Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Equities Fee Schedule To Modify Certain Connectivity and Port Fees, 15746-15763 [2023-05124]
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Federal Register / Vol. 88, No. 49 / Tuesday, March 14, 2023 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97077; File No. SR–
PEARL–2023–06]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX Pearl
Equities Fee Schedule To Modify
Certain Connectivity and Port Fees
March 8, 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 February
23, 2023, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the fee schedule (the ‘‘Fee
Schedule’’) applicable to MIAX Pearl
Equities, an equities trading facility of
the Exchange to amend certain
connectivity and port fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/pearl at MIAX Pearl’s principal
office, and at the Commission’s Public
Reference Room.
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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
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.
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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1. Purpose
The Exchange proposes to amend the
Fee Schedule to amend fees for: (1) the
1 gigabit (‘‘Gb’’) and 10Gb ultra-low
latency (‘‘ULL’’) fiber connections for
Equity Members 3 and non-Members; (2)
the Financial Information Exchange
(‘‘FIX’’) Ports,4 and the MIAX Express
Orders Interface (‘‘MEO’’) Ports.5 The
Exchange adopted connectivity and port
fees in September 2020,6 and has not
changed those fees since they were
adopted. Since that time, the Exchange
experienced ongoing increases in
expenses, particularly internal
expenses.7 As discussed more fully
below, the Exchange recently calculated
increased annual aggregate costs of
$18,331,650 for providing 1Gb and 10Gb
ULL connectivity combined and
$3,951,993 for providing FIX and MEO
Ports.
Much of the cost relates to monitoring
and analysis of data and performance of
the network via the subscriber’s
connection with nanosecond
granularity, and continuous
improvements in network performance
with the goal of improving the
subscriber’s experience. The costs
associated with maintaining and
enhancing a state-of-the-art network is a
significant expense for the Exchange,
and thus the Exchange believes that it
is reasonable and appropriate to help
offset those increased costs by amending
fees for connectivity and port services.
Subscribers expect the Exchange to
provide this level of support so they
continue to receive the performance
they expect. This differentiates the
Exchange from its competitors.
3 The term ‘‘Equity Member’’ means a Member
authorized by the Exchange to transact business on
MIAX PEARL Equities. See Exchange Rule 1901.
4 ‘‘FIX Order Interface’’ or ‘‘FOI’’ means the
Financial Information Exchange interface for certain
order types as set forth in Exchange Rule 2614. See
the Definitions section of the Fee Schedule.
5 Each MEO interface will have one Full Service
Port (‘‘FSP’’) and one Purge Port. ‘‘Full Service
Port’’ or ‘‘FSP’’ means an MEO port that supports
all MEO order input message types. See the
Definitions section of the Fee Schedule.
6 See Securities Exchange Act Release No. 90651
(December 11, 2020), 85 FR 81971 (December 17,
2020) (SR–PEARL–2020–33).
7 For example, the New York Stock Exchange,
Inc.’s (‘‘NYSE’’) Secure Financial Transaction
Infrastructure (‘‘SFTI’’) network, which contributes
to the Exchange’s connectivity cost, increased its
fees by approximately 9% since 2021. Similarly,
since 2021, the Exchange, and its affiliates,
experienced an increase in data center costs of
approximately 17% and an increase in hardware
and software costs of approximately 19%. These
percentages are based on the Exchange’s actual
2021 and proposed 2023 budgets.
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The Exchange now proposes to amend
the Fee Schedule to amend the fees for
10Gb ULL connectivity and FIX and
MEO Ports in order to recoup ongoing
costs and increased expenses set forth
below in the Exchange’s cost analysis.
The Exchange proposes to implement
the changes to the Fee Schedule
pursuant to this proposal immediately.
The Exchange initially filed the
proposal on December 30, 2022 (SR–
PEARL–2022–61) (the ‘‘Initial
Proposal’’).8 The Exchange recently
withdrew the Initial Proposal and
replaced it with this current proposal
(SR–PEARL–2023–06).
The Exchange previously included a
cost analysis in the Initial Proposal. As
described more fully below, the
Exchange provides an updated cost
analysis that includes, among other
things, additional descriptions of how
the Exchange allocated costs among it
and its affiliated exchanges (separately
among MIAX Pearl Options and MIAX
Pearl Equities, Miami International
Securities Exchange, LLC (‘‘MIAX’’),
and MIAX Emerald, LLC (‘‘MIAX
Emerald,’’ together with MIAX and
MIAX Pearl Options, the ‘‘affiliated
markets’’)) to ensure no cost was
allocated more than once, as well as
additional detail supporting its cost
allocation processes and explanations as
to why a cost allocation in this proposal
may differ from the same cost allocation
in a similar proposal submitted by one
of its affiliated exchanges. Although the
baseline cost analysis used to justify the
proposed fees was made in the Initial
Proposal, the fees themselves have not
changed since the Initial Proposal and
the Exchange still proposes fees that are
intended to cover the Exchange’s cost of
providing 10Gb ULL connectivity and
FIX and MEO Ports with a reasonable
mark-up over those costs.
*
*
*
*
*
Starting in 2017, following the United
States Court of Appeals for the District
of Columbia’s Susquehanna Decision 9
and various other developments, the
Commission began to undertake a
heightened review of exchange filings,
including non-transaction fee filings
that was substantially and materially
different from it prior review process
(hereinafter referred to as the ‘‘Revised
Review Process’’). In the Susquehanna
Decision, the D.C. Circuit Court stated
that the Commission could not maintain
a practice of ‘‘unquestioning reliance’’
8 See Securities Exchange Act Release No. 96631
(January 10, 2023), 88 FR 2671 (January 17, 2023)
(SR–PEARL–2022–61).
9 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
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on claims made by a self-regulatory
organization (‘‘SRO’’) in the course of
filing a rule or fee change with the
Commission.10 Then, on October 16,
2018, the Commission issued an
opinion in Securities Industry and
Financial Markets Association finding
that exchanges failed both to establish
that the challenged fees were
constrained by significant competitive
forces and that these fees were
consistent with the Act.11 On that same
day, the Commission issued an order
remanding to various exchanges and
national market system (‘‘NMS’’) plans
challenges to over 400 rule changes and
plan amendments that were asserted in
57 applications for review (the ‘‘Remand
Order’’).12 The Remand Order directed
the exchanges to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based
on that record, in a written decision that
is sufficient to enable us to perform our
review.’’ 13 The Commission denied
requests by various exchanges and plan
participants for reconsideration of the
Remand Order.14 However, the
Commission did extend the deadlines in
the Remand Order ‘‘so that they d[id]
not begin to run until the resolution of
the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the
court’s mandate.’’ 15 Both the Remand
Order and the Order Denying
Reconsideration were appealed to the
D.C. Circuit.
While the above appeal to the D.C.
Circuit was pending, on March 29, 2019,
the Commission issued an order
disapproving a proposed fee change by
BOX Exchange LLC (‘‘BOX’’) to
establish connectivity fees (the ‘‘BOX
Order’’), which significantly increased
the level of information needed for the
Commission to believe that an
exchange’s filing satisfied its obligations
under the Act with respect to changing
a fee.16 Despite approving hundreds of
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10 Id.
11 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84432, 2018 WL 5023228
(October 16, 2018) (the ‘‘SIFMA Decision’’).
12 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84433, 2018 WL 5023230
(Oct. 16, 2018). See 15 U.S.C. 78k–1, 78s; see also
Rule 608(d) of Regulation NMS, 17 CFR 242.608(d)
(asserted as an alternative basis of jurisdiction in
some applications).
13 Id. at page 2.
14 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 85802, 2019 WL 2022819
(May 7, 2019) (the ‘‘Order Denying
Reconsideration’’).
15 Order Denying Reconsideration, 2019 WL
2022819, at *13.
16 See Securities Exchange Act Release No. 85459
(March 29, 2019), 84 FR 13363 (April 4, 2019) (SR–
BOX–2018–24, SR–BOX–2018–37, and SR–BOX–
2019–04) (Order Disapproving Proposed Rule
Changes to Amend the Fee Schedule on the BOX
Market LLC Options Facility to Establish BOX
Connectivity Fees for Participants and Non-
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access fee filings in the years prior to
the BOX Order (described further
below) utilizing a ‘‘market-based’’ test,
the Commission changed course and
disapproved BOX’s proposal to begin
charging connectivity at one-fourth the
rate of competing exchanges’ pricing.
Also while the above appeal was
pending, on May 21, 2019, the
Commission Staff issued guidance ‘‘to
assist the national securities exchanges
and FINRA . . . in preparing Fee Filings
that meet their burden to demonstrate
that proposed fees are consistent with
the requirements of the Securities
Exchange Act.’’ 17 In the Staff Guidance,
the Commission Staff states that, ‘‘[a]s
an initial step in assessing the
reasonableness of a fee, staff considers
whether the fee is constrained by
significant competitive forces.’’ 18 The
Staff Guidance also states that, ‘‘. . .
even where an SRO cannot demonstrate,
or does not assert, that significant
competitive forces constrain the fee at
issue, a cost-based discussion may be an
alternative basis upon which to show
consistency with the Exchange Act.’’ 19
Following the BOX Order and Staff
Guidance, on August 6, 2020, the D.C.
Circuit vacated the Commission’s
SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC 20 and remanded for
further proceedings consistent with its
opinion.21 That same day, the D.C.
Circuit issued an order remanding the
Remand Order to the Commission for
reconsideration in light of NASDAQ.
The court noted that the Remand Order
required the exchanges and NMS plan
Participants Who Connect to the BOX Network).
The Commission noted in the BOX Order that it
‘‘historically applied a ‘market-based’ test in its
assessment of market data fees, which [the
Commission] believe[s] present similar issues as the
connectivity fees proposed herein.’’ Id. at page 16.
Despite this admission, the Commission
disapproved BOX’s proposal to begin charging
$5,000 per month for 10Gb connections (while
allowing legacy exchanges to charge rates equal to
3–4 times that amount utilizing ‘‘market-based’’ fee
filings from years prior).
17 See Staff Guidance on SRO Rule Filings
Relating to Fees (May 21, 2019), available at https://
www.sec.gov/tm/staff-guidance-sro-rule-filings-fees
(the ‘‘Staff Guidance’’).
18 Id.
19 Id.
20 NASDAQ Stock Mkt., LLC v. SEC, No 18–1324,
--- Fed. App’x ----, 2020 WL 3406123 (D.C. Cir. June
5, 2020). The court’s mandate was issued on August
6, 2020.
21 Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C.
Cir. 2020). The court’s mandate issued on August
6, 2020. The D.C. Circuit held that Exchange Act
‘‘Section 19(d) is not available as a means to
challenge the reasonableness of generallyapplicable fee rules.’’ Id. The court held that ‘‘for
a fee rule to be challengeable under Section 19(d),
it must, at a minimum, be targeted at specific
individuals or entities.’’ Id. Thus, the court held
that ‘‘Section 19(d) is not an available means to
challenge the fees at issue’’ in the SIFMA Decision.
Id.
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15747
participants to consider the challenges
that the Commission had remanded in
light of the SIFMA Decision. The D.C.
Circuit concluded that because the
SIFMA Decision ‘‘has now been
vacated, the basis for the [Remand
Order] has evaporated.’’ 22 Accordingly,
on August 7, 2020, the Commission
vacated the Remand Order and ordered
the parties to file briefs addressing
whether the holding in NASDAQ v. SEC
that Exchange Act Section 19(d) does
not permit challenges to generally
applicable fee rules requiring dismissal
of the challenges the Commission
previously remanded.23 The
Commission further invited ‘‘the parties
to submit briefing stating whether the
challenges asserted in the applications
for review . . . should be dismissed,
and specifically identifying any
challenge that they contend should not
be dismissed pursuant to the holding of
Nasdaq v. SEC.’’ 24 Without resolving
the above issues, on October 5, 2020, the
Commission issued an order granting
SIFMA and Bloomberg’s request to
withdraw their applications for review
and dismissed the proceedings.25
As a result of the Commission’s loss
of the NASDAQ 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.’’ 26 As
such, all of those fees remained in place
and amounted to a baseline set of fees
for those exchanges that had the benefit
of getting their fees in place before the
Commission Staff’s fee review process
materially changed. The net result of
this history and lack of resolution in the
D.C. Circuit Court resulted in an uneven
competitive landscape where the
Commission subjects all new nontransaction fee filings 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
22 Id. at *2; see also id. (‘‘[T]he sole purpose of
the challenged remand has disappeared.’’).
23 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 89504, 2020 WL 4569089
(August 7, 2020) (the ‘‘Order Vacating Prior Order
and Requesting Additional Briefs’’).
24 Id.
25 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 90087 (October 5, 2020).
26 See supra note 21, at page 2.
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disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable,
the practical effect of the Revised
Review Process, Staff Guidance, and the
Commission’s related practice of
continuous suspension of new fee
filings, is anti-competitive,
discriminatory, and has put in place an
un-level playing field, which has
negatively impacted smaller, nascent,
non-legacy exchanges (‘‘non-legacy
exchanges’’), while favoring larger,
incumbent, entrenched, legacy
exchanges (‘‘legacy exchanges’’).27 The
legacy exchanges all established a
significantly higher baseline for access
and market data fees prior to the
Revised Review Process. From 2011
until the issuance of the Staff Guidance
in 2019, national securities exchanges
filed, and the Commission Staff did not
abrogate or suspend (allowing such fees
to become effective), at least 92 filings 28
to amend exchange connectivity or port
fees (or similar access fees). The support
for each of those filings was a simple
statement by the relevant exchange that
the fees were constrained by
competitive forces.29 These fees remain
in effect today.
The net result is that the non-legacy
exchanges are effectively now blocked
27 Commission Chair Gary Gensler recently
reiterated the Commission’s mandate to ensure
competition in the equities markets. See ‘‘Statement
on Minimum Price Increments, Access Fee Caps,
Round Lots, and Odd-Lots’’, by Chair Gary Gensler,
dated December 14, 2022 (stating ‘‘[i]n 1975,
Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the
establishment of the national market system and
enhance competition in the securities markets,
including the equity markets’’ (emphasis added)).
In that same statement, Chair Gary Gensler cited the
five objectives laid out by Congress in 11A of the
Exchange Act (15 U.S.C. 78k–1), including ensuring
‘‘fair competition among brokers and dealers,
among exchange markets, and between exchange
markets and markets other than exchange
markets. . . .’’ (emphasis added). Id. at note 1. See
also Securities Acts Amendments of 1975, available
at https://www.govtrack.us/congress/bills/94/s249.
28 This timeframe also includes challenges to over
400 rule filings by SIFMA and Bloomberg discussed
above. Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84433, 2018 WL 5023230
(Oct. 16, 2018). Those filings were left to stand,
while at the same time, blocking newer exchanges
from the ability to establish competitive access and
market data fees. See The Nasdaq Stock Market,
LLC v. SEC, Case No. 18–1292 (D.C. Cir. June 5,
2020). The expectation at the time of the litigation
was that the 400 rule flings challenged by SIFMA
and Bloomberg would need to be justified under
revised review standards.
29 See, e.g., Securities Exchange Act Release Nos.
74417 (March 3, 2015), 80 FR 12534 (March 9,
2015) (SR–ISE–2015–06); 83016 (April 9, 2018), 83
FR 16157 (April 13, 2018) (SR–PHLX–2018–26);
70285 (August 29, 2013), 78 FR 54697 (September
5, 2013) (SR–NYSEMKT–2013–71); 76373
(November 5, 2015), 80 FR 70024 (November 12,
2015) (SR–NYSEMKT–2015–90); 79729 (January 4,
2017), 82 FR 3061 (January 10, 2017) (SR–
NYSEARCA–2016–172).
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by the Commission Staff from adopting
or increasing fees to amounts
comparable to the legacy exchanges
(which were not subject to the Revised
Review Process and Staff Guidance),
despite providing enhanced disclosures
and rationale to support their proposed
fee changes that far exceed any such
support provided by legacy exchanges.
Simply put, legacy exchanges were able
to increase their non-transaction fees
during an extended period in which the
Commission applied a ‘‘market-based’’
test that only relied upon the assumed
presence of significant competitive
forces, while exchanges today are
subject to a cost-based test requiring
extensive cost and revenue disclosures,
a process that is complex, inconsistently
applied, and rarely results in a
successful outcome, i.e., nonsuspension. The Revised Review
Process and Staff Guidance changed
decades-long Commission Staff
standards for review, resulting in unfair
discrimination and placing an undue
burden on inter-market competition
between legacy exchanges and nonlegacy exchanges.
Commission Staff now require
exchange filings, including from nonlegacy exchanges such as the Exchange,
to provide detailed cost-based analysis
in place of competition-based arguments
to support such changes. However, even
with the added detailed cost and
expense disclosures, the Commission
Staff continues to either suspend such
filings and institute disapproval
proceedings, or put the exchanges in the
unenviable position of having to
repeatedly withdraw and re-file with
additional detail in order to continue to
charge those fees.30 By impeding any
path forward for non-legacy exchanges
to establish commensurate nontransaction fees, or by failing to provide
any alternative means for smaller
markets to establish ‘‘fee parity’’ with
legacy exchanges, the Commission is
stifling competition: non-legacy
exchanges are, in effect, being deprived
of the revenue necessary to compete on
a level playing field with legacy
exchanges. This is particularly harmful,
given that the costs to maintain
exchange systems and operations
continue to increase.
The Commission Staff’s change in
position impedes the ability of non30 For example, the options exchange affiliates of
MIAX Pearl Equities, MIAX, MIAX Pearl Options,
and MIAX Emerald, have filed, and subsequently
withdrawn, various forms of connectivity and port
fee changes seven (7) times since August 2021. Each
of the proposals contained hundreds of cost and
revenue disclosures never previously disclosed by
legacy exchanges in their access and market data fee
filings prior to 2019.
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legacy exchanges to raise revenue to
invest in their systems to compete with
the legacy exchanges who already enjoy
disproportionate non-transaction fee
based revenue. For example, the Cboe
Exchange, Inc. (‘‘Cboe’’) reported
‘‘access and capacity fee’’ revenue of
$70,893,000 for 2020 31 and $80,383,000
for 2021.32 Cboe C2 Exchange, Inc.
(‘‘C2’’) reported ‘‘access and capacity
fee’’ revenue of $19,016,000 for 2020 33
and $22,843,000 for 2021.34 Cboe BZX
Exchange, Inc. (‘‘BZX’’) reported ‘‘access
and capacity fee’’ revenue of
$38,387,000 for 2020 35 and $44,800,000
for 2021.36 Cboe EDGX Exchange, Inc.
(‘‘EDGX’’) reported ‘‘access and capacity
fee’’ revenue of $26,126,000 for 2020 37
and $30,687,000 for 2021.38 For 2021,
the affiliated Cboe, C2, BZX, and EDGX
(the four largest exchanges of the Cboe
exchange group) reported $178,712,000
in ‘‘access and capacity fees’’ in 2021.
NASDAQ Phlx, LLC (‘‘NASDAQ Phlx’’)
reported ‘‘Trade Management Services’’
revenue of $20,817,000 for 2019.39 The
Exchange notes it is unable to compare
‘‘access fee’’ revenues with NASDAQ
Phlx (or other affiliated NASDAQ
exchanges) because after 2019, the
‘‘Trade Management Services’’ line item
was bundled into a much larger line
item in PHLX’s Form 1, simply titled
‘‘Market services.’’ 40
31 According to Cboe’s 2021 Form 1 Amendment,
access and capacity fees represent fees assessed for
the opportunity to trade, including fees for tradingrelated functionality. See Cboe 2021 Form 1
Amendment, available at https://www.sec.gov/
Archives/edgar/vprr/2100/21000465.pdf.
32 See Cboe 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001155.pdf.
33 See C2 2021 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000469.pdf.
34 See C2 2022 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2200/
22001156.pdf.
35 See BZX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000465.pdf.
36 See BZX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001152.pdf.
37 See EDGX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000467.pdf.
38 See EDGX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001154.pdf.
39 According to PHLX, ‘‘Trade Management
Services’’ includes ‘‘a wide variety of alternatives
for connectivity to and accessing [the PHLX]
markets for a fee. These participants are charged
monthly fees for connectivity and support in
accordance with [PHLX’s] published fee
schedules.’’ See PHLX 2020 Form 1 Amendment,
available at https://www.sec.gov/Archives/edgar/
vprr/2001/20012246.pdf.
40 See PHLX Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf. The Exchanges notes that this type
of Form 1 accounting appears to be designed to
obfuscate the true financials of such exchanges and
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The much higher non-transaction fees
charged by the legacy exchanges
provides them with two significant
competitive advantages. First, legacy
exchanges are able to use their
additional non-transaction revenue for
investments in infrastructure, vast
marketing and advertising on major
media outlets,41 new products and other
innovations. Second, higher nontransaction fees provide the legacy
exchanges with greater flexibility to
lower their transaction fees (or use the
revenue from the higher non-transaction
fees to subsidize transaction fee rates),
which are more immediately impactful
in competition for order flow and
market share, given the variable nature
of this cost on member firms. The
prohibition of a reasonable path forward
denies the Exchange (and other nonlegacy exchanges) this flexibility,
eliminates the ability to remain
competitive on transaction fees, and
hinders the ability to compete for order
flow and market share with legacy
exchanges. While one could debate
whether the pricing of non-transaction
fees are subject to the same market
forces as transaction fees, there is little
doubt that subjecting one exchange to a
materially different standard than that
historically applied to legacy exchanges
for non-transaction fees leaves that
exchange at a disadvantage in its ability
to compete with its pricing of
transaction fees.
While the Commission has clearly
noted that the Staff Guidance is merely
guidance and ‘‘is not a rule, regulation
or statement of the . . . Commission
. . . the Commission has neither
approved nor disapproved its content
. . .’’,42 this is not the reality
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 repeated
good-faith efforts by the Exchange to
provide substantial amount of costrelated details. For example, the options
facility of MIAX Pearl has attempted to
increase similar fees using a cost-based
justification numerous times, having
submitted over six filings.43 However,
has the effect of perpetuating fee and revenue
advantages of legacy exchanges.
41 See, e.g., CNBC Debuts New Set on NYSE Floor,
available at https://www.cnbc.com/id/46517876.
42 See supra note 17, at note 1.
43 See, e.g., Securities Exchange Act Release Nos.
92798 (August 27, 2021), 86 FR 49360 (September
2, 2021) (SR–PEARL–2021–33); 92644 (August 11,
2021), 86 FR 46055 (August 17, 2021) (SR–PEARL–
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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
and without ever being precise about
what additional data points are
required. The Commission Staff appears
to be interpreting the reasonableness
standard set forth in Section 6(b)(4) of
the Act 44 in a manner that is not
possible to achieve. This essentially
nullifies the cost-based approach for
exchanges as a legitimate alternative as
laid out in the Staff Guidance. By
refusing to accept a reasonable costbased argument to justify nontransaction fees (in addition to refusing
to accept a competition-based argument
as described above), or by failing to
provide the detail required to achieve
that standard, the Commission Staff is
effectively preventing non-legacy
exchanges from making any nontransaction fee changes, which benefits
the legacy exchanges and is
anticompetitive to the non-legacy
exchanges. This does not meet the
fairness standard under the Act and is
discriminatory.
Because of the un-level playing field
created by the Revised Review Process
and Staff Guidance, the Exchange
believes that the Commission Staff, at
this point, should either (a) provide
sufficient clarity on how its cost-based
standard can be met, including a clear
and exhaustive articulation of required
data and its views on acceptable
margins,45 to the extent that this is
pertinent; (b) establish a framework to
provide for commensurate nontransaction based fees among competing
exchanges to ensure fee parity; 46 or (c)
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).
44 15 U.S.C. 78f(b)(4).
45 To the extent that the cost-based standard
includes Commission Staff making determinations
as to the appropriateness of certain profit margins,
the Exchange believes that Staff should be clear as
to what they determine is an appropriate profit
margin.
46 In light of the arguments above regarding
disparate standards of review for historical legacy
non-transaction fees and current non-transaction
fees for non-legacy exchanges, a fee parity
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15749
accept that certain competition-based
arguments are applicable given the
linkage between non-transaction fees
and transaction fees, especially where
non-transaction fees among exchanges
are based upon disparate standards of
review, lack parity, and impede fair
competition. Considering the absence of
any such framework or clarity, the
Exchange believes that the Commission
does not have a reasonable basis to deny
the Exchange this change in fees, where
the proposed change would result in
fees meaningfully lower than
comparable fees at competing exchanges
and where the associated nontransaction revenue is meaningfully
lower than competing exchanges.
In light of the above, disapproval of
this would not meet the fairness
standard under the Act, would be
discriminatory and place a substantial
burden on competition. The Exchange
would be uniquely disadvantaged by
not being able to increase its access fees
to comparable levels (or lower levels
than current market rates) to those of
other exchanges for connectivity. If the
Commission Staff were to disapprove
this proposal, that action, and not
market forces, would substantially affect
whether the Exchange can be successful
in its competition with other exchanges.
Disapproval of this filing could also be
viewed as an arbitrary and capricious
decision should the Commission Staff
continue to ignore its past treatment of
non-transaction fee filings before
implementation of the Revised Review
Process and Staff Guidance and refuse
to allow such filings to be approved
despite significantly enhanced
arguments and cost disclosures.47
Lastly, the Exchange notes that the
Commission Staff has allowed similar
fee increases by other exchanges to
remain in effect by publishing those
filings for comment and allowing the
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.
47 The Exchange’s costs have clearly increased
and continue to increase, particularly regarding
capital expenditures, as well as employee benefits
provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed
by the Exchange to cover its ever-increasing costs
has been acceptable to the Commission Staff since
2021. The only other fair and reasonable alternative
would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance
and Revised Review Process to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based on that
record, in a written decision that is sufficient to
enable us to perform our review,’’ and to ensure a
comparable review process with the Exchange’s
filing.
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exchange to withdraw and re-file
numerous times.48 Recently, the
Commission Staff has not afforded the
Exchange the same flexibility.49 This
again is evidence that the Commission
Staff is not treating non-transaction fee
filings in a consistent manner and is
holding exchanges to different levels of
scrutiny in reviewing filings.
*
*
*
*
*
ddrumheller on DSK120RN23PROD with NOTICES1
1Gb and 10Gb ULL Connectivity Fee
Change
Sections 2(a) and (b) of the Fee
Schedule describe network connectivity
fees for the 1Gb ULL and 10Gb ULL
fiber connections, which are charged to
both Equity Members and non-Members
for connectivity to the Exchange’s
primary and secondary facilities. The
Exchange offers its Equity Members the
ability to connect to the Exchange in
order to transmit orders to and receive
information from the Exchange. Equity
Members can also choose to connect to
the Exchange indirectly through
physical connectivity maintained by a
third-party extranet. Extranet physical
connections may provide access to one
or multiple Equity Members on a single
connection. The number of physical
connections assigned to each User 50 as
of November 30, 2022, ranges from one
to eleven, depending on the scope and
scale of the Equity Member’s trading
activity on the Exchange as determined
by the Equity Member, including the
Equity Member’s determination of the
need for redundant connectivity. The
Exchange notes that 40% of its Equity
Members do not maintain a physical
connection directly with the Exchange
in the Primary Data Center (though
48 See, e.g., Securities Exchange Act Release Nos.
93937 (January 10, 2022), 87 FR 2466 (January 14,
2022) (SR–MEMX–2021–22); 94419 (March 15,
2022), 87 FR 16046 (March 21, 2022) (SR–MEMX–
2022–02); SR–MEMX–2022–12 (withdrawn before
being noticed); 94924 (May 16, 2022), 87 FR 31026
(May 20, 2022) (SR–MEMX–2022–13); 95299 (July
15, 2022), 87 FR 43563 (July 21, 2022) (SR–MEMX–
2022–17); SR–MEMX–2022–24 (withdrawn before
being noticed); 95936 (September 27, 2022), 87 FR
59845 (October 3, 2022) (SR–MEMX–2022–26);
94901 (May 12, 2022), 87 FR 30305 (May 18, 2022)
(SR–MRX–2022–04); SR–MRX–2022–06
(withdrawn before being noticed); 95262 (July 12,
2022), 87 FR 42780 (July 18, 2022) (SR–MRX–2022–
09); 95710 (September 8, 2022), 87 FR 56464
(September 14, 2022) (SR–MRX–2022–12); 96046
(October 12, 2022), 87 FR 63119 (October 18, 2022)
(SR–MRX–2022–20); 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR–MEMX–2022–
26); and 96430 (December 1, 2022), 87 FR 75083
(December 7, 2022) (SR–MEMX–2022–32).
49 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).
50 The term ‘‘User’’ shall mean any Member or
Sponsored Participant who is authorized to obtain
access to the System pursuant to Exchange Rule
2602. See Exchange Rule 1901.
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many such Equity Members have
connectivity through a third-party
provider) and another 46% have either
one or two physical ports to connect to
the Exchange in the Primary Data
Center. Thus, only a limited number of
Equity Members, 14%, maintain three or
more physical ports to connect to the
Exchange in the Primary Data Center.
In order to cover the continuous
increase in aggregate costs of providing
physical connectivity to Equity
Members and non-Equity Members and
make a modest profit, as described
below, the Exchange proposes to amend
the monthly connectivity fees as
follows: (a) increase the 1Gb ULL
connection from $1,000 to $2,500; and
(b) increase the 10Gb ULL connection
from $3,500 to $8,000.51
FIX and MEO Ports
Similar to other exchanges, the
Exchange offers its Equity Members
application sessions, also known as
ports, for order entry and receipt of
trade execution reports and order
messages. Equity Members can also
choose to connect to the Exchange
indirectly through a session maintained
by a third-party service bureau. Service
bureau sessions may provide access to
one or multiple Equity Members on a
single session. The number of sessions
assigned to each User as of November
30, 2022, ranges from one to more than
100, depending on the scope and scale
of the Equity Member’s trading activity
on the Exchange (either through a direct
connection or through a service bureau)
as determined by the Equity Member.
For example, by using multiple
sessions, Equity Members can segregate
order flow from different internal desks,
business lines, or customers. The
Exchange does not impose any
minimum or maximum requirements for
how many application sessions an
Equity Member or service bureau can
maintain, and does not propose to
impose any minimum or maximum
session requirements for its Equity
Members or their service bureaus.
Section 2(d), Port Fees, of the Fee
Schedule describes fees for access and
services used by Equity Members and
non-Members. The Exchange provides
the following types of ports: (i) FIX
51 The Exchange notes that while its proposed fee
of $8,000 per 10Gb ULL connection is higher than
MEMX’s $6,000 monthly fee for its xNet Physical
Connection, MEMX does not offer any other
physical connectivity, such as a 1Gb connection, for
a lower fee. See Securities Exchange Act Release
No. 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR–MEMX–2022–26). See MEMX
Fee Schedule, Connectivity and Application
Sessions, available at https://
info.memxtrading.com/fee-schedule/ (last visited
December 28, 2022).
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Frm 00112
Fmt 4703
Sfmt 4703
Ports, which allow Equity Members to
send orders and other messages using
the FIX protocol; and (ii) MEO Ports,
which allow Equity Members order
entry capabilities to all Exchange
matching engines.
The Exchange operates a primary and
secondary data center as well as a
disaster recovery center. Each Port
provides access to all Exchange data
centers for a single fee. The Exchange
currently provides the first twenty-five
(25) FIX and MEO Ports free of charge
and absorbed all associated costs since
the launch of MIAX Pearl Equities. The
Exchange charges the following separate
monthly fees for FIX and MEO Ports:
$450 for ports 26–50, $400 for ports 51–
75, $350 for ports 76–100, and $300 for
ports 101 and higher. The Exchange
now proposes to provide the first five
(5) FIX or MEO Ports free of charge, then
charge a flat rate of $450 per port for
port six (6) and above.52
Implementation
The proposed fee changes are
immediately effective.
2. Statutory Basis
The Exchange believes that the
proposed fees are consistent with
Section 6(b) of the Act 53 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 54 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among Equity Members and other
persons using any facility or system
which the Exchange operates or
controls. The Exchange also believes the
proposed fees further the objectives of
Section 6(b)(5) of the Act 55 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
52 The Exchange notes that the proposed fee of
$450 per port equals the amount charged by MEMX
for MEMX’s application sessions (order entry and
drop copy ports), but MEMX does not offer any
ports free of charge. See MEMX Fee Schedule,
Connectivity and Application Sessions, available at
https://info.memxtrading.com/fee-schedule/ (last
visited December 28, 2022). See Securities
Exchange Act Release No. 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–
2022–26). Unlike MEMX and other exchanges, the
Exchange also continues to provide FXD Ports (i.e.,
Drop Copy Ports) free of charge.
53 15 U.S.C. 78f(b).
54 15 U.S.C. 78f(b)(4).
55 15 U.S.C. 78f(b)(5).
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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 56 and the Staff Guidance,57
the Exchange believes that the proposed
fees are consistent with the Act because
they are: (i) reasonable, equitably
allocated, not unfairly discriminatory,
and not an undue burden on
competition; (ii) comply with the BOX
Order and the Staff Guidance; and (iii)
supported by evidence (including
comprehensive revenue and cost data
and analysis) that they are fair and
reasonable and will not result in
excessive pricing or supra-competitive
profit.
The Exchange believes that
exchanges, in setting fees of all types,
should meet high standards of
transparency to demonstrate why each
new fee or fee amendment meets the
requirements of the Act that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
market participants. The Exchange
believes this high standard is especially
important when an exchange imposes
various fees for market participants to
access an exchange’s marketplace.
In the Staff Guidance, the
Commission Staff states that, ‘‘[a]s an
initial step in assessing the
reasonableness of a fee, staff considers
whether the fee is constrained by
significant competitive forces.’’ 58 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.’’ 59
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.’’ 60
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
56 See
57 See
supra note 16.
supra note 17.
58 Id.
dedicated access via 1Gb and10Gb ULL
connectivity as well as FIX and MEO
Ports. As discussed above, the Revised
Review Process and Staff Guidance have
created an uneven playing field between
legacy and non-legacy exchanges by
severely restricting non-legacy
exchanges from being able to increase
non-transaction relates fees to provide
them with additional necessary revenue
to better compete with legacy
exchanges, which largely set fees prior
to the Revised Review Process. 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 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 by using the
revenue from the higher non-transaction
fees to subsidize transaction fee rates.
The latter is more immediately
impactful in competition for order flow
and market share, given the variable
nature of this cost on Equity Member
firms. The absence of a reasonable path
forward to increase non-transaction fees
to comparable (or lower rates) limits the
Exchange’s flexibility to, among other
things, make additional investments in
infrastructure and advertising,
diminishes the ability to remain
competitive on transaction fees, and
hinders the ability to compete for order
flow and market share. Again, while one
could debate whether the pricing of
non-transaction fees are subject to the
same market forces as transaction fees,
there is little doubt that subjecting one
exchange to a materially different
standard than that applied to other
exchanges for non-transaction fees
leaves that exchange at a disadvantage
in its ability to compete with its pricing
of transaction fees.
The Proposed Fees Ensure Parity
Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations
in September 2020 and adopted its
initial fee schedule, with 1Gb ULL
connectivity set at $1,000, 10Gb ULL
connectivity fees set at $3,500, and
provided the first twenty-five (25) FIX
and MEO Ports for free.61 As a new
exchange entrant, the Exchange chose to
offer such services at a discounted rate
or free of charge to encourage market
participants to trade on the Exchange
and experience, among things, the
quality of the Exchange’s technology
59 Id.
60 Id.
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21:09 Mar 13, 2023
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supra note 6.
Frm 00113
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15751
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.62
The Exchange has not amended any of
its non-transaction fees since its launch
in September 2022. The Exchange
balanced business and competitive
concerns with the need to financially
compete with the larger incumbent
exchanges that charge higher fees for
similar connectivity and use that
revenue to invest in their technology
and other service offerings.
The proposed changes to the Fee
Schedule are reasonable in several
respects. As a threshold matter, the
Exchange is subject to significant
competitive forces, which constrains its
pricing determinations for transaction
fees as well as non-transaction fees. The
fact that the market for order flow is
competitive has long been recognized by
the courts. In NetCoalition v. Securities
62 See Securities Exchange Act Release No. 94894
(May 11, 2022), 87 FR 29987 (May 17, 2022) (SR–
BOX–2022–17) (stating, ‘‘[t]he Exchange established
this lower (when compared to other options
exchanges in the industry) Participant Fee in order
to encourage market participants to become
Participants of BOX . . .’’). See also Securities
Exchange Act Release No. 90076 (October 2, 2020),
85 FR 63620 (October 8, 2020) (SR–MEMX–2020–
10) (proposing to adopt the initial fee schedule and
stating that ‘‘[u]nder the initial proposed Fee
Schedule, the Exchange proposes to make clear that
it does not charge any fees for membership, market
data products, physical connectivity or application
sessions.’’). MEMX’s market share has increased
and recently proposed to adopt numerous nontransaction fees, including fees for membership,
market data, and connectivity. See Securities
Exchange Act Release Nos. 93927 (January 7, 2022),
87 FR 2191 (January 13, 2022) (SR–MEMX–2021–
19) (proposing to adopt membership fees); 96430
(December 1, 2022), 87 FR 75083 (December 7,
2022) (SR–MEMX–2022–32) and 95936 (September
27, 2022), 87 FR 59845 (October 3, 2022) (SR–
MEMX–2022–26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange
Act Release No. 88211 (February 14, 2020), 85 FR
9847 (February 20, 2020) (SR–NYSENAT–2020–05),
available at https://www.nyse.com/publicdocs/
nyse/markets/nyse-national/rule-filings/filings/
2020/SR-NYSENat-2020-05.pdf (initiating market
data fees for the NYSE National exchange after
initially setting such fees at zero).
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and Exchange Commission, the D.C.
Circuit stated, ‘‘[n]o one disputes that
competition for order flow is ‘fierce.’
. . . As the SEC explained, ‘[i]n the U.S.
national market system, buyers and
sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’ . . . .’’ 63
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.’’ 64
Congress directed the Commission to
‘‘rely on ‘competition, whenever
possible, in meeting its regulatory
responsibilities for overseeing the SROs
and the national market system.’ ’’ 65 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.’’ 66 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.’’ 67 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.’’ 68
The Exchange believes the competing
exchanges’ connectivity and port fees
are useful examples of alternative
approaches to providing and charging
for access and demonstrating how such
fees are competitively set and
constrained. To that end, the Exchange
believes the proposed fees are
competitive and reasonable because the
proposed fees are similar to or less than
fees charged for similar connectivity
and port access provided by other
exchanges with comparable market
shares. As such, the Exchange believes
that denying its ability to institute fees
that are closer to parity with legacy
exchanges, in effect, impedes its ability
to compete, including in its pricing of
transaction fees and ability to invest in
competitive infrastructure and other
offerings.
The following table shows how the
Exchange’s proposed fees remain
similar to or less than fees charged for
similar connectivity and port access
provided by other exchanges with
similar market share. Each of the market
data rates in place at competing
exchanges were filed with the
Commission for immediate effectiveness
and remain in place today.
Exchange
Type of connection or port
MIAX Pearl Equities (as proposed) (market share of 1.02% for the month of November
2022) 69.
1Gb ULL connection ...................
10Gb ULL connection .................
FIX and MEO Ports .....................
MEMX 70 (market share of 3.05% for the month of November 2022) 71 ..............................
NASDAQ PSX LLC (‘‘PSX’’) 72 (market share of 0.70% for the month of November
2022) 73.
FXD Ports (i.e., Drop Copy
Ports).
1Gb connection ...........................
xNet Physical connection ............
Order Entry Ports ........................
Drop Copy Ports ..........................
1Gb connection ...........................
10Gb connection .........................
NASDAQ BX LLC (‘‘BX’’) 74 (market share of 0.60% for the month of November 2022) 75
Order Entry Ports ........................
Drop Copy Ports ..........................
1Gb Ultra connection ..................
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10Gb Ultra connection ................
Order Entry Ports ........................
Drop Copy Ports ..........................
There is no requirement, regulatory or
otherwise, that any broker-dealer
connect to and access any (or all of) the
available equity exchanges. Market
participants may choose to become a
member of one or more equities
exchanges based on the market
participant’s assessment of the business
63 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)).
64 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
65 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.’’).
66 See Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74,770 (December 9,
2008) (SR–NYSEArca–2006–21).
67 Id.
68 See Staff Guidance, supra note 17.
69 See Market at a Glance, available at https://
www.miaxoptions.com/.
70 See MEMX Fee Schedule, Connectivity and
Application Sessions, available at https://
info.memxtrading.com/fee-schedule/.
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Monthly fee
(per connection or per port)
$2,500.
$8,000.
1–5 ports: FREE.
6 ports or more: $450 per port.
FREE.
Not available.
$6,000 per connection.
$450 per port.
$450 per port.
$2,500 per connection (plus $1,500
installation fee).
$7,500 per connection (plus $1,500
installation fee).
$400 per port.
$400 per port.
$2,500 per connection (plus $1,500
installation fee).
$15,000 (plus $1,500 installation fee).
$500 per port.
$500 per port.
opportunity relative to the costs of the
Exchange. With this, there is elasticity
of demand for exchange membership.
As an example, one Market Maker of
71 See
supra note 69.
PSX Pricing Schedule, available at https://
www.nasdaqtrader.com/Trader.aspx?id=PSX_
Pricing; and PSX Rules, General 8: Connectivity,
Section 2, Direct Connectivity.
73 See supra note 69.
74 See BX Pricing Schedule, available at https://
www.nasdaqtrader.com/Trader.aspx?id=bx_pricing;
and BX Rules, General 8: Connectivity, Section 2,
Direct Connectivity.
75 See supra note 69.
72 See
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MIAX Pearl Options terminated their
membership effective January 1, 2023 as
a direct result of the proposed fee
changes to the MIAX Pearl Options fee
schedule.
It is not a requirement for market
participants to become members of all
equities exchanges, in fact, certain
market participants conduct an equities
business as a member of only one
market.76 A very small number of
market participants choose to become a
member of all sixteen (16) equities
exchanges. Most firms that actively
trade on equities markets are not
currently Equity Members of the
Exchange and do not purchase
connectivity or port services at the
Exchange. Connectivity and ports are
only available to Equity Members or
service bureaus, and only an Equity
Member may utilize a port.77
BOX recently noted in a proposal to
amend their own trading permit fees
that of the 62 market making firms that
are registered as Market Makers across
Cboe, MIAX, and BOX, 42 firms access
only one of the three exchanges.78 For
equities, the Exchange currently has 45
Equity Members. Also, MEMX noted in
a January 2022 filing that it had only 66
members, and, based on publicly
available information regarding a
sample of the Exchange’s competitors,
NYSE has 142 members, Cboe BZX has
140 members, and Investors Exchange
LLC (‘‘IEX’’) has 133 members.79 For
options, the Exchange and its affiliates,
76 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.’’
77 Service Bureaus may obtain ports on behalf of
Equity Members.
78 See Securities Exchange Act Release No. 94894
(May 11, 2022), 87 FR 29987 (May 17, 2022) (SR–
BOX–2022–17).
79 See Securities Exchange Act Release No. 93927
(January 7, 2022), 87 FR 2191 (January 13, 2022)
(SR–MEMX–2021–19).
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MIAX and MIAX Emerald, have a total
of 47 members. Of those 47 total
members, 35 are members of all three
affiliated exchanges, four (4) are
members of only two (2) affiliated
exchanges, and eight (8) are members of
only one affiliated exchange. The
Exchange believes that significant
differences in membership numbers
describes by the Exchange, BOX, and
MEMX demonstrate that firms can, and
do, select which exchanges they wish to
access, and, accordingly, exchanges
must take competitive considerations
into account when setting fees for such
access. The Exchange also notes that no
firm is an Equity Member of the
Exchange only. The above data
evidences that a broker-dealer need not
have direct connectivity to all
exchanges, let alone the Exchange and
its affiliates, and broker-dealers may
elect to do so based on their own
business decisions and need to directly
access each exchange’s liquidity pool.
Not only is there not an actual
regulatory requirement to connect to
every equities exchange, the Exchange
believes there is also no ‘‘de facto’’ or
practical requirement as well, as further
evidenced by the broker-dealer
membership analysis of exchanges
discussed above. Indeed, broker-dealers
choose if and how to access a particular
exchange and because it is a choice, the
Exchange must set reasonable pricing,
otherwise prospective members would
not connect and existing members
would disconnect from the Exchange.
The decision to become a member of an
exchange, is complex, and not solely
based on the non-transactional costs
assessed by an exchange. As noted
herein, specific factors include, but are
not limited to: (i) an exchange’s
available liquidity in equities securities;
(ii) trading functionality offered on a
particular market; (iii) product offerings;
(iv) customer service on an exchange;
and (v) transactional pricing. Becoming
a member of the exchange does not
‘‘lock’’ a potential member into a market
or diminish the overall competition for
exchange services.
In lieu of becoming a member at each
exchange, a market participant may join
one exchange and elect to have their
orders routed in the event that a better
price is available on an away market.
Nothing in the Order Protection Rule
requires a firm to become an Equity
Member at—or establish connectivity
to—the Exchange.80 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
80 See
PO 00000
was executed at a superior price and
prevent a trade-through.81
With respect to the submission of
orders, Equity Members may also
choose not to purchase any connection
at all from the Exchange, and instead
rely on the port of a third party to
submit an order. For example, a thirdparty broker-dealer Equity Member of
the Exchange may be utilized by a retail
investor to submit orders into an
Exchange. An institutional investor may
utilize a broker-dealer, a service
bureau,82 or request sponsored access 83
through a member of an exchange in
order to submit a trade directly to an
equities exchange.84 A market
participant may either pay the costs
associated with becoming a member of
an exchange or, in the alternative, a
market participant may elect to pay
commissions to a broker-dealer, pay fees
to a service bureau to submit trades, or
pay a member to sponsor the market
participant in order to submit trades
directly to an exchange.
Non-Member third-parties, such as
service bureaus and extranets, resell the
Exchange’s connectivity. This indirect
connectivity is another viable
alternative for market participants to
trade on the Exchange without
connecting directly to the Exchange
(and thus not pay the Exchange’s
connectivity fees), which alternative is
already being used by non-Equity
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).85 Indeed, the Exchange does not
81 Members may elect to not route their orders by
utilizing the Do Not Route or Post Only order type
instructions. See Exchange Rule 2614(c)(1) and (2).
82 Service Bureaus provide access to market
participants to submit and execute orders on an
exchange. On the Exchange, a Service Bureau may
be an Equity Member. Some Equity Members utilize
a Service Bureau for connectivity and that Service
Bureau may not be an Equity Member. Some market
participants utilize a Service Bureau who is an
Equity Member to submit orders.
83 Sponsored Access is an arrangement whereby
an Equity Member permits its customers to enter
orders into an exchange’s system that bypass the
Equity Member’s trading system and are routed
directly to the Exchange, including routing through
a service bureau or other third-party technology
provider.
84 This may include utilizing a floor broker and
submitting the trade to an equities trading floor.
85 See, e.g., Nasdaq Price List—U.S. Direct
Connection and Extranet Fees, available at, US
17 CFR 242.611.
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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.86 Particularly,
in the event that a market participant
views the Exchange’s direct
connectivity and access fees as more or
less attractive than competing markets,
that market participant can choose to
connect to the Exchange indirectly or
may choose not to connect to the
Exchange and connect instead to one or
more of the other 15 equities markets.
Accordingly, the Exchange believes that
the proposed fees are fair and
reasonable and constrained by
competitive forces.
The Exchange is obligated to regulate
its Equity Members and secure access to
its environment. To properly regulate its
Equity Members and secure the trading
environment, the Exchange takes
measures to ensure access is monitored
and maintained with various controls.
Connectivity and ports are methods
utilized by the Exchange to grant Equity
Members secure access to communicate
with the Exchange and exercise trading
rights. When a market participant elects
to be an Equity Member, and is
approved for membership by the
Exchange, the Equity Member is granted
trading rights to enter orders and/or
quotes into Exchange through secure
connections.
Again, there is no legal or regulatory
requirement that a market participant
become an Equity Member of the
Exchange, or, if it is an Equity Member,
to purchase connectivity beyond the one
connection that is necessary to quote or
submit orders on the Exchange. Equity
Members may freely choose to rely on
one or many connections, depending on
their business model. This is again
evidenced by the fact that one MIAX
Pearl Options Market Maker terminated
their MIAX Pearl membership effective
January 1, 2023 as a direct result of the
proposed connectivity and port fee
changes on MIAX Pearl Options. If a
market participant chooses to become
an Equity Member, they may then
choose to purchase connectivity beyond
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).
86 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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the one connection that is necessary to
quote or submit orders on the Exchange.
Members may freely choose to rely on
one or many connections, depending on
their business model.
Cost Analysis
In general, the Exchange believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
Exchange Act requirements that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
members and markets. In particular, the
Exchange believes that each exchange
should take extra care to be able to
demonstrate that these fees are based on
its costs and reasonable business needs.
In proposing to charge fees for
connectivity services, the Exchange is
especially diligent in assessing those
fees in a transparent way against its own
aggregate costs of providing the related
service, and in carefully and
transparently assessing the impact on
Equity Members—both generally and in
relation to other Equity Members, i.e., to
assure the fee will not create a financial
burden on any participant and will not
have an undue impact in particular on
smaller Equity Members and
competition among Equity Members in
general. The Exchange believes that this
level of diligence and transparency is
called for by the requirements of Section
19(b)(1) under the Act,87 and Rule 19b–
4 thereunder,88 with respect to the types
of information SROs should provide
when filing fee changes, and Section
6(b) of the Act,89 which requires, among
other things, that exchange fees be
reasonable and equitably allocated,90
not designed to permit unfair
discrimination,91 and that they not
impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.92 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.93 The Exchange reiterates 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
87 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
89 15 U.S.C. 78f(b).
90 15 U.S.C. 78f(b)(4).
91 15 U.S.C. 78f(b)(5).
92 15 U.S.C. 78f(b)(8).
93 See Staff Guidance, supra note 17.
88 17
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fees, most of which were put in place
before the Revised Review Process and
Staff Guidance.
As detailed below, the Exchange
recently calculated its aggregate annual
costs for providing physical 1Gb and
10Gb ULL connectivity to the Exchange
at $18,331,650 combined ($17,726,799
for 10Gb ULL connectivity and $604,851
for 1Gb connectivity) (or approximately
$1,527,637 per month for combined
connectivity costs, rounded to the
nearest dollar when dividing the
combined annual cost by 12 months).
The Exchange also recently calculated
its aggregate annual costs for providing
FIX and MEO Ports at $3,951,993
combined ($911,998 for FIX Ports and
$3,039,995 for MEO Ports) (or
approximately $329,333 per month for
combined FIX and MEO Port costs,
rounded to the nearest dollar when
dividing the combined annual cost by
12 months). In order to cover a portion
of the aggregate costs of providing
connectivity to its Users (both Equity
Members and non-Equity Members 94)
going forward, as described below, the
Exchange proposes to modify its Fee
Schedule as described above.
In 2020, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).95 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’’).
As an initial step, the Exchange
determined the total cost for the
94 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.
95 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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Exchange and the affiliated markets.
That total cost was then divided among
the Exchange and each of its affiliated
markets based on a number of factors,
including server counts, additional
hardware and software utilization,
current or anticipated functional or nonfunctional development projects,
capacity needs, end-of-life or end-ofservice intervals, number of members,
market model (e.g., price time or prorata), which may impact message traffic,
individual system architectures that
impact platform size,96 storage needs,
dedicated infrastructure versus shared
infrastructure allocated per platform
based on the resources required to
support each platform, number of
available connections, and employees
allocated time. This will result in
different allocation percentages among
the Exchange and its affiliated markets.
Meanwhile this allocation methodology
ensures that no portion of any cost was
allocated twice or double-counted
between the Exchange and its affiliated
markets.
Next, the Exchange adopted an
allocation methodology with thoughtful
and consistently applied principles to
guide how much of a particular cost
amount allocated to the Exchange
pursuant to the above methodology
should be allocated within the Exchange
to each core service. For instance, fixed
costs that are not driven by client
activity (e.g., message rates), such as
data center costs, were allocated more
heavily to the provision of physical
connectivity (62%), with smaller
allocations to FIX Ports (1.2%) and MEO
Ports (3.8%), and the remainder to the
provision of transaction execution,
membership services and market data
services (33%). This next level of the
allocation methodology at the
individual exchange level also took into
account a number of factors similar to
those set forth under the first allocation
methodology described above, to
determine the appropriate allocation to
connectivity or market data versus what
is to be allocated to providing other
services. The allocation methodology
was developed through an assessment of
costs with senior management
intimately 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. Each of the
below cost allocations is unique to the
Exchange and represents a percentage of
overall cost that was allocated to the
Exchange pursuant to the initial
allocation described above.
By allocating segmented costs to each
core service, the Exchange was able to
estimate by core service the potential
margin it might earn based on different
fee models. The Exchange notes that as
a non-listing venue it has five primary
sources of revenue that it can
potentially use to fund its operations:
transaction fees, fees for connectivity
and port services, membership fees,
regulatory fees, and market data fees.
Accordingly, the Exchange must cover
its expenses from these five primary
sources of revenue. The Exchange also
notes that as a general matter each of
these sources of revenue is based on
services that are interdependent. For
instance, the Exchange’s system for
executing transactions is dependent on
physical hardware and connectivity;
only Equity Members and parties that
they sponsor to participate directly on
the Exchange may submit orders to the
Exchange; many Equity Members (but
not all) consume market data from the
Exchange in order to trade on the
Exchange; and the Exchange consumes
market data from external sources in
order to comply with regulatory
obligations. Accordingly, given this
interdependence, the allocation of costs
to each service or revenue source
required judgment of the Exchange and
was weighted based on estimates of the
Exchange that the Exchange believes are
reasonable, as set forth below. While
there is no standardized and generally
accepted methodology for 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. In
the absence of the Commission
attempting to specify a methodology for
the allocation of exchanges’
interdependent costs, the Exchange is
left with its best efforts attempt to
conduct such an allocation in a
thoughtful and reasonable manner.
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 1Gb and10Gb ULL
connectivity, as well as FIX and MEO
Ports, result in an aggregate combined
monthly cost of $1,856,970, as further
detailed below.
Costs Related to Offering Physical 1Gb
and 10Gb ULL Connectivity
The following charts detail the
individual line-item costs considered by
the Exchange to be related to offering
physical dedicated 1Gb and 10Gb ULL
connectivity via an unshared network as
well as the percentage of the Exchange’s
overall costs that such costs represent
for such area (e.g., as set forth below, the
Exchange allocated approximately
47.6% of its overall Human Resources
cost to offering physical 1Gb and 10Gb
ULL connectivity).
10Gb ULL CONNECTIVITY
Annual cost 97
ddrumheller on DSK120RN23PROD with NOTICES1
Cost drivers
Human Resources .................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .............................................................
Internet Services, including Internet Services .......................................................................
Data Center ...........................................................................................................................
Hardware and Software Maintenance and Licenses ............................................................
Depreciation ...........................................................................................................................
96 For example, the Exchange maintains 24
matching engines, MIAX Pearl Options maintains
12 matching engines, MIAX maintains 24 matching
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engines and MIAX Emerald maintains 12 matching
engines.
97 The Annual Cost includes figures rounded to
the nearest dollar.
PO 00000
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5,936,741
69,451
1,818,808
1,052,797
642,112
3,448,206
Monthly cost 98
494,728
5,788
151,567
87,733
53,509
287,351
% of all
46.1
60
72.5
60
58
73.6
98 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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10Gb ULL CONNECTIVITY—Continued
Annual cost 97
Cost drivers
Monthly cost 98
% of all
Allocated Shared Expenses ..................................................................................................
4,758,684
396,557
48.6
Total ................................................................................................................................
17,726,799
1,477,233
54
1Gb ULL CONNECTIVITY
Annual cost 99
Cost drivers
% of all
Human Resources .................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .............................................................
Internet Services, including External Market Data ................................................................
Data Center ...........................................................................................................................
Hardware and Software Maintenance and Licenses ............................................................
Depreciation ...........................................................................................................................
Allocated Shared Expenses ..................................................................................................
$202,566
2,370
62,059
35,922
21,909
117,655
162,370
$16,880
197
5,172
2,993
1,826
9,805
13,531
1.6
2.0
2.5
2.0
2.0
2.5
1.7
Total ................................................................................................................................
604,851
50,404
1.8
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
physical 1Gb and 10Gb ULL
connectivity.
Human Resources
ddrumheller on DSK120RN23PROD with NOTICES1
Monthly cost 100
For personnel costs (Human
Resources), the Exchange calculated an
allocation of employee time for
employees whose functions include
providing and maintaining physical
connectivity and performance thereof
(primarily the Exchange’s network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity) and for which the
Exchange allocated percentages of 58%
for 10Gb ULL connectivity and 2.0% for
1Gb connectivity of each employee’s
time. The Exchange also allocated
Human Resources costs to provide
physical connectivity to a limited subset
of personnel with ancillary functions
related to establishing and maintaining
such connectivity (such as information
security and finance personnel), for
which the Exchange allocated cost on an
employee-by-employee basis (i.e., only
including those personnel who do
support functions related to providing
physical connectivity) and then applied
a smaller allocation to such employees
(less than 37%). The Exchange notes
that it and its affiliated markets have
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.
Specifically, twice a year and as needed
with additional new hires and new
99 See
supra note 97.
supra note 98.
100 See
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project initiatives, in consultation with
each employee, managers and
department heads assign a percentage of
time to every employee and then
allocate that time amongst the Exchange
and its affiliated markets to determine
that market’s individual Human
Resources expense. Then, again in
consultation with each employee,
managers and department heads assign
a percentage of each employee’s time
allocated to the Exchange into buckets
including, network connectivity, ports,
market data, and other exchange
services. This process ensures that every
employee is 100% allocated, ensuring
there is no double counting between the
Exchange and its affiliated markets.
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
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Exchange. The Connectivity line-item is
more narrowly focused on technology
used to complete connections to the
Exchange and to connect to external
markets. The Exchange notes that its
connectivity to external markets is
required in order to receive market data
to run the Exchange’s matching engine
and basic operations compliant with
existing regulations, primarily
Regulation NMS.
The Exchange relies on various
connectivity and content service
providers for connectivity and data
feeds for the entire U.S. equities
industry, as well as content,
connectivity, and infrastructure services
for critical components of the network
that are necessary to provide and
maintain its System Networks and
access to its System Networks via 1Gb
and 10Gb ULL connectivity.
Specifically, the Exchange utilizes
connectivity and content service
providers to connect to other national
securities exchanges, the NASDAQ UTP
and CTA/CQ Plans, and to receive
market data from other exchanges and
market data providers. The Exchange
understands that these service providers
provide services to most, if not all, of
the other U.S. exchanges and other
market participants. Connectivity and
market data provided these service
providers is critical to the Exchanges
daily operations and performance of its
System Networks to which market
participants connect to via 10Gb ULL
connectivity. Without these services
providers, the Exchange would not be
able to connect to other national
securities exchanges, market data
providers, or the NASDAQ UTP and
CTA/CQ Plans and, therefore, would not
be able to operate and support its
System Networks. The Exchange does
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believes it is reasonable to allocate a
small amount of such costs to 10Gb ULL
connectivity.
not employ a separate fee to cover its
connectivity and content service
provider expense and recoups that
expense, in part, by charging for 1Gb
and 10Gb ULL connectivity.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment (such as
dedicated space, security services,
cooling and power). The Exchange notes
that it does not own the Primary Data
Center or the Secondary Data Center,
but instead, leases space in data centers
operated by third parties. The Exchange
has allocated a high percentage of the
Data Center cost (62%) to physical 1Gb
and 10Gb ULL connectivity because the
third-party data centers and the
Exchange’s physical equipment
contained therein is the most direct cost
in providing physical access to the
Exchange. In other words, for the
Exchange to operate in a dedicated
space with connectivity of participants
to a physical trading platform, the data
centers are a very tangible cost, and in
turn, if the Exchange did not maintain
such a presence then physical
connectivity would be of no value to
market participants.
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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 physical
connectivity as such market data is
necessary here to offer certain services
related to such connectivity, such as
certain risk checks that are performed
prior to execution, and checking for
other conditions (e.g., limit order price
protection, trading collars). This
allocation was included as part of the
internet Services cost described
above.101 Thus, as market data from
other Exchanges is consumed at the
matching engine level, (to which
physical connectivity provides access
to) in order to validate orders before
additional entering the matching engine
or being executed, the Exchange
101 This allocation may differ from MIAX Pearl
Options due to the different amount of proprietary
market data feeds the Exchange purchases for its
options and equities trading platforms. For options,
the Exchange primarily relies on data purchased
from OPRA. For equities, the Exchange does not
solely rely on data purchased from the consolidated
tape plans (e.g., Nasdaq UTP, CTA, and CQ plans),
but rather purchases multiple proprietary market
data feeds from other equities exchanges. See, e.g.,
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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.102
Monthly Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of Exchange
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which are owned by
the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
As noted above, the Exchange allocated
73.6% of all depreciation costs to
providing physical 10Gb ULL
connectivity and 2.5% of all
depreciation costs to providing 1Gb
connectivity. The Exchange notes,
however, that it did not allocate
depreciation costs for any depreciated
software necessary to operate the
Exchange to physical connectivity, as
such software does not impact the
provision of physical connectivity. The
Exchange also notes that this allocation
differs from its affiliated markets due to
a number of factors, such as the age of
physical assets and software (e.g., older
physical assets and software were
previously depreciated and removed
from the allocation), or certain system
enhancements that required new
physical assets and software, thus
providing a higher contribution to the
depreciated cost.
15757
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.103
The Exchange notes that the 50%
allocation of general shared expenses for
physical connectivity is higher than that
allocated to general shared expenses for
FIX and MEO Ports based on its
allocation methodology that weighted
costs attributable to each Core Service
based on an understanding of each area.
While physical connectivity has several
areas where certain tangible costs are
heavily weighted towards providing
such service (e.g., Data Centers, as
described above), FIX and MEO Ports do
not require as many broad or indirect
resources as other Core Services. The
total monthly cost for 10Gb ULL
connectivity of $1,477,233 was divided
by the number of physical 10Gb ULL
connections the Exchange maintained at
the time that proposed pricing was
determined (90), to arrive at a cost of
approximately $16,414 per month, per
physical 10Gb ULL connection. The
total monthly cost for 1Gb connectivity
of $50,404 was divided by the number
of physical 1Gb connections the
Exchange maintained at the time that
proposed pricing was determined (8), to
arrive at a cost of approximately $6,301
per month, per physical 1Gb
connection.
Costs Related to Offering FIX and MEO
Ports
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
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
FIX and MEO Ports as well as the
percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 22.4% of its
overall Human Resources cost to
offering FIX and MEO Ports).
Exchange Rule 2613 (setting forth the data feeds the
Exchange subscribes to for each equities exchange
and trading center).
102 This expense may be greater than the
Exchange’s affiliated markets, specifically MIAX
and MIAX Emerald, because, unlike MIAX and
MIAX Emerald, MIAX Pearl (the options and
equities markets) maintains an additional gateway
to accommodate its member’s access and
connectivity needs. This added gateway contributes
to the difference in allocations between the
Exchange and MIAX and MIAX Emerald.
103 The Exchange notes that MEMX allocated a
precise amount of 10% of the overall cost for
directors to providing physical connectivity. The
Exchange does not calculate is expenses at that
granular a level. Instead, director costs are included
as part of the overall general allocation.
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FIX PORTS
Annual cost 104
Cost drivers
Monthly cost 105
% of all
Human Resources .................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .............................................................
Internet Services, including External Market Data ................................................................
Data Center ...........................................................................................................................
Hardware and Software Maintenance and Licenses ............................................................
Depreciation ...........................................................................................................................
Allocated Shared Expenses ..................................................................................................
$665,726
535
11,574
20,262
5,108
92,114
116,679
$55,476
45
965
1,689
426
7,676
9,723
5.2
0.5
0.5
1.2
0.5
2.0
1.2
Total ................................................................................................................................
911,998
76,000
2.8
MEO PORTS
Annual cost 106
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Cost drivers
Monthly cost 107
% of all
Human Resources .................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .............................................................
Internet Services, including External Market Data ................................................................
Data Center ...........................................................................................................................
Hardware and Software Maintenance and Licenses ............................................................
Depreciation ...........................................................................................................................
Allocated Shared Expenses ..................................................................................................
$2,219,088
1,782
38,582
67,538
17,026
307,048
388,931
$184,924
149
3,215
5,628
1,419
25,587
32,411
17.2
1.5
1.5
3.8
1.5
6.6
4.0
Total ................................................................................................................................
3,039,995
253,333
9.3
Human Resources
With respect to FIX and MEO Ports,
the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing FIX and
MEO Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). Just as described above for
10Gb ULL connectivity, 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
104 See
supra note 97 (describing rounding of
Annual Costs).
105 See supra note 98 (describing rounding of
Monthly Costs based on annual costs).
106 See supra note 97 (describing rounding of
Annual Costs).
107 See supra note 98 (describing rounding of
Monthly Costs based on annual costs).
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Exchange believed they are involved in
overseeing tasks related to providing
application sessions and maintaining
performance thereof. The Human
Resources cost was again calculated
using a blended rate of compensation
reflecting salary, equity and bonus
compensation, benefits, payroll taxes,
and 401(k) matching contributions.
Connectivity and Internet Services
The Connectivity cost includes
external fees paid to connect to other
exchanges, cabling and switches, as
described above. For purposes of FIX
and MEO Ports, the Exchange also
includes a portion of its costs related to
External Market Data, as described
below.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment as well as
related costs (the Exchange does not
own the Primary Data Center or the
Secondary Data Center, but instead,
leases space in data centers operated by
third parties).
External Market Data
External Market Data includes fees
paid to third parties, including other
exchanges, to receive and consume
market data from other markets. The
Exchange included External Market
Data fees to the provision of application
sessions as such market data is also
necessary here (in addition to physical
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connectivity) to offer certain services
related to such sessions, such as
validating orders on entry against the
national best bid and national best offer
and checking for other conditions (e.g.,
whether a symbol is halted or subject to
a short sale circuit breaker). This
allocation was included as part of the
internet Services cost described
above.108 Thus, as market data from
other Exchanges is consumed at the
application session level in order to
validate orders before additional
processing occurs with respect to such
orders, the Exchange believes it is
reasonable to allocate a small amount of
such costs to application sessions.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
108 This allocation may differ from MIAX Pearl
Options due to the different amount of proprietary
market data feeds the Exchange purchases for its
options and equities trading platforms. For options,
the Exchange primarily relies on data purchased
from OPRA. For equities, the Exchange does not
solely rely on data purchased from the consolidated
tape plans (e.g., Nasdaq UTP, CTA, and CQ plans),
but rather purchases multiple proprietary market
data feeds from other equities exchanges. See, e.g.,
Exchange Rule 2613 (setting forth the data feeds the
Exchange subscribes to for each equities exchange
and trading center). The Exchange separately notes
that MEMX separately allocated 7.5% of its external
market data costs to providing physical
connectivity.
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Monthly Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of order entry
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which is owned by
the Exchange and some of which is
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange allocated 8.6% of all
depreciation costs to providing FIX and
MEO Ports. In contrast to physical
connectivity, described above, the
Exchange did allocate depreciation costs
for depreciated software necessary to
operate the Exchange to FIX and MEO
Ports because such software is related to
the provision of such connectivity. The
Exchange also notes that this allocation
differs from its affiliated markets due to
a number of factors, such as the age of
physical assets and software (e.g., older
physical assets and software were
previously depreciated and removed
from the allocation), or certain system
enhancements that required new
physical assets and software, thus
providing a higher contribution to the
depreciated cost.
Allocated Shared Expenses
Finally, a limited portion of general
shared expenses was allocated to overall
FIX and MEO Ports costs as without
these general shared costs the Exchange
would not be able to operate in the
manner that it does and provide
application sessions. The costs included
in general shared expenses include
general expenses of the Exchange,
including office space and office
expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and
training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange again notes that the cost of
paying directors to serve on its Board of
Directors is included in the calculation
of Allocated Shared Expenses, and thus
a portion of such overall cost amounting
to less than 20% of the overall cost for
directors was allocated to providing FIX
and MEO Ports. The Exchange notes
that the 5.2% allocation of general
shared expenses for FIX and MEO Ports
is lower than that allocated to general
shared expenses for physical
connectivity based on its allocation
methodology that weighted costs
attributable to each Core Service based
on an understanding of each area. While
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FIX and MEO Ports have several areas
where certain tangible costs are heavily
weighted towards providing such
service (e.g., Data Centers, as described
above), 1Gb and 10Gb ULL connectivity
requires a broader level of support from
Exchange personnel in different areas,
which in turn leads to a broader general
level of cost to the Exchange. The total
monthly cost for FIX Ports of $76,000
was divided by the number of FIX Ports
the Exchange maintained at the time
that proposed pricing was determined
(142), to arrive at a cost of
approximately $535 per month, per FIX
Port (rounded to the nearest dollar when
dividing the approximate monthly cost
by the number of FIX Ports). The total
monthly cost for MEO Ports of $253,333
was divided by the number of MEO
Ports the Exchange maintained at the
time that proposed pricing was
determined (336), to arrive at a cost of
approximately $754 per month, per
MEO Port (rounded to the nearest dollar
when dividing the approximate monthly
cost by the number of MEO Ports).
Cost Analysis—Additional Discussion
In conducting its Cost Analysis, the
Exchange did not allocate any of its
expenses in full to any core services
(including physical connectivity or FIX
and MEO Ports) and did not doublecount any expenses. Instead, as
described above, the Exchange allocated
applicable cost drivers across its core
services and used the same Cost
Analysis to form the basis of this
proposal and the filings the Exchange
submitted proposing fees for proprietary
data feeds offered by the Exchange. For
instance, in calculating the Human
Resources expenses to be allocated to
physical connections based upon the
above described methodology, the
Exchange has a team of employees
dedicated to network infrastructure and
with respect to such employees the
Exchange allocated network
infrastructure personnel with a high
percentage of the cost of such personnel
(60%) to 1Gb and 10Gb ULL
connectivity given their focus on
functions necessary to provide physical
connections. The salaries of those same
personnel were allocated only 25% to
FIX and MEO Ports and the remaining
15% was allocated to transactions and
market data. The Exchange did not
allocate any other Human Resources
expense for providing physical
connections to any other employee
group, outside of a smaller allocation of
37% for 1Gb and 10Gb ULL
connectivity of the cost associated with
certain specified personnel who work
closely with and support network
infrastructure personnel. In contrast, the
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15759
Exchange allocated much smaller
percentages of costs (less than 21%)
across a wider range of personnel
groups in order to allocate Human
Resources costs to providing FIX and
MEO Ports. This is because a much
wider range of personnel are involved in
functions necessary to offer, monitor
and maintain FIX and MEO Ports but
the tasks necessary to do so are not a
primary or full-time function.
In total, the Exchange allocated 47.6%
of its personnel costs to providing
physical connections and 22.4% of its
personnel costs to providing FIX and
MEO Ports, for a total allocation of 70%
Human Resources expense to provide
these specific connectivity services. In
turn, the Exchange allocated the
remaining 30% of its Human Resources
expense to membership (less than 1%)
and transactions and market data
(9.5%). Thus, again, the Exchange’s
allocations of cost across core services
were based on real costs of operating the
Exchange and were not double-counted
across the core services or their
associated revenue streams.
As another example, the Exchange
allocated depreciation expense to all
core services, including physical
connections and FIX and MEO Ports,
but in different amounts. The Exchange
believes it is reasonable to allocate the
identified portion of such expense
because such expense includes the
actual cost of the computer equipment,
such as dedicated servers, computers,
laptops, monitors, information security
appliances and storage, and network
switching infrastructure equipment,
including switches and taps that were
purchased to operate and support the
network. Without this equipment, the
Exchange would not be able to operate
the network and provide connectivity
services to its Equity Members and nonEquity Members and their customers.
However, the Exchange did not allocate
all of the depreciation and amortization
expense toward the cost of providing
connectivity services, but instead
allocated approximately 85% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (76.185% attributed to 1Gb and
10Gb ULL physical connections and
8.6% to FIX and MEO Ports). The
Exchange allocated the remaining
depreciation and amortization expense
(approximately 15%) toward the cost of
providing transaction services,
membership services and market data.
The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated. The Exchange does
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not yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
connectivity, the Exchange will have to
be successful in retaining existing
clients that wish to maintain physical
connectivity and/or FIX and MEO Ports
or in obtaining new clients that will
purchase such services. Similarly, the
Exchange will have to be successful in
retaining a positive net capture on
transaction fees in order to realize the
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. It is possible however that
such costs will either decrease or
increase. To the extent the Exchange
sees growth in use of connectivity
services it will receive additional
revenue to offset future cost increases.
However, if use of connectivity
services is static or decreases, the
Exchange might not realize the revenue
that it anticipates or needs in order to
cover applicable costs. Accordingly, the
Exchange is committing to conduct a
one-year review after implementation of
these fees. The Exchange expects that it
may propose to adjust fees at that time,
to increase fees in the event that
revenues fail to cover costs and a
reasonable mark-up of such costs.
Similarly, the Exchange would propose
to decrease fees in the event that
revenue materially exceeds our current
projections. In addition, the Exchange
will periodically conduct a review to
inform its decision making on whether
a fee change is appropriate (e.g., to
monitor for costs increasing/decreasing
or subscribers increasing/decreasing,
etc. in ways that suggest the thencurrent fees are becoming dislocated
from the prior cost-based analysis) and
would propose to increase fees in the
event that revenues fail to cover its costs
and a reasonable mark-up, or decrease
fees in the event that revenue or the
mark-up materially exceeds our current
projections. In the event that the
Exchange determines to propose a fee
change, the results of a timely review,
including an updated cost estimate, will
be included in the rule filing proposing
the fee change. More generally, we
believe that it is appropriate for an
exchange to refresh and update
information about its relevant costs and
revenues in seeking any future changes
to fees, and the Exchange commits to do
so.
providing and maintaining necessary
hardware and other network
infrastructure as well as network
monitoring and support services;
without such hardware, infrastructure,
monitoring and support the Exchange
would be unable to provide the
connectivity services. Much of the cost
relates to monitoring and analysis of
data and performance of the network via
the subscriber’s connection(s). The
above cost, namely those associated
with hardware, software, and human
capital, enable the Exchange to measure
network performance with nanosecond
granularity. These same costs are also
associated with time and money spent
seeking to continuously improve the
network performance, improving the
subscriber’s experience, based on
monitoring and analysis activity. The
Exchange routinely works to improve
the performance of the network’s
hardware and software. The costs
associated with maintaining and
enhancing a state-of-the-art exchange
network is a significant expense for the
Exchange, and thus the Exchange
believes that it is reasonable and
appropriate to help offset those costs by
amending fees for connectivity services.
Subscribers, particularly those of 10Gb
ULL connectivity, expect the Exchange
to provide this level of support to
connectivity so they continue to receive
the performance they expect. This
differentiates the Exchange from its
competitors. As detailed above, the
Exchange has five primary sources of
revenue that it can potentially use to
fund its operations: transaction fees,
fees for connectivity services,
membership and regulatory fees, and
market data fees. Accordingly, the
Exchange must cover its expenses from
these five primary sources of revenue.
• The Exchange’s Cost Analysis
estimates the annual cost to provide
10Gb ULL connectivity services at
$17,726,799. Based on current 10Gb
ULL connectivity services usage, the
Exchange would generate annual
revenue of approximately $9,144,000.
This represents a negative margin when
compared to the cost of providing 10Gb
ULL connectivity services, which will
decrease over time.109
• The Exchange’s Cost Analysis
estimates the annual cost to provide 1Gb
connectivity services at $604,851. Based
on current 1Gb connectivity services
usage, the Exchange would generate
annual revenue of approximately
$312,000. This represents a negative
Projected Revenue
The proposed fees will allow the
Exchange to cover certain costs incurred
by the Exchange associated with
109 Assuming the U.S. inflation rate continues at
its current rate, the projected profit margins in this
proposal will further decrease. See, e.g., https://
www.usinflationcalculator.com/inflation/currentinflation-rates/ (last visited February 15, 2023).
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margin when compared to the cost of
providing 1Gb connectivity services,
which will decrease over time.110
• The Exchange’s Cost Analysis
estimates the annual cost to provide FIX
Port services at $911,998. Based on
current FIX Port services usage, the
Exchange would generate annual
revenue of approximately $388,800.
This represents a negative margin when
compared to the cost of providing FIX
Port services, which will decrease over
time.111
• The Exchange’s Cost Analysis
estimates the annual cost to provide
MEO Port services at $3,039,995. Based
on current MEO Port services usage, the
Exchange would generate annual
revenue of approximately $1,296,000.
This represents a negative margin when
compared to the cost of providing MEO
Port services, which will decrease over
time.112
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 that
deviates from that of other exchanges or
supra-competitive profit, when
comparing the total expense of the
Exchange associated with providing 1Gb
and 10Gb ULL connectivity and FIX and
MEO Port services versus the total
projected revenue of the Exchange
associated with those services. In fact,
the Exchange will generate negative
margins on those connectivity and port
services even with the proposed fees.
*
*
*
*
*
MIAX Pearl Equities has operated at
a cumulative net annual loss since it
launched operations in 2020.113 The
Exchange has operated at a net loss due
to a number of factors, one of which is
choosing to forgo revenue by offering
certain products, such as connectivity,
at lower rates than other exchanges to
attract order flow and encourage market
participants to experience the high
determinism, low latency, and
resiliency of the Exchange’s trading
systems. The Exchange should not now
be penalized for seeking to raise its fees
in light of necessary technology changes
and its increased costs after offering
such products as discounted prices.
Therefore, the Exchange believes the
proposed fees are reasonable because
110 Id.
111 Id.
112 Id.
113 The Exchange has incurred a cumulative loss
of $79 million since its inception in 2020. See
Exchange’s Form 1/A, Application for Registration
or Exemption from Registration as a National
Securities Exchange, filed July 28, 2021, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000461.pdf.
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they are based on both relative costs to
the Exchange to provide dedicated 1Gb
and 10Gb ULL connectivity as well as
FIX and MEO Ports, the extent to which
the product drives the Exchange’s
overall costs and the relative value of
the product, as well as the Exchange’s
objective to make access to its Systems
broadly available to market participants.
The Exchange also believes the
proposed fees are reasonable because
they are designed to generate annual
revenue to recoup the Exchange’s costs
of providing dedicated 1Gb and 10Gb
ULL connectivity as well as FIX and
MEO Ports.
The Exchange notes that its revenue
estimate is based on projections and
will only be realized to the extent
customer activity actually produces the
revenue estimated. As a competitor in
the hyper-competitive exchange
environment, and an exchange focused
on driving competition, the Exchange
does not yet know whether such
projections will be realized. For
instance, in order to generate the
revenue expected from 1Gb and 10Gb
ULL connectivity as well as FIX and
MEO Ports, the Exchange will have to be
successful in retaining existing clients
that wish to utilize 1Gb and 10Gb ULL
connectivity as well as FIX and MEO
Ports and/or obtaining new clients that
will purchase such access. To the extent
the Exchange is successful in
encouraging new clients, the Exchange
does not believe it should be penalized
for such success. 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.
The Exchange is part of a holding
company that operates four exchange
markets and, therefore, the Exchange
and its affiliated markets must allocate
shared costs across all of those markets
accordingly, pursuant to the abovedescribed allocation methodology. In
contrast, the Investors Exchange LLC
(‘‘IEX’’) and MEMX, which are currently
each operating only one exchange, in
their recent non-transaction fee filings
can allocate the entire amount of that
same cost to a single exchange. This can
result in lower profit margins for the
non-transaction fees proposed by IEX
and MEMX because the single allocated
cost does not experience the efficiencies
and synergies associated with shared
costs across multiple platforms. The
Exchange and its affiliated markets must
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21:09 Mar 13, 2023
Jkt 259001
share a single cost, which results in cost
efficiencies that cause a broader gap
between the allocated cost amount and
projected revenue, even though the fee
levels being proposed are lower or
similar to competing markets (as
described above). To the extent that the
application of a cost-based standard
results in Commission Staff making
determinations as to the appropriateness
of certain profit margins, the
Commission Staff must consider
whether the proposed fee level is
comparable to, or on parity with, the
same fee charged by competing
exchanges and how different cost
allocation methodologies (such as across
multiple markets) may result in
different profit margins for comparable
fee levels. If it is the case that the
Commission Staff is making
determinations as to appropriate profit
margins, the Exchange believes that
Staff should be clear to all market
participants as to what they determine
is an appropriate profit margin and
should apply such determinations
consistently and, in the case of certain
legacy exchanges, retroactively, if such
standards are to avoid having a
discriminatory effect.
Further, the proposal reflects the
Exchange’s efforts to control its costs,
which the Exchange does on an ongoing
basis as a matter of good business
practice. A potential profit margin
should not be judged alone based on its
size, but is also indicative of costs
management and whether the ultimate
fee reflects the value of the services
provided. For example, a profit margin
on one exchange should not be deemed
excessive where that exchange has been
successful in controlling its costs, but
not excessive where on another
exchange where that exchange is
charging comparable fees but has a
lower profit margin due to higher costs.
Doing so could have the perverse effect
of not incentivizing cost control where
higher costs alone could be used to
justify fees increases.
The Proposed Pricing Is Not Unfairly
Discriminatory and Provides for the
Equitable Allocation of Fees, Dues, and
Other Charges
The Exchange believes that the
proposed fees are reasonable, fair,
equitable, and not unfairly
discriminatory because they are
designed to align fees with services
provided and will apply equally to all
subscribers.
1Gb and 10Gb ULL Connectivity
The Exchange believes that the
proposed fees are equitably allocated
among users of the network connectivity
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15761
and port alternatives, as the users of
10Gb ULL connections consume
substantially more bandwidth and
network resources than users of 1Gb
ULL connection. Specifically, the
Exchange notes that 10Gb ULL
connection users account for more than
99% of message traffic over the network,
driving other costs that are linked to
capacity utilization, as described above,
while the users of the 1Gb ULL
connections account for less than 1% of
message traffic over the network. In the
Exchange’s experience, users of the 1Gb
connections do not have the same
business needs for the high-performance
network as 10Gb ULL users.
The Exchange’s high-performance
network and supporting infrastructure
(including employee support), provides
unparalleled system throughput with
the network ability to support access to
several distinct equities markets. To
achieve a consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall network connectivity
expense for storage and network
transport capabilities. The Exchange
must also purchase additional storage
capacity on an ongoing basis to ensure
it has sufficient capacity to store these
messages to satisfy its record keeping
requirements under the Exchange
Act.114 Thus, as the number of messages
an entity increases, certain other costs
incurred by the Exchange that are
correlated to, though not directly
affected by, connection costs (e.g.,
storage costs, surveillance costs, service
expenses) also increase. Given this
difference in network utilization rate,
the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users
pay for the vast majority of the shared
network resources from which all
market participants’ benefit.
FIX and MEO Ports
To achieve a consistent, premium
network performance, the Exchange
must build out and maintain a network
that has the capacity to handle the
message rate requirements of its most
heavy network consumers. Billions of
messages per day consume the
Exchange’s resources and significantly
contribute to the overall network
114 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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Federal Register / Vol. 88, No. 49 / Tuesday, March 14, 2023 / Notices
connectivity expense for storage and
network transport capabilities. The
Exchange must also purchase additional
storage capacity on an ongoing basis to
ensure it has sufficient capacity to store
these messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.115 Thus, as the number of
connections an Equity Member has
increases, the related pull on Exchange
resources also increases. The Exchange
sought to design the proposed pricing
structure to set the amount of the fees
to relate to the number of connections
a firm purchases, while continuing to
provide the first five (5) ports for free.
The more connections purchased by an
Equity Member likely results in greater
expenditure of Exchange resources and
increased cost to the Exchange. The
Exchange further believes that the
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because, for the flat fee,
the Exchange provides each Equity
Member their first five (5) ports for free,
unlike other equity exchanges
referenced above.
ddrumheller on DSK120RN23PROD with NOTICES1
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed
fees will not result in any burden on
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
proposed fees will allow the Exchange
to recoup some of its costs in providing
1Gb and10Gb ULL connectivity as well
as FIX and MEO Ports at below market
rates to market participants since the
Exchange launched operations. As
described above, the Exchange has
operated at a cumulative net annual loss
since it launched operations in 2020 116
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
115 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
116 See supra note 113.
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21:09 Mar 13, 2023
Jkt 259001
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 industry, which
resulted in lower initial revenues.
Examples of this are 1Gb and 10Gb ULL
connectivity as well as FIX and MEO
Ports, for which the Exchange only now
seeks to adopt fees at a level similar to
or lower than those of other equity
exchanges.
Further, the Exchange does not
believe that the proposed fee increase
for the 1Gb or 10Gb ULL connection
change would place certain market
participants at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. The
proposed fees would apply uniformly to
all market participants regardless of the
number of connections they choose to
purchase. The proposed fee does not
favor certain categories of market
participants in a manner that would
impose an undue burden on
competition.
The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. In particular,
Exchange personnel has been informally
discussing potential fees for
connectivity services with a diverse
group of market participants that are
connected to the Exchange (including
large and small firms, firms with large
connectivity service footprints and
small connectivity service footprints, as
well as extranets and service bureaus)
for several months leading up to that
time. The Exchange does not believe the
proposed fees for connectivity services
would negatively impact the ability of
Equity Members, non-Equity Members
(extranets or service bureaus), thirdparties that purchase the Exchange’s
connectivity and resell it, and customers
of those resellers to compete with other
market participants or that they are
placed at a disadvantage.
The Exchange does anticipate,
however, that some market participants
may reduce or discontinue use of
connectivity services provided directly
by the Exchange in response to the
proposed fees. In fact, as mentioned
above, one MIAX Pearl Market Maker
terminated their MIAX Pearl Options
membership on January 1, 2023 as a
direct result of the proposed fee
PO 00000
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changes.117 The Exchange does not
believe that the proposed fees for
connectivity services place certain
market participants at a relative
disadvantage to other market
participants because the proposed
connectivity pricing is associated with
relative usage of the Exchange by each
market participant and does not impose
a barrier to entry to smaller participants.
The Exchange believes its proposed
pricing is reasonable and, when coupled
with the availability of third-party
providers that also offer connectivity
solutions, that participation on the
Exchange is affordable for all market
participants, including smaller trading
firms. As described above, the
connectivity services purchased by
market participants typically increase
based on their additional message traffic
and/or the complexity of their
operations. The market participants that
utilize more connectivity services
typically utilize the most bandwidth,
and those are the participants that
consume the most resources from the
network. Accordingly, the proposed fees
for connectivity services do not favor
certain categories of market participants
in a manner that would impose a
burden on competition; rather, the
allocation of the proposed connectivity
fees reflects the network resources
consumed by the various size of market
participants and the costs to the
Exchange of providing such
connectivity services.
Inter-Market Competition
The Exchange also does not believe
that the proposed rule change will result
in any burden on inter-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. As discussed
above, market participants are not
forced to connect to all exchanges.
There is no reason to believe that our
117 The Exchange acknowledges that IEX included
in its proposal to adopt market data fees after
offering market data for free an analysis of what its
projected revenue would be if all of its existing
customers continued to subscribe versus what its
projected revenue would be if a limited number of
customers subscribed due to the new fees. See
Securities Exchange Act Release No. 94630 (April
7, 2022), 87 FR 21945 (April 13, 2022) (SR–IEX–
2022–02). MEMX did not include a similar analysis
in either of its recent non-transaction fee proposals.
See, e.g., supra note 48. The Exchange does not
believe a similar analysis would be useful here
because it is amending existing fees, not proposing
to charge a new fee where existing subscribers may
terminate connections because they are no longer
enjoying the service at no cost. In addition, despite
the potential for existing subscribers to terminate
connections due to the proposal, the Exchange
anticipates its number of subscribers to remain
generally static, resulting in an immaterial
difference between a best case and worst case
scenario.
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ddrumheller on DSK120RN23PROD with NOTICES1
proposed price increase will harm
another exchange’s ability to compete.
There are other markets of which market
participants may connect to trade
equities at higher rates than the
Exchange’s. There is also a range of
alternative strategies, including routing
to the exchange through another
participant or market center or accessing
the Exchange indirectly. Market
participants are free to choose which
exchange or reseller to use to satisfy
their business needs. Accordingly, the
Exchange does not believe its proposed
fee changes impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
*
*
*
*
*
In conclusion, as discussed
thoroughly above, the Exchange
regrettably believes that the application
of the Revised Review Process and Staff
Guidance has adversely affected intermarket competition among legacy and
non-legacy exchanges by impeding the
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
118 See letter from Brian Sopinsky, General
Counsel, Susquehanna International Group, LLP to
21:09 Mar 13, 2023
Jkt 259001
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,119 and Rule
19b–4(f)(2) 120 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
PEARL–2023–06 on the subject line.
Paper Comments
The Exchange received one comment
letter on the Initial Proposal.118 In its
VerDate Sep<11>2014
letter, the sole commenter seeks to
incorporate comments submitted on
previous Exchange proposals to which
the Exchange has previously responded.
To the extent the sole commenter has
attempted to raise new issues in its
letter, the Exchange believes those
issues are not germane to this proposal
in particular, but rather raise larger
issues with the current environment
surrounding exchange non-transaction
fee proposals that should be addressed
by the Commission through rule
making, or Congress, more holistically
and not through an individual exchange
fee filing. Among other things, the
commenter is requesting additional data
and information that is both opaque and
a moving target and would constitute a
level of disclosure materially over and
above that provided by any competitor
exchanges.
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Vanessa Countryman, Secretary, Commission, dated
February 7, 2023.
119 15 U.S.C. 78s(b)(3)(A)(ii).
120 17 CFR 240.19b–4(f)(2).
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15763
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–PEARL–2023–06. 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–2023–06 and
should be submitted on or before April
4, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.121
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–05124 Filed 3–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
2:00 p.m. on Thursday,
March 16, 2023.
PLACE: The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
STATUS: This meeting will be closed to
the public.
TIME AND DATE:
121 17
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]]>Agencies
[Federal Register Volume 88, Number 49 (Tuesday, March 14, 2023)]
[Notices]
[Pages 15746-15763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05124]
[[Page 15746]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97077; File No. SR-PEARL-2023-06]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Equities Fee Schedule To Modify Certain Connectivity and Port
Fees
March 8, 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 February 23, 2023, 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 fee schedule (the
``Fee Schedule'') applicable to MIAX Pearl Equities, an equities
trading facility of the Exchange to amend certain connectivity and port
fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/pearl at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule to amend fees for:
(1) the 1 gigabit (``Gb'') and 10Gb ultra-low latency (``ULL'') fiber
connections for Equity Members \3\ and non-Members; (2) the Financial
Information Exchange (``FIX'') Ports,\4\ and the MIAX Express Orders
Interface (``MEO'') Ports.\5\ The Exchange adopted connectivity and
port fees in September 2020,\6\ and has not changed those fees since
they were adopted. Since that time, the Exchange experienced ongoing
increases in expenses, particularly internal expenses.\7\ As discussed
more fully below, the Exchange recently calculated increased annual
aggregate costs of $18,331,650 for providing 1Gb and 10Gb ULL
connectivity combined and $3,951,993 for providing FIX and MEO Ports.
---------------------------------------------------------------------------
\3\ The term ``Equity Member'' means a Member authorized by the
Exchange to transact business on MIAX PEARL Equities. See Exchange
Rule 1901.
\4\ ``FIX Order Interface'' or ``FOI'' means the Financial
Information Exchange interface for certain order types as set forth
in Exchange Rule 2614. See the Definitions section of the Fee
Schedule.
\5\ Each MEO interface will have one Full Service Port (``FSP'')
and one Purge Port. ``Full Service Port'' or ``FSP'' means an MEO
port that supports all MEO order input message types. See the
Definitions section of the Fee Schedule.
\6\ See Securities Exchange Act Release No. 90651 (December 11,
2020), 85 FR 81971 (December 17, 2020) (SR-PEARL-2020-33).
\7\ For example, the New York Stock Exchange, Inc.'s (``NYSE'')
Secure Financial Transaction Infrastructure (``SFTI'') network,
which contributes to the Exchange's connectivity cost, increased its
fees by approximately 9% since 2021. Similarly, since 2021, the
Exchange, and its affiliates, experienced an increase in data center
costs of approximately 17% and an increase in hardware and software
costs of approximately 19%. These percentages are based on the
Exchange's actual 2021 and proposed 2023 budgets.
---------------------------------------------------------------------------
Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity and port
services. Subscribers expect the Exchange to provide this level of
support so they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and FIX and MEO Ports in order to recoup
ongoing costs and increased expenses set forth below in the Exchange's
cost analysis. The Exchange proposes to implement the changes to the
Fee Schedule pursuant to this proposal immediately. The Exchange
initially filed the proposal on December 30, 2022 (SR-PEARL-2022-61)
(the ``Initial Proposal'').\8\ The Exchange recently withdrew the
Initial Proposal and replaced it with this current proposal (SR-PEARL-
2023-06).
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 96631 (January 10,
2023), 88 FR 2671 (January 17, 2023) (SR-PEARL-2022-61).
---------------------------------------------------------------------------
The Exchange previously included a cost analysis in the Initial
Proposal. As described more fully below, the Exchange provides an
updated cost analysis that includes, among other things, additional
descriptions of how the Exchange allocated costs among it and its
affiliated exchanges (separately among MIAX Pearl Options and MIAX
Pearl Equities, Miami International Securities Exchange, LLC
(``MIAX''), and MIAX Emerald, LLC (``MIAX Emerald,'' together with MIAX
and MIAX Pearl Options, the ``affiliated markets'')) to ensure no cost
was allocated more than once, as well as additional detail supporting
its cost allocation processes and explanations as to why a cost
allocation in this proposal may differ from the same cost allocation in
a similar proposal submitted by one of its affiliated exchanges.
Although the baseline cost analysis used to justify the proposed fees
was made in the Initial Proposal, the fees themselves have not changed
since the Initial Proposal and the Exchange still proposes fees that
are intended to cover the Exchange's cost of providing 10Gb ULL
connectivity and FIX and MEO Ports with a reasonable mark-up over those
costs.
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \9\ and various other
developments, the Commission began to undertake a heightened review of
exchange filings, including non-transaction fee filings that was
substantially and materially different from it prior review process
(hereinafter referred to as the ``Revised Review Process''). In the
Susquehanna Decision, the D.C. Circuit Court stated that the Commission
could not maintain a practice of ``unquestioning reliance''
[[Page 15747]]
on claims made by a self-regulatory organization (``SRO'') in the
course of filing a rule or fee change with the Commission.\10\ Then, on
October 16, 2018, the Commission issued an opinion in Securities
Industry and Financial Markets Association finding that exchanges
failed both to establish that the challenged fees were constrained by
significant competitive forces and that these fees were consistent with
the Act.\11\ On that same day, the Commission issued an order remanding
to various exchanges and national market system (``NMS'') plans
challenges to over 400 rule changes and plan amendments that were
asserted in 57 applications for review (the ``Remand Order'').\12\ The
Remand Order directed the exchanges to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \13\
The Commission denied requests by various exchanges and plan
participants for reconsideration of the Remand Order.\14\ However, the
Commission did extend the deadlines in the Remand Order ``so that they
d[id] not begin to run until the resolution of the appeal of the SIFMA
Decision in the D.C. Circuit and the issuance of the court's mandate.''
\15\ Both the Remand Order and the Order Denying Reconsideration were
appealed to the D.C. Circuit.
---------------------------------------------------------------------------
\9\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\10\ Id.
\11\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\12\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84433, 2018 WL 5023230 (Oct. 16, 2018). See 15 U.S.C.
78k-1, 78s; see also Rule 608(d) of Regulation NMS, 17 CFR
242.608(d) (asserted as an alternative basis of jurisdiction in some
applications).
\13\ Id. at page 2.
\14\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\15\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased the level of
information needed for the Commission to believe that an exchange's
filing satisfied its obligations under the Act with respect to changing
a fee.\16\ Despite approving hundreds of access fee filings in the
years prior to the BOX Order (described further below) utilizing a
``market-based'' test, the Commission changed course and disapproved
BOX's proposal to begin charging connectivity at one-fourth the rate of
competing exchanges' pricing.
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\16\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to
Amend the Fee Schedule on the BOX Market LLC Options Facility to
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted
in the BOX Order that it ``historically applied a `market-based'
test in its assessment of market data fees, which [the Commission]
believe[s] present similar issues as the connectivity fees proposed
herein.'' Id. at page 16. Despite this admission, the Commission
disapproved BOX's proposal to begin charging $5,000 per month for
10Gb connections (while allowing legacy exchanges to charge rates
equal to 3-4 times that amount utilizing ``market-based'' fee
filings from years prior).
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Also while the above appeal was pending, on May 21, 2019, the
Commission Staff issued guidance ``to assist the national securities
exchanges and FINRA . . . in preparing Fee Filings that meet their
burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \17\ In the Staff
Guidance, the Commission Staff states that, ``[a]s an initial step in
assessing the reasonableness of a fee, staff considers whether the fee
is constrained by significant competitive forces.'' \18\ The Staff
Guidance also states that, ``. . . even where an SRO cannot
demonstrate, or does not assert, that significant competitive forces
constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \19\
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\17\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Staff Guidance'').
\18\ Id.
\19\ Id.
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Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC \20\ and remanded for further proceedings consistent
with its opinion.\21\ That same day, the D.C. Circuit issued an order
remanding the Remand Order to the Commission for reconsideration in
light of NASDAQ. The court noted that the Remand Order required the
exchanges and NMS plan participants to consider the challenges that the
Commission had remanded in light of the SIFMA Decision. The D.C.
Circuit concluded that because the SIFMA Decision ``has now been
vacated, the basis for the [Remand Order] has evaporated.'' \22\
Accordingly, on August 7, 2020, the Commission vacated the Remand Order
and ordered the parties to file briefs addressing whether the holding
in NASDAQ v. SEC that Exchange Act Section 19(d) does not permit
challenges to generally applicable fee rules requiring dismissal of the
challenges the Commission previously remanded.\23\ The Commission
further invited ``the parties to submit briefing stating whether the
challenges asserted in the applications for review . . . should be
dismissed, and specifically identifying any challenge that they contend
should not be dismissed pursuant to the holding of Nasdaq v. SEC.''
\24\ Without resolving the above issues, on October 5, 2020, the
Commission issued an order granting SIFMA and Bloomberg's request to
withdraw their applications for review and dismissed the
proceedings.\25\
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\20\ NASDAQ Stock Mkt., LLC v. SEC, No 18-1324, --- Fed. App'x -
---, 2020 WL 3406123 (D.C. Cir. June 5, 2020). The court's mandate
was issued on August 6, 2020.
\21\ Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020).
The court's mandate issued on August 6, 2020. The D.C. Circuit held
that Exchange Act ``Section 19(d) is not available as a means to
challenge the reasonableness of generally-applicable fee rules.''
Id. The court held that ``for a fee rule to be challengeable under
Section 19(d), it must, at a minimum, be targeted at specific
individuals or entities.'' Id. Thus, the court held that ``Section
19(d) is not an available means to challenge the fees at issue'' in
the SIFMA Decision. Id.
\22\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\23\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 89504, 2020 WL 4569089 (August 7, 2020) (the ``Order
Vacating Prior Order and Requesting Additional Briefs'').
\24\ Id.
\25\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ 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.'' \26\
As such, all of those fees remained in place and amounted to a baseline
set of fees for those exchanges that had the benefit of getting their
fees in place before the Commission Staff's fee review process
materially changed. The net result of this history and lack of
resolution in the D.C. Circuit Court resulted in an uneven competitive
landscape where the Commission subjects all new non-transaction fee
filings to the new Revised Review Process, while allowing the
previously challenged fee filings, mostly submitted by incumbent
exchanges prior to 2019, to remain in effect and not subject to the
``record'' or ``review'' earlier intended by the Commission.
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\26\ See supra note 21, at page 2.
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While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving
[[Page 15748]]
disclosures and requiring exchanges to justify that their market data
and access fee proposals are fair and reasonable, the practical effect
of the Revised Review Process, Staff Guidance, and the Commission's
related practice of continuous suspension of new fee filings, is anti-
competitive, discriminatory, and has put in place an un-level playing
field, which has negatively impacted smaller, nascent, non-legacy
exchanges (``non-legacy exchanges''), while favoring larger, incumbent,
entrenched, legacy exchanges (``legacy exchanges'').\27\ The legacy
exchanges all established a significantly higher baseline for access
and market data fees prior to the Revised Review Process. From 2011
until the issuance of the Staff Guidance in 2019, national securities
exchanges filed, and the Commission Staff did not abrogate or suspend
(allowing such fees to become effective), at least 92 filings \28\ to
amend exchange connectivity or port fees (or similar access fees). The
support for each of those filings was a simple statement by the
relevant exchange that the fees were constrained by competitive
forces.\29\ These fees remain in effect today.
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\27\ Commission Chair Gary Gensler recently reiterated the
Commission's mandate to ensure competition in the equities markets.
See ``Statement on Minimum Price Increments, Access Fee Caps, Round
Lots, and Odd-Lots'', by Chair Gary Gensler, dated December 14, 2022
(stating ``[i]n 1975, Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the establishment of
the national market system and enhance competition in the securities
markets, including the equity markets'' (emphasis added)). In that
same statement, Chair Gary Gensler cited the five objectives laid
out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1),
including ensuring ``fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets. . . .'' (emphasis added). Id. at note
1. See also Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249.
\28\ This timeframe also includes challenges to over 400 rule
filings by SIFMA and Bloomberg discussed above. Sec. Indus. & Fin.
Mkts. Ass'n, Securities Exchange Act Release No. 84433, 2018 WL
5023230 (Oct. 16, 2018). Those filings were left to stand, while at
the same time, blocking newer exchanges from the ability to
establish competitive access and market data fees. See The Nasdaq
Stock Market, LLC v. SEC, Case No. 18-1292 (D.C. Cir. June 5, 2020).
The expectation at the time of the litigation was that the 400 rule
flings challenged by SIFMA and Bloomberg would need to be justified
under revised review standards.
\29\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\30\
By impeding any path forward for non-legacy exchanges to establish
commensurate non-transaction fees, or by failing to provide any
alternative means for smaller markets to establish ``fee parity'' with
legacy exchanges, the Commission is stifling competition: non-legacy
exchanges are, in effect, being deprived of the revenue necessary to
compete on a level playing field with legacy exchanges. This is
particularly harmful, given that the costs to maintain exchange systems
and operations continue to increase.
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\30\ For example, the options exchange affiliates of MIAX Pearl
Equities, MIAX, MIAX Pearl Options, and MIAX Emerald, have filed,
and subsequently withdrawn, various forms of connectivity and port
fee changes seven (7) times since August 2021. Each of the proposals
contained hundreds of cost and revenue disclosures never previously
disclosed by legacy exchanges in their access and market data fee
filings prior to 2019.
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The Commission Staff's change in position impedes the ability of
non-legacy exchanges to raise revenue to invest in their systems to
compete with the legacy exchanges who already enjoy disproportionate
non-transaction fee based revenue. For example, the Cboe Exchange, Inc.
(``Cboe'') reported ``access and capacity fee'' revenue of $70,893,000
for 2020 \31\ and $80,383,000 for 2021.\32\ Cboe C2 Exchange, Inc.
(``C2'') reported ``access and capacity fee'' revenue of $19,016,000
for 2020 \33\ and $22,843,000 for 2021.\34\ Cboe BZX Exchange, Inc.
(``BZX'') reported ``access and capacity fee'' revenue of $38,387,000
for 2020 \35\ and $44,800,000 for 2021.\36\ Cboe EDGX Exchange, Inc.
(``EDGX'') reported ``access and capacity fee'' revenue of $26,126,000
for 2020 \37\ and $30,687,000 for 2021.\38\ For 2021, the affiliated
Cboe, C2, BZX, and EDGX (the four largest exchanges of the Cboe
exchange group) reported $178,712,000 in ``access and capacity fees''
in 2021. NASDAQ Phlx, LLC (``NASDAQ Phlx'') reported ``Trade Management
Services'' revenue of $20,817,000 for 2019.\39\ The Exchange notes it
is unable to compare ``access fee'' revenues with NASDAQ Phlx (or other
affiliated NASDAQ exchanges) because after 2019, the ``Trade Management
Services'' line item was bundled into a much larger line item in PHLX's
Form 1, simply titled ``Market services.'' \40\
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\31\ According to Cboe's 2021 Form 1 Amendment, access and
capacity fees represent fees assessed for the opportunity to trade,
including fees for trading-related functionality. See Cboe 2021 Form
1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\32\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\33\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\34\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\35\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\36\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\37\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\38\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\39\ According to PHLX, ``Trade Management Services'' includes
``a wide variety of alternatives for connectivity to and accessing
[the PHLX] markets for a fee. These participants are charged monthly
fees for connectivity and support in accordance with [PHLX's]
published fee schedules.'' See PHLX 2020 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
\40\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf. The Exchanges
notes that this type of Form 1 accounting appears to be designed to
obfuscate the true financials of such exchanges and has the effect
of perpetuating fee and revenue advantages of legacy exchanges.
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[[Page 15749]]
The much higher non-transaction fees charged by the legacy
exchanges provides them with two significant competitive advantages.
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing
and advertising on major media outlets,\41\ new products and other
innovations. Second, higher non-transaction fees provide the legacy
exchanges with greater flexibility to lower their transaction fees (or
use the revenue from the higher non-transaction fees to subsidize
transaction fee rates), which are more immediately impactful in
competition for order flow and market share, given the variable nature
of this cost on member firms. The prohibition of a reasonable path
forward denies the Exchange (and other non-legacy exchanges) this
flexibility, eliminates the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share with legacy exchanges. While one could debate whether the
pricing of non-transaction fees are subject to the same market forces
as transaction fees, there is little doubt that subjecting one exchange
to a materially different standard than that historically applied to
legacy exchanges for non-transaction fees leaves that exchange at a
disadvantage in its ability to compete with its pricing of transaction
fees.
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\41\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
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While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its content . . .'',\42\ this is not the reality experienced by
exchanges such as MIAX 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 repeated good-faith efforts by the Exchange
to provide substantial amount of cost-related details. For example, the
options facility of MIAX Pearl has attempted to increase similar fees
using a cost-based justification numerous times, having submitted over
six filings.\43\ However, despite providing 100+ page filings
describing in extensive detail its costs associated with providing the
services described in the filings, Commission Staff continues to
suspend such filings, with the rationale that the Exchange has not
provided sufficient detail of its costs and without ever being precise
about what additional data points are required. The Commission Staff
appears to be interpreting the reasonableness standard set forth in
Section 6(b)(4) of the Act \44\ in a manner that is not possible to
achieve. This essentially nullifies the cost-based approach for
exchanges as a legitimate alternative as laid out in the Staff
Guidance. By refusing to accept a reasonable cost-based argument to
justify non-transaction fees (in addition to refusing to accept a
competition-based argument as described above), or by failing to
provide the detail required to achieve that standard, the Commission
Staff is effectively preventing non-legacy exchanges from making any
non-transaction fee changes, which benefits the legacy exchanges and is
anticompetitive to the non-legacy exchanges. This does not meet the
fairness standard under the Act and is discriminatory.
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\42\ See supra note 17, at note 1.
\43\ See, e.g., Securities Exchange Act Release Nos. 92798
(August 27, 2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-
33); 92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-
PEARL-2021-36); 93162 (September 28, 2021), 86 FR 54739 (October 4,
2021) (SR-PEARL-2021-45); 93556 (November 10, 2021), 86 FR 64235
(November 17, 2021) (SR-PEARL-2021-53); 93774 (December 14, 2021),
86 FR 71952 (December 20, 2021) (SR-PEARL-2021-57); 93894 (January
4, 2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58); 94258
(February 15, 2022), 87 FR 9659 (February 22, 2022) (SR-PEARL-2022-
03); 94286 (February 18, 2022), 87 FR 10860 (February 25, 2022) (SR-
PEARL-2022-04); 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022)
(SR-PEARL-2022-11); 94722 (April 14, 2022), 87 FR 23660 (April 20,
2022) (SR-PEARL-2022-12); 94888 (May 11, 2022), 87 FR 29892 (May 17,
2022) (SR-PEARL-2022-18).
\44\ 15 U.S.C. 78f(b)(4).
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Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\45\ to the extent that this is pertinent; (b) establish a
framework to provide for commensurate non-transaction based fees among
competing exchanges to ensure fee parity; \46\ or (c) accept that
certain competition-based arguments are applicable given the linkage
between non-transaction fees and transaction fees, especially where
non-transaction fees among exchanges are based upon disparate standards
of review, lack parity, and impede fair competition. Considering the
absence of any such framework or clarity, the Exchange believes that
the Commission does not have a reasonable basis to deny the Exchange
this change in fees, where the proposed change would result in fees
meaningfully lower than comparable fees at competing exchanges and
where the associated non-transaction revenue is meaningfully lower than
competing exchanges.
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\45\ To the extent that the cost-based standard includes
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Exchange believes that Staff should be
clear as to what they determine is an appropriate profit margin.
\46\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
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In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and place a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other exchanges for connectivity. If the Commission Staff were to
disapprove this proposal, that action, and not market forces, would
substantially affect whether the Exchange can be successful in its
competition with other exchanges. Disapproval of this filing could also
be viewed as an arbitrary and capricious decision should the Commission
Staff continue to ignore its past treatment of non-transaction fee
filings before implementation of the Revised Review Process and Staff
Guidance and refuse to allow such filings to be approved despite
significantly enhanced arguments and cost disclosures.\47\
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\47\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever-increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
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Lastly, the Exchange notes that the Commission Staff has allowed
similar fee increases by other exchanges to remain in effect by
publishing those filings for comment and allowing the
[[Page 15750]]
exchange to withdraw and re-file numerous times.\48\ Recently, the
Commission Staff has not afforded the Exchange the same
flexibility.\49\ This again is evidence that the Commission Staff is
not treating non-transaction fee filings in a consistent manner and is
holding exchanges to different levels of scrutiny in reviewing filings.
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\48\ See, e.g., Securities Exchange Act Release Nos. 93937
(January 10, 2022), 87 FR 2466 (January 14, 2022) (SR-MEMX-2021-22);
94419 (March 15, 2022), 87 FR 16046 (March 21, 2022) (SR-MEMX-2022-
02); SR-MEMX-2022-12 (withdrawn before being noticed); 94924 (May
16, 2022), 87 FR 31026 (May 20, 2022) (SR-MEMX-2022-13); 95299 (July
15, 2022), 87 FR 43563 (July 21, 2022) (SR-MEMX-2022-17); SR-MEMX-
2022-24 (withdrawn before being noticed); 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26); 94901 (May
12, 2022), 87 FR 30305 (May 18, 2022) (SR-MRX-2022-04); SR-MRX-2022-
06 (withdrawn before being noticed); 95262 (July 12, 2022), 87 FR
42780 (July 18, 2022) (SR-MRX-2022-09); 95710 (September 8, 2022),
87 FR 56464 (September 14, 2022) (SR-MRX-2022-12); 96046 (October
12, 2022), 87 FR 63119 (October 18, 2022) (SR-MRX-2022-20); 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26); and 96430 (December 1, 2022), 87 FR 75083 (December 7, 2022)
(SR-MEMX-2022-32).
\49\ Securities Exchange Act Release Nos. 94721 (April 14,
2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11) and 94722
(April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-12).
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* * * * *
1Gb and 10Gb ULL Connectivity Fee Change
Sections 2(a) and (b) of the Fee Schedule describe network
connectivity fees for the 1Gb ULL and 10Gb ULL fiber connections, which
are charged to both Equity Members and non-Members for connectivity to
the Exchange's primary and secondary facilities. The Exchange offers
its Equity Members the ability to connect to the Exchange in order to
transmit orders to and receive information from the Exchange. Equity
Members can also choose to connect to the Exchange indirectly through
physical connectivity maintained by a third-party extranet. Extranet
physical connections may provide access to one or multiple Equity
Members on a single connection. The number of physical connections
assigned to each User \50\ as of November 30, 2022, ranges from one to
eleven, depending on the scope and scale of the Equity Member's trading
activity on the Exchange as determined by the Equity Member, including
the Equity Member's determination of the need for redundant
connectivity. The Exchange notes that 40% of its Equity Members do not
maintain a physical connection directly with the Exchange in the
Primary Data Center (though many such Equity Members have connectivity
through a third-party provider) and another 46% have either one or two
physical ports to connect to the Exchange in the Primary Data Center.
Thus, only a limited number of Equity Members, 14%, maintain three or
more physical ports to connect to the Exchange in the Primary Data
Center.
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\50\ The term ``User'' shall mean any Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Exchange Rule 2602. See Exchange Rule 1901.
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In order to cover the continuous increase in aggregate costs of
providing physical connectivity to Equity Members and non-Equity
Members and make a modest profit, as described below, the Exchange
proposes to amend the monthly connectivity fees as follows: (a)
increase the 1Gb ULL connection from $1,000 to $2,500; and (b) increase
the 10Gb ULL connection from $3,500 to $8,000.\51\
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\51\ The Exchange notes that while its proposed fee of $8,000
per 10Gb ULL connection is higher than MEMX's $6,000 monthly fee for
its xNet Physical Connection, MEMX does not offer any other physical
connectivity, such as a 1Gb connection, for a lower fee. See
Securities Exchange Act Release No. 95936 (September 27, 2022), 87
FR 59845 (October 3, 2022) (SR-MEMX-2022-26). See MEMX Fee Schedule,
Connectivity and Application Sessions, available at https://info.memxtrading.com/fee-schedule/ (last visited December 28, 2022).
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FIX and MEO Ports
Similar to other exchanges, the Exchange offers its Equity Members
application sessions, also known as ports, for order entry and receipt
of trade execution reports and order messages. Equity Members can also
choose to connect to the Exchange indirectly through a session
maintained by a third-party service bureau. Service bureau sessions may
provide access to one or multiple Equity Members on a single session.
The number of sessions assigned to each User as of November 30, 2022,
ranges from one to more than 100, depending on the scope and scale of
the Equity Member's trading activity on the Exchange (either through a
direct connection or through a service bureau) as determined by the
Equity Member. For example, by using multiple sessions, Equity Members
can segregate order flow from different internal desks, business lines,
or customers. The Exchange does not impose any minimum or maximum
requirements for how many application sessions an Equity Member or
service bureau can maintain, and does not propose to impose any minimum
or maximum session requirements for its Equity Members or their service
bureaus.
Section 2(d), Port Fees, of the Fee Schedule describes fees for
access and services used by Equity Members and non-Members. The
Exchange provides the following types of ports: (i) FIX Ports, which
allow Equity Members to send orders and other messages using the FIX
protocol; and (ii) MEO Ports, which allow Equity Members order entry
capabilities to all Exchange matching engines.
The Exchange operates a primary and secondary data center as well
as a disaster recovery center. Each Port provides access to all
Exchange data centers for a single fee. The Exchange currently provides
the first twenty-five (25) FIX and MEO Ports free of charge and
absorbed all associated costs since the launch of MIAX Pearl Equities.
The Exchange charges the following separate monthly fees for FIX and
MEO Ports: $450 for ports 26-50, $400 for ports 51-75, $350 for ports
76-100, and $300 for ports 101 and higher. The Exchange now proposes to
provide the first five (5) FIX or MEO Ports free of charge, then charge
a flat rate of $450 per port for port six (6) and above.\52\
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\52\ The Exchange notes that the proposed fee of $450 per port
equals the amount charged by MEMX for MEMX's application sessions
(order entry and drop copy ports), but MEMX does not offer any ports
free of charge. See MEMX Fee Schedule, Connectivity and Application
Sessions, available at https://info.memxtrading.com/fee-schedule/
(last visited December 28, 2022). See Securities Exchange Act
Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3,
2022) (SR-MEMX-2022-26). Unlike MEMX and other exchanges, the
Exchange also continues to provide FXD Ports (i.e., Drop Copy Ports)
free of charge.
---------------------------------------------------------------------------
Implementation
The proposed fee changes are immediately effective.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \53\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \54\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Equity Members and other persons using any facility or system
which the Exchange operates or controls. The Exchange also believes the
proposed fees further the objectives of Section 6(b)(5) of the Act \55\
in that they are designed to promote just and equitable principles of
trade, remove impediments to and perfect the mechanism of a free and
open market and a national market system, and, in general protect
investors and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
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\53\ 15 U.S.C. 78f(b).
\54\ 15 U.S.C. 78f(b)(4).
\55\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the
[[Page 15751]]
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 \56\ and the Staff Guidance,\57\ 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.
---------------------------------------------------------------------------
\56\ See supra note 16.
\57\ See supra note 17.
---------------------------------------------------------------------------
The Exchange believes that exchanges, in setting fees of all types,
should meet high standards of transparency to demonstrate why each new
fee or fee amendment meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various fees for market participants to access an
exchange's marketplace.
In the Staff Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\58\ 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.'' \59\ 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.'' \60\
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\58\ Id.
\59\ Id.
\60\ Id.
---------------------------------------------------------------------------
The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 1Gb and10Gb ULL connectivity as well as FIX and MEO Ports. As
discussed above, the Revised Review Process and Staff Guidance have
created an uneven playing field between legacy and non-legacy exchanges
by severely restricting non-legacy exchanges from being able to
increase non-transaction relates fees to provide them with additional
necessary revenue to better compete with legacy exchanges, which
largely set fees prior to the Revised Review Process. 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 by using the revenue from
the higher non-transaction fees to subsidize transaction fee rates. The
latter is more immediately impactful in competition for order flow and
market share, given the variable nature of this cost on Equity Member
firms. The absence of a reasonable path forward to increase non-
transaction fees to comparable (or lower rates) limits the Exchange's
flexibility to, among other things, make additional investments in
infrastructure and advertising, diminishes the ability to remain
competitive on transaction fees, and hinders the ability to compete for
order flow and market share. Again, while one could debate whether the
pricing of non-transaction fees are subject to the same market forces
as transaction fees, there is little doubt that subjecting one exchange
to a materially different standard than that applied to other exchanges
for non-transaction fees leaves that exchange at a disadvantage in its
ability to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations in September 2020 and adopted its
initial fee schedule, with 1Gb ULL connectivity set at $1,000, 10Gb ULL
connectivity fees set at $3,500, and provided the first twenty-five
(25) FIX and MEO Ports for free.\61\ As a new exchange entrant, the
Exchange chose to offer such services at a discounted rate or free of
charge to encourage market participants to trade on the Exchange and
experience, among things, the quality of the Exchange's technology and
trading functionality. This practice is not uncommon. New exchanges
often do not charge fees or charge lower fees for certain services such
as memberships/trading permits to attract order flow to an exchange,
and later amend their fees to reflect the true value of those services,
absorbing all costs to provide those services in the meantime. Allowing
new exchange entrants time to build and sustain market share through
various pricing incentives before increasing non-transaction fees
encourages market entry and fee parity, which promotes competition
among exchanges. It also enables new exchanges to mature their markets
and allow market participants to trade on the new exchanges without
fees serving as a potential barrier to attracting memberships and order
flow.\62\
---------------------------------------------------------------------------
\61\ See supra note 6.
\62\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX . . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
---------------------------------------------------------------------------
The Exchange has not amended any of its non-transaction fees since
its launch in September 2022. The Exchange balanced business and
competitive concerns with the need to financially compete with the
larger incumbent exchanges that charge higher fees for similar
connectivity and use that revenue to invest in their technology and
other service offerings.
The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
competitive forces, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. The fact that the
market for order flow is competitive has long been recognized by the
courts. In NetCoalition v. Securities
[[Page 15752]]
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' . . . .'' \63\
---------------------------------------------------------------------------
\63\ 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.'' \64\
---------------------------------------------------------------------------
\64\ 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.' '' \65\ 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.'' \66\ 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.'' \67\ 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.'' \68\
---------------------------------------------------------------------------
\65\ 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.'').
\66\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\67\ Id.
\68\ See Staff Guidance, supra note 17.
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The Exchange believes the competing exchanges' connectivity and
port fees are useful examples of alternative approaches to providing
and charging for access and demonstrating how such fees are
competitively set and constrained. To that end, the Exchange believes
the proposed fees are competitive and reasonable because the proposed
fees are similar to or less than fees charged for similar connectivity
and port access provided by other exchanges with comparable market
shares. As such, the Exchange believes that denying its ability to
institute fees that are closer to parity with legacy exchanges, in
effect, impedes its ability to compete, including in its pricing of
transaction fees and ability to invest in competitive infrastructure
and other offerings.
The following table shows how the Exchange's proposed fees remain
similar to or less than fees charged for similar connectivity and port
access provided by other exchanges with similar market share. Each of
the market data rates in place at competing exchanges were filed with
the Commission for immediate effectiveness and remain in place today.
----------------------------------------------------------------------------------------------------------------
Type of connection
Exchange or port Monthly fee (per connection or per port)
----------------------------------------------------------------------------------------------------------------
MIAX Pearl Equities (as proposed) (market 1Gb ULL connection. $2,500.
share of 1.02% for the month of November 10Gb ULL connection $8,000.
2022) \69\. FIX and MEO Ports.. 1-5 ports: FREE.
6 ports or more: $450 per port.
FXD Ports (i.e., FREE.
Drop Copy Ports).
MEMX \70\ (market share of 3.05% for the 1Gb connection..... Not available.
month of November 2022) \71\. xNet Physical $6,000 per connection.
connection.
Order Entry Ports.. $450 per port.
Drop Copy Ports.... $450 per port.
NASDAQ PSX LLC (``PSX'') \72\ (market share 1Gb connection..... $2,500 per connection (plus $1,500
of 0.70% for the month of November 2022) installation fee).
\73\.
10Gb connection.... $7,500 per connection (plus $1,500
installation fee).
Order Entry Ports.. $400 per port.
Drop Copy Ports.... $400 per port.
NASDAQ BX LLC (``BX'') \74\ (market share of 1Gb Ultra $2,500 per connection (plus $1,500
0.60% for the month of November 2022) \75\. connection. installation fee).
10Gb Ultra $15,000 (plus $1,500 installation fee).
connection.
Order Entry Ports.. $500 per port.
Drop Copy Ports.... $500 per port.
----------------------------------------------------------------------------------------------------------------
There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available equity
exchanges. Market participants may choose to become a member of one or
more equities exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, one Market Maker of
[[Page 15753]]
MIAX Pearl Options terminated their membership effective January 1,
2023 as a direct result of the proposed fee changes to the MIAX Pearl
Options fee schedule.
---------------------------------------------------------------------------
\69\ See Market at a Glance, available at https://www.miaxoptions.com/.
\70\ See MEMX Fee Schedule, Connectivity and Application
Sessions, available at https://info.memxtrading.com/fee-schedule/.
\71\ See supra note 69.
\72\ See PSX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing; and PSX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
\73\ See supra note 69.
\74\ See BX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; and BX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
\75\ See supra note 69.
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It is not a requirement for market participants to become members
of all equities exchanges, in fact, certain market participants conduct
an equities business as a member of only one market.\76\ A very small
number of market participants choose to become a member of all sixteen
(16) equities exchanges. Most firms that actively trade on equities
markets are not currently Equity Members of the Exchange and do not
purchase connectivity or port services at the Exchange. Connectivity
and ports are only available to Equity Members or service bureaus, and
only an Equity Member may utilize a port.\77\
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\76\ 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.''
\77\ Service Bureaus may obtain ports on behalf of Equity
Members.
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BOX recently noted in a proposal to amend their own trading permit
fees that of the 62 market making firms that are registered as Market
Makers across Cboe, MIAX, and BOX, 42 firms access only one of the
three exchanges.\78\ For equities, the Exchange currently has 45 Equity
Members. Also, MEMX noted in a January 2022 filing that it had only 66
members, and, based on publicly available information regarding a
sample of the Exchange's competitors, NYSE has 142 members, Cboe BZX
has 140 members, and Investors Exchange LLC (``IEX'') has 133
members.\79\ For options, the Exchange and its affiliates, MIAX and
MIAX Emerald, have a total of 47 members. Of those 47 total members, 35
are members of all three affiliated exchanges, four (4) are members of
only two (2) affiliated exchanges, and eight (8) are members of only
one affiliated exchange. The Exchange believes that significant
differences in membership numbers describes by the Exchange, BOX, and
MEMX demonstrate that firms can, and do, select which exchanges they
wish to access, and, accordingly, exchanges must take competitive
considerations into account when setting fees for such access. The
Exchange also notes that no firm is an Equity Member of the Exchange
only. The above data evidences that a broker-dealer need not have
direct connectivity to all exchanges, let alone the Exchange and its
affiliates, and broker-dealers may elect to do so based on their own
business decisions and need to directly access each exchange's
liquidity pool.
---------------------------------------------------------------------------
\78\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17).
\79\ See Securities Exchange Act Release No. 93927 (January 7,
2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19).
---------------------------------------------------------------------------
Not only is there not an actual regulatory requirement to connect
to every equities exchange, the Exchange believes there is also no ``de
facto'' or practical requirement as well, as further evidenced by the
broker-dealer membership analysis of exchanges discussed above. Indeed,
broker-dealers choose if and how to access a particular exchange and
because it is a choice, the Exchange must set reasonable pricing,
otherwise prospective members would not connect and existing members
would disconnect from the Exchange. The decision to become a member of
an exchange, is complex, and not solely based on the non-transactional
costs assessed by an exchange. As noted herein, specific factors
include, but are not limited to: (i) an exchange's available liquidity
in equities securities; (ii) trading functionality offered on a
particular market; (iii) product offerings; (iv) customer service on an
exchange; and (v) transactional pricing. Becoming a member of the
exchange does not ``lock'' a potential member into a market or diminish
the overall competition for exchange services.
In lieu of becoming a member at each exchange, a market participant
may join one exchange and elect to have their orders routed in the
event that a better price is available on an away market. Nothing in
the Order Protection Rule requires a firm to become an Equity Member
at--or establish connectivity to--the Exchange.\80\ 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.\81\
---------------------------------------------------------------------------
\80\ See 17 CFR 242.611.
\81\ Members may elect to not route their orders by utilizing
the Do Not Route or Post Only order type instructions. See Exchange
Rule 2614(c)(1) and (2).
---------------------------------------------------------------------------
With respect to the submission of orders, Equity Members may also
choose not to purchase any connection at all from the Exchange, and
instead rely on the port of a third party to submit an order. For
example, a third-party broker-dealer Equity Member of the Exchange may
be utilized by a retail investor to submit orders into an Exchange. An
institutional investor may utilize a broker-dealer, a service
bureau,\82\ or request sponsored access \83\ through a member of an
exchange in order to submit a trade directly to an equities
exchange.\84\ 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.
---------------------------------------------------------------------------
\82\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be an Equity Member. Some Equity Members utilize a
Service Bureau for connectivity and that Service Bureau may not be
an Equity Member. Some market participants utilize a Service Bureau
who is an Equity Member to submit orders.
\83\ Sponsored Access is an arrangement whereby an Equity Member
permits its customers to enter orders into an exchange's system that
bypass the Equity Member's trading system and are routed directly to
the Exchange, including routing through a service bureau or other
third-party technology provider.
\84\ This may include utilizing a floor broker and submitting
the trade to an equities trading floor.
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Non-Member third-parties, such as service bureaus and extranets,
resell the Exchange's connectivity. This indirect connectivity is
another viable alternative for market participants to trade on the
Exchange without connecting directly to the Exchange (and thus not pay
the Exchange's connectivity fees), which alternative is already being
used by non-Equity Members and further constrains the price that the
Exchange is able to charge for connectivity and other access fees to
its market. The Exchange notes that it could, but chooses not to,
preclude market participants from reselling its connectivity. Unlike
other exchanges, the Exchange also does not currently assess fees on
third-party resellers on a per customer basis (i.e., fees based on the
number of firms that connect to the Exchange indirectly via the third-
party).\85\ Indeed, the Exchange does not
[[Page 15754]]
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.\86\ Particularly, in the event that a market participant views the
Exchange's direct connectivity and access fees as more or less
attractive than competing markets, that market participant can choose
to connect to the Exchange indirectly or may choose not to connect to
the Exchange and connect instead to one or more of the other 15
equities markets. Accordingly, the Exchange believes that the proposed
fees are fair and reasonable and constrained by competitive forces.
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\85\ 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).
\86\ The Exchange notes that resellers, such as SFTI, are not
required to publicize, let alone justify or file with the Commission
their fees, and as such could charge the market participant any fees
it deems appropriate (including connectivity fees higher than the
Exchange's connectivity fees), even if such fees would otherwise be
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------
The Exchange is obligated to regulate its Equity Members and secure
access to its environment. To properly regulate its Equity Members and
secure the trading environment, the Exchange takes measures to ensure
access is monitored and maintained with various controls. Connectivity
and ports are methods utilized by the Exchange to grant Equity Members
secure access to communicate with the Exchange and exercise trading
rights. When a market participant elects to be an Equity Member, and is
approved for membership by the Exchange, the Equity Member is granted
trading rights to enter orders and/or quotes into Exchange through
secure connections.
Again, there is no legal or regulatory requirement that a market
participant become an Equity Member of the Exchange, or, if it is an
Equity Member, to purchase connectivity beyond the one connection that
is necessary to quote or submit orders on the Exchange. Equity Members
may freely choose to rely on one or many connections, depending on
their business model. This is again evidenced by the fact that one MIAX
Pearl Options Market Maker terminated their MIAX Pearl membership
effective January 1, 2023 as a direct result of the proposed
connectivity and port fee changes on MIAX Pearl Options. If a market
participant chooses to become an Equity Member, they may then choose to
purchase connectivity beyond the one connection that is necessary to
quote or submit orders on the Exchange. Members may freely choose to
rely on one or many connections, depending on their business model.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
is especially diligent in assessing those fees in a transparent way
against its own aggregate costs of providing the related service, and
in carefully and transparently assessing the impact on Equity Members--
both generally and in relation to other Equity Members, i.e., to assure
the fee will not create a financial burden on any participant and will
not have an undue impact in particular on smaller Equity Members and
competition among Equity Members in general. The Exchange believes that
this level of diligence and transparency is called for by the
requirements of Section 19(b)(1) under the Act,\87\ and Rule 19b-4
thereunder,\88\ with respect to the types of information SROs should
provide when filing fee changes, and Section 6(b) of the Act,\89\ which
requires, among other things, that exchange fees be reasonable and
equitably allocated,\90\ not designed to permit unfair
discrimination,\91\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\92\ 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.\93\ The Exchange
reiterates 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.
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\87\ 15 U.S.C. 78s(b)(1).
\88\ 17 CFR 240.19b-4.
\89\ 15 U.S.C. 78f(b).
\90\ 15 U.S.C. 78f(b)(4).
\91\ 15 U.S.C. 78f(b)(5).
\92\ 15 U.S.C. 78f(b)(8).
\93\ See Staff Guidance, supra note 17.
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As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 1Gb and 10Gb ULL connectivity to
the Exchange at $18,331,650 combined ($17,726,799 for 10Gb ULL
connectivity and $604,851 for 1Gb connectivity) (or approximately
$1,527,637 per month for combined connectivity costs, rounded to the
nearest dollar when dividing the combined annual cost by 12 months).
The Exchange also recently calculated its aggregate annual costs for
providing FIX and MEO Ports at $3,951,993 combined ($911,998 for FIX
Ports and $3,039,995 for MEO Ports) (or approximately $329,333 per
month for combined FIX and MEO Port costs, rounded to the nearest
dollar when dividing the combined annual cost by 12 months). In order
to cover a portion of the aggregate costs of providing connectivity to
its Users (both Equity Members and non-Equity Members \94\) going
forward, as described below, the Exchange proposes to modify its Fee
Schedule as described above.
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\94\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services, and thus, may access application sessions on behalf of one
or more Members. Extranets offer physical connectivity services to
Members and non-Members.
---------------------------------------------------------------------------
In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\95\ 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'').
---------------------------------------------------------------------------
\95\ 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.
---------------------------------------------------------------------------
As an initial step, the Exchange determined the total cost for the
[[Page 15755]]
Exchange and the affiliated markets. That total cost was then divided
among the Exchange and each of its affiliated markets based on a number
of factors, including server counts, additional hardware and software
utilization, current or anticipated functional or non-functional
development projects, capacity needs, end-of-life or end-of-service
intervals, number of members, market model (e.g., price time or pro-
rata), which may impact message traffic, individual system
architectures that impact platform size,\96\ storage needs, dedicated
infrastructure versus shared infrastructure allocated per platform
based on the resources required to support each platform, number of
available connections, and employees allocated time. This will result
in different allocation percentages among the Exchange and its
affiliated markets. Meanwhile this allocation methodology ensures that
no portion of any cost was allocated twice or double-counted between
the Exchange and its affiliated markets.
---------------------------------------------------------------------------
\96\ For example, the Exchange maintains 24 matching engines,
MIAX Pearl Options maintains 12 matching engines, MIAX maintains 24
matching engines and MIAX Emerald maintains 12 matching engines.
---------------------------------------------------------------------------
Next, the Exchange adopted an allocation methodology with
thoughtful and consistently applied principles to guide how much of a
particular cost amount allocated to the Exchange pursuant to the above
methodology should be allocated within the Exchange to each core
service. For instance, fixed costs that are not driven by client
activity (e.g., message rates), such as data center costs, were
allocated more heavily to the provision of physical connectivity (62%),
with smaller allocations to FIX Ports (1.2%) and MEO Ports (3.8%), and
the remainder to the provision of transaction execution, membership
services and market data services (33%). This next level of the
allocation methodology at the individual exchange level also took into
account a number of factors similar to those set forth under the first
allocation methodology described above, to determine the appropriate
allocation to connectivity or market data versus what is to be
allocated to providing other services. The allocation methodology was
developed through an assessment of costs with senior management
intimately 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. Each of the below
cost allocations is unique to the Exchange and represents a percentage
of overall cost that was allocated to the Exchange pursuant to the
initial allocation described above.
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity and
port services, membership fees, regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue. The Exchange also notes that as a general
matter each of these sources of revenue is based on services that are
interdependent. For instance, the Exchange's system for executing
transactions is dependent on physical hardware and connectivity; only
Equity Members and parties that they sponsor to participate directly on
the Exchange may submit orders to the Exchange; many Equity Members
(but not all) consume market data from the Exchange in order to trade
on the Exchange; and the Exchange consumes market data from external
sources in order to comply with regulatory obligations. Accordingly,
given this interdependence, the allocation of costs to each service or
revenue source required judgment of the Exchange and was weighted based
on estimates of the Exchange that the Exchange believes are reasonable,
as set forth below. While there is no standardized and generally
accepted methodology for 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. In the absence of the Commission attempting to
specify a methodology for the allocation of exchanges' interdependent
costs, the Exchange is left with its best efforts attempt to conduct
such an allocation in a thoughtful and reasonable manner.
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
1Gb and10Gb ULL connectivity, as well as FIX and MEO Ports, result in
an aggregate combined monthly cost of $1,856,970, as further detailed
below.
Costs Related to Offering Physical 1Gb and 10Gb ULL Connectivity
The following charts detail the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
1Gb and 10Gb ULL connectivity via an unshared network as well as the
percentage of the Exchange's overall costs that such costs represent
for such area (e.g., as set forth below, the Exchange allocated
approximately 47.6% of its overall Human Resources cost to offering
physical 1Gb and 10Gb ULL connectivity).
---------------------------------------------------------------------------
\97\ The Annual Cost includes figures rounded to the nearest
dollar.
\98\ 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.
10Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \97\ Monthly cost \98\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources............................................... 5,936,741 494,728 46.1
Connectivity (external fees, cabling, switches, etc.)......... 69,451 5,788 60
Internet Services, including Internet Services................ 1,818,808 151,567 72.5
Data Center................................................... 1,052,797 87,733 60
Hardware and Software Maintenance and Licenses................ 642,112 53,509 58
Depreciation.................................................. 3,448,206 287,351 73.6
[[Page 15756]]
Allocated Shared Expenses..................................... 4,758,684 396,557 48.6
-------------------------------------------------
Total..................................................... 17,726,799 1,477,233 54
----------------------------------------------------------------------------------------------------------------
1Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \99\ Monthly cost \100\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources............................................... $202,566 $16,880 1.6
Connectivity (external fees, cabling, switches, etc.)......... 2,370 197 2.0
Internet Services, including External Market Data............. 62,059 5,172 2.5
Data Center................................................... 35,922 2,993 2.0
Hardware and Software Maintenance and Licenses................ 21,909 1,826 2.0
Depreciation.................................................. 117,655 9,805 2.5
Allocated Shared Expenses..................................... 162,370 13,531 1.7
-------------------------------------------------
Total..................................................... 604,851 50,404 1.8
----------------------------------------------------------------------------------------------------------------
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 1Gb and
10Gb ULL connectivity.
---------------------------------------------------------------------------
\99\ See supra note 97.
\100\ See supra note 98.
---------------------------------------------------------------------------
Human Resources
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity) and for which the Exchange allocated percentages of 58%
for 10Gb ULL connectivity and 2.0% for 1Gb connectivity of each
employee's time. The Exchange also allocated Human Resources costs to
provide physical connectivity to a limited subset of personnel with
ancillary functions related to establishing and maintaining such
connectivity (such as information security and finance personnel), for
which the Exchange allocated cost on an employee-by-employee basis
(i.e., only including those personnel who do support functions related
to providing physical connectivity) and then applied a smaller
allocation to such employees (less than 37%). The Exchange notes that
it and its affiliated markets have 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. Specifically, twice a year and as needed with additional new
hires and new project initiatives, in consultation with each employee,
managers and department heads assign a percentage of time to every
employee and then allocate that time amongst the Exchange and its
affiliated markets to determine that market's individual Human
Resources expense. Then, again in consultation with each employee,
managers and department heads assign a percentage of each employee's
time allocated to the Exchange into buckets including, network
connectivity, ports, market data, and other exchange services. This
process ensures that every employee is 100% allocated, ensuring there
is no double counting between the Exchange and its affiliated markets.
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. equities
industry, as well as content, connectivity, and infrastructure services
for critical components of the network that are necessary to provide
and maintain its System Networks and access to its System Networks via
1Gb and 10Gb ULL connectivity. Specifically, the Exchange utilizes
connectivity and content service providers to connect to other national
securities exchanges, the NASDAQ UTP and CTA/CQ Plans, and to receive
market data from other exchanges and market data providers. The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity and market data provided these service
providers is critical to the Exchanges daily operations and performance
of its System Networks to which market participants connect to via 10Gb
ULL connectivity. Without these services providers, the Exchange would
not be able to connect to other national securities exchanges, market
data providers, or the NASDAQ UTP and CTA/CQ Plans and, therefore,
would not be able to operate and support its System Networks. The
Exchange does
[[Page 15757]]
not employ a separate fee to cover its connectivity and content service
provider expense and recoups that expense, in part, by charging for 1Gb
and 10Gb ULL connectivity.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (62%) to
physical 1Gb and 10Gb ULL connectivity because the third-party data
centers and the Exchange's physical equipment contained therein is the
most direct cost in providing physical access to the Exchange. In other
words, for the Exchange to operate in a dedicated space with
connectivity of participants to a physical trading platform, the data
centers are a very tangible cost, and in turn, if the Exchange did not
maintain such a presence then physical connectivity would be of no
value to market participants.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
physical connectivity as such market data is necessary here to offer
certain services related to such connectivity, such as certain risk
checks that are performed prior to execution, and checking for other
conditions (e.g., limit order price protection, trading collars). This
allocation was included as part of the internet Services cost described
above.\101\ Thus, as market data from other Exchanges is consumed at
the matching engine level, (to which physical connectivity provides
access to) in order to validate orders before additional entering the
matching engine or being executed, the Exchange believes it is
reasonable to allocate a small amount of such costs to 10Gb ULL
connectivity.
---------------------------------------------------------------------------
\101\ This allocation may differ from MIAX Pearl Options due to
the different amount of proprietary market data feeds the Exchange
purchases for its options and equities trading platforms. For
options, the Exchange primarily relies on data purchased from OPRA.
For equities, the Exchange does not solely rely on data purchased
from the consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ
plans), but rather purchases multiple proprietary market data feeds
from other equities exchanges. See, e.g., Exchange Rule 2613
(setting forth the data feeds the Exchange subscribes to for each
equities exchange and trading center).
---------------------------------------------------------------------------
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.\102\
---------------------------------------------------------------------------
\102\ This expense may be greater than the Exchange's affiliated
markets, specifically MIAX and MIAX Emerald, because, unlike MIAX
and MIAX Emerald, MIAX Pearl (the options and equities markets)
maintains an additional gateway to accommodate its member's access
and connectivity needs. This added gateway contributes to the
difference in allocations between the Exchange and MIAX and MIAX
Emerald.
---------------------------------------------------------------------------
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of Exchange infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 73.6% of all depreciation costs to providing physical 10Gb
ULL connectivity and 2.5% of all depreciation costs to providing 1Gb
connectivity. The Exchange notes, however, that it did not allocate
depreciation costs for any depreciated software necessary to operate
the Exchange to physical connectivity, as such software does not impact
the provision of physical connectivity. The Exchange also notes that
this allocation differs from its affiliated markets due to a number of
factors, such as the age of physical assets and software (e.g., older
physical assets and software were previously depreciated and removed
from the allocation), or certain system enhancements that required new
physical assets and software, thus providing a higher contribution to
the depreciated cost.
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.\103\ The Exchange notes that the
50% allocation of general shared expenses for physical connectivity is
higher than that allocated to general shared expenses for FIX and MEO
Ports based on its allocation methodology that weighted costs
attributable to each Core Service based on an understanding of each
area. While physical connectivity has several areas where certain
tangible costs are heavily weighted towards providing such service
(e.g., Data Centers, as described above), FIX and MEO Ports do not
require as many broad or indirect resources as other Core Services. The
total monthly cost for 10Gb ULL connectivity of $1,477,233 was divided
by the number of physical 10Gb ULL connections the Exchange maintained
at the time that proposed pricing was determined (90), to arrive at a
cost of approximately $16,414 per month, per physical 10Gb ULL
connection. The total monthly cost for 1Gb connectivity of $50,404 was
divided by the number of physical 1Gb connections the Exchange
maintained at the time that proposed pricing was determined (8), to
arrive at a cost of approximately $6,301 per month, per physical 1Gb
connection.
---------------------------------------------------------------------------
\103\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors to providing physical
connectivity. The Exchange does not calculate is expenses at that
granular a level. Instead, director costs are included as part of
the overall general allocation.
---------------------------------------------------------------------------
Costs Related to Offering FIX and MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering FIX and MEO Ports
as well as the percentage of the Exchange's overall costs such costs
represent for such area (e.g., as set forth below, the Exchange
allocated approximately 22.4% of its overall Human Resources cost to
offering FIX and MEO Ports).
[[Page 15758]]
FIX Ports
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \104\ Monthly cost \105\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources............................................... $665,726 $55,476 5.2
Connectivity (external fees, cabling, switches, etc.)......... 535 45 0.5
Internet Services, including External Market Data............. 11,574 965 0.5
Data Center................................................... 20,262 1,689 1.2
Hardware and Software Maintenance and Licenses................ 5,108 426 0.5
Depreciation.................................................. 92,114 7,676 2.0
Allocated Shared Expenses..................................... 116,679 9,723 1.2
-------------------------------------------------
Total..................................................... 911,998 76,000 2.8
----------------------------------------------------------------------------------------------------------------
MEO Ports
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \106\ Monthly cost \107\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources............................................... $2,219,088 $184,924 17.2
Connectivity (external fees, cabling, switches, etc.)......... 1,782 149 1.5
Internet Services, including External Market Data............. 38,582 3,215 1.5
Data Center................................................... 67,538 5,628 3.8
Hardware and Software Maintenance and Licenses................ 17,026 1,419 1.5
Depreciation.................................................. 307,048 25,587 6.6
Allocated Shared Expenses..................................... 388,931 32,411 4.0
-------------------------------------------------
Total..................................................... 3,039,995 253,333 9.3
----------------------------------------------------------------------------------------------------------------
Human Resources
---------------------------------------------------------------------------
\104\ See supra note 97 (describing rounding of Annual Costs).
\105\ See supra note 98 (describing rounding of Monthly Costs
based on annual costs).
\106\ See supra note 97 (describing rounding of Annual Costs).
\107\ See supra note 98 (describing rounding of Monthly Costs
based on annual costs).
---------------------------------------------------------------------------
With respect to FIX and MEO Ports, the Exchange calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing FIX and MEO Ports and maintaining
performance thereof (including a broader range of employees such as
technical operations personnel, market operations personnel, and
software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). Just
as described above for 10Gb ULL connectivity, the estimates of Human
Resources cost were again determined by consulting with department
leaders, determining which employees are involved in tasks related to
providing application sessions and maintaining performance thereof, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of their time such employees devote to
tasks related to providing application sessions and maintaining
performance thereof. The Exchange notes that senior level executives
were only allocated Human Resources costs to the extent the Exchange
believed they are involved in overseeing tasks related to providing
application sessions and maintaining performance thereof. The Human
Resources cost was again calculated using a blended rate of
compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges, cabling and switches, as described above. For purposes
of FIX and MEO Ports, the Exchange also includes a portion of its costs
related to External Market Data, as described below.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
application sessions as such market data is also necessary here (in
addition to physical connectivity) to offer certain services related to
such sessions, such as validating orders on entry against the national
best bid and national best offer and checking for other conditions
(e.g., whether a symbol is halted or subject to a short sale circuit
breaker). This allocation was included as part of the internet Services
cost described above.\108\ 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.
---------------------------------------------------------------------------
\108\ This allocation may differ from MIAX Pearl Options due to
the different amount of proprietary market data feeds the Exchange
purchases for its options and equities trading platforms. For
options, the Exchange primarily relies on data purchased from OPRA.
For equities, the Exchange does not solely rely on data purchased
from the consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ
plans), but rather purchases multiple proprietary market data feeds
from other equities exchanges. See, e.g., Exchange Rule 2613
(setting forth the data feeds the Exchange subscribes to for each
equities exchange and trading center). The Exchange separately notes
that MEMX separately allocated 7.5% of its external market data
costs to providing physical connectivity.
---------------------------------------------------------------------------
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
[[Page 15759]]
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of order entry infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 8.6% of
all depreciation costs to providing FIX and MEO Ports. In contrast to
physical connectivity, described above, the Exchange did allocate
depreciation costs for depreciated software necessary to operate the
Exchange to FIX and MEO Ports because such software is related to the
provision of such connectivity. The Exchange also notes that this
allocation differs from its affiliated markets due to a number of
factors, such as the age of physical assets and software (e.g., older
physical assets and software were previously depreciated and removed
from the allocation), or certain system enhancements that required new
physical assets and software, thus providing a higher contribution to
the depreciated cost.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall FIX and MEO Ports costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 20% of the overall cost for
directors was allocated to providing FIX and MEO Ports. The Exchange
notes that the 5.2% allocation of general shared expenses for FIX and
MEO Ports is lower than that allocated to general shared expenses for
physical connectivity based on its allocation methodology that weighted
costs attributable to each Core Service based on an understanding of
each area. While FIX and MEO Ports have several areas where certain
tangible costs are heavily weighted towards providing such service
(e.g., Data Centers, as described above), 1Gb and 10Gb ULL connectivity
requires a broader level of support from Exchange personnel in
different areas, which in turn leads to a broader general level of cost
to the Exchange. The total monthly cost for FIX Ports of $76,000 was
divided by the number of FIX Ports the Exchange maintained at the time
that proposed pricing was determined (142), to arrive at a cost of
approximately $535 per month, per FIX Port (rounded to the nearest
dollar when dividing the approximate monthly cost by the number of FIX
Ports). The total monthly cost for MEO Ports of $253,333 was divided by
the number of MEO Ports the Exchange maintained at the time that
proposed pricing was determined (336), to arrive at a cost of
approximately $754 per month, per MEO Port (rounded to the nearest
dollar when dividing the approximate monthly cost by the number of MEO
Ports).
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or FIX and MEO Ports) and did not double- count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections based upon the above described
methodology, the Exchange has a team of employees dedicated to network
infrastructure and with respect to such employees the Exchange
allocated network infrastructure personnel with a high percentage of
the cost of such personnel (60%) to 1Gb and 10Gb ULL connectivity given
their focus on functions necessary to provide physical connections. The
salaries of those same personnel were allocated only 25% to FIX and MEO
Ports and the remaining 15% was allocated to transactions and market
data. The Exchange did not allocate any other Human Resources expense
for providing physical connections to any other employee group, outside
of a smaller allocation of 37% for 1Gb and 10Gb ULL connectivity of the
cost associated with certain specified personnel who work closely with
and support network infrastructure personnel. In contrast, the Exchange
allocated much smaller percentages of costs (less than 21%) across a
wider range of personnel groups in order to allocate Human Resources
costs to providing FIX and MEO Ports. This is because a much wider
range of personnel are involved in functions necessary to offer,
monitor and maintain FIX and MEO Ports but the tasks necessary to do so
are not a primary or full-time function.
In total, the Exchange allocated 47.6% of its personnel costs to
providing physical connections and 22.4% of its personnel costs to
providing FIX and MEO Ports, for a total allocation of 70% Human
Resources expense to provide these specific connectivity services. In
turn, the Exchange allocated the remaining 30% of its Human Resources
expense to membership (less than 1%) and transactions and market data
(9.5%). Thus, again, the Exchange's allocations of cost across core
services were based on real costs of operating the Exchange and were
not double-counted across the core services or their associated revenue
streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and FIX and MEO
Ports, but in different amounts. The Exchange believes it is reasonable
to allocate the identified portion of such expense because such expense
includes the actual cost of the computer equipment, such as dedicated
servers, computers, laptops, monitors, information security appliances
and storage, and network switching infrastructure equipment, including
switches and taps that were purchased to operate and support the
network. Without this equipment, the Exchange would not be able to
operate the network and provide connectivity services to its Equity
Members and non-Equity Members and their customers. However, the
Exchange did not allocate all of the depreciation and amortization
expense toward the cost of providing connectivity services, but instead
allocated approximately 85% of the Exchange's overall depreciation and
amortization expense to connectivity services (76.185% attributed to
1Gb and 10Gb ULL physical connections and 8.6% to FIX and MEO Ports).
The Exchange allocated the remaining depreciation and amortization
expense (approximately 15%) toward the cost of providing transaction
services, membership services and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does
[[Page 15760]]
not yet know whether such expectations will be realized. For instance,
in order to generate the revenue expected from connectivity, the
Exchange will have to be successful in retaining existing clients that
wish to maintain physical connectivity and/or FIX and MEO Ports or in
obtaining new clients that will purchase such services. Similarly, the
Exchange will have to be successful in retaining a positive net capture
on transaction fees in order to realize the 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. It is
possible however that such costs will either decrease or increase. To
the extent the Exchange sees growth in use of connectivity services it
will receive additional revenue to offset future cost increases.
However, if use of connectivity services is static or decreases,
the Exchange might not realize the revenue that it anticipates or needs
in order to cover applicable costs. Accordingly, the Exchange is
committing to conduct a one-year review after implementation of these
fees. The Exchange expects that it may propose to adjust fees at that
time, to increase fees in the event that revenues fail to cover costs
and a reasonable mark-up of such costs. Similarly, the Exchange would
propose to decrease fees in the event that revenue materially exceeds
our current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, we believe that it is appropriate for an exchange to
refresh and update information about its relevant costs and revenues in
seeking any future changes to fees, and the Exchange commits to do so.
Projected Revenue
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity services. Much of the cost relates to monitoring and
analysis of data and performance of the network via the subscriber's
connection(s). The above cost, namely those associated with hardware,
software, and human capital, enable the Exchange to measure network
performance with nanosecond granularity. These same costs are also
associated with time and money spent seeking to continuously improve
the network performance, improving the subscriber's experience, based
on monitoring and analysis activity. The Exchange routinely works to
improve the performance of the network's hardware and software. The
costs associated with maintaining and enhancing a state-of-the-art
exchange network is a significant expense for the Exchange, and thus
the Exchange believes that it is reasonable and appropriate to help
offset those costs by amending fees for connectivity services.
Subscribers, particularly those of 10Gb ULL connectivity, expect the
Exchange to provide this level of support to connectivity so they
continue to receive the performance they expect. This differentiates
the Exchange from its competitors. As detailed above, the Exchange has
five primary sources of revenue that it can potentially use to fund its
operations: transaction fees, fees for connectivity services,
membership and regulatory fees, and market data fees. Accordingly, the
Exchange must cover its expenses from these five primary sources of
revenue.
The Exchange's Cost Analysis estimates the annual cost to
provide 10Gb ULL connectivity services at $17,726,799. Based on current
10Gb ULL connectivity services usage, the Exchange would generate
annual revenue of approximately $9,144,000. This represents a negative
margin when compared to the cost of providing 10Gb ULL connectivity
services, which will decrease over time.\109\
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\109\ Assuming the U.S. inflation rate continues at its current
rate, the projected profit margins in this proposal will further
decrease. See, e.g., https://www.usinflationcalculator.com/inflation/current-inflation-rates/ (last visited February 15, 2023).
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The Exchange's Cost Analysis estimates the annual cost to
provide 1Gb connectivity services at $604,851. Based on current 1Gb
connectivity services usage, the Exchange would generate annual revenue
of approximately $312,000. This represents a negative margin when
compared to the cost of providing 1Gb connectivity services, which will
decrease over time.\110\
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\110\ Id.
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The Exchange's Cost Analysis estimates the annual cost to
provide FIX Port services at $911,998. Based on current FIX Port
services usage, the Exchange would generate annual revenue of
approximately $388,800. This represents a negative margin when compared
to the cost of providing FIX Port services, which will decrease over
time.\111\
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\111\ Id.
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The Exchange's Cost Analysis estimates the annual cost to
provide MEO Port services at $3,039,995. Based on current MEO Port
services usage, the Exchange would generate annual revenue of
approximately $1,296,000. This represents a negative margin when
compared to the cost of providing MEO Port services, which will
decrease over time.\112\
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\112\ Id.
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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 that deviates from that of
other exchanges or supra-competitive profit, when comparing the total
expense of the Exchange associated with providing 1Gb and 10Gb ULL
connectivity and FIX and MEO Port services versus the total projected
revenue of the Exchange associated with those services. In fact, the
Exchange will generate negative margins on those connectivity and port
services even with the proposed fees.
* * * * *
MIAX Pearl Equities has operated at a cumulative net annual loss
since it launched operations in 2020.\113\ The Exchange has operated at
a net loss due to a number of factors, one of which is choosing to
forgo revenue by offering certain products, such as connectivity, at
lower rates than other exchanges to attract order flow and encourage
market participants to experience the high determinism, low latency,
and resiliency of the Exchange's trading systems. The Exchange should
not now be penalized for seeking to raise its fees in light of
necessary technology changes and its increased costs after offering
such products as discounted prices. Therefore, the Exchange believes
the proposed fees are reasonable because
[[Page 15761]]
they are based on both relative costs to the Exchange to provide
dedicated 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports,
the extent to which the product drives the Exchange's overall costs and
the relative value of the product, as well as the Exchange's objective
to make access to its Systems broadly available to market participants.
The Exchange also believes the proposed fees are reasonable because
they are designed to generate annual revenue to recoup the Exchange's
costs of providing dedicated 1Gb and 10Gb ULL connectivity as well as
FIX and MEO Ports.
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\113\ The Exchange has incurred a cumulative loss of $79 million
since its inception in 2020. See Exchange's Form 1/A, Application
for Registration or Exemption from Registration as a National
Securities Exchange, filed July 28, 2021, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
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The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 1Gb and 10Gb ULL connectivity as well as FIX and MEO
Ports, the Exchange will have to be successful in retaining existing
clients that wish to utilize 1Gb and 10Gb ULL connectivity as well as
FIX and MEO Ports and/or obtaining new clients that will purchase such
access. To the extent the Exchange is successful in encouraging new
clients, the Exchange does not believe it should be penalized for such
success. 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.
The Exchange is part of a holding company that operates four
exchange markets and, therefore, the Exchange and its affiliated
markets must allocate shared costs across all of those markets
accordingly, pursuant to the above-described allocation methodology. In
contrast, the Investors Exchange LLC (``IEX'') and MEMX, which are
currently each operating only one exchange, in their recent non-
transaction fee filings can allocate the entire amount of that same
cost to a single exchange. This can result in lower profit margins for
the non-transaction fees proposed by IEX and MEMX because the single
allocated cost does not experience the efficiencies and synergies
associated with shared costs across multiple platforms. The Exchange
and its affiliated markets must share a single cost, which results in
cost efficiencies that cause a broader gap between the allocated cost
amount and projected revenue, even though the fee levels being proposed
are lower or similar to competing markets (as described above). To the
extent that the application of a cost-based standard results in
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Commission Staff must consider whether the
proposed fee level is comparable to, or on parity with, the same fee
charged by competing exchanges and how different cost allocation
methodologies (such as across multiple markets) may result in different
profit margins for comparable fee levels. If it is the case that the
Commission Staff is making determinations as to appropriate profit
margins, the Exchange believes that Staff should be clear to all market
participants as to what they determine is an appropriate profit margin
and should apply such determinations consistently and, in the case of
certain legacy exchanges, retroactively, if such standards are to avoid
having a discriminatory effect.
Further, the proposal reflects the Exchange's efforts to control
its costs, which the Exchange does on an ongoing basis as a matter of
good business practice. A potential profit margin should not be judged
alone based on its size, but is also indicative of costs management and
whether the ultimate fee reflects the value of the services provided.
For example, a profit margin on one exchange should not be deemed
excessive where that exchange has been successful in controlling its
costs, but not excessive where on another exchange where that exchange
is charging comparable fees but has a lower profit margin due to higher
costs. Doing so could have the perverse effect of not incentivizing
cost control where higher costs alone could be used to justify fees
increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
1Gb and 10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have the same business
needs for the high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct equities markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages to satisfy its record keeping requirements under
the Exchange Act.\114\ Thus, as the number of messages an entity
increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, connection costs (e.g.,
storage costs, surveillance costs, service expenses) also increase.
Given this difference in network utilization rate, the Exchange
believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all market participants' benefit.
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\114\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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FIX and MEO Ports
To achieve a consistent, premium network performance, the Exchange
must build out and maintain a network that has the capacity to handle
the message rate requirements of its most heavy network consumers.
Billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network
[[Page 15762]]
connectivity expense for storage and network transport capabilities.
The Exchange must also purchase additional storage capacity on an
ongoing basis to ensure it has sufficient capacity to store these
messages as part of it surveillance program and to satisfy its record
keeping requirements under the Exchange Act.\115\ Thus, as the number
of connections an Equity Member has increases, the related pull on
Exchange resources also increases. The Exchange sought to design the
proposed pricing structure to set the amount of the fees to relate to
the number of connections a firm purchases, while continuing to provide
the first five (5) ports for free. The more connections purchased by an
Equity Member likely results in greater expenditure of Exchange
resources and increased cost to the Exchange. The Exchange further
believes that the proposed fees are reasonable, equitably allocated and
not unfairly discriminatory because, for the flat fee, the Exchange
provides each Equity Member their first five (5) ports for free, unlike
other equity exchanges referenced above.
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\115\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 1Gb
and10Gb ULL connectivity as well as FIX and MEO Ports at below market
rates to market participants since the Exchange launched operations. As
described above, the Exchange has operated at a cumulative net annual
loss since it launched operations in 2020 \116\ 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
industry, which resulted in lower initial revenues. Examples of this
are 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, for
which the Exchange only now seeks to adopt fees at a level similar to
or lower than those of other equity exchanges.
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\116\ See supra note 113.
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Further, the Exchange does not believe that the proposed fee
increase for the 1Gb or 10Gb ULL connection change would place certain
market participants at the Exchange at a relative disadvantage compared
to other market participants or affect the ability of such market
participants to compete. The proposed fees would apply uniformly to all
market participants regardless of the number of connections they choose
to purchase. The proposed fee does not favor certain categories of
market participants in a manner that would impose an undue burden on
competition.
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Equity Members, non-Equity Members (extranets or service
bureaus), third-parties that purchase the Exchange's connectivity and
resell it, and customers of those resellers to compete with other
market participants or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Market Maker terminated their
MIAX Pearl Options membership on January 1, 2023 as a direct result of
the proposed fee changes.\117\ The Exchange does not believe that the
proposed fees for connectivity services place certain market
participants at a relative disadvantage to other market participants
because the proposed connectivity pricing is associated with relative
usage of the Exchange by each market participant and does not impose a
barrier to entry to smaller participants. The Exchange believes its
proposed pricing is reasonable and, when coupled with the availability
of third-party providers that also offer connectivity solutions, that
participation on the Exchange is affordable for all market
participants, including smaller trading firms. As described above, the
connectivity services purchased by market participants typically
increase based on their additional message traffic and/or the
complexity of their operations. The market participants that utilize
more connectivity services typically utilize the most bandwidth, and
those are the participants that consume the most resources from the
network. Accordingly, the proposed fees for connectivity services do
not favor certain categories of market participants in a manner that
would impose a burden on competition; rather, the allocation of the
proposed connectivity fees reflects the network resources consumed by
the various size of market participants and the costs to the Exchange
of providing such connectivity services.
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\117\ The Exchange acknowledges that IEX included in its
proposal to adopt market data fees after offering market data for
free an analysis of what its projected revenue would be if all of
its existing customers continued to subscribe versus what its
projected revenue would be if a limited number of customers
subscribed due to the new fees. See Securities Exchange Act Release
No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-
2022-02). MEMX did not include a similar analysis in either of its
recent non-transaction fee proposals. See, e.g., supra note 48. The
Exchange does not believe a similar analysis would be useful here
because it is amending existing fees, not proposing to charge a new
fee where existing subscribers may terminate connections because
they are no longer enjoying the service at no cost. In addition,
despite the potential for existing subscribers to terminate
connections due to the proposal, the Exchange anticipates its number
of subscribers to remain generally static, resulting in an
immaterial difference between a best case and worst case scenario.
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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, market participants are not forced to connect to all
exchanges. There is no reason to believe that our
[[Page 15763]]
proposed price increase will harm another exchange's ability to
compete. There are other markets of which market participants may
connect to trade equities at higher rates than the Exchange's. There is
also a range of alternative strategies, including routing to the
exchange through another participant or market center or accessing the
Exchange indirectly. Market participants are free to choose which
exchange or reseller to use to satisfy their business needs.
Accordingly, the Exchange does not believe its proposed fee changes
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange received one comment letter on the Initial
Proposal.\118\ In its letter, the sole commenter seeks to incorporate
comments submitted on previous Exchange proposals to which the Exchange
has previously responded. To the extent the sole commenter has
attempted to raise new issues in its letter, the Exchange believes
those issues are not germane to this proposal in particular, but rather
raise larger issues with the current environment surrounding exchange
non-transaction fee proposals that should be addressed by the
Commission through rule making, or Congress, more holistically and not
through an individual exchange fee filing. Among other things, the
commenter is requesting additional data and information that is both
opaque and a moving target and would constitute a level of disclosure
materially over and above that provided by any competitor exchanges.
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\118\ See letter from Brian Sopinsky, General Counsel,
Susquehanna International Group, LLP to Vanessa Countryman,
Secretary, Commission, dated February 7, 2023.
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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,\119\ and Rule 19b-4(f)(2) \120\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\119\ 15 U.S.C. 78s(b)(3)(A)(ii).
\120\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-PEARL-2023-06 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-2023-06. 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-2023-06 and should be submitted on
or before April 4, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\121\
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\121\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05124 Filed 3-13-23; 8:45 am]
BILLING CODE 8011-01-P
