g., re-pricing of
orders to avoid lock or crossed markets,
trading collars). This allocation was
included as part of the Internet Services
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cost described above. Thus, as market
data from other Exchanges is consumed
at the matching engine level, (to which
10Gb ULL connectivity provides access
to) in order to validate orders before
additional entering the matching engine
or being executed, the Exchange
believes it is reasonable to allocate a
small amount of such costs to 10Gb ULL
connectivity.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to operate and monitor physical
assets necessary to offer physical
connectivity to the Exchange.
Monthly Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of Exchange
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which are owned by
the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
As noted above, the Exchange allocated
58.2% of all depreciation costs to
providing physical 10Gb ULL
connectivity. The Exchange notes,
however, that it did not allocate
depreciation costs for any depreciated
software necessary to operate the
Exchange to physical connectivity, as
such software does not impact the
provision of physical connectivity.
Allocated Shared Expenses
Finally, a limited portion of general
shared expenses was allocated to overall
physical connectivity costs as without
these general shared costs the Exchange
would not be able to operate in the
manner that it does and provide
physical connectivity. The costs
included in general shared expenses
include general expenses of the
Exchange, including office space and
office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting
and training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange notes that the cost of paying
directors to serve on its Board of
Directors is also included in the
Exchange’s general shared expenses.126
The Exchange notes that the 49.2%
allocation of general shared expenses for
physical 10Gb ULL connectivity is
Costs Related To Offering Full Service
MEO Ports
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
Full Service MEO Ports as well as the
percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 8.3% of its
overall Human Resources cost to
offering Full Service MEO Ports).
Annual cost 127
Cost drivers
Monthly cost 128
% 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 ....................................................................................................
$1,159,831
1,589
6,033
41,881
22,438
127,986
284,374
$96,653
132
503
3,490
1,870
10,666
23,698
8.3
1.4
1.4
3.4
1.4
3.9
3.6
Total ..................................................................................................................................
1,644,132
137,012
5.8
With respect to Full Service MEO
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing Full
Service 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.
126 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.
127 See supra note 124 (describing rounding of
Annual Costs).
128 See supra note 125 (describing rounding of
Monthly Costs based on Annual Costs).
Human Resources
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higher than that allocated to general
shared expenses for Full Service 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), Full Service MEO Ports do not
require as many broad or indirect
resources as other Core Services. The
total monthly cost for 10Gb ULL
connectivity of $963,959 was divided by
the number of physical 10Gb ULL
connections the Exchange maintained at
the time that proposed pricing was
determined (108), to arrive at a cost of
approximately $8,925 per month, per
physical 10Gb ULL connection.
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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 Full
Service MEO Ports, the Exchange also
includes a portion of its costs related to
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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). This
allocation was included as part of the
internet Services cost described
above.129 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.
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Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
Monthly Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of order entry
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which is owned by
the Exchange and some of which is
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange allocated 3.9% of all
depreciation costs to providing Full
Service MEO Ports. In contrast to
physical connectivity, described above,
129 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
providing physical connectivity.
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the Exchange did allocate depreciation
costs for depreciated software necessary
to operate the Exchange to Full Service
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
Full Service 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 4.0% of the overall cost for
directors was allocated to providing Full
Service MEO Ports. The Exchange notes
that the 3.6% allocation of general
shared expenses for Full Service 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
Full Service MEO Ports have several
areas where certain tangible costs are
heavily weighted towards providing
such service (e.g., Data Centers, as
described above), 10Gb ULL
connectivity requires a broader level of
support from Exchange personnel in
different areas, which in turn leads to a
broader general level of cost to the
Exchange. The total monthly cost of
$137,012 was divided by the number of
Full Service MEO Ports the Exchange
maintained at the time that proposed
pricing was determined (20 total; 16
Full Service MEO Port, Bulk, and 4 Full
Service MEO Port, Single), to arrive at
a cost of approximately $6,851 per
month, per Full Service MEO Port.
Cost Analysis—Additional Discussion
In conducting its Cost Analysis, the
Exchange did not allocate any of its
expenses in full to any core services
(including physical connectivity or Full
Service MEO Ports) and did not doublecount any expenses. Instead, as
described above, the Exchange allocated
applicable cost drivers across its core
PO 00000
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2723
services and used the same Cost
Analysis to form the basis of this
proposal and the filings the Exchange
submitted proposing fees for proprietary
data feeds offered by the Exchange. For
instance, in calculating the Human
Resources expenses to be allocated to
physical connections, the Exchange has
a team of employees dedicated to
network infrastructure and with respect
to such employees the Exchange
allocated network infrastructure
personnel with a high percentage of the
cost of such personnel (42.9%) given
their focus on functions necessary to
provide physical connections. The
salaries of those same personnel were
allocated only 12.3% to Full Service
MEO Ports and the remaining 44.8%
was allocated to 1Gb connectivity, other
port services, transaction services,
membership services and market data.
The Exchange did not allocate any other
Human Resources expense for providing
physical connections to any other
employee group, outside of a smaller
allocation of 16.9% for 10Gb ULL
connectivity or 17.3% for the entire
network, of the cost associated with
certain specified personnel who work
closely with and support network
infrastructure personnel. In contrast, the
Exchange allocated much smaller
percentages of costs (6.0% or less)
across a wider range of personnel
groups in order to allocate Human
Resources costs to providing Full
Service MEO Ports. This is because a
much wider range of personnel are
involved in functions necessary to offer,
monitor and maintain Full Service MEO
Ports but the tasks necessary to do so are
not a primary or full-time function.
In total, the Exchange allocated 26.9%
of its personnel costs to providing
physical connections and 8.3% of its
personnel costs to providing Full
Service MEO Ports, for a total allocation
of 35.2% Human Resources expense to
provide these specific connectivity
services. In turn, the Exchange allocated
the remaining 64.8% of its Human
Resources expense to membership
services, transaction services, other port
services and market data. Thus, again,
the Exchange’s allocations of cost across
core services were based on real costs of
operating the Exchange and were not
double-counted across the core services
or their associated revenue streams.
As another example, the Exchange
allocated depreciation expense to all
core services, including physical
connections and Full Service 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
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equipment, such as dedicated servers,
computers, laptops, monitors,
information security appliances and
storage, and network switching
infrastructure equipment, including
switches and taps that were purchased
to operate and support the network.
Without this equipment, the Exchange
would not be able to operate the
network and provide connectivity
services to its Members and nonMembers and their customers. However,
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing
connectivity services, but instead
allocated approximately 62.1% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (58.2% attributed to 10Gb ULL
physical connections and 3.9% to Full
Service MEO Ports). The Exchange
allocated the remaining depreciation
and amortization expense
(approximately 37.9%) toward the cost
of providing transaction services,
membership services, other port
services and market data.
The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated. The Exchange does
not yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
connectivity, the Exchange will have to
be successful in retaining existing
clients that wish to maintain physical
connectivity and/or Full Service 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
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,
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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 130
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
130 For
purposes of calculating revenue for 10Gb
ULL connectivity, the Exchange used projected
revenues for February 2023, the first full month for
which it will provide dedicated 10Gb ULL
connectivity to the Exchange and cease operating a
shared 10Gb ULL network with MIAX.
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network is a significant expense for the
Exchange, and thus the Exchange
believes that it is reasonable and
appropriate to help offset those costs by
amending fees for connectivity services.
Subscribers, particularly those of 10Gb
ULL connectivity, expect the Exchange
to provide this level of support to
connectivity so they continue to receive
the performance they expect. This
differentiates the Exchange from its
competitors. As detailed above, the
Exchange has five primary sources of
revenue that it can potentially use to
fund its operations: transaction fees,
fees for connectivity services,
membership and regulatory fees, and
market data fees. Accordingly, the
Exchange must cover its expenses from
these five primary sources of revenue.
The Exchange’s Cost Analysis
estimates the annual cost to provide
10Gb ULL connectivity services at
$11,567,509. Based on current 10Gb
ULL connectivity services usage, the
Exchange would generate annual
revenue of approximately $17,496,000.
This represents a modest profit of 34%
when compared to the cost of providing
10Gb ULL connectivity services. The
Exchange’s Cost Analysis estimates the
annual cost to provide Full Service
MEO Port services at $1,644,132. Based
on current Full Service MEO Port
services usage, the Exchange would
generate annual revenue of
approximately $1,644,000. This
represents a small negative margin
when compared to the cost of providing
Full Service 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 10Gb ULL connectivity
and Full Service MEO Port services
versus the total projected revenue of the
Exchange associated with network 10Gb
ULL connectivity and Full Service MEO
Port services.
*
*
*
*
*
The Exchange has operated at a
cumulative net annual loss since it
launched operations in 2017.131 The
Exchange has operated at a net loss due
to a number of factors, one of which is
choosing to forgo revenue by offering
certain products, such as connectivity,
at lower rates than other options
131 The Exchange has incurred a cumulative loss
of $79 million since its inception in 2017 to 2021.
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.
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exchanges to attract order flow and
encourage market participants to
experience the high determinism, low
latency, and resiliency of the Exchange’s
trading systems. The Exchange should
not now be penalized for seeking to
raise its fees in light of necessary
technology changes and its increased
costs after offering such products as
discounted prices. Therefore, the
Exchange believes the proposed fees are
reasonable because they are based on
both relative costs to the Exchange to
provide dedicated 10Gb ULL
connectivity and Full Service 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
10Gb ULL connectivity and Full Service
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
environment, and an exchange focused
on driving competition, the Exchange
does not yet know whether such
projections will be realized. For
instance, in order to generate the
revenue expected from 10Gb ULL
connectivity and Full Service MEO
Ports, the Exchange will have to be
successful in retaining existing clients
that wish to utilize 10Gb ULL
connectivity and Full Service MEO
Ports and/or obtaining new clients that
will purchase such access. To the extent
the Exchange is successful in
encouraging new clients to utilize 10Gb
ULL connectivity and Full Service MEO
Ports, the Exchange does not believe it
should be penalized for such success.
The Exchange, like other exchanges, is,
after all, a for-profit business, which
provides economic value to its
Members. To the extent the Exchange
has mispriced and experiences a net
loss in clients, the Exchange could
experience a net reduction in revenue.
While the Exchange believes in
transparency around costs and potential
revenue, the Exchange does not believe
that these estimates should form the
sole basis of whether or not a proposed
fee is reasonable or can be adopted.
Further, the proposal reflects the
Exchange’s efforts to control its costs,
which the Exchange does on an ongoing
basis as a matter of good business
practice. A potential profit margin
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should not be judged alone based on its
size, but is also indicative of costs
management and whether the ultimate
fee reflects the value of the services
provided. For example, a profit margin
on one exchange should not be deemed
excessive where that exchange has been
successful in controlling its costs, but
not excessive where on another
exchange where that exchange is
charging comparable fees but has a
lower profit margin due to higher costs.
Doing so could have the perverse effect
of not incentivizing cost control where
higher costs alone could be used to
justify fees increases.
The Proposed Pricing Is Not Unfairly
Discriminatory and Provides for the
Equitable Allocation of Fees, Dues, and
Other Charges
The Exchange believes that the
proposed fees are reasonable, fair,
equitable, and not unfairly
discriminatory because they are
designed to align fees with services
provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the
proposed fees are equitably allocated
among users of the network connectivity
and port alternatives, as the users of
10Gb ULL connections consume
substantially more bandwidth and
network resources than users of 1Gb
ULL connection. Specifically, the
Exchange notes that 10Gb ULL
connection users account for more than
99% of message traffic over the network,
driving other costs that are linked to
capacity utilization, as described above,
while the users of the 1Gb ULL
connections account for less than 1% of
message traffic over the network. In the
Exchange’s experience, users of the 1Gb
connections do not have the same
business needs for the high-performance
network as 10Gb ULL users.
The Exchange’s high-performance
network and supporting infrastructure
(including employee support), provides
unparalleled system throughput with
the network ability to support access to
several distinct options markets. To
achieve a consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall network connectivity
expense for storage and network
transport capabilities. The Exchange
must also purchase additional storage
capacity on an ongoing basis to ensure
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2725
it has sufficient capacity to store these
messages to satisfy its record keeping
requirements under the Exchange
Act.132 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.
Full Service MEO Ports
The tiered pricing structure for Full
Service MEO Ports has been in effect
since 2018.133 The Exchange now
proposes a pricing structure that is used
by the Exchange’s affiliates, MIAX and
MIAX Emerald, except with lower
pricing for each tier for Full Service
MEO Ports (Bulk) and a flat fee for Full
Service MEO Ports (Single). Members
that are frequently in the highest tier for
Full Service MEO Ports consume the
most bandwidth and resources of the
network. Specifically, like above for the
10Gb ULL connectivity, the Exchange
notes that the Market Makers who reach
the highest tier for Full Service MEO
Ports (Bulk) account for approximately
greater than 84% of ADV on the
Exchange, while Market Makers that are
typically in the lowest Tier for Full
Service MEO Ports, account for
approximately less than 14% of ADV on
the Exchange. The remaining 1% is
accounted for by Market Makers who
are frequently in the middle Tier for
Full Service MEO Ports (Bulk).
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
132 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
133 See Securities Exchange Act Release No.
82867 (March 13, 2018), 83 FR 12044 (March 19,
2018) (SR–PEARL–2018–07).
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Exchange Act.134 Thus, as the number of
connections a Market Maker has
increases, the related pull on Exchange
resources also increases. The Exchange
sought to design the proposed tieredpricing structure to set the amount of
the fees to relate to the number of
connections a firm purchases. The more
connections purchased by a Market
Maker likely results in greater
expenditure of Exchange resources and
increased cost to the Exchange.
The Exchange further believes that the
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because, for the flat fee,
the Exchange provides each Member
two (2) Full Service MEO Ports for each
matching engine to which that Member
is connected. Unlike other options
exchanges that provide similar port
functionality and charge fees on a per
port basis,135 the Exchange offers Full
Service MEO Ports as a package and
provides Members with the option to
receive up to two Full Service MEO
Ports per matching engine to which it
connects. The Exchange currently has
twelve (12) matching engines, which
means Members may receive up to
twenty-four (24) Full Service MEO Ports
for a single monthly fee, that can vary
based on certain volume percentages.
The Exchange currently assesses
Members a fee of $5,000 per month in
the highest Full Service MEO Port—
Bulk Tier, regardless of the number of
Full Service MEO Ports allocated to the
Member. Assuming a Member connects
to all twelve (12) matching engines
during a month, with two Full Service
MEO Ports per matching engine, this
results in a cost of $208.33 per Full
Service MEO Port—Bulk ($5,000
divided by 24) for the month. This fee
has been unchanged since the Exchange
adopted Full Service MEO Port fees in
2018.136 Members will continue to
receive two (2) Full Service MEO Ports
to each matching engine to which they
are connected for the single flat monthly
fee. Assuming a Member connects to all
twelve (12) matching engines during the
month, and achieves the highest Tier for
that month, with two Full Service MEO
Ports (Bulk) per matching engine, this
would result in a cost of $500 per Full
Service MEO Port ($12,000 divided by
24).
134 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
135 See supra notes 95 to 102 and accompanying
text.
136 See Securities Exchange Act Release No.
82867 (March 13, 2018), 83 FR 12044 (March 19,
2018) (SR–PEARL–2018–07).
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed
fees will not result in any burden on
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
proposed fees will allow the Exchange
to recoup some of its costs in providing
10Gb ULL connectivity and Full Service
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 2017 137 due to
providing a low-cost alternative to
attract order flow and encourage market
participants to experience the high
determinism and resiliency of the
Exchange’s trading Systems. To do so,
the Exchange chose to waive the fees for
some non-transaction related services
and Exchange products or provide them
at a very lower fee, which was not
profitable to the Exchange. This resulted
in the Exchange forgoing revenue it
could have generated from assessing any
fees or higher fees. The Exchange could
have sought to charge higher fees at the
outset, but that could have served to
discourage participation on the
Exchange. Instead, the Exchange chose
to provide a low-cost exchange
alternative to the options industry,
which resulted in lower initial
revenues. Examples of this are 10Gb
ULL connectivity and Full Service MEO
Ports, for which the Exchange only now
seeks to adopt fees at a level similar to
or lower than those of other options
exchanges.
Further, the Exchange does not
believe that the proposed fee increase
for the 10Gb ULL connection change
would place certain market participants
at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. As is
the case with the current proposed flat
fee, the proposed fee would apply
uniformly to all market participants
regardless of the number of connections
they choose to purchase. The proposed
fee does not favor certain categories of
market participants in a manner that
would impose an undue burden on
competition.
137 See
PO 00000
supra note 131.
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The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. In particular,
Exchange personnel has been informally
discussing potential fees for
connectivity services with a diverse
group of market participants that are
connected to the Exchange (including
large and small firms, firms with large
connectivity service footprints and
small connectivity service footprints, as
well as extranets and service bureaus)
for several months leading up to that
time. The Exchange does not believe the
proposed fees for connectivity services
would negatively impact the ability of
Members, non-Members (extranets or
service bureaus), third-parties that
purchase the Exchange’s connectivity
and resell it, and customers of those
resellers to compete with other market
participants or that they are placed at a
disadvantage.
The Exchange does anticipate,
however, that some market participants
may reduce or discontinue use of
connectivity services provided directly
by the Exchange in response to the
proposed fees. In fact, as mentioned
above, one Member will terminate their
membership on January 1, 2023 as a
direct result of the proposed fee
changes. 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
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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.
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Inter-Market Competition
The Exchange also does not believe
that the proposed rule change will result
in any burden on inter-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. As discussed
above, options market participants are
not forced to connect to all options
exchanges. There is no reason to believe
that our proposed price increase will
harm another exchange’s ability to
compete. There are other options
markets of which market participants
may connect to trade options at higher
rates than the Exchange’s. There is also
a range of alternative strategies,
including routing to the exchange
through another participant or market
center or accessing the Exchange
indirectly. Market participants are free
to choose which exchange or reseller to
use to satisfy their business needs.
Accordingly, the Exchange does not
believe its proposed fee changes impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
The Exchange also believes that the
proposed fees for 10Gb connectivity are
appropriate and warranted in light of it
bifurcating 10Gb connectivity between
the Exchange and MIAX and would not
impose any burden on competition
because this is a technology driven
change that would assist the Exchange
in recovering costs related to providing
dedicating 10Gb connectivity to the
Exchange while enabling it to continue
to meet current and anticipated
demands for connectivity by its
Members and other market participants.
Separating its 10Gb network from MIAX
would enable the Exchange to better
compete with other exchanges by
ensuring it can continue to provide
adequate connectivity to existing and
new Members, which may increase in
ability to compete for order flow and
deepen its liquidity pool, improving the
overall quality of its market.
The proposed rates for 10Gb ULL
connectivity are also driven by the
Exchange’s need to bifurcate its 10Gb
ULL network shared with MIAX so that
it can continue to meet current and
anticipated connectivity demands of all
market participants. Similarly, and also
in connection with a technology change,
Cboe Exchange, Inc. (‘‘Cboe’’) amended
access and connectivity fees, including
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port fees.138 Specifically, Cboe adopted
certain logical ports to allow for the
delivery and/or receipt of trading
messages—i.e., orders, accepts, cancels,
transactions, etc. Cboe established tiered
pricing for BOE and FIX logical ports,
tiered pricing for BOE Bulk ports, and
flat prices for DROP, Purge Ports, GRP
Ports and Multicast PITCH/Top Spin
Server Ports. Cboe argued in its fee
proposal that the proposed pricing more
closely aligned its access fees to those
of its affiliated exchanges, and
reasonably so, as the affiliated
exchanges offer substantially similar
connectivity and functionality and are
on the same platform that Cboe migrated
to.139 Cboe also justified its proposal by
stating that, ‘‘. . . the Exchange believes
substitutable products and services are
in fact available to market participants,
including, among other things, other
options exchanges a market participant
may connect to in lieu of the Exchange,
indirect connectivity to the Exchange
via a third-party reseller of connectivity
and/or trading of any options product,
including proprietary products, in the
Over-the-Counter (OTC) markets.’’ 140
Cboe stated in its proposal that,
The rule structure for options
exchanges are also fundamentally
different from those of equities
exchanges. In particular, options market
participants are not forced to connect to
(and purchase market data from) all
options exchanges. For example, there
are many order types that are available
in the equities markets that are not
utilized in the options markets, which
relate to mid-point pricing and pegged
pricing which require connection to the
SIPs and each of the equities exchanges
in order to properly execute those
orders in compliance with best
execution obligations. Additionally, in
the options markets, the linkage routing
and trade through protection are
handled by the exchanges, not by the
individual members. Thus not
connecting to an options exchange or
disconnecting from an options exchange
does not potentially subject a brokerdealer to violate order protection
requirements. Gone are the days when
the retail brokerage firms (such as
Fidelity, Schwab, and eTrade) were
members of the options exchanges—
they are not members of the Exchange
or its affiliates, they do not purchase
connectivity to the Exchange, and they
do not purchase market data from the
138 See Securities Exchange Act Release No.
90333 (November 4, 2020), 85 FR 71666 (November
10, 2020) (SR–CBOE–2020–105). The Exchange
notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
139 Id. at 71676.
140 Id.
PO 00000
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2727
Exchange. Accordingly, not only is there
not an actual regulatory requirement to
connect to every options exchange, the
Exchange believes there is also no ‘‘de
facto’’ or practical requirement as well,
as further evidenced by the recent
significant reduction in the number of
broker-dealers that are members of all
options exchanges.141
The proposal also referenced the
National Market System Plan Governing
the Consolidated Audit Trail (‘‘CAT
NMS Plan’’),142 wherein the
Commission discussed the existence of
competition in the marketplace
generally, and particularly for
exchanges with unique business
models. The Commission acknowledged
that, even if an exchange were to exit
the marketplace due to its proposed feerelated change, it would not
significantly impact competition in the
market for exchange trading services
because these markets are served by
multiple competitors.143 Further, the
Commission explicitly stated that
‘‘[c]onsequently, demand for these
services in the event of the exit of a
competitor is likely to be swiftly met by
existing competitors.’’ 144 Finally, the
Commission recognized that while some
exchanges may have a unique business
model that is not currently offered by
competitors, a competitor could create
similar business models if demand were
adequate, and if a competitor did not do
so, the Commission believes it would be
likely that new entrants would do so if
the exchange with that unique business
model was otherwise profitable.145
Cboe also filed to establish a monthly
fee for Certification Logical Ports of
$250 per Certification Logical Port.146
Cboe reasoned that purchasing
additional Certification Logical Ports,
beyond the one Certification Logical
Port per logical port type offered in the
production environment free of charge,
is voluntary and not required in order
to participate in the production
141 Id.
at 71676.
Securities Exchange Act Release No.
86901 (September 9, 2019), 84 FR 48458 (September
13, 2019) (File No. S7–13–19).
143 Id.
144 Id.
145 Id.
146 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
2022) (SR–Cboe–2022–011). Cboe offers BOE and
FIX Logical Ports, BOE Bulk Logical Ports, DROP
Logical Ports, Purge Ports, GRP Ports and Multicast
PITCH/Top Spin Server Ports. For each type of the
aforementioned logical ports that are used in the
production environment, the Exchange also offers
corresponding ports which provide Trading Permit
Holders and non-TPHs access to the Exchange’s
certification environment to test proprietary
systems and applications (i.e., ‘‘Certification Logical
Ports’’).
142 See
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environment, including live production
trading on the Exchange.147
In its statutory basis, Cboe justified
the new port fee by stating that it
believed the Certification Logical Port
fee were reasonable because while such
ports were no longer completely free,
TPHs and non-TPHs would continue to
be entitled to receive free of charge one
Certification Logical Port for each type
of logical port that is currently offered
in the production environment.148 Cboe
noted that other exchanges assess
similar fees and cited to NASDAQ LLC
and MIAX.149 Cboe also noted that the
decision to purchase additional ports is
optional and no market participant is
required or under any regulatory
obligation to purchase excess
Certification Logical Ports in order to
access the Exchange’s certification
environment.150 Finally, similar
proposals to adopt a Certification
Logical Port monthly fee were filed by
Cboe BYX Exchange, Inc.,151 BZX,152
and Cboe EDGA Exchange, Inc.153
The Cboe fee proposals described
herein were filed subsequent to the D.C.
Circuit decision in Susquehanna Int’l
Grp., LLC v. SEC, 866 F.3d 442 (D.C. Cir.
2017), meaning that such fee filings
were subject to the same (and current)
standard for SEC review and approval as
this proposal. In summary, the
Exchange requests the Commission
apply the same standard of review to
this proposal which was applied to the
various Cboe and Cboe affiliated
markets’ filings with respect to nontransaction fees. If the Commission were
to apply a different standard of review
to this proposal than it applied to other
exchange fee filings it would create a
burden on competition such that it
would impair the Exchange’s ability to
make necessary technology driven
changes, such as bifurcating its 10Gb
ULL network, because it would be
unable to monetize or recoup costs
related to that change and compete with
larger, non-legacy exchanges.
*
*
*
*
*
In conclusion, as discussed
thoroughly above, the Exchange
regrettably believes that the application
147 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
2022) (SR–Cboe–2022–011).
148 Id. at 18426.
149 Id.
150 Id.
151 See Securities Exchange Act Release No.
94507 (March 24, 2002), 87 FR 18439 (March 30,
2022) (SR–CboeBYX–2022–004).
152 See Securities Exchange Act Release No.
94511 (March 24, 2002), 87 FR 18411 (March 30,
2022) (SR–CboeBZX–2022–021).
153 See Securities Exchange Act Release No.
94517 (March 25, 2002), 87 FR 18848 (March 31,
2022) (SR–CboeBZX–2022–021).
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of the Revised Review Process and Staff
Guidance has adversely affected intermarket competition among legacy and
non-legacy exchanges by impeding the
ability of non-legacy exchanges to adopt
or increase fees for their market data
and access services (including
connectivity and port products and
services) that are on parity or
commensurate with fee levels
previously established by legacy
exchanges. Since the adoption of the
Revised Review Process and Staff
Guidance, and even more so recently, it
has become extraordinarily difficult to
adopt or increase fees to generate
revenue necessary to invest in systems,
provide innovative trading products and
solutions, and improve competitive
standing to the benefit of non-legacy
exchanges’ market participants.
Although the Staff Guidance served an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable, it
has also negatively impacted non-legacy
exchanges in particular in their efforts
to adopt or increase fees that would
enable them to more fairly compete with
legacy exchanges, despite providing
enhanced disclosures and rationale
under both competitive and cost basis
approaches provided for by the Revised
Review Process and Staff Guidance to
support their proposed fee changes.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,154 and Rule
19b–4(f)(2) 155 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.
154 15
155 17
PO 00000
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
Frm 00130
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PEARL–2022–62 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–2022–62. 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–2022–62 and
should be submitted on or before
February 7, 2023.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.156
Sherry R. Haywood,
Assistant Secretary.
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
[FR Doc. 2023–00662 Filed 1–13–23; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–96629; File No. SR–MIAX–
2022–50]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend the Fee Schedule
To Modify Certain Connectivity and
Port Fees
January 10, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
30, 2022, Miami International Securities
Exchange, LLC (‘‘MIAX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Options Exchange Fee
Schedule (the ‘‘Fee Schedule’’) to
amend certain connectivity and port
fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings, at MIAX’s principal office, and
at the Commission’s Public Reference
Room.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
156 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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The Exchange proposes to amend the
Fee Schedule as follows: (1) increase the
fees for a 10 gigabit (‘‘Gb’’) ultra-low
latency (‘‘ULL’’) fiber connection for
Members 3 and non-Members; and (2)
amend the fees for Limited Service
MIAX Express Interface (‘‘MEI’’) Ports 4
available to Market Makers.5 The
Exchange and its affiliate, MIAX
PEARL, LLC (‘‘MIAX Pearl’’) operated
10Gb ULL connectivity (for MIAX
Pearl’s options market) on a single
shared network that provided access to
both exchanges via a single 10Gb ULL
connection. The Exchange last increased
fees for 10Gb ULL connections from
$9,300 to $10,000 per month on January
1, 2021.6 At the same time, MIAX Pearl
also increased its 10Gb ULL
connectivity fee from $9,300 to $10,000
per month.7 The Exchange and MIAX
Pearl shared a combined cost analysis in
those filings due to the single shared
10Gb ULL connectivity network for both
exchanges. In those filings, the
Exchange and MIAX Pearl allocated a
combined total of $17.9 million in
expenses to providing 10Gb ULL
connectivity.8
Beginning in late January 2023, the
Exchange also recently determined a
substantial operational need to no
longer operate 10Gb ULL connectivity
on a single shared network with MIAX
Pearl. The Exchange is bifurcating 10Gb
ULL connectivity due to ever-increasing
capacity constraints and to enable it to
continue to satisfy the anticipated
access needs for Members and other
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 MIAX Express Interface is a connection to MIAX
systems that enables Market Makers to submit
simple and complex electronic quotes to MIAX. See
Fee Schedule, note 26.
5 The term ‘‘Market Makers’’ refers to Lead Market
Makers (‘‘LMMs’’), Primary Lead Market Makers
(‘‘PLMMs’’), and Registered Market Makers
(‘‘RMMs’’) collectively. See Exchange Rule 100.
6 See Securities Exchange Act Release No. 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02).
7 See Securities Exchange Act Release No. 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021)
(SR–PEARL–2021–01).
8 See id.
PO 00000
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2729
market participants.9 Since the time of
2021 increase discussed above, the
Exchange experienced ongoing
increases in expenses, particularly
internal expenses. As discussed more
fully below, the Exchange recently
calculated increased annual aggregate
costs of $12,034,554 for providing 10Gb
ULL connectivity on a single unshared
network (an overall increase over its
prior cost to provide 10Gb ULL
connectivity on a shared network with
MIAX Pearl) and $2,157,178 for
providing Limited Service MEI Ports.
Much of the cost relates to monitoring
and analysis of data and performance of
the network via the subscriber’s
connection with nanosecond
granularity, and continuous
improvements in network performance
with the goal of improving the
subscriber’s experience. The costs
associated with maintaining and
enhancing a state-of-the-art network is a
significant expense for the Exchange,
and thus the Exchange believes that it
is reasonable and appropriate to help
offset those increased costs by amending
fees for connectivity services.
Subscribers expect the Exchange to
provide this level of support so they
continue to receive the performance
they expect. This differentiates the
Exchange from its competitors.
The Exchange now proposes to amend
the Fee Schedule to amend the fees for
10Gb ULL connectivity and Limited
Service MEI Ports in order to recoup
cost related to bifurcating 10Gb
connectivity to the Exchange and MIAX
Pearl as well as the ongoing costs and
increase in expenses set forth below in
the Exchange’s cost analysis.10
*
*
*
*
*
Starting in 2017, following the United
States Court of Appeals for the District
of Columbia’s Susquehanna Decision 11
and various other developments, the
Commission began to undertake a
heightened review of exchange filings,
including non-transaction fee filings
that was substantially and materially
9 See MIAX Options and MIAX Pearl Options—
Announce planned network changes related to
shared 10G ULL extranet, issued August 12, 2022,
available at https://www.miaxoptions.com/alerts/
2022/08/12/miax-options-and-miax-pearl-optionsannounce-planned-network-changes-related-0. The
Exchange will continue to provide access to both
the Exchange and MIAX Pearl over a single shared
1Gb connection. See Securities Exchange Act
Release Nos. 96553 (December 20, 2022), 87 FR
79379 (December 27, 2022) (SR–PEARL–2022–60);
96545 (December 20, 2022) 87 FR 79393 (December
27, 2022) (SR–MIAX–2022–48).
10 The Exchange notes that MIAX Pearl will make
a similar filing to increase its 10Gb ULL
connectivity fees.
11 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
E:\FR\FM\17JAN1.SGM
17JAN1
]]>Agencies
[Federal Register Volume 88, Number 10 (Tuesday, January 17, 2023)]
[Notices]
[Pages 2707-2729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00662]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96632; File No. SR-PEARL-2022-62]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Options 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Fee Schedule (the ``Fee Schedule'') to amend certain connectivity and
port fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/pearl at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.
[[Page 2708]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule as follows: (1)
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'')
fiber connection for Members \3\ and non-Members; (2) amend the
calculation of fees for MIAX Express Network Full Service (``MEO'') \4\
Ports (Bulk and Single); and (3) amend the fees for Full Service MEO
Ports (Bulk and Single). The Exchange and its affiliate, Miami
International Securities Exchange, LLC (``MIAX'') operated 10Gb ULL
connectivity on a single shared network that provided access to both
exchanges via a single 10Gb ULL connection. The Exchange last increased
fees for 10Gb ULL connections from $9,300 to $10,000 per month on
January 1, 2021.\5\ At the same time, MIAX also increased its 10Gb ULL
connectivity fee from $9,300 to $10,000 per month.\6\ The Exchange and
MIAX shared a combined cost analysis in those filings due to the single
shared 10Gb ULL connectivity network for both exchanges. In those
filings, the Exchange and MIAX allocated a combined total of $17.9
million in expenses to providing 10Gb ULL connectivity.\7\
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ The term ``MEO Interface'' or ``MEO'' means a binary order
interface for certain order types as set forth in Rule 516 into the
MIAX Pearl System. See the Definitions Section of the Fee Schedule
and Exchange Rule 100.
\5\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
\6\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
\7\ See id.
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Beginning in late January 2023, the Exchange also recently
determined a substantial operational need to no longer operate 10Gb ULL
connectivity on a single shared network with MIAX. The Exchange is
bifurcating 10Gb ULL connectivity due to ever-increasing capacity
constraints and to enable it to continue to satisfy the anticipated
access needs for Members and other market participants.\8\ Since the
time of 2021 increase discussed above, the Exchange experienced ongoing
increases in expenses, particularly internal expenses.\9\ As discussed
more fully below, the Exchange recently calculated increased annual
aggregate costs of $11,567,509 for providing 10Gb ULL connectivity on a
single unshared network (an overall increase over its prior cost to
provide 10Gb ULL connectivity on a shared network with MIAX) and
$1,644,132 for providing Full Service MEO Ports.
---------------------------------------------------------------------------
\8\ See MIAX Options and MIAX Pearl Options--Announce planned
network changes related to shared 10G ULL extranet, issued August
12, 2022, available at https://www.miaxoptions.com/alerts/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-related-0. The Exchange will continue to provide access to
both the Exchange and MIAX over a single shared 1Gb connection. See
Securities Exchange Act Release Nos. 96553 (December 20, 2022), 87
FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 (December 20,
2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-48).
\9\ The Exchange notes it last filed to amend the fees for Full
Service MEO Ports in 2018 (excluding filings made in July 2021
through early 2022), prior to which the Exchange provided Full
Service MEO Ports free of charge since the it launched operations in
2017 and absorbed all costs since that time. See Securities Exchange
Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR-PEARL-2018-07).
---------------------------------------------------------------------------
Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity services.
Subscribers expect the Exchange to provide this level of support so
they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and Full Service MEO Ports (Bulk and
Single) in order to recoup cost related to bifurcating 10Gb
connectivity to the Exchange and MIAX as well as the ongoing costs and
increase in expenses set forth below in the Exchange's cost
analysis.\10\
---------------------------------------------------------------------------
\10\ The Exchange notes that MIAX will make a similar filing to
increase its 10Gb ULL connectivity fees.
---------------------------------------------------------------------------
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \11\ and various other
developments, the Commission began to undertake a heightened review of
exchange filings, including non-transaction fee filings that was
substantially and materially different from it prior review process
(hereinafter referred to as the ``Revised Review Process''). In the
Susquehanna Decision, the D.C. Circuit Court stated that the Commission
could not maintain a practice of ``unquestioning reliance'' on claims
made by a self-regulatory organization (``SRO'') in the course of
filing a rule or fee change with the Commission.\12\ Then, on October
16, 2018, the Commission issued an opinion in Securities Industry and
Financial Markets Association finding that exchanges failed both to
establish that the challenged fees were constrained by significant
competitive forces and that these fees were consistent with the
Act.\13\ On that same day, the Commission issued an order remanding to
various exchanges and national market system (``NMS'') plans challenges
to over 400 rule changes and plan amendments that were asserted in 57
applications for review (the ``Remand Order'').\14\ The Remand Order
directed the exchanges to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review.'' \15\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\16\ However, the Commission did
extend the deadlines in the Remand Order ``so that they d[id] not begin
to run until the resolution of the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the
[[Page 2709]]
court's mandate.'' \17\ Both the Remand Order and the Order Denying
Reconsideration were appealed to the D.C. Circuit.
---------------------------------------------------------------------------
\11\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\12\ Id.
\13\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\14\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84433, 2018 WL 5023230 (Oct. 16, 2018). See 15 U.S.C.
78k-1, 78s; see also Rule 608(d) of Regulation NMS, 17 CFR
242.608(d) (asserted as an alternative basis of jurisdiction in some
applications).
\15\ Id. at page 2.
\16\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\17\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
---------------------------------------------------------------------------
While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased the level of
information needed for the Commission to believe that an exchange's
filing satisfied its obligations under the Act with respect to changing
a fee.\18\ Despite approving hundreds of access fee filings in the
years prior to the BOX Order (described further below) utilizing a
``market-based'' test, the Commission changed course and disapproved
BOX's proposal to begin charging connectivity at one-fourth the rate of
competing exchanges' pricing.
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to
Amend the Fee Schedule on the BOX Market LLC Options Facility to
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted
in the BOX Order that it ``historically applied a `market-based'
test in its assessment of market data fees, which [the Commission]
believe[s] present similar issues as the connectivity fees proposed
herein.'' Id. at page 16. Despite this admission, the Commission
disapproved BOX's proposal to begin charging $5,000 per month for
10Gb connections (while allowing legacy exchanges to charge rates
equal to 3-4 times that amount utilizing ``market-based'' fee
filings from years prior).
---------------------------------------------------------------------------
Also while the above appeal was pending, on May 21, 2019, the
Commission Staff issued guidance ``to assist the national securities
exchanges and FINRA . . . in preparing Fee Filings that meet their
burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \19\ In the Staff
Guidance, the Commission Staff states that, ``[a]s an initial step in
assessing the reasonableness of a fee, staff considers whether the fee
is constrained by significant competitive forces.'' \20\ The Staff
Guidance also states that, ``. . . even where an SRO cannot
demonstrate, or does not assert, that significant competitive forces
constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \21\
---------------------------------------------------------------------------
\19\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Staff Guidance'').
\20\ Id.
\21\ Id.
---------------------------------------------------------------------------
Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC \22\ and remanded for further proceedings consistent
with its opinion.\23\ That same day, the D.C. Circuit issued an order
remanding the Remand Order to the Commission for reconsideration in
light of NASDAQ. The court noted that the Remand Order required the
exchanges and NMS plan participants to consider the challenges that the
Commission had remanded in light of the SIFMA Decision. The D.C.
Circuit concluded that because the SIFMA Decision ``has now been
vacated, the basis for the [Remand Order] has evaporated.'' \24\
Accordingly, on August 7, 2020, the Commission vacated the Remand Order
and ordered the parties to file briefs addressing whether the holding
in NASDAQ v. SEC that Exchange Act Section 19(d) does not permit
challenges to generally applicable fee rules requiring dismissal of the
challenges the Commission previously remanded.\25\ The Commission
further invited ``the parties to submit briefing stating whether the
challenges asserted in the applications for review . . . should be
dismissed, and specifically identifying any challenge that they contend
should not be dismissed pursuant to the holding of Nasdaq v. SEC.''
\26\ Without resolving the above issues, on October 5, 2020, the
Commission issued an order granting SIFMA and Bloomberg's request to
withdraw their applications for review and dismissed the
proceedings.\27\
---------------------------------------------------------------------------
\22\ NASDAQ Stock Mkt., LLC v. SEC, No 18-1324, --- Fed. App'x -
---, 2020 WL 3406123 (D.C. Cir. June 5, 2020). The court's mandate
was issued on August 6, 2020.
\23\ Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020).
The court's mandate issued on August 6, 2020. The D.C. Circuit held
that Exchange Act ``Section 19(d) is not available as a means to
challenge the reasonableness of generally-applicable fee rules.''
Id. The court held that ``for a fee rule to be challengeable under
Section 19(d), it must, at a minimum, be targeted at specific
individuals or entities.'' Id. Thus, the court held that ``Section
19(d) is not an available means to challenge the fees at issue'' in
the SIFMA Decision. Id.
\24\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\25\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 89504, 2020 WL 4569089 (August 7, 2020) (the ``Order
Vacating Prior Order and Requesting Additional Briefs'').
\26\ Id.
\27\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
---------------------------------------------------------------------------
As a result of the Commission's loss of the NASDAQ vs. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \28\
As such, all of those fees remained in place and amounted to a baseline
set of fees for those exchanges that had the benefit of getting their
fees in place before the Commission Staff's fee review process
materially changed. The net result of this history and lack of
resolution in the D.C. Circuit Court resulted in an uneven competitive
landscape where the Commission subjects all new non-transaction fee
filings, particularly those submitted by new exchanges, to the new
Revised Review Process, while allowing the previously challenged fee
filings, mostly submitted by incumbent exchanges prior to 2019, to
remain in effect and not subject to the ``record'' or ``review''
earlier intended by the Commission.
---------------------------------------------------------------------------
\28\ See supra note 14, at page 2.
---------------------------------------------------------------------------
While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\29\ The legacy exchanges all
established a significantly higher baseline for access and market data
fees prior to the Revised Review Process. From 2011 until the issuance
of the Staff Guidance in 2019, national securities exchanges filed, and
the Commission Staff did not abrogate or suspend (allowing such fees to
become effective), at least 92 filings \30\
[[Page 2710]]
to amend exchange connectivity or port fees (or similar access fees).
The support for each of those filings was a simple statement by the
relevant exchange that the fees were constrained by competitive
forces.\31\ These fees remain in effect today.
---------------------------------------------------------------------------
\29\ Commission Chair Gary Gensler recently reiterated the
Commission's mandate to ensure competition in the equities markets.
See ``Statement on Minimum Price Increments, Access Fee Caps, Round
Lots, and Odd-Lots'', by Chair Gary Gensler, dated December 14, 2022
(stating ``[i]n 1975, Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the establishment of
the national market system and enhance competition in the securities
markets, including the equity markets'' (emphasis added)). In that
same statement, Chair Gary Gensler cited the five objectives laid
out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1),
including ensuring ``fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets. . . .'' (emphasis added). Id. at note
1. See also Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249.
\30\ This timeframe also includes challenges to over 400 rule
filings by SIFMA and Bloomberg discussed above. Sec. Indus. & Fin.
Mkts. Ass'n, Securities Exchange Act Release No. 84433, 2018 WL
5023230 (Oct. 16, 2018). Those filings were left to stand, while at
the same time, blocking newer exchanges from the ability to
establish competitive access and market data fees. See The Nasdaq
Stock Market, LLC v. SEC, Case No. 18-1292 (D.C. Cir. June 5, 2020).
The expectation at the time of the litigation was that the 400 rule
flings challenged by SIFMA and Bloomberg would need to be justified
under revised review standards.
\31\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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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 MIAX Pearl, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\32\
By impeding any path forward for non-legacy exchanges to establish
commensurate non-transaction fees, or by failing to provide any
alternative means for smaller markets to establish ``fee parity'' with
legacy exchanges, the Commission is stifling competition: non-legacy
exchanges are, in effect, being deprived of the revenue necessary to
compete on a level playing field with legacy exchanges. This is
particularly harmful, given that the costs to maintain exchange systems
and operations continue to increase. The Commission Staff's change in
position impedes the ability of non-legacy exchanges to raise revenue
to invest in their systems to compete with the legacy exchanges who
already enjoy disproportionate non-transaction fee based revenue. For
example, the Cboe Exchange, Inc. (``Cboe'') reported ``access and
capacity fee'' revenue of $70,893,000 for 2020 \33\ and $80,383,000 for
2021.\34\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \35\ and $22,843,000 for
2021.\36\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \37\ and $44,800,000 for
2021.\38\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \39\ and $30,687,000 for
2021.\40\ For 2021, the affiliated Cboe, C2, BZX, and EDGX (the four
largest exchanges of the Cboe exchange group) reported $178,712,000 in
``access and capacity fees'' in 2021. NASDAQ Phlx, LLC (``NASDAQ
Phlx'') reported ``Trade Management Services'' revenue of $20,817,000
for 2019.\41\ The Exchange notes it is unable to compare ``access fee''
revenues with NASDAQ Phlx (or other affiliated NASDAQ exchanges)
because after 2019, the ``Trade Management Services'' line item was
bundled into a much larger line item in PHLX's Form 1, simply titled
``Market services.'' \42\
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\32\ The Exchange has filed, and subsequently withdrew, various
forms of this proposed fee change numerous times since August 2021
with each proposal containing hundreds of cost and revenue
disclosures never previously disclosed by legacy exchanges in their
access and market data fee filings prior to 2019.
\33\ According to Cboe's 2021 Form 1 Amendment, access and
capacity fees represent fees assessed for the opportunity to trade,
including fees for trading-related functionality. See Cboe 2021 Form
1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\34\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\35\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\36\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\37\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\38\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\39\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\40\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\41\ According to PHLX, ``Trade Management Services'' includes
``a wide variety of alternatives for connectivity to and accessing
[the PHLX] markets for a fee. These participants are charged monthly
fees for connectivity and support in accordance with [PHLX's]
published fee schedules.'' See PHLX 2020 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
\42\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf.
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The much higher non-transaction fees charged by the legacy
exchanges provides them with two significant competitive advantages.
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing
and advertising on major media outlets,\43\ new products and other
innovations. Second, higher non-transaction fees provide the legacy
exchanges with greater flexibility to lower their transaction fees (or
use the revenue from the higher non-transaction fees to subsidize
transaction fee rates), which are more immediately impactful in
competition for order flow and market share, given the variable nature
of this cost on member firms. The prohibition of a reasonable path
forward denies the Exchange (and other non-legacy exchanges) this
flexibility, eliminates the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share with legacy exchanges. While one could debate whether the
pricing of non-transaction fees are subject to the same market forces
as transaction fees, there is little doubt that subjecting one exchange
to a materially different standard than that historically applied to
legacy exchanges for non-transaction fees leaves that exchange at a
disadvantage in its ability to compete with its pricing of transaction
fees.
---------------------------------------------------------------------------
\43\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
---------------------------------------------------------------------------
While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its
[[Page 2711]]
content. . .'',\44\ this is not the reality experienced by exchanges
such as MIAX Pearl. As such, non-legacy exchanges are forced to rely on
an opaque cost-based justification standard. However, because the Staff
Guidance is devoid of detail on what must be contained in cost-based
justification, this standard is nearly impossible to meet despite good-
faith efforts by the Exchange to provide substantial amount of cost-
related details. The Exchange has attempted to increase fees using a
cost-based justification numerous times, having submitted over six
filings.\45\ However, despite providing 100+ page filings describing in
extensive detail its costs associated with providing the services
described in the filings, Commission Staff continues to suspend such
filings, with the rationale that the Exchange has not provided
sufficient detail of its costs. The Commission Staff appears to be
interpreting the reasonableness standard set forth in Section 6(b)(4)
of the Act \46\ in a manner that is not possible to achieve. This
essentially nullifies the cost-based approach for exchanges as a
legitimate alternative as laid out in the Staff Guidance. By refusing
to accept a reasonable cost-based argument to justify non-transaction
fees (in addition to refusing to accept a competition-based argument as
described above), or by failing to provide the detail required to
achieve that standard, the Commission Staff is effectively preventing
non-legacy exchanges from making any non-transaction fee changes, which
benefits the legacy exchanges and anticompetitive to the non-legacy
exchanges. This does not meet the fairness standard under the Act and
is discriminatory.
---------------------------------------------------------------------------
\44\ See supra note 19, at note 1.
\45\ See Securities Exchange Act Release Nos. 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).
\46\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\47\ to the extent that this is pertinent; (b) establish a
framework to provide for commensurate non-transaction based fees among
competing exchanges to ensure fee parity; \48\ or (c) accept that
certain competition-based arguments are applicable given the linkage
between non-transaction fees and transaction fees, especially where
non-transaction fees among exchanges are based upon disparate standards
of review, lack parity, and impede fair competition. Considering the
absence of any such framework or clarity, the Exchange believes that
the Commission does not have a reasonable basis to deny the Exchange
this change in fees, where the proposed change would result in fees
meaningfully lower than comparable fees at competing exchanges and
where the associated non-transaction revenue is meaningfully lower than
competing exchanges.
---------------------------------------------------------------------------
\47\ To the extent that the cost-based standard includes
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Exchange believes that Staff should be
clear as to what they determine is an appropriate profit margin.
\48\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
---------------------------------------------------------------------------
In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and place a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other options exchanges for connectivity. If the Commission Staff
were to disapprove this proposal, that action, and not market forces,
would substantially affect whether the Exchange can be successful in
its competition with other options exchanges. Disapproval of this
filing could also be viewed as an arbitrary and capricious decision
should the Commission Staff continue to ignore its past treatment of
non-transaction fee filings before implementation of the Revised Review
Process and Staff Guidance and refuse to allow such filings to be
approved despite significantly enhanced arguments and cost
disclosures.\49\
---------------------------------------------------------------------------
\49\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
---------------------------------------------------------------------------
Lastly, the Exchange notes that the Commission Staff has allowed
similar fee increases by other exchanges to remain in effect by
publishing those filings for comment and allowing the exchange to
withdraw and re-file numerous times.\50\ Recently, the Commission Staff
has not afforded the Exchange the same flexibility.\51\ This again is
evidence that the Commission Staff is not treating non-transaction fee
filings in a consistent manner and is holding exchanges to different
levels of scrutiny in reviewing filings.
---------------------------------------------------------------------------
\50\ See, e.g., Securities Exchange Act Release Nos. 93937
(January 10, 2022), 87 FR 2466 (January 14, 2022) (SR-MEMX-2021-22);
94419 (March 15, 2022), 87 FR 16046 (March 21, 2022) (SR-MEMX-2022-
02); SR-MEMX-2022-12 (withdrawn before being noticed); 94924 (May
16, 2022), 87 FR 31026 (May 20, 2022) (SR-MEMX-2022-13); 95299 (July
15, 2022), 87 FR 43563 (July 21, 2022) (SR-MEMX-2022-17); SR-MEMX-
2022-24 (withdrawn before being noticed); 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26); 94901 (May
12, 2022), 87 FR 30305 (May 18, 2022) (SR-MRX-2022-04); SR-MRX-2022-
06 (withdrawn before being noticed); 95262 (July 12, 2022), 87 FR
42780 (July 18, 2022) (SR-MRX-2022-09); 95710 (September 8, 2022),
87 FR 56464 (September 14, 2022) (SR-MRX-2022-12); 96046 (October
12, 2022), 87 FR 63119 (October 18, 2022) (SR-MRX-2022-20); 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26); and 96430 (December 1, 2022), 87 FR 75083 (December 7, 2022)
(SR-MEMX-2022-32).
\51\ 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).
---------------------------------------------------------------------------
* * * * *
10Gb ULL Connectivity Fee Change
The Exchange recently filed a proposal to no longer operate 10Gb
connectivity to the Exchange on a single shared network with its
affiliate, MIAX. This change is an operational necessity due to ever-
increasing capacity constraints and to accommodate anticipated access
needs for Members and other market participants.\52\ This proposal: (i)
sets forth the applicable fees for the bifurcated 10Gb ULL network; and
(ii) removes provisions in the Fee Schedule that provides for a shared
10Gb ULL network; and (iii)
[[Page 2712]]
specifies that market participants may continue to connect to both the
Exchange and MIAX via the 1Gb network.
---------------------------------------------------------------------------
\52\ See supra note 8.
---------------------------------------------------------------------------
The Exchange plans to bifurcate the Exchange and MIAX 10Gb ULL
networks in the first quarter of 2023, currently anticipated to be
effective on January 23, 2023. The Exchange issued an alert on August
12, 2022 publicly announcing the planned network change and
implementation plan and dates to provide market participants adequate
time to prepare.\53\ Upon bifurcation of the 10Gb ULL network,
subscribers would need to purchase separate connections to the Exchange
and MIAX at the applicable rate. The Exchange's proposed amended rate
for 10Gb ULL connectivity is described below. Until the 10Gb ULL
network is bifurcated, subscribers to 10Gb ULL connectivity would be
able to connect to both the Exchange and MIAX at the applicable rate
set forth below.
---------------------------------------------------------------------------
\53\ Id.
---------------------------------------------------------------------------
The Exchange, therefore, proposes to amend the Fee Schedule to
increase the fees for Members and non-Members to access the Exchange's
system networks \54\ via a 10Gb ULL fiber connection and to specify
that this fee is for a dedicated connection to the Exchange and no
longer provides access to MIAX. Specifically, the Exchange proposes to
amend Sections (5)(a)-(b) of the Fee Schedule to increase the 10Gb ULL
connectivity fee for Members and non-Members from $10,000 per month to
$13,500 per month (``10Gb ULL Fee'').\55\ The Exchange also proposes to
amend the Fee Schedule to reflect the bifurcation of the 10Gb ULL
network and specify that only the 1Gb network provides access to both
the Exchange and MIAX.
---------------------------------------------------------------------------
\54\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\55\ Market participants that purchase additional 10Gb ULL
connections as a result of this change will not be subject to the
Exchange's Member Network Connectivity Testing and Certification Fee
under Section (4)(c) of the Exchange's fee schedule. See Section
(4)(c) of the Exchange's fee schedule available at https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10192022.pdf (providing that ``Network
Connectivity Testing and Certification Fees will not be assessed in
situations where the Exchange initiates a mandatory change to the
Exchange's system that requires testing and certification. Member
Network Connectivity Testing and Certification Fees will not be
assessed for testing and certification of connectivity to the
Exchange's Disaster Recovery Facility.'').
---------------------------------------------------------------------------
The Exchange proposes to make the following changes to reflect the
bifurcated 10Gb ULL network for the Exchange and MIAX. First, in the
Definitions section of the Fee Schedule, the Exchange proposes to amend
the last sentence in the definition of ``MENI'' to specify that the
MENI can be configured to provide network connectivity to the trading
platforms, market data systems, test systems, and disaster recovery
facilities of the Exchange's affiliate, MIAX, via a single, shared 1Gb
connection. Next, the Exchange proposes to amend the explanatory
paragraphs below the network connectivity fee tables in Sections
(5)(a)-(b) of the Fee Schedule to specify that, with the bifurcated
10Gb ULL network, Members (and non-Members) utilizing the MENI to
connect to the trading platforms, market data systems, test systems,
and disaster recovery facilities of the Exchange and MIAX via a single,
can only do so via a shared 1Gb connection.
The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange will continue to pro-rate the fees when a
Member or non-Member makes a change to the connectivity (by adding or
deleting connections) with such pro-rated fees based on the number of
trading days that the Member or non-Member has been credentialed to
utilize any of the Exchange APIs or market data feeds in the production
environment through such connection, divided by the total number of
trading days in such month multiplied by the applicable monthly rate.
Implementation of 10Gb ULL Fee. The proposed 10Gb ULL fee will be
effective January 1, 2023. From January 1, 2023 until January 22, 2023,
subscribers to 10Gb ULL connectivity will continue to receive access to
both the Exchange and MIAX via a single 10Gb ULL connection. Upon
bifurcation of the 10Gb ULL network on January 23, 2023, subscribers
that elect to continue to access both the Exchange and MIAX via a 10Gb
ULL connection will need to purchase separate 10Gb ULL connections from
each exchange. Existing subscribers of 10Gb ULL connections on the
Exchange that also purchase a new 10Gb ULL connection to access MIAX
would pay a pro-rated portion of the monthly fee for the added
connection for the remainder of the month.
Full Service MEO Ports--Bulk and Single
Background
The Exchange also proposes to amend Section (5)(d) of the Fee
Schedule to amend the calculation and amount of fees for Full Service
MEO Ports. The Exchange currently offers different types of MEO Ports
depending on the services required by the Member, including a Full
Service MEO Port-Bulk,\56\ a Full Service MEO Port-Single,\57\ and a
Limited Service MEO Port.\58\ For one monthly price, a Member may be
allocated two (2) Full-Service MEO Ports of either type per matching
engine \59\ and may request Limited Service MEO Ports for which MIAX
Pearl will assess Members Limited Service MEO Port fees based on a
sliding scale for the number of Limited Service MEO Ports utilized each
month. The two (2) Full-Service MEO Ports that may be allocated per
matching engine to a Member may consist of: (a) two (2) Full Service
MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--Single; or (c) one
(1) Full Service MEO Port--Bulk and one (1) Full Service MEO Port--
Single.
---------------------------------------------------------------------------
\56\ ``Full Service MEO Port--Bulk'' means an MEO port that
supports all MEO input message types and binary bulk order entry.
See the Definitions Section of the Fee Schedule.
\57\ ``Full Service MEO Port--Single'' means an MEO port that
supports all MEO input message types and binary order entry on a
single order-by-order basis, but not bulk orders. See the
Definitions Section of the Fee Schedule.
\58\ ``Limited Service MEO Port'' means an MEO port that
supports all MEO input message types, but does not support bulk
order entry and only supports limited order types, as specified by
the Exchange via Regulatory Circular. See the Definitions Section of
the Fee Schedule.
\59\ A ``Matching Engine'' is a part of the Exchange's
electronic system that processes options orders and trades on a
symbol-by-symbol basis. See the Definitions Section of the Fee
Schedule.
---------------------------------------------------------------------------
Currently, the Exchange assesses Members Full Service MEO Port
Fees, either for a Full Service MEO Port--Bulk and/or for a Full
Service MEO Port--Single, based upon the monthly total volume executed
by a Member and its Affiliates \60\ on the Exchange, across all origin
types, not including Excluded Contracts,\61\ as compared to the Total
Consolidated Volume (``TCV''),\62\ in all
[[Page 2713]]
MIAX Pearl-listed options. The Exchange adopted a tier-based fee
structure based upon the volume-based tiers detailed in the definition
of ``Non-Transaction Fees Volume-Based Tiers'' described in the
Definitions section of the Fee Schedule. The Exchange assesses these
and other monthly Port fees to Members in each month the market
participant is credentialed to use a Port in the production
environment.
---------------------------------------------------------------------------
\60\ ``Affiliate'' means (i) an affiliate of a Member of at
least 75% common ownership between the firms as reflected on each
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed EEM of an Appointed
Market Maker). See the Definitions Section of the Fee Schedule.
\61\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\62\ ``TCV'' means total consolidated volume calculated as the
total national volume in those classes listed on MIAX Pearl for the
month for which the fees apply, excluding consolidated volume
executed during the period of time in which the Exchange experiences
an Exchange System Disruption (solely in the option classes of the
affected Matching Engine). See the Definitions Section of the Fee
Schedule.
---------------------------------------------------------------------------
Full Service MEO Port (Bulk) Fee Changes
Current Full Service MEO Port (Bulk) Fees. The Exchange currently
assesses all Members (Market Makers \63\ and Electronic Exchange
Members \64\ (``EEMs'')) monthly Full Service MEO Port--Bulk fees as
follows:
---------------------------------------------------------------------------
\63\ The term ``Market Maker'' means a Member registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange Rules. See the
Definitions Section of the Fee Schedule and Exchange Rule 100.
\64\ The term ``Electronic Exchange Member'' or ``EEM'' means
the holder of a Trading Permit who is a Member representing as agent
Public Customer Orders or Non-Customer Orders on the Exchange and
those non-Market Maker Members conducting proprietary trading.
Electronic Exchange Members are deemed ``members'' under the
Exchange Act. See the Definitions Section of the Fee Schedule and
Exchange Rule 100.
---------------------------------------------------------------------------
(i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $4,500; and
(iii) if its volume falls within the parameters of Tier 3 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
Proposed Full Service MEO Port (Bulk) Fees. The Exchange proposes
to amend the calculation and amount of Full Service MEO Port (Bulk)
fees for EEMs and Market Makers. In particular, for EEMs, the Exchange
proposes to move away from the above-described volume tier-based fee
structure and instead charge all EEMs that utilize Full Service MEO
Ports (Bulk) a flat monthly fee of $7,500. For this flat monthly fee,
EEMs will continue to be entitled to two (2) Full Service MEO Ports
(Bulk) for each Matching Engine for the single monthly fee of $7,500.
The Exchange now proposes to amend the calculation and amount of Full
Service MEO Port (Bulk) fees for Market Makers by moving away from the
above-described volume tier-based fee structure to harmonize the Full
Service MEO Port (Bulk) fee structure for Market Makers with that of
the Exchange's affiliates, MIAX and MIAX Emerald.\65\ The Exchange
proposes that the amount of the monthly Full Service MEO Port (Bulk)
fees for Market Makers would be based on the lesser of either the per
class traded or percentage of total national average daily volume
(``ADV'') measurement based on classes traded by volume. The amount of
monthly Market Maker Full Service MEO Port (Bulk) fee would be based
upon the number of classes in which the Market Maker was registered to
quote on any given day within the calendar month, or upon the class
volume percentages. This change in how Full Service MEO Port (Bulk)
fees are calculated is identical to how the Exchange assesses Market
Makers Trading Permit fees, which is in line with how numerous
exchanges charge similar membership fees.
---------------------------------------------------------------------------
\65\ See MIAX Fee Schedule, Section (5)(d)(ii) and MIAX Emerald
Fee Schedule, Section (5)(d)(ii).
---------------------------------------------------------------------------
Specifically, the Exchange proposes to adopt the following Full
Service MEO Port (Bulk) fees for Market Makers: (i) $5,000 for Market
Maker registrations in up to 10 option classes or up to 20% of option
classes by national ADV; (ii) $7,500 for Market Maker registrations in
up to 40 option classes or up to 35% of option classes by ADV; (iii)
$10,000 for Market Maker registrations in up to 100 option classes or
up to 50% of option classes by ADV; and (iv) $12,000 for Market Maker
registrations in over 100 option classes or over 50% of option classes
by ADV up to all option classes listed on MIAX Pearl. For example, if
Market Maker 1 elects to quote the top 40 option classes which consist
of 58% of the total national average daily volume in the prior calendar
quarter, the Exchange would assess $7,500 to Market Maker 1 for the
month which is the lesser of `up to 40 classes' and `over 50% of
classes by volume up to all classes listed on MIAX Pearl'. If Market
Maker 2 elects to quote the bottom 1000 option classes which consist of
10% of the total national average daily volume in the prior quarter,
the Exchange would assess $5,000 to Market Maker 2 for the month which
is the lesser of `over 100 classes' and `up to 20% of classes by
volume. The Exchange notes that the proposed tiers (ranging from $5,000
to $12,000) are lower than the tiers that the Exchange's affiliates
charge for their comparable ports (ranging from $5,000 to $20,500) for
similar per class tier thresholds.\66\
---------------------------------------------------------------------------
\66\ See id.
---------------------------------------------------------------------------
With the proposed changes, a Market Maker would be determined to be
registered in a class if that Market Maker has been registered in one
or more series in that class.\67\ The Exchange will assess MIAX Pearl
Market Makers the monthly Market Maker Full Service MEO Port (Bulk) fee
based on the greatest number of classes listed on MIAX Pearl that the
MIAX Pearl Market Maker registered to quote in on any given day within
a calendar month. Therefore, with the proposed changes to the
calculation of Market Maker Full Service MEO Port (Bulk) fees, the
Exchange's Market Makers would be encouraged to quote in more series in
each class they are registered in because each additional series in
that class would not count against their total classes for purposes of
the Full Service MEO Port (Bulk) fee tiers. The class volume percentage
is based on the total national ADV in classes listed on MIAX Pearl in
the prior calendar quarter. Newly listed option classes are excluded
from the calculation of the monthly Market Maker Full Service MEO Port
(Bulk) fee until the calendar quarter following their listing, at which
time the newly listed option classes will be included in both the per
class count and the percentage of total national ADV.
---------------------------------------------------------------------------
\67\ Pursuant to Exchange Rule 602(a), a Member that has
qualified as a Market Maker may register to make markets in
individual series of options.
---------------------------------------------------------------------------
The Exchange also proposes to adopt an alternative lower Full
Service MEO Port (Bulk) fee for Market Makers who fall within the 2nd,
3rd and 4th levels of the proposed Market Maker Full Service MEO Port
(Bulk) fee table: (i) Market Maker registrations in up to 40 option
classes or up to 35% of option classes by volume; (ii) Market Maker
registrations in up to 100 option classes or up to 50% of option
classes by volume; and (iii) Market Maker registrations in over 100
option classes or over 50% of option classes by volume up to all option
classes listed on MIAX Pearl. In particular, the Exchange proposes to
adopt footnote ``**'' following the Market Maker Full Service MEO Port
(Bulk) fee table for these Monthly Full Service MEO Port (Bulk) tier
levels. New proposed footnote ``**'' will provide that if the Market
Maker's total monthly executed volume during the relevant month is less
than 0.040% of the total monthly TCV for MIAX Pearl-listed option
classes for that month, then the fee will be $6,000 instead of the fee
otherwise applicable to such level.
The purpose of the alternative lower fee designated in proposed
footnote ``**'' is to provide a lower fixed fee to
[[Page 2714]]
those Market Makers who are willing to quote the entire Exchange market
(or substantial amount of the Exchange market), as objectively measured
by either number of classes assigned or national ADV, but who do not
otherwise execute a significant amount of volume on the Exchange. The
Exchange believes that, by offering lower fixed fees to Market Makers
that execute less volume, the Exchange will retain and attract smaller-
scale Market Makers, which are an integral component of the option
marketplace, but have been decreasing in number in recent years, due to
industry consolidation. Since these smaller-scale Market Makers utilize
less Exchange capacity due to lower overall volume executed, the
Exchange believes it is reasonable and equitable to offer such Market
Makers a lower fixed fee. The Exchange notes that the Exchange's
affiliates, MIAX and MIAX Emerald, also provide lower MIAX Express
Interface (``MEI'') Port fees (the comparable ports on those exchanges)
for Market Makers who quote the entire MIAX and MIAX Emerald markets
(or substantial amount of those markets), as objectively measured by
either number of classes assigned or national ADV, but who do not
otherwise execute a significant amount of volume on MIAX or MIAX
Emerald.\68\ The proposed changes to the Full Service MEO Port (Bulk)
fees for Market Makers who fall within the 2nd, 3rd and 4th levels of
the fee table are based upon a business determination of current Market
Maker assignments and trading volume.
---------------------------------------------------------------------------
\68\ See MIAX Fee Schedule, Section (5)(d)(ii), note ``*'' and
MIAX Emerald Fee Schedule, Section (5)(d)(ii), note ````.
---------------------------------------------------------------------------
Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\69\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports (described
above) per matching engine to which that Member connects. The Exchange
currently has twelve (12) matching engines, which means Market Makers
may receive up to twenty-four (24) Full Service MEO Ports for a single
monthly fee, that can vary based on the lesser of either the per class
traded or percentage of total national ADV measurement based on classes
traded by volume, as described above. For illustrative purposes, the
Exchange currently assesses a fee of $5,000 per month for Market Makers
that reach the highest Full Service MEO Port (Bulk) tier, regardless of
the number of Full Service MEO Ports allocated to the Market Maker. For
example, assuming a Market Maker connects to all twelve (12) matching
engines during a month, with two Full Service MEO Ports (Bulk) per
matching engine, this results in an effective fee of $208.33 per Full
Service MEO Port ($5,000 divided by 24) for the month, as compared to
other exchanges that charge over $1,000 per port and require multiple
ports to connect to all of their matching engines.\70\ This fee had
been unchanged since the Exchange adopted Full Service MEO Port fees in
2018.\71\ The Exchange proposes to increase Full Service MEO Port fees,
with the highest monthly fee of $12,000 for the Full Service MEO Ports
(Bulk). Market Makers will continue to receive two (2) Full Service MEO
Ports to each matching engine to which they connect for the single flat
monthly fee. Assuming a Market Maker connects to all twelve (12)
matching engines during the month, with two Full Service MEO Ports per
matching engine, this would result in an effective fee of $500 per Full
Service MEO Port ($12,000 divided by 24).
---------------------------------------------------------------------------
\69\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees (each port charged on a per matching engine basis, with NYSE
American having 17 match engines). See NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many matching engines are used
by each exchange?) (September 2020) (providing a link to an Excel
file detailing the number of matching engines per options exchange);
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a
per matching engine basis, NYSE Arca having 19 match engines); and
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How
many matching engines are used by each exchange?) (September 2020)
(providing a link to an Excel file detailing the number of matching
engines per options exchange). See NASDAQ Fee Schedule, NASDAQ
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports
and Other Services (each port charged on a per matching engine
basis, with Nasdaq having multiple matching engines). See NASDAQ
Specialized Quote Interface (SQF) Specification, Version 6.5b
(updated February 13, 2020), Section 2, Architecture, available at
https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface Specification''). The
NASDAQ SQF Interface Specification also provides that NASDAQ's
affiliates, NASDAQ Phlx and NASDAQ BX, Inc. (``BX''), have trading
infrastructures that may consist of multiple matching engines with
each matching engine trading only a range of option classes.
Further, the NASDAQ SQF Interface Specification provides that the
SQF infrastructure is such that the firms connect to one or more
servers residing directly on the matching engine infrastructure.
Since there may be multiple matching engines, firms will need to
connect to each engine's infrastructure in order to establish the
ability to quote the symbols handled by that engine.
\70\ Id. See also infra notes 95 to 102 and accompanying text.
\71\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
Full Service MEO Ports
[Bulk]
----------------------------------------------------------------------------------------------------------------
Total number of
ports for market
Number of match maker to connect Total fee Effective per
engines to all match (monthly) port fee
engines
----------------------------------------------------------------------------------------------------------------
Pricing Based on Market Maker Being Charged 12 24 $5,000 $208.33
the Highest Tier (Current).................
Pricing Based on Market Maker Being Charged 12 24 12,000 500
the Highest Tier (as proposed).............
----------------------------------------------------------------------------------------------------------------
Full Service MEO Port (Single) Fee Changes
Current Full Service MEO Port (Single) Fees. The Exchange currently
assesses all Members (Market Makers and EEMs) monthly Full Service MEO
Port (Single) fees as follows:
(i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $3,375; and
(iii) if its volume falls within the parameters of Tier 3 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
Proposed Full Service MEO Port (Single) Fees. The Exchange proposes
to
[[Page 2715]]
amend the calculation and amount of Full Service MEO Port (Single) fees
for EEMs and Market Makers. In particular, the Exchange proposes to
move away from the above-described volume tier-based fee structure and
instead charge all Members that utilize Full Service MEO Ports (Single)
a flat monthly fee of $4,000. For this flat monthly fee, all Members
will continue to be entitled to two (2) Full Service MEO Ports (Single)
for each Matching Engine for the single monthly fee of $4,000.
The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, MEO ports allow for a higher throughput and can handle
much higher quote/order rates than FIX ports. Members that are Market
Makers or high frequency trading firms utilize these ports (typically
coupled with 10Gb ULL connectivity) because they transact in
significantly higher amounts of messages being sent to and from the
Exchange, versus FIX port users, who are traditionally customers
sending only orders to the Exchange (typically coupled with 1Gb
connectivity). The different types of ports cater to the different
types of Exchange Memberships and different capabilities of the various
Exchange Members. Certain Members need ports and connections that can
handle using far more of the network's capacity for message throughput,
risk protections, and the amount of information that the System has to
assess. Those Members account for the vast majority of network capacity
utilization and volume executed on the Exchange, as discussed
throughout. For example, three (3) Members account for 64% of all 10Gb
ULL connections and Full Service MEO Ports purchased.
The Exchange proposes to increase its monthly Full Service MEO Port
fees since it has not done so since the fees were adopted in 2018,\72\
which are designed to recover a portion of the costs associated with
directly accessing the Exchange. As described above, the Exchange's
affiliates, MIAX and MIAX Emerald, also charge fees for their high
throughput, low latency ports in a similar fashion as the Exchange
proposes to charge for its MEO Ports--generally, the more active user
the Member (i.e., the greater number/greater national ADV of classes
assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port
fee.\73\ This concept is, therefore, not new or novel.
---------------------------------------------------------------------------
\72\ See id.
\73\ See Exchange Fee Schedule, Section (5)d)ii); MIAX Emerald
Fee Schedule, Section (5)(d)(ii).
---------------------------------------------------------------------------
Implementation of Full Service MEO Port Fees. This proposed fee
change 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 \74\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \75\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of Section 6(b)(5) of the Act \76\ 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.
---------------------------------------------------------------------------
\74\ 15 U.S.C. 78f(b).
\75\ 15 U.S.C. 78f(b)(4).
\76\ 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 \77\ and
the Staff Guidance,\78\ 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.
---------------------------------------------------------------------------
\77\ See supra note 18.
\78\ See supra note 19.
---------------------------------------------------------------------------
The Exchange believes that exchanges, in setting fees of all types,
should meet high standards of transparency to demonstrate why each new
fee or fee amendment meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various fees for market participants to access an
exchange's marketplace.
In the Staff Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\79\ 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.'' \80\ In the Staff Guidance, the Commission Staff further states
that, ``[i]f an SRO seeks to support its claims that a proposed fee is
fair and reasonable because it will permit recovery of the SRO's costs,
. . . , specific information, including quantitative information,
should be provided to support that argument.'' \81\
---------------------------------------------------------------------------
\79\ Id.
\80\ Id.
\81\ Id.
---------------------------------------------------------------------------
The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 10Gb ULL connectivity (driven by the bifurcation of the 10Gb ULL
network) and Full Service 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 Member firms. The absence of a
reasonable path forward to increase non-transaction fees to comparable
(or lower rates) limits the
[[Page 2716]]
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 February 2017 \82\ and adopted
its initial fee schedule, with 10Gb ULL connectivity fees set at $8,500
(the Exchange originally had a non-ULL 10Gb connectivity option, which
it has since removed) and a fee waiver for all Full Service MEO Port
fees.\83\ As a new exchange entrant, the Exchange chose to offer Full
Service MEO Ports free of charge to encourage market participants to
trade on the Exchange and experience, among things, the quality of the
Exchange's technology and trading functionality. This practice is not
uncommon. New exchanges often do not charge fees or charge lower fees
for certain services such as memberships/trading permits to attract
order flow to an exchange, and later amend their fees to reflect the
true value of those services, absorbing all costs to provide those
services in the meantime. Allowing new exchange entrants time to build
and sustain market share through various pricing incentives before
increasing non-transaction fees encourages market entry and fee parity,
which promotes competition among exchanges. It also enables new
exchanges to mature their markets and allow market participants to
trade on the new exchanges without fees serving as a potential barrier
to attracting memberships and order flow.\84\
---------------------------------------------------------------------------
\82\ See MIAX PEARL Successfully Launches Trading Operations,
dated February 6, 2017, available at https://www.miaxoptions.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf.
\83\ See Securities Exchange Act Release No. 80061 (February 17,
2017), 82 FR 11676 (February 24, 2017) (SR-PEARL-2017-10).
\84\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX. . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
---------------------------------------------------------------------------
Later in 2018, as the Exchange's market share increased,\85\ the
Exchange adopted nominal fees for Full Service MEO Ports.\86\ The
Exchange last increased the fees for its 10Gb ULL fiber connections
from $9,300 to $10,000 per month on January 1, 2021.\87\ 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.
---------------------------------------------------------------------------
\85\ The Exchange experienced a monthly average trading volume
of 3.94% for the month of March 2018. See Market at a Glance,
available at www.miaxoptions.com.
\86\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
\87\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
---------------------------------------------------------------------------
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'. . ..'' \88\
---------------------------------------------------------------------------
\88\ 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.'' \89\
---------------------------------------------------------------------------
\89\ 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.''' \90\ As a
result, and as evidenced above, the Commission has historically relied
on competitive forces to determine whether a fee proposal is equitable,
fair, reasonable, and not unreasonably or unfairly discriminatory. ``If
competitive forces are operative, the self-interest of the exchanges
themselves will work powerfully to constrain unreasonable or unfair
behavior.'' \91\ 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.'' \92\ 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.'' \93\
---------------------------------------------------------------------------
\90\ 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.'').
\91\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\92\ Id.
\93\ See Staff Guidance, supra note 19.
---------------------------------------------------------------------------
The Exchange believes the competing exchanges' 10Gb connectivity
and port fees are useful examples of alternative approaches to
providing and charging for access and demonstrating how such fees are
competitively set and
[[Page 2717]]
constrained. To that end, the Exchange believes the proposed fees are
reasonable because the proposed fees are similar to or less than fees
charged for similar connectivity and port access provided by other
options exchanges with comparable market shares. As such, the Exchange
believes that denying its ability to institute fees that are closer to
parity with legacy exchanges, in effect, impedes its ability to
compete, including in its pricing of transaction fees and ability to
invest in competitive infrastructure.
The following table shows how the Exchange's proposed fees remain
similar to or less than fees charged for similar connectivity and port
access provided by other options exchanges with similar market share.
Each of the market data rates in place at competing options exchanges
were filed with the Commission for immediate effectiveness and remain
in place today.
----------------------------------------------------------------------------------------------------------------
Exchange Type of connection or port Monthly fee (per connection or per port)
----------------------------------------------------------------------------------------------------------------
MIAX Pearl (as proposed) (equity options 10Gb ULL connection........ $13,500.
market share of 4.45% for the month of Full Service MEO Port Lesser of either the per class basis or
November 2022) \94\. (Bulk) for Market Makers. percentage of total national ADV by the
Market Maker, as follows:
$5,000-up to 10 classes or up to 20% of
classes by volume.
$7,500 **-up to 40 classes or up to 35%
of classes by volume.
$10,000 **-up to 100 classes or up to 50%
of classes by volume.
$12,000 **-over 100 classes or over 50%
of all classes by volume up to all
classes (or $500 per port per matching
engine).
** A lower rate of $6,000 will apply to
these tiers if the Market Maker's total
monthly executed volume is less than
0.040% of total monthly TCV for MIAX
Pearl options.
Full Service MEO Port $7,500 (or $312.50 per port per matching
(Bulk) for EEMs. engine).
Full Service MEO Port $4,000 (or $166.66 per port per matching
(Single) for Market Makers engine).
and EEMs.
NASDAQ \95\ (equity options market share 10Gb Ultra fiber connection $15,000 per connection.
of 7.14% for the month of November SQF Port................... 1-5 ports: $1,500 per port.
2022) \96\. 6-20 ports: $1,000 per port.
21 or more ports: $500 per port.
NASDAQ ISE LLC (``ISE'') \97\ (equity 10Gb Ultra fiber connection $15,000 per connection.
options market share of 6.19% for the SQF Port................... $1,100 per port.
month of November 2022) \98\.
NYSE American LLC (``NYSE American'') 10Gb LX LCN connection..... $22,000 per connection.
\99\ (equity options market share of Order/Quote Entry Port..... Ports 1-40. $450 per port.
6.93% for the month of November 2022) Ports 41 and greater. $150 per port.
\100\.
NASDAQ GEMX, LLC (``GEMX'') \101\ 10Gb Ultra connection...... $15,000 per connection.
(equity options market share of 1.93% SQF Port................... $1,250 per port.
for the month of November 2022) \102\.
----------------------------------------------------------------------------------------------------------------
The Exchange acknowledges that, without additional contextual
information, the above table may lead someone to believe that the
Exchange's proposed fees for Full Service MEO Ports is higher than
other exchanges when in fact, that is not true. The Exchange provides
each Member or non-Member access to two (2) ports on all twelve (12)
matching engines for a single fee and a vast majority choose to connect
to all twelve (12) matching engines and utilize both ports for a total
of 24 ports. Other exchanges charge on a per port basis and require
firms to connect to multiple matching engines, thereby multiplying the
cost to access their full market.\103\
---------------------------------------------------------------------------
\94\ See supra note 85.
\95\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\96\ See supra note 85.
\97\ See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8: Connectivity.
\98\ See supra note 85.
\99\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
\100\ See supra note 85.
\101\ See GEMX Pricing Schedule, Options 7, Section 6,
Connectivity Fees and GEMX Rules, General 8: Connectivity.
\102\ See supra note 85.
\103\ See Specialized Quote Interface Specification, Nasdaq
PHLX, Nasdaq Options Market, Nasdaq BX Options, Version 6.5a,
Section 2, Architecture (revised August 16, 2019), available at
https://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------
There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options
exchanges. Market participants may choose to become a member of one or
more options exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, one Member will terminate their membership effective January
1, 2023 as a direct result of the proposed fee changes.
It is not a requirement for market participants to become members
of all options exchanges, in fact, certain market participants conduct
an options business as a member of only one options market.\104\ A very
small number
[[Page 2718]]
of market participants choose to become a member of all sixteen options
exchanges. Most firms that actively trade on options markets are not
currently Members of the Exchange and do not purchase connectivity or
port services at the Exchange. Connectivity and ports are only
available to Members or service bureaus, and only a Member may utilize
a port.\105\
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\104\ 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.''
\105\ Service Bureaus may obtain ports on behalf of Members.
---------------------------------------------------------------------------
One other exchange recently noted in a proposal to amend their own
trading permit fees that of the 62 market making firms that are
registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access
only one of the three exchanges.\106\ 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 are
members of only two (2) affiliated exchanges, and eight (8) are members
of only one affiliated exchange. The Exchange also notes that no firm
is a Member of the Exchange only. The above data evidences that a
broker-dealer need not have direct connectivity to all options
exchanges, let alone the Exchange and its two affiliates, and broker-
dealers may elect to do so based on their own business decisions and
need to directly access each exchange's liquidity pool.
---------------------------------------------------------------------------
\106\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change to Amend the
Fee Schedule on the BOX Options Market LLC Facility To Adopt
Electronic Market Maker Trading Permit Fees). The Exchange believes
that BOX's observation demonstrates that market making firms can,
and do, select which exchanges they wish to access, and,
accordingly, options exchanges must take competitive considerations
into account when setting fees for such access.
---------------------------------------------------------------------------
Not only is there not an actual regulatory requirement to connect
to every options exchange, the Exchange believes there is also no ``de
facto'' or practical requirement as well, as further evidenced by the
broker-dealer membership analysis of the options exchanges discussed
above. As noted above, this is evidenced by the fact that one Member
will terminate their membership effective January 1, 2023 as a direct
result of the proposed fee changes. Indeed, broker-dealers choose if
and how to access a particular exchange and because it is a choice, the
Exchange must set reasonable pricing, otherwise prospective members
would not connect and existing members would disconnect from the
Exchange. The decision to become a member of an exchange, particularly
for registered market makers, is complex, and not solely based on the
non-transactional costs assessed by an exchange. As noted herein,
specific factors include, but are not limited to: (i) an exchange's
available liquidity in options series; (ii) trading functionality
offered on a particular market; (iii) product offerings; (iv) customer
service on an exchange; and (v) transactional pricing. Becoming a
member of the exchange does not ``lock'' a potential member into a
market or diminish the overall competition for exchange services.
In lieu of becoming a member at each options exchange, a market
participant may join one exchange and elect to have their orders routed
in the event that a better price is available on an away market.
Nothing in the Order Protection Rule requires a firm to become a Member
at--or establish connectivity to--the Exchange.\107\ 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.\108\
---------------------------------------------------------------------------
\107\ See Options Order Protection and Locked/Crossed Market
Plan (August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
\108\ Members may elect to not route their orders by utilizing
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------
With respect to the submission of orders, Members may also choose
not to purchase any connection at all from the Exchange, and instead
rely on the port of a third party to submit an order. For example, a
third-party broker-dealer Member of the Exchange may be utilized by a
retail investor to submit orders into an Exchange. An institutional
investor may utilize a broker-dealer, a service bureau,\109\ or request
sponsored access \110\ through a member of an exchange in order to
submit a trade directly to an options exchange.\111\ 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.
---------------------------------------------------------------------------
\109\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be a Member. Some Members utilize a Service Bureau for
connectivity and that Service Bureau may not be a Member. Some
market participants utilize a Service Bureau who is a Member to
submit orders.
\110\ Sponsored Access is an arrangement whereby a Member
permits its customers to enter orders into an exchange's system that
bypass the Member's trading system and are routed directly to the
Exchange, including routing through a service bureau or other third-
party technology provider.
\111\ This may include utilizing a floor broker and submitting
the trade to one of the five options trading floors.
---------------------------------------------------------------------------
Non-Member third-parties, such as service bureaus and extranets,
resell the Exchange's connectivity. This indirect connectivity is
another viable alternative for market participants to trade on the
Exchange without connecting directly to the Exchange (and thus not pay
the Exchange's connectivity fees), which alternative is already being
used by non-Members and further constrains the price that the Exchange
is able to charge for connectivity and other access fees to its market.
The Exchange notes that it could, but chooses not to, preclude market
participants from reselling its connectivity. Unlike other exchanges,
the Exchange also does not currently assess fees on third-party
resellers on a per customer basis (i.e., fees based on the number of
firms that connect to the Exchange indirectly via the third-
party).\112\ 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.\113\ Particularly, in the
event that a market participant views the Exchange's direct
connectivity and access fees as more or less attractive than competing
markets, that market participant can choose to connect to the Exchange
indirectly or may choose not to connect to the Exchange and connect
instead to one or more of the other 16 options markets. Accordingly,
the Exchange believes that the proposed fees are fair and
[[Page 2719]]
reasonable and constrained by competitive forces.
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\112\ 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).
\113\ The Exchange notes that resellers, such as SFTI, are not
required to publicize, let alone justify or file with the Commission
their fees, and as such could charge the market participant any fees
it deems appropriate (including connectivity fees higher than the
Exchange's connectivity fees), even if such fees would otherwise be
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------
The Exchange is obligated to regulate its Members and secure access
to its environment. In order to properly regulate its Members and
secure the trading environment, the Exchange takes measures to ensure
access is monitored and maintained with various controls. Connectivity
and ports are methods utilized by the Exchange to grant Members secure
access to communicate with the Exchange and exercise trading rights.
When a market participant elects to be a Member, and is approved for
membership by the Exchange, the Member is granted trading rights to
enter orders and/or quotes into Exchange through secure connections.
Again, there is no legal or regulatory requirement that a market
participant become a Member of the Exchange, or, if it is a Member, to
purchase connectivity beyond the one connection that is necessary to
quote or submit orders on the Exchange. Members may freely choose to
rely on one or many connections, depending on their business model.
Bifurcation of 10Gb ULL Connectivity and Related Fees
The Exchange stresses that bifurcating the 10Gb ULL connectivity
between the Exchange and MIAX was not designed with the objective to
generate an overall increase in access fee revenue. Rather, the
proposed change is necessitated by 10Gb ULL connectivity experiencing a
significant decrease in port availability mostly driven by connectivity
demands of latency sensitive Members that seek to maintain multiple
10Gb ULL connections on every switch in the network. Due to the ever-
increasing connectivity demands, the Exchange found it necessary to
bifurcate 10Gb ULL connectivity to the Exchange's and MIAX Pearl's
Systems and networks to continue to meet ongoing and future 10Gb ULL
connectivity and access demands. Such changes accordingly necessitated
a review of the Exchange's previous 10Gb ULL connectivity fees and
related costs. The proposed fees are reasonable as they are intended to
allow the Exchange to cover ongoing costs related to providing and
maintaining such connectivity, described more fully below. The ever
increasing connectivity demands that necessitated this change also
proves that the proposed fees are reasonable because this demand
reflects that Members and non-Members believe they are getting value
from the 10Gb ULL connections they purchase.
The Exchange announced on August 12, 2022 the planned network
change and January 23, 2023 implementation date to provide market
participants adequate time to prepare.\114\ Since August 12, 2022, the
Exchange has worked with current 10Gb ULL subscribers to address their
connectivity needs ahead of the January 23, 2023 date. Based on those
interactions and subscriber feedback, the Exchange expects a minimal
net increase of approximately six (6) overall 10Gb ULL connectivity
subscriptions across the Exchange and MIAX. This anticipated immaterial
increase in overall connections reflect a minimal fee impact for all
types of subscribers and reflects that subscribers elected to
reallocate existing 10Gb ULL connectivity directly to the Exchange or
MIAX, or chose to decrease or cease connectivity as a result of the
change.
---------------------------------------------------------------------------
\114\ See supra note 8.
---------------------------------------------------------------------------
Should the Commission Staff disapprove such fees, it would
effectively dictate how an exchange manages its technology and would
hamper the Exchange's ability to continue to invest in and fund access
services in a manner that allows it to meet existing and anticipated
access demands of market participants. Disapproval could also have the
adverse effect of discouraging exchanges from innovating technology to
the benefit of market participants if it believes the Commission would
later prevent that exchange from monetizing its innovation, thus
adversely impacting competition. Also, as noted above, the economic
consequences of not being able to better establish fee parity with
other exchanges for non-transaction fees hampers the Exchange's ability
to compete as aggressively on transaction fees.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
seeks to be especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and also carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level of diligence and transparency is called for by the
requirements of Section 19(b)(1) under the Act,\115\ and Rule 19b-4
thereunder,\116\ with respect to the types of information SROs should
provide when filing fee changes, and Section 6(b) of the Act,\117\
which requires, among other things, that exchange fees be reasonable
and equitably allocated,\118\ not designed to permit unfair
discrimination,\119\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\120\ 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.\121\ 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.
---------------------------------------------------------------------------
\115\ 15 U.S.C. 78s(b)(1).
\116\ 17 CFR 240.19b-4.
\117\ 15 U.S.C. 78f(b).
\118\ 15 U.S.C. 78f(b)(4).
\119\ 15 U.S.C. 78f(b)(5).
\120\ 15 U.S.C. 78f(b)(8).
\121\ See Staff Guidance, supra note 19.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $11,567,509 (or approximately $963,959 per month, rounded
to the nearest dollar when dividing the annual cost by 12 months) and
its aggregate annual costs for providing Full Service MEO Ports at
$1,644,132 (or approximately $137,012 per month, rounded to the nearest
dollar when dividing the annual cost by 12 months). In order to cover
the aggregate costs of providing connectivity to its Users (both
Members and non-Members \122\) going forward and to make a modest
profit, as described below, the Exchange proposes to modify its Fee
[[Page 2720]]
Schedule to charge a fee of $13,500 per month for each physical 10Gb
ULL connection and to remove language providing for a shared 10Gb ULL
network between the Exchange and MIAX. The Exchange also proposes to
modify its Fee Schedule to charge tiered rates for Full Service MEO
Ports (Bulk) depending on the number of classes assigned or the
percentage of national ADV, which is in line with how the Exchange's
affiliates, MIAX and MIAX Emerald, assess fees for their comparable MEI
Ports.
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\122\ 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 2019, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\123\ 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 1Gb and 10Gb ULL physical
connectivity (62%), with smaller allocations to all ports (5%), 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.
---------------------------------------------------------------------------
\123\ The Exchange frequently updates it Cost Analysis as
strategic initiatives change, costs increase or decrease, and market
participant needs and trading activity changes. The Exchange's most
recent Cost Analysis was conducted ahead of this filing.
---------------------------------------------------------------------------
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity and
port services, membership fees, regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue. The Exchange also notes that as a general
matter each of these sources of revenue is based on services that are
interdependent. For instance, the Exchange's system for executing
transactions is dependent on physical hardware and connectivity, only
Members and parties that they sponsor to participate directly on the
Exchange may submit orders to the Exchange, many Members (but not all)
consume market data from the Exchange in order to trade on the
Exchange, and the Exchange consumes market data from external sources
in order to comply with regulatory obligations. Accordingly, given this
interdependence, the allocation of costs to each service or revenue
source required judgment of the Exchange and was weighted based on
estimates of the Exchange that the Exchange believes are reasonable, as
set forth below. While there is no standardized and generally accepted
methodology the allocation of an exchange's costs, the Exchange's
methodology is the result of an extensive review and analysis and will
be consistently applied going forward for any other potential fee
proposals.
Through the Exchange's extensive updated Cost Analysis, the
Exchange analyzed every expense item in the Exchange's general expense
ledger to determine whether each such expense relates to the provision
of connectivity services, and, if such expense did so relate, what
portion (or percentage) of such expense actually supports the provision
of connectivity services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to network connectivity
services. In turn, the Exchange allocated certain costs more to
physical connectivity and others to ports, while certain costs were
only allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the cost drivers to provide
10Gb ULL connectivity and Full Service MEO Port services, results in an
aggregate monthly cost of approximately $1,106,971 (utilizing the
rounded numbers when dividing the annual cost for 10Gb ULL connectivity
and annual cost for Full Service MEO Ports by 12 months, then adding
both numbers together), as further detailed below.
Costs Related To Offering Physical 10Gb ULL Connectivity
The following chart details the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
10Gb ULL connectivity via an unshared network as well as the percentage
of the Exchange's overall costs that such costs represent for such area
(e.g., as set forth below, the Exchange allocated approximately 26.9%
of its overall Human Resources cost to offering physical connectivity).
[[Page 2721]]
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \124\ \125\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $3,675,098 $306,258 26.3
Connectivity (external fees, cabling, switches, etc.).......... 70,163 5,847 60.6
Internet Services, including External Market Data.............. 322,388 26,866 73.3
Data Center.................................................... 739,983 61,665 60.6
Hardware and Software Maintenance and Licenses................. 959,157 79,930 58.6
Depreciation................................................... 1,885,969 157,164 58.2
Allocated Shared Expenses...................................... 3,914,751 326,229 49.2
------------------------------------------------
Total...................................................... 11,567,509 963,959 40.5
----------------------------------------------------------------------------------------------------------------
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 10Gb ULL
connectivity.
---------------------------------------------------------------------------
\124\ The Annual Cost includes figures rounded to the nearest
dollar.
\125\ The Monthly Cost was determined by dividing the Annual
Cost for each line item by twelve (12) months and rounding up or
down to the nearest dollar.
---------------------------------------------------------------------------
Human Resources
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity) and for which the Exchange allocated a percentage of
42.9% 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 17%). The Exchange
notes that it has 184 employees and each department leader has direct
knowledge of the time spent by those spent by each employee with
respect to the various tasks necessary to operate the Exchange. The
estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing physical connectivity, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of their time such employees devote to
tasks related to providing physical connectivity. The Exchange notes
that senior level executives were only allocated Human Resources costs
to the extent the Exchange believed they are involved in overseeing
tasks related to providing physical connectivity. The Human Resources
cost was calculated using a blended rate of compensation reflecting
salary, equity and bonus compensation, benefits, payroll taxes, and
401(k) matching contributions.
Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges and third parties, cabling and switches required to
operate the Exchange. The Connectivity line-item is more narrowly
focused on technology used to complete connections to the Exchange and
to connect to external markets. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity and content service
providers for connectivity and data feeds for the entire U.S. options
industry, as well as content, connectivity, and infrastructure services
for critical components of the network that are necessary to provide
and maintain its System Networks and access to its System Networks via
10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity
and content service providers to connect to other national securities
exchanges, the Options Price Reporting Authority (``OPRA''), and to
receive market data from other exchanges and market data providers. The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity and market data provided these service
providers is critical to the Exchanges daily operations and performance
of its System Networks to which market participants connect to via 10Gb
ULL connectivity. Without these services providers, the Exchange would
not be able to connect to other national securities exchanges, market
data providers, or OPRA and, therefore, would not be able to operate
and support its System Networks. The Exchange does not employ a
separate fee to cover its connectivity and content service provider
expense and recoups that expense, in part, by charging for 10Gb ULL
connectivity.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (60.6%) to
physical 10Gb ULL connectivity because the third-party data centers and
the Exchange's physical equipment contained therein is the most direct
cost in providing physical access to the Exchange. In other words, for
the Exchange to operate in a dedicated space with connectivity of
participants to a physical trading platform, the data centers are a
very tangible cost, and in turn, if the Exchange did not maintain such
a presence then physical connectivity would be of no value to market
participants.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
10Gb ULL connectivity as such market data is necessary here to offer
certain services related to such connectivity, such as certain risk
checks that are performed prior to execution, and checking for other
conditions (e.g., re-pricing of orders to avoid lock or crossed
markets, trading collars). This allocation was included as part of the
Internet Services
[[Page 2722]]
cost described above. Thus, as market data from other Exchanges is
consumed at the matching engine level, (to which 10Gb ULL connectivity
provides access to) in order to validate orders before additional
entering the matching engine or being executed, the Exchange believes
it is reasonable to allocate a small amount of such costs to 10Gb ULL
connectivity.
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of Exchange infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 58.2% of all depreciation costs to providing physical 10Gb
ULL connectivity. The Exchange notes, however, that it did not allocate
depreciation costs for any depreciated software necessary to operate
the Exchange to physical connectivity, as such software does not impact
the provision of physical connectivity.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall physical connectivity costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide physical connectivity. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange notes that the cost of paying
directors to serve on its Board of Directors is also included in the
Exchange's general shared expenses.\126\ The Exchange notes that the
49.2% allocation of general shared expenses for physical 10Gb ULL
connectivity is higher than that allocated to general shared expenses
for Full Service 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), Full
Service MEO Ports do not require as many broad or indirect resources as
other Core Services. The total monthly cost for 10Gb ULL connectivity
of $963,959 was divided by the number of physical 10Gb ULL connections
the Exchange maintained at the time that proposed pricing was
determined (108), to arrive at a cost of approximately $8,925 per
month, per physical 10Gb ULL connection.
---------------------------------------------------------------------------
\126\ 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 Full Service MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Full Service MEO
Ports as well as the percentage of the Exchange's overall costs such
costs represent for such area (e.g., as set forth below, the Exchange
allocated approximately 8.3% of its overall Human Resources cost to
offering Full Service MEO Ports).
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \127\ \128\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................ $1,159,831 $96,653 8.3
Connectivity (external fees, cabling, switches, etc.).......... 1,589 132 1.4
Internet Services, including External Market Data.............. 6,033 503 1.4
Data Center.................................................... 41,881 3,490 3.4
Hardware and Software Maintenance and Licenses................. 22,438 1,870 1.4
Depreciation................................................... 127,986 10,666 3.9
Allocated Shared Expenses...................................... 284,374 23,698 3.6
------------------------------------------------
Total...................................................... 1,644,132 137,012 5.8
----------------------------------------------------------------------------------------------------------------
Human Resources
---------------------------------------------------------------------------
\127\ See supra note 124 (describing rounding of Annual Costs).
\128\ See supra note 125 (describing rounding of Monthly Costs
based on Annual Costs).
---------------------------------------------------------------------------
With respect to Full Service MEO Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Full Service 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 Full Service MEO Ports, the Exchange also includes a portion of its
costs related to
[[Page 2723]]
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). This allocation was included as
part of the internet Services cost described above.\129\ 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.
---------------------------------------------------------------------------
\129\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of order entry infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 3.9% of
all depreciation costs to providing Full Service MEO Ports. In contrast
to physical connectivity, described above, the Exchange did allocate
depreciation costs for depreciated software necessary to operate the
Exchange to Full Service 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 Full Service 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 4.0% of the overall cost for
directors was allocated to providing Full Service MEO Ports. The
Exchange notes that the 3.6% allocation of general shared expenses for
Full Service 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 Full Service MEO Ports have several
areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Centers, as described above), 10Gb
ULL connectivity requires a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange. The total monthly cost of $137,012 was
divided by the number of Full Service MEO Ports the Exchange maintained
at the time that proposed pricing was determined (20 total; 16 Full
Service MEO Port, Bulk, and 4 Full Service MEO Port, Single), to arrive
at a cost of approximately $6,851 per month, per Full Service MEO Port.
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or Full Service 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 (42.9%) given their
focus on functions necessary to provide physical connections. The
salaries of those same personnel were allocated only 12.3% to Full
Service MEO Ports and the remaining 44.8% was allocated to 1Gb
connectivity, other port services, transaction services, membership
services and market data. The Exchange did not allocate any other Human
Resources expense for providing physical connections to any other
employee group, outside of a smaller allocation of 16.9% for 10Gb ULL
connectivity or 17.3% for the entire network, of the cost associated
with certain specified personnel who work closely with and support
network infrastructure personnel. In contrast, the Exchange allocated
much smaller percentages of costs (6.0% or less) across a wider range
of personnel groups in order to allocate Human Resources costs to
providing Full Service MEO Ports. This is because a much wider range of
personnel are involved in functions necessary to offer, monitor and
maintain Full Service MEO Ports but the tasks necessary to do so are
not a primary or full-time function.
In total, the Exchange allocated 26.9% of its personnel costs to
providing physical connections and 8.3% of its personnel costs to
providing Full Service MEO Ports, for a total allocation of 35.2% Human
Resources expense to provide these specific connectivity services. In
turn, the Exchange allocated the remaining 64.8% of its Human Resources
expense to membership services, transaction services, other port
services and market data. Thus, again, the Exchange's allocations of
cost across core services were based on real costs of operating the
Exchange and were not double-counted across the core services or their
associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and Full Service 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
[[Page 2724]]
equipment, such as dedicated servers, computers, laptops, monitors,
information security appliances and storage, and network switching
infrastructure equipment, including switches and taps that were
purchased to operate and support the network. Without this equipment,
the Exchange would not be able to operate the network and provide
connectivity services to its Members and non-Members and their
customers. However, the Exchange did not allocate all of the
depreciation and amortization expense toward the cost of providing
connectivity services, but instead allocated approximately 62.1% of the
Exchange's overall depreciation and amortization expense to
connectivity services (58.2% attributed to 10Gb ULL physical
connections and 3.9% to Full Service MEO Ports). The Exchange allocated
the remaining depreciation and amortization expense (approximately
37.9%) toward the cost of providing transaction services, membership
services, other port services and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or Full Service 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 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 \130\
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\130\ For purposes of calculating revenue for 10Gb ULL
connectivity, the Exchange used projected revenues for February
2023, the first full month for which it will provide dedicated 10Gb
ULL connectivity to the Exchange and cease operating a shared 10Gb
ULL network with MIAX.
---------------------------------------------------------------------------
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 $11,567,509. Based on current 10Gb
ULL connectivity services usage, the Exchange would generate annual
revenue of approximately $17,496,000. This represents a modest profit
of 34% when compared to the cost of providing 10Gb ULL connectivity
services. The Exchange's Cost Analysis estimates the annual cost to
provide Full Service MEO Port services at $1,644,132. Based on current
Full Service MEO Port services usage, the Exchange would generate
annual revenue of approximately $1,644,000. This represents a small
negative margin when compared to the cost of providing Full Service 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 10Gb ULL connectivity and Full
Service MEO Port services versus the total projected revenue of the
Exchange associated with network 10Gb ULL connectivity and Full Service
MEO Port services.
* * * * *
The Exchange has operated at a cumulative net annual loss since it
launched operations in 2017.\131\ The Exchange has operated at a net
loss due to a number of factors, one of which is choosing to forgo
revenue by offering certain products, such as connectivity, at lower
rates than other options
[[Page 2725]]
exchanges to attract order flow and encourage market participants to
experience the high determinism, low latency, and resiliency of the
Exchange's trading systems. The Exchange should not now be penalized
for seeking to raise its fees in light of necessary technology changes
and its increased costs after offering such products as discounted
prices. Therefore, the Exchange believes the proposed fees are
reasonable because they are based on both relative costs to the
Exchange to provide dedicated 10Gb ULL connectivity and Full Service
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 10Gb ULL
connectivity and Full Service MEO Ports.
---------------------------------------------------------------------------
\131\ The Exchange has incurred a cumulative loss of $79 million
since its inception in 2017 to 2021. 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 environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 10Gb ULL connectivity and Full Service MEO Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Full Service MEO Ports and/or
obtaining new clients that will purchase such access. To the extent the
Exchange is successful in encouraging new clients to utilize 10Gb ULL
connectivity and Full Service MEO Ports, the Exchange does not believe
it should be penalized for such success. The Exchange, like other
exchanges, is, after all, a for-profit business, which provides
economic value to its Members. To the extent the Exchange has mispriced
and experiences a net loss in clients, the Exchange could experience a
net reduction in revenue. While the Exchange believes in transparency
around costs and potential revenue, the Exchange does not believe that
these estimates should form the sole basis of whether or not a proposed
fee is reasonable or can be adopted.
Further, the proposal reflects the Exchange's efforts to control
its costs, which the Exchange does on an ongoing basis as a matter of
good business practice. A potential profit margin should not be judged
alone based on its size, but is also indicative of costs management and
whether the ultimate fee reflects the value of the services provided.
For example, a profit margin on one exchange should not be deemed
excessive where that exchange has been successful in controlling its
costs, but not excessive where on another exchange where that exchange
is charging comparable fees but has a lower profit margin due to higher
costs. Doing so could have the perverse effect of not incentivizing
cost control where higher costs alone could be used to justify fees
increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have the same business
needs for the high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct options markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages to satisfy its record keeping requirements under
the Exchange Act.\132\ 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.
---------------------------------------------------------------------------
\132\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
Full Service MEO Ports
The tiered pricing structure for Full Service MEO Ports has been in
effect since 2018.\133\ The Exchange now proposes a pricing structure
that is used by the Exchange's affiliates, MIAX and MIAX Emerald,
except with lower pricing for each tier for Full Service MEO Ports
(Bulk) and a flat fee for Full Service MEO Ports (Single). Members that
are frequently in the highest tier for Full Service MEO Ports consume
the most bandwidth and resources of the network. Specifically, like
above for the 10Gb ULL connectivity, the Exchange notes that the Market
Makers who reach the highest tier for Full Service MEO Ports (Bulk)
account for approximately greater than 84% of ADV on the Exchange,
while Market Makers that are typically in the lowest Tier for Full
Service MEO Ports, account for approximately less than 14% of ADV on
the Exchange. The remaining 1% is accounted for by Market Makers who
are frequently in the middle Tier for Full Service MEO Ports (Bulk).
---------------------------------------------------------------------------
\133\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------
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
[[Page 2726]]
Exchange Act.\134\ Thus, as the number of connections a Market Maker
has increases, the related pull on Exchange resources also increases.
The Exchange sought to design the proposed tiered-pricing structure to
set the amount of the fees to relate to the number of connections a
firm purchases. The more connections purchased by a Market Maker likely
results in greater expenditure of Exchange resources and increased cost
to the Exchange.
---------------------------------------------------------------------------
\134\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange further believes that the proposed fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for the flat fee, the Exchange provides each Member two (2)
Full Service MEO Ports for each matching engine to which that Member is
connected. Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\135\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports per matching
engine to which it connects. The Exchange currently has twelve (12)
matching engines, which means Members may receive up to twenty-four
(24) Full Service MEO Ports for a single monthly fee, that can vary
based on certain volume percentages. The Exchange currently assesses
Members a fee of $5,000 per month in the highest Full Service MEO
Port--Bulk Tier, regardless of the number of Full Service MEO Ports
allocated to the Member. Assuming a Member connects to all twelve (12)
matching engines during a month, with two Full Service MEO Ports per
matching engine, this results in a cost of $208.33 per Full Service MEO
Port--Bulk ($5,000 divided by 24) for the month. This fee has been
unchanged since the Exchange adopted Full Service MEO Port fees in
2018.\136\ Members will continue to receive two (2) Full Service MEO
Ports to each matching engine to which they are connected for the
single flat monthly fee. Assuming a Member connects to all twelve (12)
matching engines during the month, and achieves the highest Tier for
that month, with two Full Service MEO Ports (Bulk) per matching engine,
this would result in a cost of $500 per Full Service MEO Port ($12,000
divided by 24).
---------------------------------------------------------------------------
\135\ See supra notes 95 to 102 and accompanying text.
\136\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Full Service 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 2017 \137\ due to providing a low-
cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems. To do so, the Exchange chose to waive the
fees for some non-transaction related services and Exchange products or
provide them at a very lower fee, which was not profitable to the
Exchange. This resulted in the Exchange forgoing revenue it could have
generated from assessing any fees or higher fees. The Exchange could
have sought to charge higher fees at the outset, but that could have
served to discourage participation on the Exchange. Instead, the
Exchange chose to provide a low-cost exchange alternative to the
options industry, which resulted in lower initial revenues. Examples of
this are 10Gb ULL connectivity and Full Service MEO Ports, for which
the Exchange only now seeks to adopt fees at a level similar to or
lower than those of other options exchanges.
---------------------------------------------------------------------------
\137\ See supra note 131.
---------------------------------------------------------------------------
Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As is the case with the current proposed flat
fee, the proposed fee would apply uniformly to all market participants
regardless of the number of connections they choose to purchase. The
proposed fee does not favor certain categories of market participants
in a manner that would impose an undue burden on competition.
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and
customers of those resellers to compete with other market participants
or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one Member will terminate their membership on
January 1, 2023 as a direct result of the proposed fee changes. 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
[[Page 2727]]
allocation of the proposed connectivity fees reflects the network
resources consumed by the various size of market participants and the
costs to the Exchange of providing such connectivity services.
Inter-Market Competition
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. There is no reason to believe that our
proposed price increase will harm another exchange's ability to
compete. There are other options markets of which market participants
may connect to trade options at higher rates than the Exchange's. There
is also a range of alternative strategies, including routing to the
exchange through another participant or market center or accessing the
Exchange indirectly. Market participants are free to choose which
exchange or reseller to use to satisfy their business needs.
Accordingly, the Exchange does not believe its proposed fee changes
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
The Exchange also believes that the proposed fees for 10Gb
connectivity are appropriate and warranted in light of it bifurcating
10Gb connectivity between the Exchange and MIAX and would not impose
any burden on competition because this is a technology driven change
that would assist the Exchange in recovering costs related to providing
dedicating 10Gb connectivity to the Exchange while enabling it to
continue to meet current and anticipated demands for connectivity by
its Members and other market participants. Separating its 10Gb network
from MIAX would enable the Exchange to better compete with other
exchanges by ensuring it can continue to provide adequate connectivity
to existing and new Members, which may increase in ability to compete
for order flow and deepen its liquidity pool, improving the overall
quality of its market.
The proposed rates for 10Gb ULL connectivity are also driven by the
Exchange's need to bifurcate its 10Gb ULL network shared with MIAX so
that it can continue to meet current and anticipated connectivity
demands of all market participants. Similarly, and also in connection
with a technology change, Cboe Exchange, Inc. (``Cboe'') amended access
and connectivity fees, including port fees.\138\ Specifically, Cboe
adopted certain logical ports to allow for the delivery and/or receipt
of trading messages--i.e., orders, accepts, cancels, transactions, etc.
Cboe established tiered pricing for BOE and FIX logical ports, tiered
pricing for BOE Bulk ports, and flat prices for DROP, Purge Ports, GRP
Ports and Multicast PITCH/Top Spin Server Ports. Cboe argued in its fee
proposal that the proposed pricing more closely aligned its access fees
to those of its affiliated exchanges, and reasonably so, as the
affiliated exchanges offer substantially similar connectivity and
functionality and are on the same platform that Cboe migrated to.\139\
Cboe also justified its proposal by stating that, ``. . . the Exchange
believes substitutable products and services are in fact available to
market participants, including, among other things, other options
exchanges a market participant may connect to in lieu of the Exchange,
indirect connectivity to the Exchange via a third-party reseller of
connectivity and/or trading of any options product, including
proprietary products, in the Over-the-Counter (OTC) markets.'' \140\
Cboe stated in its proposal that,
---------------------------------------------------------------------------
\138\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105). The
Exchange notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
\139\ Id. at 71676.
\140\ Id.
---------------------------------------------------------------------------
The rule structure for options exchanges are also fundamentally
different from those of equities exchanges. In particular, options
market participants are not forced to connect to (and purchase market
data from) all options exchanges. For example, there are many order
types that are available in the equities markets that are not utilized
in the options markets, which relate to mid-point pricing and pegged
pricing which require connection to the SIPs and each of the equities
exchanges in order to properly execute those orders in compliance with
best execution obligations. Additionally, in the options markets, the
linkage routing and trade through protection are handled by the
exchanges, not by the individual members. Thus not connecting to an
options exchange or disconnecting from an options exchange does not
potentially subject a broker-dealer to violate order protection
requirements. Gone are the days when the retail brokerage firms (such
as Fidelity, Schwab, and eTrade) were members of the options
exchanges--they are not members of the Exchange or its affiliates, they
do not purchase connectivity to the Exchange, and they do not purchase
market data from the Exchange. Accordingly, not only is there not an
actual regulatory requirement to connect to every options exchange, the
Exchange believes there is also no ``de facto'' or practical
requirement as well, as further evidenced by the recent significant
reduction in the number of broker-dealers that are members of all
options exchanges.\141\
---------------------------------------------------------------------------
\141\ Id. at 71676.
---------------------------------------------------------------------------
The proposal also referenced the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\142\ wherein
the Commission discussed the existence of competition in the
marketplace generally, and particularly for exchanges with unique
business models. The Commission acknowledged that, even if an exchange
were to exit the marketplace due to its proposed fee-related change, it
would not significantly impact competition in the market for exchange
trading services because these markets are served by multiple
competitors.\143\ Further, the Commission explicitly stated that
``[c]onsequently, demand for these services in the event of the exit of
a competitor is likely to be swiftly met by existing competitors.''
\144\ Finally, the Commission recognized that while some exchanges may
have a unique business model that is not currently offered by
competitors, a competitor could create similar business models if
demand were adequate, and if a competitor did not do so, the Commission
believes it would be likely that new entrants would do so if the
exchange with that unique business model was otherwise profitable.\145\
---------------------------------------------------------------------------
\142\ See Securities Exchange Act Release No. 86901 (September
9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
\143\ Id.
\144\ Id.
\145\ Id.
---------------------------------------------------------------------------
Cboe also filed to establish a monthly fee for Certification
Logical Ports of $250 per Certification Logical Port.\146\ Cboe
reasoned that purchasing additional Certification Logical Ports, beyond
the one Certification Logical Port per logical port type offered in the
production environment free of charge, is voluntary and not required in
order to participate in the production
[[Page 2728]]
environment, including live production trading on the Exchange.\147\
---------------------------------------------------------------------------
\146\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011). Cboe offers
BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical
Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server
Ports. For each type of the aforementioned logical ports that are
used in the production environment, the Exchange also offers
corresponding ports which provide Trading Permit Holders and non-
TPHs access to the Exchange's certification environment to test
proprietary systems and applications (i.e., ``Certification Logical
Ports'').
\147\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011).
---------------------------------------------------------------------------
In its statutory basis, Cboe justified the new port fee by stating
that it believed the Certification Logical Port fee were reasonable
because while such ports were no longer completely free, TPHs and non-
TPHs would continue to be entitled to receive free of charge one
Certification Logical Port for each type of logical port that is
currently offered in the production environment.\148\ Cboe noted that
other exchanges assess similar fees and cited to NASDAQ LLC and
MIAX.\149\ Cboe also noted that the decision to purchase additional
ports is optional and no market participant is required or under any
regulatory obligation to purchase excess Certification Logical Ports in
order to access the Exchange's certification environment.\150\ Finally,
similar proposals to adopt a Certification Logical Port monthly fee
were filed by Cboe BYX Exchange, Inc.,\151\ BZX,\152\ and Cboe EDGA
Exchange, Inc.\153\
---------------------------------------------------------------------------
\148\ Id. at 18426.
\149\ Id.
\150\ Id.
\151\ See Securities Exchange Act Release No. 94507 (March 24,
2002), 87 FR 18439 (March 30, 2022) (SR-CboeBYX-2022-004).
\152\ See Securities Exchange Act Release No. 94511 (March 24,
2002), 87 FR 18411 (March 30, 2022) (SR-CboeBZX-2022-021).
\153\ See Securities Exchange Act Release No. 94517 (March 25,
2002), 87 FR 18848 (March 31, 2022) (SR-CboeBZX-2022-021).
---------------------------------------------------------------------------
The Cboe fee proposals described herein were filed subsequent to
the D.C. Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866
F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject
to the same (and current) standard for SEC review and approval as this
proposal. In summary, the Exchange requests the Commission apply the
same standard of review to this proposal which was applied to the
various Cboe and Cboe affiliated markets' filings with respect to non-
transaction fees. If the Commission were to apply a different standard
of review to this proposal than it applied to other exchange fee
filings it would create a burden on competition such that it would
impair the Exchange's ability to make necessary technology driven
changes, such as bifurcating its 10Gb ULL network, because it would be
unable to monetize or recoup costs related to that change and compete
with larger, non-legacy exchanges.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\154\ and Rule 19b-4(f)(2) \155\ 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.
---------------------------------------------------------------------------
\154\ 15 U.S.C. 78s(b)(3)(A)(ii).
\155\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-PEARL-2022-62 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-2022-62. 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-2022-62 and should be submitted on
or before February 7, 2023.
[[Page 2729]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\156\
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\156\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00662 Filed 1-13-23; 8:45 am]
BILLING CODE 8011-01-P
