Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Modify Certain Connectivity and Port Fees, 15782-15803 [2023-05128]
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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.
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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.123 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.
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,124 and Rule
19b–4(f)(2) 125 thereunder. At any time
within 60 days of the filing of the
123 See letter from Brian Sopinsky, General
Counsel, Susquehanna International Group, LLP to
Vanessa Countryman, Secretary, Commission, dated
February 7, 2023.
124 15 U.S.C. 78s(b)(3)(A)(ii).
125 17 CFR 240.19b–4(f)(2).
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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–
EMERALD–2023–05 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–EMERALD–2023–05. 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
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comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–EMERALD–2023–05 and
should be submitted on or before April
4, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.126
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–05126 Filed 3–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97081; File No. SR–MIAX–
2023–08]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Its 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, Miami International Securities
Exchange, LLC (‘‘MIAX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Fee Schedule (‘‘Fee
Schedule’’) to amend certain
connectivity and port fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings, at MIAX’s principal office, and
at the Commission’s Public Reference
Room.
126 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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
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The Exchange proposes to amend the
Fee Schedule as follows: (1) increase the
fees for a 10 gigabit (‘‘Gb’’) ultra-low
latency (‘‘ULL’’) fiber connection for
Members 3 and non-Members; and (2)
amend the fees for Limited Service
MIAX Express Interface (‘‘MEI’’) Ports 4
available to Market Makers.5 The
Exchange and its affiliate, MIAX
PEARL, LLC (‘‘MIAX Pearl’’) operated
10Gb ULL connectivity (for MIAX
Pearl’s options market) on a single
shared network that provided access to
both exchanges via a single 10Gb ULL
connection. The Exchange last increased
fees for 10Gb ULL connections from
$9,300 to $10,000 per month on January
1, 2021.6 At the same time, MIAX Pearl
also increased its 10Gb ULL
connectivity fee from $9,300 to $10,000
per month.7 The Exchange and MIAX
Pearl shared a combined cost analysis in
those filings due to the single shared
10Gb ULL connectivity network for both
exchanges. In those filings, the
Exchange and MIAX Pearl allocated a
combined total of $17.9 million in
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 MIAX Express Interface is a connection to MIAX
systems that enables Market Makers to submit
simple and complex electronic quotes to MIAX. See
Fee Schedule, note 26.
5 The term ‘‘Market Makers’’ refers to Lead Market
Makers (‘‘LMMs’’), Primary Lead Market Makers
(‘‘PLMMs’’), and Registered Market Makers
(‘‘RMMs’’) collectively. See Exchange Rule 100.
6 See Securities Exchange Act Release No. 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02).
7 See Securities Exchange Act Release No. 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021)
(SR–PEARL–2021–01).
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expenses to providing 10Gb ULL
connectivity.8
Beginning in late January 2023, the
Exchange also recently determined a
substantial operational need to no
longer operate 10Gb ULL connectivity
on a single shared network with MIAX
Pearl. The Exchange is bifurcating 10Gb
ULL connectivity due to ever-increasing
capacity constraints and to enable it to
continue to satisfy the anticipated
access needs for Members and other
market participants.9 Since the time of
2021 increase discussed above, the
Exchange experienced ongoing
increases in expenses, particularly
internal expenses.10 As discussed more
fully below, the Exchange recently
calculated increased annual aggregate
costs of $12,034,554 for providing 10Gb
ULL connectivity on a single unshared
network (an overall increase over its
prior cost to provide 10Gb ULL
connectivity on a shared network with
MIAX Pearl) and $2,157,178 for
providing Limited Service MEI Ports.
Much of the cost relates to monitoring
and analysis of data and performance of
the network via the subscriber’s
connection with nanosecond
granularity, and continuous
improvements in network performance
with the goal of improving the
subscriber’s experience. The costs
associated with maintaining and
enhancing a state-of-the-art network is a
significant expense for the Exchange,
and thus the Exchange believes that it
is reasonable and appropriate to help
offset those increased costs by amending
fees for connectivity services.
Subscribers expect the Exchange to
provide this level of support so they
continue to receive the performance
they expect. This differentiates the
Exchange from its competitors.
The Exchange now proposes to amend
the Fee Schedule to amend the fees for
8 See
id.
MIAX Options and MIAX Pearl Options—
Announce planned network changes related to
shared 10G ULL extranet, issued August 12, 2022,
available at https://www.miaxoptions.com/alerts/
2022/08/12/miax-options-and-miax-pearl-optionsannounce-planned-network-changes-related-0. The
Exchange will continue to provide access to both
the Exchange and MIAX Pearl over a single shared
1Gb connection. See Securities Exchange Act
Release Nos. 96553 (December 20, 2022), 87 FR
79379 (December 27, 2022) (SR–PEARL–2022–60);
96545 (December 20, 2022) 87 FR 79393 (December
27, 2022) (SR–MIAX–2022–48).
10 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.
9 See
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10Gb ULL connectivity and Limited
Service MEI Ports in order to recoup
cost related to bifurcating 10Gb
connectivity to the Exchange and MIAX
Pearl as well as the ongoing costs and
increase in expenses set forth below in
the Exchange’s cost analysis.11 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–MIAX–2022–
50) (the ‘‘Initial Proposal’’).12 The
Exchange recently withdrew the Initial
Proposal and replaced it with this
current proposal (SR–MIAX–2023–08).
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 (MIAX Pearl
(separately among MIAX Pearl Options
and MIAX Pearl Equities) and MIAX
Emerald, LLC (‘‘MIAX Emerald,’’
together with MIAX Pearl Options and
MIAX Pearl Equities, 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
Limited Service MEI 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 13
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
11 The Exchange notes that MIAX Pearl will make
a similar filing to increase its 10Gb ULL
connectivity fees.
12 See Securities Exchange Act Release No. 96629
(January 10, 2023), 88 FR 2729 (January 17, 2023)
(SR–MIAX–2022–50).
13 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
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a practice of ‘‘unquestioning reliance’’
on claims made by a self-regulatory
organization (‘‘SRO’’) in the course of
filing a rule or fee change with the
Commission.14 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.15 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’’).16 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.’’ 17 The Commission denied
requests by various exchanges and plan
participants for reconsideration of the
Remand Order.18 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.’’ 19 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.20 Despite approving hundreds of
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14 Id.
15 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84432, 2018 WL 5023228
(October 16, 2018) (the ‘‘SIFMA Decision’’).
16 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).
17 Id. at page 2.
18 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 85802, 2019 WL 2022819
(May 7, 2019) (the ‘‘Order Denying
Reconsideration’’).
19 Order Denying Reconsideration, 2019 WL
2022819, at *13.
20 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
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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.’’ 21 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.’’ 22 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.’’ 23
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 24 and remanded for
further proceedings consistent with its
opinion.25 That same day, the D.C.
Circuit issued an order remanding the
Remand Order to the Commission for
reconsideration in light of NASDAQ.
Market LLC Options Facility to Establish BOX
Connectivity Fees for Participants and NonParticipants Who Connect to the BOX Network).
The Commission noted in the BOX Order that it
‘‘historically applied a ‘market-based’ test in its
assessment of market data fees, which [the
Commission] believe[s] present similar issues as the
connectivity fees proposed herein.’’ Id. at page 16.
Despite this admission, the Commission
disapproved BOX’s proposal to begin charging
$5,000 per month for 10Gb connections (while
allowing legacy exchanges to charge rates equal to
3–4 times that amount utilizing ‘‘market-based’’ fee
filings from years prior).
21 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’’).
22 Id.
23 Id.
24 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.
25 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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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.’’ 26 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.27 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.’’ 28 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.29
As a result of the Commission’s loss
of the NASDAQ v. SEC case noted
above, the Commission never followed
through with its intention to subject the
over 400 fee filings to ‘‘develop a
record,’’ and to ‘‘explain their
conclusions, based on that record, in a
written decision that is sufficient to
enable us to perform our review.’’ 30 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.
26 Id. at *2; see also id. (‘‘[T]he sole purpose of
the challenged remand has disappeared.’’).
27 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’’).
28 Id.
29 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 90087 (October 5, 2020).
30 See supra note 16, at page 2.
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While the Exchange appreciates that
the Staff Guidance articulates an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable,
the practical effect of the Revised
Review Process, Staff Guidance, and the
Commission’s related practice of
continuous suspension of new fee
filings, is anti-competitive,
discriminatory, and has put in place an
un-level playing field, which has
negatively impacted smaller, nascent,
non-legacy exchanges (‘‘non-legacy
exchanges’’), while favoring larger,
incumbent, entrenched, legacy
exchanges (‘‘legacy exchanges’’).31 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 32
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.33 These fees remain
in effect today.
31 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.
32 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.
33 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,
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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., 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.34 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
2017), 82 FR 3061 (January 10, 2017) (SR–
NYSEARCA–2016–172).
34 The Exchange has filed, and subsequently
withdrawn, various forms of this proposed fee
change numerous times since August 2021 with
each proposal containing hundreds of cost and
revenue disclosures never previously disclosed by
legacy exchanges in their access and market data fee
filings prior to 2019.
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Staff’s change in position impedes the
ability of non-legacy exchanges to raise
revenue to invest in their systems to
compete with the legacy exchanges who
already enjoy disproportionate nontransaction fee based revenue. For
example, the Cboe Exchange, Inc.
(‘‘Cboe’’) reported ‘‘access and capacity
fee’’ revenue of $70,893,000 for 2020 35
and $80,383,000 for 2021.36 Cboe C2
Exchange, Inc. (‘‘C2’’) reported ‘‘access
and capacity fee’’ revenue of
$19,016,000 for 2020 37 and $22,843,000
for 2021.38 Cboe BZX Exchange, Inc.
(‘‘BZX’’) reported ‘‘access and capacity
fee’’ revenue of $38,387,000 for 2020 39
and $44,800,000 for 2021.40 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
‘‘access and capacity fee’’ revenue of
$26,126,000 for 2020 41 and $30,687,000
for 2021.42 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 2019.43 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.’’ 44
35 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.
36 See Cboe 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001155.pdf.
37 See C2 2021 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000469.pdf.
38 See C2 2022 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2200/
22001156.pdf.
39 See BZX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000465.pdf.
40 See BZX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001152.pdf.
41 See EDGX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000467.pdf.
42 See EDGX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001154.pdf.
43 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.
44 See PHLX Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
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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,45 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
. . .’’,46 this is not the reality
experienced by exchanges such as
MIAX. As such, non-legacy exchanges
are forced to rely on an opaque costbased justification standard. However,
because the Staff Guidance is devoid of
detail on what must be contained in
cost-based justification, this standard is
nearly impossible to meet despite
repeated good-faith efforts by the
Exchange to provide substantial amount
of cost-related details. The Exchange has
attempted to increase fees using a costbased justification numerous times,
having submitted over six filings.47
21000475.pdf. The Exchange 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.
45 See, e.g., CNBC Debuts New Set on NYSE Floor,
available at https://www.cnbc.com/id/46517876.
46 See supra note 21, at note 1.
47 See Securities Exchange Act Release Nos.
94890 (May 11, 2022), 87 FR 29945 (May 17, 2022)
(SR–MIAX–2022–20); 94720 (April 14, 2022), 87 FR
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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 48 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 competitionbased 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.
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,49 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; 50 or (c)
23586 (April 20, 2022) (SR–MIAX–2022–16); 94719
(April 14, 2022), 87 FR 23600 (April 20, 2022) (SR–
MIAX–2022–14); 94259 (February 15, 2022), 87 FR
9747 (February 22, 2022) (SR–MIAX–2022–08);
94256 (February 15, 2022), 87 FR9711 (February 22,
2022) (SR–MIAX–2022–07); 93771 (December 14,
2021), 86 FR 71940 (December 20, 2021) (SR–
MIAX–2021–60); 93775 (December 14, 2021), 86 FR
71996 (December 20, 2021) (SR–MIAX–2021–59);
93185 (September 29, 2021), 86 FR 55093 (October
5, 2021) (SR–MIAX–2021–43); 93165 (September
28, 2021), 86 FR 54750 (October 4, 2021) (SR–
MIAX–2021–41); 92661 (August 13, 2021), 86 FR
46737 (August 19, 2021) (SR–MIAX–2021–37);
92643 (August 11, 2021), 86 FR 46034 (August 17,
2021) (SR–MIAX–2021–35).
48 15 U.S.C. 78f(b)(4).
49 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.
50 In light of the arguments above regarding
disparate standards of review for historical legacy
non-transaction fees and current non-transaction
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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 places a substantial
burden on competition. The Exchange
would be uniquely disadvantaged by
not being able to increase its access fees
to comparable levels (or lower levels
than current market rates) to those of
other options exchanges for
connectivity. If the Commission Staff
were to disapprove this proposal, that
action, and not market forces, would
substantially affect whether the
Exchange can be successful in its
competition with other options
exchanges. Disapproval of this filing
could also be viewed as an arbitrary and
capricious decision should the
Commission Staff continue to ignore its
past treatment of non-transaction fee
filings before implementation of the
Revised Review Process and Staff
Guidance and refuse to allow such
filings to be approved despite
significantly enhanced arguments and
cost disclosures.51
Lastly, the Exchange notes that the
Commission Staff has allowed similar
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.
51 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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fee increases by other exchanges to
remain in effect by publishing those
filings for comment and allowing the
exchange to withdraw and re-file
numerous times.52 Recently, the
Commission Staff has not afforded the
Exchange the same flexibility.53 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
10Gb ULL Connectivity Fee Change
The Exchange recently filed a
proposal to no longer operate 10Gb
connectivity to the Exchange on a single
shared network with its affiliate, MIAX
Pearl. This change is an operational
necessity due to ever-increasing
capacity constraints and to
accommodate anticipated access needs
for Members and other market
participants.54 This proposal: (i) sets
forth the applicable fees for the
bifurcated 10Gb ULL network; and (ii)
removes provisions in the Fee Schedule
that provides for a shared 10Gb ULL
network; and (iii) specifies that market
participants may continue to connect to
both the Exchange and MIAX Pearl via
the 1Gb network.
The Exchange bifurcated the
Exchange and MIAX Pearl 10Gb ULL
networks on January 23, 2023. The
Exchange issued an alert on August 12,
2022 publicly announcing the planned
network change and implementation
plan and dates to provide market
participants adequate time to prepare.55
Upon bifurcation of the 10Gb ULL
network, subscribers would need to
purchase separate connections to the
52 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).
53 See Securities Exchange Act Release Nos.
94719 (April 14, 2022), 87 FR 23600 (April 20,
2022) (SR–MIAX–2022–14) and 94720 (April 14,
2022), 87 FR 23586 (April 20, 2022) (SR–MIAX–
2022–16).
54 See supra note 9.
55 Id.
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Exchange and MIAX at the applicable
rate. The Exchange’s proposed amended
rate for 10Gb ULL connectivity is
described below. Until the 10Gb ULL
network is bifurcated, subscribers to
10Gb ULL connectivity would be able to
connect to both the Exchange and MIAX
Pearl at the applicable rate set forth
below.
The Exchange, therefore, proposes to
amend the Fee Schedule to increase the
fees for Members and non-Members to
access the Exchange’s system
networks 56 via a 10Gb ULL fiber
connection and to specify that this fee
is for a dedicated connection to the
Exchange and no longer provides access
to MIAX Pearl. Specifically, the
Exchange proposes to amend Sections
5(a)–(b) of the Fee Schedule to increase
the 10Gb ULL connectivity fee for
Members and non-Members from
$10,000 per month to $13,500 per
month (‘‘10Gb ULL Fee’’).57 The
Exchange also proposes to amend the
Fee Schedule to reflect the bifurcation
of the 10Gb ULL network and specify
that only the 1Gb network provides
access to both the Exchange and MIAX
Pearl.
The Exchange proposes to make the
following changes to reflect the
bifurcated 10Gb ULL network for the
Exchange and MIAX Pearl. The
Exchange proposes to amend the
explanatory paragraphs below the
network connectivity fee tables in
Sections 5(a)–(b) of the Fee Schedule to
specify that, with the bifurcated 10Gb
ULL network, Members (and nonMembers) utilizing the MENI to connect
to the trading platforms, market data
systems, test systems, and disaster
recovery facilities of the Exchange and
MIAX Pearl via a single, can only do so
via a shared 1Gb connection.
The Exchange will continue to assess
monthly Member and non-Member
network connectivity fees for
connectivity to the primary and
secondary facilities in any month the
56 The Exchange’s system networks consist of the
Exchange’s extranet, internal network, and external
network.
57 Market participants that purchase additional
10Gb ULL connections as a result of this change
will not be subject to the Exchange’s Member
Network Connectivity Testing and Certification Fee
under Section 4(c) of the Exchange’s fee schedule.
See Section 4(c) of the Exchange’s fee schedule
available at https://www.miaxoptions.com/sites/
default/files/fee_schedule-files/MIAX_Options_Fee_
Schedule_10192022.pdf (providing that ‘‘Network
Connectivity Testing and Certification Fees will not
be assessed in situations where the Exchange
initiates a mandatory change to the Exchange’s
system that requires testing and certification.
Member Network Connectivity Testing and
Certification Fees will not be assessed for testing
and certification of connectivity to the Exchange’s
Disaster Recovery Facility.’’).
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15787
Member or non-Member is credentialed
to use any of the Exchange APIs or
market data feeds in the production
environment. The Exchange will
continue to pro-rate the fees when a
Member or non-Member makes a change
to the connectivity (by adding or
deleting connections) with such prorated fees based on the number of
trading days that the Member or nonMember has been credentialed to utilize
any of the Exchange APIs or market data
feeds in the production environment
through such connection, divided by the
total number of trading days in such
month multiplied by the applicable
monthly rate.
Limited Service MEI Ports
Background
The Exchange also proposes to amend
Section 5(d) of the Fee Schedule to
adopt a tiered-pricing structure for
Limited Service MEI Ports available to
Market Makers. The Exchange allocates
two (2) Full Service MEI Ports 58 and
two (2) Limited Service MEI Ports 59 per
matching engine 60 to which each
Market Maker connects. Market Makers
may also request additional Limited
Service MEI Ports for each matching
engine to which they connect. The Full
Service MEI Ports and Limited Service
MEI Ports all include access to the
Exchange’s primary and secondary data
centers and its disaster recovery center.
Market Makers may request additional
Limited Service MEI Ports. Currently,
Market Makers are assessed a $100
monthly fee for each Limited Service
MEI Port for each matching engine
above the first two Limited Service MEI
58 Full Service MEI Ports provide Market Makers
with the ability to send Market Maker quotes,
eQuotes, and quote purge messages to the MIAX
System. Full Service MEI Ports are also capable of
receiving administrative information. Market
Makers are limited to two Full Service MEI Ports
per matching engine. See Fee Schedule, Section
5(d)(ii), note 27.
59 Limited Service MEI Ports provide Market
Makers with the ability to send eQuotes and quote
purge messages only, but not Market Maker Quotes,
to the MIAX System. Limited Service MEI Ports are
also capable of receiving administrative
information. Market Makers initially receive two
Limited Service MEI Ports per matching engine. See
Fee Schedule, Section 5(d)(ii), note 28.
60 A ‘‘matching engine’’ is a part of the MIAX
electronic system that processes options quotes and
trades on a symbol-by-symbol basis. Some matching
engines will process option classes with multiple
root symbols, and other matching engines will be
dedicated to one single option root symbol (for
example, options on SPY will be processed by one
single matching engine that is dedicated only to
SPY). A particular root symbol may only be
assigned to a single designated matching engine. A
particular root symbol may not be assigned to
multiple matching engines. See Fee Schedule,
Section 5(d)(ii), note 29.
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Ports that are included for free. This fee
was unchanged since 2016.61
ddrumheller on DSK120RN23PROD with NOTICES1
Limited Service MEI Port Fee Changes
The Exchange now proposes to move
from a flat monthly fee per Limited
Service MEI Port for each matching
engine to a tiered-pricing structure for
Limited Service MEI Ports for each
matching engine under which the
monthly fee would vary depending on
the number of Limited Service MEI
Ports each Market Maker elects to
purchase. Specifically, the Exchange
will continue to provide the first and
second Limited Service MEI Ports for
each matching engine free of charge. For
Limited Service MEI Ports, the
Exchange proposes to adopt the
following tiered-pricing structure: (i) the
third and fourth Limited Service MEI
Ports for each matching engine will
increase from the current flat monthly
fee of $100 to $150 per port; (ii) the fifth
and sixth Limited Service MEI Ports for
each matching engine will increase from
the current flat monthly fee of $100 to
$200 per port; and (iii) the seventh or
more Limited Service MEI Ports will
increase from the current monthly flat
fee of $100 to $250 per port. The
Exchange believes a tiered-pricing
structure will encourage Market Makers
to be more efficient when determining
how to connect to the Exchange. This
should also enable the Exchange to
better monitor and provide access to the
Exchange’s network to ensure sufficient
capacity and headroom in the System 62
in accordance with its fair access
requirements under Section 6(b)(5) of
the Act.63
The Exchange offers various types of
ports with differing prices because each
port accomplishes different tasks, are
suited to different types of Members,
and consume varying capacity amounts
of the network. For instance, Market
Makers who take the maximum amount
of Limited Service MEI Ports account for
approximately greater than 99% of
message traffic over the network, while
Market Makers with fewer Limited
Service MEI Ports account for
approximately less than 1% of message
traffic over the network. In the
61 See Securities Exchange Act Release No. 79666
(December 22, 2016), 81 FR 96133 (December 29,
2016) (SR–MIAX–2016–47).
62 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See the Definitions Section of the Fee
Schedule and Exchange Rule 100.
63 See 15 U.S.C. 78f(b). The Exchange may offer
access on terms that are not unfairly discriminatory
among its Members, and ensure sufficient capacity
and headroom in the System. The Exchange
monitors the System’s performance and makes
adjustments to its System based on market
conditions and Member demand.
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Exchange’s experience, Market Makers
who only utilize the two free Limited
Service MEI Ports do not have a
business need for the high performance
network solutions required by Market
Makers who take the maximum amount
of Limited Service MEI Ports. The
Exchange’s high performance network
solutions and supporting infrastructure
(including employee support), provides
unparalleled system throughput and the
capacity to handle approximately 18
million quote messages per second.
Based on November 2022 trading
results, on an average day, the Exchange
handles over approximately 8.8 billion
quotes, and more than 185 billion
quotes over the entire month. Of that
total, Market Makers with the maximum
amount of Limited Service MEI Ports
generated approximately 5 billion
quotes, and Market Makers who utilized
the two free Limited Service MEI Ports
generated approximately 1.5 billion
quotes. Also for November 2022, Market
Makers who utilized 3 to 4 Limited
Service MEI ports submitted an average
of 1,152,654,133 quotes per day and
Market Makers who utilized 5 to 9
Limited Service MEI ports submitted an
average of 1,172,105,181 quotes per day.
To achieve a consistent, premium
network performance, the Exchange
must build out and maintain a network
that has the capacity to handle the
message rate requirements of its most
heavy network consumers. These
billions of messages per day consume
the Exchange’s resources and
significantly contribute to the overall
network connectivity expense for
storage and network transport
capabilities. The Exchange must also
purchase additional storage capacity on
an ongoing basis to ensure it has
sufficient capacity to store these
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.64 Thus, as the number of
connections a Market Maker has
increases, certain other costs incurred
by the Exchange that are correlated to,
though not directly affected by,
connection costs (e.g., storage costs,
surveillance costs, service expenses)
also increase. The Exchange sought to
design the proposed tiered-pricing
structure to set the amount of the fees
to relate to the number of connections
a firm purchases. The more connections
purchased by a Market Maker likely
results in greater expenditure of
Exchange resources and increased cost
64 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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to the Exchange. With this in mind, the
Exchange proposes no fee or lower fees
for those Market Makers who receive
fewer Limited Service MEI Ports since
those Market Makers generally tend to
send the least amount of orders and
messages over those connections. Given
this difference in network utilization
rate, the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that Market Makers who
take the most Limited Service MEI Ports
pay for the vast majority of the shared
network resources from which all
Member and non-Member users benefit,
but is designed and maintained from a
capacity standpoint to specifically
handle the message rate and
performance requirements of those
Market Makers.
The Exchange proposes to increase its
monthly Limited Service MEI Port fees
since it has not done so since 2016,65
which is designed to recover a portion
of the costs associated with directly
accessing the Exchange.
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 66 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 67 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among Members and other persons
using any facility or system which the
Exchange operates or controls. The
Exchange also believes the proposed
fees further the objectives of Section
6(b)(5) of the Act 68 in that they are
designed to promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general protect investors and the public
interest and are not designed to permit
unfair discrimination between
customers, issuers, brokers and dealers.
The Exchange believes that the
information provided to justify the
proposed fees meets or exceeds the
amount of detail required in respect of
proposed fee changes under the Revised
Review Process and as set forth in
recent Staff Guidance. Based on both the
BOX Order 69 and the Staff Guidance,70
the Exchange believes that the proposed
65 See Securities Exchange Act Release No. 79666
(December 22, 2016), 81 FR 96133 (December 29,
2016) (SR–MIAX–2016–47).
66 15 U.S.C. 78f(b).
67 15 U.S.C. 78f(b)(4).
68 15 U.S.C. 78f(b)(5).
69 See supra note 20.
70 See supra note 21.
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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.’’ 71 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.’’ 72
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.’’ 73
The proposed fees are reasonable
because they promote parity among
exchange pricing for access, which
promotes competition, including in the
Exchanges’ ability to competitively
price transaction fees, invest in
infrastructure, new products and other
innovations, all while allowing the
Exchange to recover its costs to provide
dedicated access via 10Gb ULL
connectivity (driven by the bifurcation
of the 10Gb ULL network) and Limited
Service MEI Ports. As discussed above,
the Revised Review Process and Staff
Guidance have created an uneven
playing field between legacy and nonlegacy exchanges by severely restricting
71 Id.
The Proposed Fees Ensure Parity
Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations
in 2012 and adopted its initial fee
schedule, with all connectivity and port
fees set at $0.00 (the Exchange originally
had a non-ULL 10Gb connectivity
option, which it has since removed).74
As a new exchange entrant, the
Exchange chose to offer connectivity
and ports free of charge to encourage
market participants to trade on the
Exchange and experience, among things,
the quality of the Exchange’s technology
and trading functionality. This practice
is not uncommon. New exchanges often
do not charge fees or charge lower fees
for certain services such as
memberships/trading permits to attract
order flow to an exchange, and later
74 See Securities Exchange Act Release No. 68415
(December 12, 2012), 77 FR 74905 (December 18,
2012) (SR–MIAX–2012–01).
72 Id.
73 Id.
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non-legacy exchanges from being able to
increase non-transaction related 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 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.
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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.75
Later in 2013, as the Exchange’s
market share increased,76 the Exchange
adopted a nominal $10 fee for each
additional Limited Service MEI Port.77
The Exchange last increased the fees for
its 10Gb ULL fiber connections from
$9,300 to $10,000 per month on January
1, 2021.78 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
75 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).
76 The Exchange experienced a monthly average
equity options trading volume of 1.87% for the
month of November 2013. See Market at a Glance,
available at www.miaxoptions.com.
77 See Securities Exchange Act Release No. 70903
(November 20, 2013), 78 FR 70615 (November 26,
2013) (SR–MIAX–2013–52).
78 See Securities Exchange Act Release No. 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02).
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competitive forces, which constrains its
pricing determinations for transaction
fees as well as non-transaction fees. The
fact that the market for order flow is
competitive has long been recognized by
the courts. In NetCoalition v. Securities
and Exchange Commission, the D.C.
Circuit stated, ‘‘[n]o one disputes that
competition for order flow is ‘fierce.’
. . . As the SEC explained, ‘[i]n the U.S.
national market system, buyers and
sellers of securities, and the brokerdealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’ . . . .’’ 79
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.’’ 80
Congress directed the Commission to
‘‘rely on ‘competition, whenever
possible, in meeting its regulatory
responsibilities for overseeing the SROs
and the national market system.’ ’’ 81 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.’’ 82 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.’’ 83 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.’’ 84
Type of connection or port
Monthly fee
(per connection or per port)
MIAX (as proposed) (equity options market share of 5.64% for the month of November
2022) 85.
10Gb ULL connection .................
Limited Service MEI Ports ...........
NASDAQ 86 (equity options market share of 6.61% for the month of November 2022) 87 ..
10Gb Ultra fiber connection ........
SQF Port 88 ..................................
NASDAQ ISE LLC (‘‘ISE’’) 89 (equity options market share of 5.76% for the month of November 2022) 90.
NYSE American LLC (‘‘NYSE American’’) 91 (equity options market share of 6.41% for
the month of November 2022) 92.
10Gb Ultra fiber connection ........
SQF Port .....................................
10Gb LX LCN connection ...........
Order/Quote Entry Port ...............
NASDAQ GEMX, LLC (‘‘GEMX’’) 93 (equity options market share of 1.79% for the month
of November 2022) 94.
10Gb Ultra connection ................
SQF Port .....................................
$13,500.
1–2 ports: FREE (not changed in this
proposal).
3–4 ports: $150 each.
5–6 ports: $200 each.
7 or more ports: $250 each.
$15,000 per connection.
1–5 ports: $1,500 per port.
6–20 ports: $1,000 per port.
21 or more ports: $500 per port.
$15,000 per connection.
$1,100 per port.
$22,000 per connection.
1–40 ports: $450 per port.
41 or more ports: $150 per port.
$15,000 per connection.
$1,250 per port.
Exchange
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The Exchange believes the competing
exchanges’ 10Gb connectivity and port
fees are useful examples of alternative
approaches to providing and charging
for access and demonstrating how such
fees are competitively set and
constrained. To that end, the Exchange
believes the proposed fees are
competitive and reasonable because the
proposed fees are similar to or less than
fees charged for similar connectivity
and port access provided by other
options exchanges with comparable
market shares. As such, the Exchange
believes that denying its ability to
institute fees that allow us to recoup our
costs and some margin in a manner that
is 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 options exchanges
with similar market share. Each of the
market data rates in place at competing
options exchanges were filed with the
Commission for immediate effectiveness
and remain in place today.
There is no requirement, regulatory or
otherwise, that any broker-dealer
connect to and access any (or all of) the
available options exchanges. Market
participants may choose to become a
member of one or more options
exchanges based on the market
participant’s assessment of the business
opportunity relative to the costs of the
Exchange. With this, there is elasticity
of demand for exchange membership.
As an example, the Exchange’s affiliate,
79 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)).
80 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
81 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.’’).
82 See Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74,770 (December 9,
2008) (SR–NYSEArca–2006–21).
83 Id.
84 See supra note 21.
85 See supra note 76.
86 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services.
87 See supra note 76.
88 Similar to the Exchange’s MEI Ports, SQF ports
are primarily utilized by Market Makers.
89 See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8:
Connectivity.
90 See supra note 76.
91 See NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. CoLocation Fees.
92 See supra note 76.
93 See GEMX Pricing Schedule, Options 7,
Section 6, Connectivity Fees and GEMX Rules,
General 8: Connectivity.
94 See supra note 76.
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MIAX PEARL, LLC (‘‘MIAX Pearl’’),
experienced a decrease in membership
as the result of similar fees proposed
herein. One MIAX Pearl 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.
It is not a requirement for market
participants to become members of all
options exchanges, in fact, certain
market participants conduct an options
business as a member of only one
options market.95 A very small number
of market participants choose to become
a member of all sixteen options
exchanges. Most firms that actively
trade on options markets are not
currently Members of the Exchange and
do not purchase connectivity or port
services at the Exchange. Connectivity
and ports are only available to Members
or service bureaus, and only a Member
may utilize a port.96
One other exchange recently noted in
a proposal to amend their own trading
permit fees that of the 62 market making
firms that are registered as Market
Makers across Cboe, MIAX, and BOX,
42 firms access only one of the three
exchanges.97 The Exchange and its
affiliates, MIAX Pearl and MIAX
Emerald, have a total of 47 members. Of
95 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.’’
96 Service Bureaus may obtain ports on behalf of
Members.
97 See Securities Exchange Act Release No. 94894
(May 11, 2022), 87 FR 29987 (May 17, 2022) (SR–
BOX–2022–17) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to Amend
the Fee Schedule on the BOX Options Market LLC
Facility To Adopt Electronic Market Maker Trading
Permit Fees). The Exchange believes that BOX’s
observation demonstrates that market making firms
can, and do, select which exchanges they wish to
access, and, accordingly, options exchanges must
take competitive considerations into account when
setting fees for such access.
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those 47 total members, 35 are members
of all three affiliated exchanges, four are
members of only two (2) affiliated
exchanges, and eight (8) are members of
only one affiliated exchange. The
Exchange also notes that no firm is a
Member of the Exchange only. The
above data evidences that a brokerdealer need not have direct connectivity
to all options exchanges, let alone the
Exchange and its two affiliates, and
broker-dealers may elect to do so based
on their own business decisions and
need to directly access each exchange’s
liquidity pool.
Not only is there not an actual
regulatory requirement to connect to
every options exchange, the Exchange
believes there is also no ‘‘de facto’’ or
practical requirement as well, as further
evidenced by the broker-dealer
membership analysis of the options
exchanges discussed above. As noted
above, this is evidenced by the fact that
one MIAX Pearl 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 (which are similar to the
changes proposed herein). Indeed,
broker-dealers choose if and how to
access a particular exchange and
because it is a choice, the Exchange
must set reasonable pricing, otherwise
prospective members would not connect
and existing members would disconnect
from the Exchange. The decision to
become a member of an exchange,
particularly for registered market
makers, is complex, and not solely
based on the non-transactional costs
assessed by an exchange. As noted
herein, specific factors include, but are
not limited to: (i) an exchange’s
available liquidity in options series; (ii)
trading functionality offered on a
particular market; (iii) product offerings;
(iv) customer service on an exchange;
and (v) transactional pricing. Becoming
a member of the exchange does not
‘‘lock’’ a potential member into a market
or diminish the overall competition for
exchange services.
In lieu of becoming a member at each
options exchange, a market participant
may join one exchange and elect to have
their orders routed in the event that a
better price is available on an away
market. Nothing in the Order Protection
Rule requires a firm to become a
Member at—or establish connectivity
to—the Exchange.98 If the Exchange is
not at the NBBO, the Exchange will
98 See Options Order Protection and Locked/
Crossed Market Plan (August 14, 2009), available at
https://www.theocc.com/getmedia/7fc629d9-4e544b99-9f11-c0e4db1a2266/options_order_protection_
plan.pdf.
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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.99
With respect to the submission of
orders, Members may also choose not to
purchase any connection at all from the
Exchange, and instead rely on the port
of a third party to submit an order. For
example, a third-party broker-dealer
Member of the Exchange may be
utilized by a retail investor to submit
orders into an Exchange. An
institutional investor may utilize a
broker-dealer, a service bureau,100 or
request sponsored access 101 through a
member of an exchange in order to
submit a trade directly to an options
exchange.102 A market participant may
either pay the costs associated with
becoming a member of an exchange or,
in the alternative, a market participant
may elect to pay commissions to a
broker-dealer, pay fees to a service
bureau to submit trades, or pay a
member to sponsor the market
participant in order to submit trades
directly to an exchange.
Non-Member third-parties, such as
service bureaus and extranets, resell the
Exchange’s connectivity. This indirect
connectivity is another viable
alternative for market participants to
trade on the Exchange without
connecting directly to the Exchange
(and thus not pay the Exchange’s
connectivity fees), which alternative is
already being used by non-Members and
further constrains the price that the
Exchange is able to charge for
connectivity and other access fees to its
market. The Exchange notes that it
could, but chooses not to, preclude
market participants from reselling its
connectivity. Unlike other exchanges,
the Exchange also does not currently
assess fees on third-party resellers on a
per customer basis (i.e., fees based on
the number of firms that connect to the
Exchange indirectly via the third99 Members may elect to not route their orders by
utilizing the Do Not Route order type. See Exchange
Rule 516(g).
100 Service Bureaus provide access to market
participants to submit and execute orders on an
exchange. On the Exchange, a Service Bureau may
be a Member. Some Members utilize a Service
Bureau for connectivity and that Service Bureau
may not be a Member. Some market participants
utilize a Service Bureau who is a Member to submit
orders.
101 Sponsored Access is an arrangement whereby
a Member permits its customers to enter orders into
an exchange’s system that bypass the Member’s
trading system and are routed directly to the
Exchange, including routing through a service
bureau or other third-party technology provider.
102 This may include utilizing a floor broker and
submitting the trade to one of the five options
trading floors.
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party).103 Indeed, the Exchange does not
receive any connectivity revenue when
connectivity is resold by a third-party,
which often is resold to multiple
customers, some of whom are agency
broker-dealers that have numerous
customers of their own.104 Particularly,
in the event that a market participant
views the Exchange’s direct
connectivity and access fees as more or
less attractive than competing markets,
that market participant can choose to
connect to the Exchange indirectly or
may choose not to connect to the
Exchange and connect instead to one or
more of the other 16 options markets.
Accordingly, the Exchange believes that
the proposed fees are fair and
reasonable and constrained by
competitive forces.
The Exchange is obligated to regulate
its Members and secure access to its
environment. In order to properly
regulate its Members and secure the
trading environment, the Exchange
takes measures to ensure access is
monitored and maintained with various
controls. Connectivity and ports are
methods utilized by the Exchange to
grant Members secure access to
communicate with the Exchange and
exercise trading rights. When a market
participant elects to be a Member, and
is approved for membership by the
Exchange, the Member is granted
trading rights to enter orders and/or
quotes into Exchange through secure
connections.
Again, there is no legal or regulatory
requirement that a market participant
become a Member of the Exchange. This
is again evidenced by the fact that one
MIAX Pearl 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. If a market
participant chooses to become a
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.
103 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).
104 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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Bifurcation of 10Gb ULL Connectivity
and Related Fees
The Exchange began to operate on a
single shared network with MIAX Pearl
when MIAX Pearl commenced
operations as a national securities
exchange on February 7, 2017.105 The
Exchange and MIAX Pearl have
operated on a single shared network to
provide Members with a single
convenient set of access points for both
exchanges. Both the Exchange and
MIAX Pearl offer two methods of
connectivity, 1Gb and 10Gb ULL
connections. The 1Gb connection
services are supported by a discrete set
of switches providing 1Gb access ports
to Members. The 10Gb ULL connection
services are supported by a second and
mutually exclusive set of switches
providing 10Gb ULL access ports to
Members. Previously, both the 1Gb and
10Gb ULL shared extranet ports allow
Members to use one connection to
access both exchanges, namely their
trading platforms, market data systems,
test systems, and disaster recovery
facilities.
The Exchange stresses that bifurcating
the 10Gb ULL connectivity between the
Exchange and MIAX Pearl was not
designed with the objective to generate
an overall increase in access fee
revenue. Rather, the proposed change
was necessitated by 10Gb ULL
connectivity experiencing a significant
decrease in port availability mostly
driven by connectivity demands of
latency sensitive Members that seek to
maintain multiple 10Gb ULL
connections on every switch in the
network. Operating two separate
national securities exchanges on a single
shared network provided certain
benefits, such as streamlined
connectivity to multiple exchanges, and
simplified exchange infrastructure.
However, doing so was no longer
sustainable due to ever-increasing
capacity constraints and current system
limitations. The network is not an
unlimited resource. As described more
fully in the proposal to bifurcate the
10Gb ULL network,106 the connectivity
needs of Members and market
participants has increased every year
105 See Securities Exchange Act Release No.
80061 (February 17, 2017), 82 FR 11676 (February
24, 2017) (establishing MIAX Pearl Fee Schedule
and establishing that the MENI can also be
configured to provide network connectivity to the
trading platforms, market data systems, test
systems, and disaster recovery facility of the MIAX
Pearl’s affiliate, MIAX, via a single, shared
connection).
106 See Securities Exchange Act Release Nos.
96553 (December 20, 2022), 87 FR 79379 (December
27, 2022) (SR–PEARL–2022–60); 96545 (December
20, 2022) 87 FR 79393 (December 27, 2022) (SR–
MIAX–2022–48).
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since the launch of MIAX Pearl and the
operations of the Exchange and MIAX
Pearl on a single shared 10Gb ULL
network is no longer feasible. This
required constant System expansion to
meet Member demand for additional
ports and 10Gb ULL connections has
resulted in limited available System
headroom, which eventually became
operationally problematic for both the
Exchange and its customers.
As stated above, the shared network is
not an unlimited resource and its
expansion was constrained by MIAX’s
and MIAX Pearl’s ability to provide fair
and equitable access to all market
participants of both markets. Due to the
ever-increasing connectivity demands,
the Exchange found it necessary to
bifurcate 10Gb ULL connectivity to the
Exchange’s and MIAX Pearl’s Systems
and networks to be able to continue to
meet ongoing and future 10Gb ULL
connectivity and access demands.107
Unlike the switches that provide 1Gb
connectivity, the availability for
additional 10Gb ULL connections on
each switch had significantly decreased.
This was mostly driven by the
connectivity demands of latency
sensitive Members (e.g., Market Makers
and liquidity removers) that sought to
maintain connectivity across multiple
10Gb ULL switches. Based on the
Exchange’s experience, such Members
did not typically use a shared 10Gb ULL
connection to reach both the Exchange
and MIAX Pearl due to related latency
concerns. Instead, those Members
maintain dedicated separate 10Gb ULL
connections for the Exchange and
separate dedicated 10Gb ULL
connections for MIAX Pearl. This
resulted in a much higher 10Gb ULL
usage per switch by those Members on
the shared 10Gb ULL network than
would otherwise be needed if the
Exchange and MIAX Pearl had their
own dedicated 10Gb ULL networks.
Separation of the Exchange and MIAX
Pearl 10Gb ULL networks naturally
lends itself to reduced 10Gb ULL port
consumption on each switch and,
therefore, increased 10Gb ULL port
availability for current Members and
new Members.
Prior to bifurcating the 10Gb ULL
network, the Exchange and MIAX Pearl
continued to add switches to meet
ongoing demand for 10Gb ULL
connectivity. That was no longer
sustainable because simply adding
additional switches to expand the
current shared 10Gb ULL network
107 Currently, the Exchange maintains sufficient
headroom to meet ongoing and future requests for
1Gb connectivity. Therefore, the Exchange did not
propose to alter 1Gb connectivity and continues to
provide 1Gb connectivity over a shared network.
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would not adequately alleviate the issue
of limited available port connectivity.
While it would have resulted in a gain
in overall port availability, the existing
switches on the shared 10Gb ULL
network in use would have continued to
suffer from lack of port headroom given
many latency sensitive Members’ needs
for a presence on each switch to reach
both the Exchange and MIAX Pearl.
This was because those latency sensitive
Members sought to have a presence on
each switch to maximize the probability
of experiencing the best network
performance. Those Members routinely
decide to rebalance orders and/or
messages over their various connections
to ensure each connection is operating
with maximum efficiency. Simply
adding switches to the extranet would
not have resolved the port availability
needs on the shared 10Gb ULL network
since many of the latency sensitive
Members were unwilling to relocate
their connections to a new switch due
to the potential detrimental performance
impact. As such, the impact of adding
new switches and rebalancing ports
would not have been effective or
responsive to customer needs. The
Exchange has found that ongoing and
continued rebalancing once additional
switches are added has had, and would
have continued to have had, a
diminishing return on increasing
available 10Gb ULL connectivity.
Based on its experience and expertise,
the Exchange found the most practical
way to increase connectivity availability
on its switches was to bifurcate the
existing 10Gb ULL networks for the
Exchange and MIAX Pearl by migrating
the exchanges’ connections from the
shared network onto their own set of
switches. Such changes accordingly
necessitated a review of the Exchange’s
previous 10Gb ULL connectivity fees
and related costs. The proposed fees are
necessary to allow the Exchange to
cover ongoing costs related to providing
and maintaining such connectivity,
described more fully below. The ever
increasing connectivity demands that
necessitated this change further support
that the proposed fees are reasonable
because this demand reflects that
Members and non-Members believe they
are getting value from the 10Gb ULL
connections they purchase.
The Exchange announced on August
12, 2022 the planned network change
and the January 23, 2023
implementation date to provide market
participants adequate time to
prepare.108 Since August 12, 2022, the
Exchange has worked with current 10Gb
ULL subscribers to address their
108 See
supra note 9.
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connectivity needs ahead of the January
23, 2023 date. Based on those
interactions and subscriber feedback,
the Exchange experienced a minimal net
increase of approximately six (6) overall
10Gb ULL connectivity subscriptions
across the Exchange and MIAX Pearl.
This anticipated immaterial increase in
overall connections reflect a minimal
fee impact for all types of subscribers
and reflects that subscribers elected to
reallocate existing 10Gb ULL
connectivity directly to the Exchange or
MIAX Pearl, or chose to decrease or
cease connectivity as a result of the
change.
Should the Commission Staff
disapprove such fees, it would
effectively dictate how an exchange
manages its technology and would
hamper the Exchange’s ability to
continue to invest in and fund access
services in a manner that allows it to
meet existing and anticipated access
demands of market participants.
Disapproval could also have the adverse
effect of discouraging exchanges from
optimizing its operations and deploying
innovative technology to the benefit of
market participants if it believes the
Commission would later prevent that
exchange from covering its costs and
monetizing operational enhancements,
thus adversely impacting competition.
Also, as noted above, the economic
consequences of not being able to better
establish fee parity with other
exchanges for non-transaction fees
hampers the Exchange’s ability to
compete on transaction fees.
Cost Analysis
In general, the Exchange believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
Exchange Act requirements that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
members and markets. In particular, the
Exchange believes that each exchange
should take extra care to be able to
demonstrate that these fees are based on
its costs and reasonable business needs.
In proposing to charge fees for
connectivity services, the Exchange 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
Members—both generally and in
relation to other Members, i.e., to assure
the fee will not create a financial burden
on any participant and will not have an
undue impact in particular on smaller
Members and competition among
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15793
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,109 and Rule 19b–4
thereunder,110 with respect to the types
of information SROs should provide
when filing fee changes, and Section
6(b) of the Act,111 which requires,
among other things, that exchange fees
be reasonable and equitably
allocated,112 not designed to permit
unfair discrimination,113 and that they
not impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.114 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.115 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.
As detailed below, the Exchange
recently calculated its aggregate annual
costs for providing physical 10Gb ULL
connectivity to the Exchange at
$12,034,554 (or approximately
$1,002,880 per month, rounded up to
the nearest dollar when dividing the
annual cost by 12 months) and its
aggregate annual costs for providing
Limited Service MEI Ports at $2,157,178
(or approximately $179,765 per month,
rounded down to the nearest dollar
when dividing the annual cost by 12
months). In order to cover the aggregate
costs of providing connectivity to its
Users (both Members and nonMembers 116) going forward and to make
a modest profit, as described below, the
Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per
month for each physical 10Gb ULL
connection and to remove language
providing for a shared 10Gb ULL
network between the Exchange and
109 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
111 15 U.S.C. 78f(b).
112 15 U.S.C. 78f(b)(4).
113 15 U.S.C. 78f(b)(5).
114 15 U.S.C. 78f(b)(8).
115 See supra note 21.
116 Types of market participants that obtain
connectivity services from the Exchange but are not
Members include service bureaus and extranets.
Service bureaus offer technology-based services to
other companies for a fee, including order entry
services, and thus, may access Limited Service MEI
Ports on behalf of one or more Members. Extranets
offer physical connectivity services to Members and
non-Members.
110 17
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MIAX Pearl. The Exchange also
proposes to modify its Fee Schedule to
charge tiered rates for additional
Limited Service MEI Ports.
In 2019, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).117 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
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,118 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 1Gb
and 10Gb ULL connectivity (62%), with
smaller allocations to all ports (15%),
and the remainder to the provision of
transaction execution, membership
services and market data services (23%).
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 Members and parties that they
sponsor to participate directly on the
Exchange may submit orders to the
Exchange; many Members (but not all)
consume market data from the Exchange
in order to trade on the Exchange; and,
the Exchange consumes market data
from external sources in order to
comply with regulatory obligations.
Accordingly, given this
interdependence, the allocation of costs
to each service or revenue source
required judgment of the Exchange and
was weighted based on estimates of the
Exchange that the Exchange believes are
reasonable, as set forth below. While
there is no standardized and generally
accepted methodology 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 will
continue to be left with its best efforts
to 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 10Gb ULL
connectivity and Limited Service MEI
Port services, including both physical
10Gb connections and Limited Service
MEI Ports, result in an aggregate
monthly cost of approximately
$1,182,645 (utilizing the rounded
numbers when dividing the annual cost
for 10Gb ULL connectivity and annual
cost for Limited Service MEI Ports by 12
months, then adding both numbers
together), as further detailed below.
117 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.
118 For example, the Exchange maintains 24
matching engines, MIAX Pearl Options maintains
12 matching engines, MIAX Pearl Equities
maintains 24 matching engines, and MIAX Emerald
maintains 12 matching engines.
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Costs Related to Offering Physical 10Gb
ULL Connectivity
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
physical dedicated 10Gb ULL
connectivity via an unshared network as
well as the percentage of the Exchange’s
overall costs that such costs represent
for such area (e.g., as set forth below, the
Exchange allocated approximately
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25.6% of its overall Human Resources
cost to offering physical connectivity).
Annual cost 119
Cost drivers
% of all
Human Resources .................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .............................................................
Internet Services, including External Market Data ................................................................
Data Center ...........................................................................................................................
Hardware and Software Maintenance and Licenses ............................................................
Depreciation ...........................................................................................................................
Allocated Shared Expenses ..................................................................................................
$3,867,297
70,163
424,584
718,950
727,734
2,310,898
3,914,928
$322,275
5,847
35,382
59,912
60,645
192,575
326,244
25
60.6
73.3
60.6
49.8
61.6
49.1
Total ................................................................................................................................
12,034,554
1,002,880
39.4
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
physical 10Gb ULL connectivity.
Human Resources
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Monthly cost 120
For personnel costs (Human
Resources), the Exchange calculated an
allocation of employee time for
employees whose functions include
providing and maintaining physical
connectivity and performance thereof
(primarily the Exchange’s network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity) and for which the
Exchange allocated a percentage of 42%
of each employee’s time. The Exchange
also allocated Human Resources costs to
provide physical connectivity to a
limited subset of personnel with
ancillary functions related to
establishing and maintaining such
connectivity (such as information
security and finance personnel), for
which the Exchange allocated cost on an
employee-by-employee basis (i.e., only
including those personnel who do
support functions related to providing
physical connectivity) and then applied
a smaller allocation to such employees
(less than 18%). The Exchange notes
that it 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
employees as needed, 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
119 The Annual Cost includes figures rounded to
the nearest dollar.
120 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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that market’s individual Human
Resources expense. Then, again
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
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feeds for the entire U.S. options
industry, as well as content,
connectivity, and infrastructure services
for critical components of the network
that are necessary to provide and
maintain its System Networks and
access to its System Networks via 10Gb
ULL connectivity. Specifically, the
Exchange utilizes connectivity and
content service providers to connect to
other national securities exchanges, the
Options Price Reporting Authority
(‘‘OPRA’’), and to receive market data
from other exchanges and market data
providers. The Exchange understands
that these service providers provide
services to most, if not all, of the other
U.S. exchanges and other market
participants. Connectivity and market
data provided these service providers is
critical to the Exchanges daily
operations and performance of its
System Networks to which market
participants connect to via 10Gb ULL
connectivity. Without these services
providers, the Exchange would not be
able to connect to other national
securities exchanges, market data
providers, or OPRA and, therefore,
would not be able to operate and
support its System Networks. The
Exchange does not employ a separate
fee to cover its connectivity and content
service provider expense and recoups
that expense, in part, by charging for
10Gb ULL connectivity.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment (such as
dedicated space, security services,
cooling and power). The Exchange notes
that it does not own the Primary Data
Center or the Secondary Data Center,
but instead, leases space in data centers
operated by third parties. The Exchange
has allocated a high percentage of the
Data Center cost (60.6%) to physical
10Gb ULL connectivity because the
third-party data centers and the
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Exchange’s physical equipment
contained therein is the most direct cost
in providing physical access to the
Exchange. In other words, for the
Exchange to operate in a dedicated
space with connectivity of participants
to a physical trading platform, the data
centers are a very tangible cost, and in
turn, if the Exchange did not maintain
such a presence then physical
connectivity would be of no value to
market participants.
External Market Data
External Market Data includes fees
paid to third parties, including other
exchanges, to receive and consume
market data from other markets. The
Exchange included External Market
Data fees to the provision of 10Gb ULL
connectivity as such market data is
necessary here to offer certain services
related to such connectivity, such as
certain risk checks that are performed
prior to execution, and checking for
other conditions (e.g., re-pricing of
orders to avoid lock or crossed markets,
trading collars). This allocation was
included as part of the internet Services
cost described above. Thus, as market
data from other exchanges is consumed
at the matching engine level, (to which
10Gb ULL connectivity provides access
to) in order to validate orders before
additional entering the matching engine
or being executed, the Exchange
believes it is reasonable to allocate a
small amount of such costs to 10Gb ULL
connectivity.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to operate and monitor physical
assets necessary to offer physical
connectivity to the Exchange.121
Monthly Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of Exchange
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which are owned by
the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
As noted above, the Exchange allocated
61.6% of all depreciation costs to
providing physical 10Gb ULL
connectivity. The Exchange notes,
however, that it did not allocate
depreciation costs for any depreciated
software necessary to operate the
Exchange to physical connectivity, as
such software does not impact the
provision of physical connectivity. 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.
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.122
The Exchange notes that the 49.1%
allocation of general shared expenses for
physical 10Gb ULL connectivity is
higher than that allocated to general
shared expenses for Limited Service
MEI Ports based on its allocation
methodology that weighted costs
attributable to each Core Service based
on an understanding of each area. While
physical connectivity has several areas
where certain tangible costs are heavily
weighted towards providing such
service (e.g., Data Centers, as described
above), Limited Service MEI Ports do
not require as many broad or indirect
resources as other Core Services. The
total monthly cost for 10Gb ULL
connectivity of $1,002,880 was divided
by the number of physical 10Gb ULL
connections the Exchange maintained at
the time that proposed pricing was
determined (93), to arrive at a cost of
approximately $10,784 per month, per
physical 10Gb ULL connection.
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
Costs Related to Offering Limited
Service MEI Ports
Annual cost 123
Cost drivers
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The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
Limited Service MEO Ports as well as
the percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 5.8% of its
overall Human Resources cost to
offering Limited Service MEI Ports).
Monthly cost 124
% of all
Human Resources .................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .............................................................
Internet Services, including External Market Data ................................................................
Data Center ...........................................................................................................................
Hardware and Software Maintenance and Licenses ............................................................
Depreciation ...........................................................................................................................
Allocated Shared Expenses ..................................................................................................
$898,480
4,435
41,601
85,214
104,859
237,335
785,254
$74,873
370
3,467
7,101
8,738
19,778
65,438
5.8
3.8
7.2
7.2
7.2
6.3
9.8
Total ................................................................................................................................
2,157,178
179,765
7.1
121 This expense may be less than the Exchange’s
affiliated markets, specifically MIAX Pearl, because,
unlike the Exchange, MIAX Pearl (the options and
equities markets) maintains an additional gateway
to accommodate its member’s access and
connectivity needs. This added gateway contributes
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to the difference in allocations between the
Exchange and MIAX Pearl.
122 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
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granular a level. Instead, director costs are included
as part of the overall general allocation.
123 See supra note 119 (describing rounding of
Annual Costs).
124 See supra note 120 (describing rounding of
Monthly Costs based on Annual Costs).
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Human Resources
With respect to Limited Service MEI
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing Limited
Service MEI Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). 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 Limited Service MEI Ports
and maintaining performance thereof,
and confirming that the proposed
allocations were reasonable based on an
understanding of the percentage of their
time such employees devote to tasks
related to providing Limited Service
MEI Ports and maintaining performance
thereof. The Exchange notes that senior
level executives were only allocated
Human Resources costs to the extent the
Exchange believed they are involved in
overseeing tasks related to providing
Limited Service MEI Ports and
maintaining performance thereof. The
Human Resources cost was again
calculated using a blended rate of
compensation reflecting salary, equity
and bonus compensation, benefits,
payroll taxes, and 401(k) matching
contributions.
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Connectivity and Internet Services
The Connectivity cost includes
external fees paid to connect to other
exchanges, cabling and switches, as
described above. For purposes of
Limited Service MEI Ports, the
Exchange also includes a portion of its
costs related to External Market Data, as
described below.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment as well as
related costs (the Exchange does not
own the Primary Data Center or the
Secondary Data Center, but instead,
leases space in data centers operated by
third parties).
External Market Data
External Market Data includes fees
paid to third parties, including other
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exchanges, to receive and consume
market data from other markets. The
Exchange included External Market
Data fees to the provision of Limited
Service MEI Ports as such market data
is also necessary here (in addition to
physical connectivity) to offer certain
services related to such ports, such as
validating orders on entry against the
national best bid and national best offer
and checking for other conditions (e.g.,
whether a symbol is halted). This
allocation was included as part of the
internet Services cost described
above.125 Thus, as market data from
other Exchanges is consumed at the
Limited Service MEI Port level in order
to validate orders before additional
processing occurs with respect to such
orders, the Exchange believes it is
reasonable to allocate a small amount of
such costs to Limited Service MEI Ports.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
Monthly Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of order entry
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which is owned by
the Exchange and some of which is
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange allocated 6.3% of all
depreciation costs to providing Limited
Service MEI Ports. In contrast to
physical connectivity, described above,
the Exchange did allocate depreciation
costs for depreciated software necessary
to operate the Exchange to Limited
Service MEI Ports because such software
is related to the provision of such
connectivity. 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.
125 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
providing physical connectivity.
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Allocated Shared Expenses
Finally, a limited portion of general
shared expenses was allocated to overall
Limited Service MEI Ports costs as
without these general shared costs the
Exchange would not be able to operate
in the manner that it does and provide
Limited Service MEI Ports. The costs
included in general shared expenses
include general expenses of the
Exchange, including office space and
office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting
and training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange again notes that the cost of
paying directors to serve on its Board of
Directors is included in the calculation
of Allocated Shared Expenses, and thus
a portion of such overall cost amounting
to less than 10% of the overall cost for
directors was allocated to providing
Limited Service MEI Ports. The
Exchange notes that the 9.8% allocation
of general shared expenses for Limited
Service MEI Ports is lower than that
allocated to general shared expenses for
physical connectivity based on its
allocation methodology that weighted
costs attributable to each Core Service
based on an understanding of each area.
While Limited Service MEI Ports have
several areas where certain tangible
costs are heavily weighted towards
providing such service (e.g., Data
Centers, as described above), 10Gb ULL
connectivity requires a broader level of
support from Exchange personnel in
different areas, which in turn leads to a
broader general level of cost to the
Exchange. The total monthly cost of
$179,765 was divided by the number of
chargeable Limited Service MEI Ports
(excluding the two free Limited Service
MEI Ports per matching engine that each
Member receives) the Exchange
maintained at the time that proposed
pricing was determined (1303), to arrive
at a cost of approximately $138 per
month, per charged Limited Service MEI
Port.
Cost Analysis—Additional Discussion
In conducting its Cost Analysis, the
Exchange did not allocate any of its
expenses in full to any core services
(including physical connectivity or
Limited Service MEI Ports) and did not
double-count any expenses. Instead, as
described above, the Exchange allocated
applicable cost drivers across its core
services and used the same Cost
Analysis to form the basis of this
proposal and the filings the Exchange
submitted proposing fees for proprietary
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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
(42%) given their focus on functions
necessary to provide physical
connections. The salaries of those same
personnel were allocated only 8.4% to
Limited Service MEI Ports and the
remaining 49.6% was allocated to 1Gb
connectivity, other port services,
transaction services, membership
services and market data. The Exchange
did not allocate any other Human
Resources expense for providing
physical connections to any other
employee group, outside of a smaller
allocation of 17.8% for 10Gb ULL
connectivity or 18.2% for the entire
network, of the cost associated with
certain specified personnel who work
closely with and support network
infrastructure personnel. In contrast, the
Exchange allocated much smaller
percentages of costs (5% or less) across
a wider range of personnel groups in
order to allocate Human Resources costs
to providing Limited Service MEI Ports.
This is because a much wider range of
personnel are involved in functions
necessary to offer, monitor and maintain
Limited Service MEI Ports but the tasks
necessary to do so are not a primary or
full-time function.
In total, the Exchange allocated 25.6%
of its personnel costs to providing
physical connections and 5.8% of its
personnel costs to providing Limited
Service MEI Ports, for a total allocation
of 31.4% Human Resources expense to
provide these specific connectivity
services. In turn, the Exchange allocated
the remaining 68.6% of its Human
Resources expense to membership
services, transaction services, other port
services and market data. Thus, again,
the Exchange’s allocations of cost across
core services were based on real costs of
operating the Exchange and were not
double-counted across the core services
or their associated revenue streams.
As another example, the Exchange
allocated depreciation expense to all
core services, including physical
connections and Limited Service MEI
Ports, but in different amounts. The
Exchange believes it is reasonable to
allocate the identified portion of such
expense because such expense includes
the actual cost of the computer
equipment, such as dedicated servers,
computers, laptops, monitors,
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information security appliances and
storage, and network switching
infrastructure equipment, including
switches and taps that were purchased
to operate and support the network.
Without this equipment, the Exchange
would not be able to operate the
network and provide connectivity
services to its Members and nonMembers and their customers. However,
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing
connectivity services, but instead
allocated approximately 67.9% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (61.6% attributed to 10Gb ULL
physical connections and 6.3% to
Limited Service MEI Ports). The
Exchange allocated the remaining
depreciation and amortization expense
(approximately 32.1%) toward the cost
of providing transaction services,
membership services, other port
services and market data.
The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated. The Exchange does
not yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
connectivity, the Exchange will have to
be successful in retaining existing
clients that wish to maintain physical
connectivity and/or Limited Service
MEI Ports or in obtaining new clients
that will purchase such services.
Similarly, the Exchange will have to be
successful in retaining a positive net
capture on transaction fees in order to
realize the anticipated revenue from
transaction pricing.
The Exchange notes that the Cost
Analysis is based on the Exchange’s
2023 fiscal year of operations and
projections. 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
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revenue materially exceeds our current
projections. In addition, the Exchange
will periodically conduct a review to
inform its decision making on whether
a fee change is appropriate (e.g., to
monitor for costs increasing/decreasing
or subscribers increasing/decreasing,
etc. in ways that suggest the thencurrent fees are becoming dislocated
from the prior cost-based analysis) and
would propose to increase fees in the
event that revenues fail to cover its costs
and a reasonable mark-up, or decrease
fees in the event that revenue or the
mark-up materially exceeds our current
projections. In the event that the
Exchange determines to propose a fee
change, the results of a timely review,
including an updated cost estimate, will
be included in the rule filing proposing
the fee change. More generally, the
Exchange believes that it is appropriate
for an exchange to refresh and update
information about its relevant costs and
revenues in seeking any future changes
to fees, and the Exchange commits to do
so.
Projected Revenue 126
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.
126 For purposes of calculating revenue for 10Gb
ULL connectivity, the Exchange used projected
revenues for February 2023, the first full month for
which it will provide dedicated 10Gb ULL
connectivity to the Exchange and cease operating a
shared 10Gb ULL network with MIAX Pearl.
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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
$12,034,554. Based on current 10Gb
ULL connectivity services usage, the
Exchange would generate annual
revenue of approximately $15,066,000.
This represents a modest profit of 20%
when compared to the cost of providing
10Gb ULL connectivity services, which
will decrease over time.127 The
Exchange’s Cost Analysis estimates the
annual cost to provide Limited Service
MEI Port services at $2,157,178. Based
on current Limited Service MEI Port
services usage, the Exchange would
generate annual revenue of
approximately $3,300,600. This
represents an estimated profit margin of
35% when compared to the cost of
providing Limited Service MEI Port
services, which will decrease over
time.128 Even if the Exchange earns
those amounts or incrementally more or
less, the Exchange believes the proposed
fees are fair and reasonable because they
will not result in pricing that deviates
from that of other exchanges or supracompetitive profit, when comparing the
total expense of the Exchange associated
with providing 10Gb ULL connectivity
and Limited Service MEI Port services
versus the total projected revenue of the
Exchange associated with network 10Gb
ULL connectivity and Limited Service
MEI Port services.
*
*
*
*
*
The Exchange has operated at a
cumulative net annual loss since it
launched operations in 2012.129 The
127 Assuming the U.S. inflation rate continues at
its current rate, the projected profit margins in this
proposal will decrease and may reach single to
negative digit levels in approximately 18 to 24
months. See, e.g., https://
www.usinflationcalculator.com/inflation/currentinflation-rates/ (last visited February 15, 2023).
128 Id.
129 The Exchange has incurred a cumulative loss
of $121 million since its inception in 2012 through
full year 2021. See Exchange’s Form 1/A,
Application for Registration or Exemption from
Registration as a National Securities Exchange, filed
June 29, 2022, available at https://www.sec.gov/
Archives/edgar/vprr/2200/22001163.pdf.
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Exchange has operated at a net loss due
to a number of factors, one of which is
choosing to forgo revenue by offering
certain products, such as connectivity,
at lower rates than other options
exchanges to attract order flow and
encourage market participants to
experience the high determinism, low
latency, and resiliency of the Exchange’s
trading systems. The Exchange should
not now be penalized for seeking to
raise its fees in light of necessary
technology changes and its increased
costs after offering such products as
discounted prices. Therefore, the
Exchange believes the proposed fees are
reasonable because they are based on
both relative costs to the Exchange to
provide dedicated 10Gb ULL
connectivity and Limited Service MEI
Ports, the extent to which the product
drives the Exchange’s overall costs and
the relative value of the product, as well
as the Exchange’s objective to make
access to its Systems broadly available
to market participants. The Exchange
also believes the proposed fees are
reasonable because they are designed to
generate annual revenue to recoup the
Exchange’s costs of providing dedicated
10Gb ULL connectivity and Limited
Service MEI Ports.
The Exchange notes that its revenue
estimate is based on projections and
will only be realized to the extent
customer activity actually produces the
revenue estimated. As a competitor in
the hyper-competitive exchange
environment, and an exchange focused
on driving competition, the Exchange
does not yet know whether such
projections will be realized. For
instance, in order to generate the
revenue expected from 10Gb ULL
connectivity and Limited Service MEI
Ports, the Exchange will have to be
successful in retaining existing clients
that wish to utilize 10Gb ULL
connectivity and Limited Service MEI
Ports and/or obtaining new clients that
will purchase such access. To the extent
the Exchange is successful in
encouraging new clients to utilize 10Gb
ULL connectivity and Limited Service
MEI Ports, the Exchange does not
believe it should be penalized for such
success. 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 owned by a holding
company that is the parent company of
four exchange markets and, therefore,
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15799
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 nontransaction fee filings can allocate the
entire amount of that same cost to a
single exchange. This can result in
lower profit margins for the nontransaction 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
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higher costs alone could be used to
justify fees increases.
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The Proposed Pricing Is Not Unfairly
Discriminatory and Provides for the
Equitable Allocation of Fees, Dues, and
Other Charges
The Exchange believes that the
proposed fees are reasonable, fair,
equitable, and not unfairly
discriminatory because they are
designed to align fees with services
provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the
proposed fees are equitably allocated
among users of the network connectivity
and port alternatives, as the users of
10Gb ULL connections consume
substantially more bandwidth and
network resources than users of 1Gb
ULL connection. Specifically, the
Exchange notes that 10Gb ULL
connection users account for more than
99% of message traffic over the network,
driving other costs that are linked to
capacity utilization, as described above,
while the users of the 1Gb ULL
connections account for less than 1% of
message traffic over the network. In the
Exchange’s experience, users of the 1Gb
connections do not have the same
business needs for the high-performance
network as 10Gb ULL users.
The Exchange’s high-performance
network and supporting infrastructure
(including employee support), provides
unparalleled system throughput with
the network ability to support access to
several distinct options markets. To
achieve a consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall network connectivity
expense for storage and network
transport capabilities. The Exchange
must also purchase additional storage
capacity on an ongoing basis to ensure
it has sufficient capacity to store these
messages to satisfy its record keeping
requirements under the Exchange
Act.130 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
130 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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difference in network utilization rate,
the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users
pay for the vast majority of the shared
network resources from which all
market participants’ benefit.
Limited Service MEI Ports
The Exchange believes that the
proposed fees are equitably allocated
among users of the network connectivity
alternatives, as the users of the Limited
Service MEI Ports consume the most
bandwidth and resources of the
network. Specifically, like above for the
10Gb ULL connectivity, the Exchange
notes that the Market Makers who take
the maximum amount of Limited
Service MEI Ports account for
approximately greater than 99% of
message traffic over the network, while
Market Makers with fewer Limited
Service MEI Ports account for
approximately less than 1% of message
traffic over the network. In the
Exchange’s experience, Market Makers
who only utilize the two free Limited
Service MEI Ports do not have a
business need for the high performance
network solutions required by Market
Makers who take the maximum amount
of Limited Service MEI Ports. The
Exchange’s high performance network
solutions and supporting infrastructure
(including employee support), provides
unparalleled system throughput and the
capacity to handle approximately 18
million quote messages per second.
Based on November 2022 trading
results, on an average day, the Exchange
handles over approximately 8.8 billion
quotes, and more than 185 billion
quotes over the entire month. Of that
total, Market Makers with the maximum
amount of Limited Service MEI Ports
generate approximately 5 billion quotes,
and Market Makers who utilize the two
free Limited Service MEI Ports generate
approximately 1.5 billion quotes. Also
for November 2022, Market Makers who
utilized 3 to 4 Limited Service MEI
ports submitted an average of
1,152,654,133 quotes per day and
Market Makers who utilized 5 to 9
Limited Service MEI ports submitted an
average of 1,172,105,181 quotes per day.
To achieve a consistent, premium
network performance, the Exchange
must build out and maintain a network
that has the capacity to handle the
message rate requirements of its most
heavy network consumers. These
billions of messages per day consume
the Exchange’s resources and
significantly contribute to the overall
network connectivity expense for
storage and network transport
capabilities. The Exchange must also
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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.131 Thus, as the number of
connections a Market Maker has
increases, certain other costs incurred
by the Exchange that are correlated to,
though not directly affected by,
connection costs (e.g., storage costs,
surveillance costs, service expenses)
also increase. The Exchange sought to
design the proposed tiered-pricing
structure to set the amount of the fees
to relate to the number of connections
a firm purchases. The more connections
purchased by a Market Maker likely
results in greater expenditure of
Exchange resources and increased cost
to the Exchange. With this in mind, the
Exchange proposes no fee or lower fees
for those Market Makers who receive
fewer Limited Service MEI Ports since
those Market Makers generally tend to
send the least amount of orders and
messages over those connections. Given
this difference in network utilization
rate, the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that Market Makers who
take the most Limited Service MEI Ports
pay for the vast majority of the shared
network resources from which all
Member and non-Member users benefit,
but is designed and maintained from a
capacity standpoint to specifically
handle the message rate and
performance requirements of those
Market Makers.
To achieve a consistent, premium
network performance, the Exchange
must build out and maintain a network
that has the capacity to handle the
message rate requirements of its most
heavy network consumers. Billions of
messages per day consume the
Exchange’s resources and significantly
contribute to the overall network
connectivity expense for storage and
network transport capabilities. The
Exchange must also purchase additional
storage capacity on an ongoing basis to
ensure it has sufficient capacity to store
these messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.132 Thus, as the number of
connections a Market Maker has
increases, the related pull on Exchange
131 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
132 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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resources also increases. The Exchange
sought to design the proposed tieredpricing structure to set the amount of
the fees to relate to the number of
connections a firm purchases. The more
connections purchased by a Market
Maker likely results in greater
expenditure of Exchange resources and
increased cost to the Exchange.
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
10Gb ULL connectivity and Limited
Service MEI Ports at below market rates
to market participants since the
Exchange launched operations. As
described above, the Exchange has
operated at a cumulative net annual loss
since it launched operations in 2012 133
due to providing a low-cost alternative
to attract order flow and encourage
market participants to experience the
high determinism and resiliency of the
Exchange’s trading Systems. To do so,
the Exchange chose to waive the fees for
some non-transaction related services
and Exchange products or provide them
at a very lower fee, which was not
profitable to the Exchange. This resulted
in the Exchange forgoing revenue it
could have generated from assessing any
fees or higher fees. The Exchange could
have sought to charge higher fees at the
outset, but that could have served to
discourage participation on the
Exchange. Instead, the Exchange chose
to provide a low-cost exchange
alternative to the options industry,
which resulted in lower initial
revenues. Examples of this are 10Gb
ULL connectivity and Limited Service
MEI Ports, for which the Exchange only
now seeks to adopt fees at a level
similar to or lower than those of other
options exchanges.
Further, the Exchange does not
believe that the proposed fee increase
for the 10Gb ULL connection change
would place certain market participants
at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. As is
133 See
supra note 129.
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the case with the current proposed flat
fee, the proposed fee would apply
uniformly to all market participants
regardless of the number of connections
they choose to purchase. The proposed
fee does not favor certain categories of
market participants in a manner that
would impose an undue burden on
competition.
The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. In particular,
Exchange personnel has been informally
discussing potential fees for
connectivity services with a diverse
group of market participants that are
connected to the Exchange (including
large and small firms, firms with large
connectivity service footprints and
small connectivity service footprints, as
well as extranets and service bureaus)
for several months leading up to that
time. The Exchange does not believe the
proposed fees for connectivity services
would negatively impact the ability of
Members, non-Members (extranets or
service bureaus), third-parties that
purchase the Exchange’s connectivity
and resell it, and customers of those
resellers to compete with other market
participants or that they are placed at a
disadvantage.
The Exchange does anticipate,
however, that some market participants
may reduce or discontinue use of
connectivity services provided directly
by the Exchange in response to the
proposed fees. In fact, as mentioned
above, one MIAX Pearl Market Maker
terminated their MIAX Pearl
membership on January 1, 2023 as a
direct result of the similar proposed fee
changes by MIAX Pearl.134 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
134 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 52. 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.
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15801
market participant and does not impose
a barrier to entry to smaller participants.
The Exchange believes its proposed
pricing is reasonable and, when coupled
with the availability of third-party
providers that also offer connectivity
solutions, that participation on the
Exchange is affordable for all market
participants, including smaller trading
firms. As described above, the
connectivity services purchased by
market participants typically increase
based on their additional message traffic
and/or the complexity of their
operations. The market participants that
utilize more connectivity services
typically utilize the most bandwidth,
and those are the participants that
consume the most resources from the
network. Accordingly, the proposed fees
for connectivity services do not favor
certain categories of market participants
in a manner that would impose a
burden on competition; rather, the
allocation of the proposed connectivity
fees reflects the network resources
consumed by the various size of market
participants and the costs to the
Exchange of providing such
connectivity services.
Inter-Market Competition
The Exchange also does not believe
that the proposed rule change will result
in any burden on inter-market
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. As discussed
above, options market participants are
not forced to connect to all options
exchanges. There is no reason to believe
that our proposed price increase will
harm another exchange’s ability to
compete. There are other options
markets of which market participants
may connect to trade options at higher
rates than the Exchange’s. There is also
a range of alternative strategies,
including routing to the exchange
through another participant or market
center or accessing the Exchange
indirectly. Market participants are free
to choose which exchange or reseller to
use to satisfy their business needs.
Accordingly, the Exchange does not
believe its proposed fee changes impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
The Exchange also believes that the
proposed fees for 10Gb connectivity are
appropriate and warranted in light of it
bifurcating 10Gb connectivity between
the Exchange and MIAX Pearl and
would not impose any burden on
competition because this is a technology
driven change that would assist the
Exchange in recovering costs related to
providing dedicating 10Gb connectivity
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ddrumheller on DSK120RN23PROD with NOTICES1
to the Exchange while enabling it to
continue to meet current and
anticipated demands for connectivity by
its Members and other market
participants. Separating its 10Gb
network from MIAX Pearl would enable
the Exchange to better compete with
other exchanges by ensuring it can
continue to provide adequate
connectivity to existing and new
Members, which may increase in ability
to compete for order flow and deepen its
liquidity pool, improving the overall
quality of its market.
The proposed rates for 10Gb ULL
connectivity are also driven by the
Exchange’s need to bifurcate its 10Gb
ULL network shared with MIAX Pearl
so that it can continue to meet current
and anticipated connectivity demands
of all market participants. Similarly, and
also in connection with a technology
change, Cboe Exchange, Inc. (‘‘Cboe’’)
amended access and connectivity fees,
including port fees.135 Specifically,
Cboe adopted certain logical ports to
allow for the delivery and/or receipt of
trading messages—i.e., orders, accepts,
cancels, transactions, etc. Cboe
established tiered pricing for BOE and
FIX logical ports, tiered pricing for BOE
Bulk ports, and flat prices for DROP,
Purge Ports, GRP Ports and Multicast
PITCH/Top Spin Server Ports. Cboe
argued in its fee proposal that the
proposed pricing more closely aligned
its access fees to those of its affiliated
exchanges, and reasonably so, as the
affiliated exchanges offer substantially
similar connectivity and functionality
and are on the same platform that Cboe
migrated to.136 Cboe also justified its
proposal by stating that, ‘‘. . . the
Exchange believes substitutable
products and services are in fact
available to market participants,
including, among other things, other
options exchanges a market participant
may connect to in lieu of the Exchange,
indirect connectivity to the Exchange
via a third-party reseller of connectivity
and/or trading of any options product,
including proprietary products, in the
Over-the-Counter (OTC) markets.’’ 137
Cboe stated in its proposal that,
The rule structure for options exchanges
are also fundamentally different from those
of equities exchanges. In particular, options
market participants are not forced to connect
to (and purchase market data from) all
options exchanges. For example, there are
many order types that are available in the
equities markets that are not utilized in the
options markets, which relate to mid-point
pricing and pegged pricing which require
connection to the SIPs and each of the
equities exchanges in order to properly
execute those orders in compliance with best
execution obligations. Additionally, in the
options markets, the linkage routing and
trade through protection are handled by the
exchanges, not by the individual members.
Thus not connecting to an options exchange
or disconnecting from an options exchange
does not potentially subject a broker-dealer to
violate order protection requirements. Gone
are the days when the retail brokerage firms
(such as Fidelity, Schwab, and eTrade) were
members of the options exchanges—they are
not members of the Exchange or its affiliates,
they do not purchase connectivity to the
Exchange, and they do not purchase market
data from the Exchange. Accordingly, not
only is there not an actual regulatory
requirement to connect to every options
exchange, the Exchange believes there is also
no ‘‘de facto’’ or practical requirement as
well, as further evidenced by the recent
significant reduction in the number of
broker-dealers that are members of all
options exchanges.138
The proposal also referenced the
National Market System Plan Governing
the Consolidated Audit Trail (‘‘CAT
NMS Plan’’),139 wherein the
Commission discussed the existence of
competition in the marketplace
generally, and particularly for
exchanges with unique business
models. The Commission acknowledged
that, even if an exchange were to exit
the marketplace due to its proposed feerelated change, it would not
significantly impact competition in the
market for exchange trading services
because these markets are served by
multiple competitors.140 Further, the
Commission explicitly stated that
‘‘[c]onsequently, demand for these
services in the event of the exit of a
competitor is likely to be swiftly met by
existing competitors.’’ 141 Finally, the
Commission recognized that while some
exchanges may have a unique business
model that is not currently offered by
competitors, a competitor could create
similar business models if demand were
adequate, and if a competitor did not do
so, the Commission believes it would be
likely that new entrants would do so if
the exchange with that unique business
model was otherwise profitable.142
Cboe also filed to establish a monthly
fee for Certification Logical Ports of
$250 per Certification Logical Port.143
138 Id.
at 71676.
Securities Exchange Act Release No.
86901 (September 9, 2019), 84 FR 48458 (September
13, 2019) (File No. S7–13–19).
140 Id.
141 Id.
142 Id.
143 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
139 See
135 See Securities Exchange Act Release No.
90333 (November 4, 2020), 85 FR 71666 (November
10, 2020) (SR–CBOE–2020–105). The Exchange
notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
136 Id. at 71676.
137 Id.
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Cboe reasoned that purchasing
additional Certification Logical Ports,
beyond the one Certification Logical
Port per logical port type offered in the
production environment free of charge,
is voluntary and not required in order
to participate in the production
environment, including live production
trading on the Exchange.144
In its statutory basis, Cboe justified
the new port fee by stating that it
believed the Certification Logical Port
fee were reasonable because while such
ports were no longer completely free,
TPHs and non-TPHs would continue to
be entitled to receive free of charge one
Certification Logical Port for each type
of logical port that is currently offered
in the production environment.145 Cboe
noted that other exchanges assess
similar fees and cited to NASDAQ LLC
and MIAX.146 Cboe also noted that the
decision to purchase additional ports is
optional and no market participant is
required or under any regulatory
obligation to purchase excess
Certification Logical Ports in order to
access the Exchange’s certification
environment.147 Finally, similar
proposals to adopt a Certification
Logical Port monthly fee were filed by
Cboe BYX Exchange, Inc.,148 BZX,149
and Cboe EDGA Exchange, Inc.150
The Cboe fee proposals described
herein were filed subsequent to the D.C.
Circuit decision in Susquehanna Int’l
Grp., LLC v. SEC, 866 F.3d 442 (D.C. Cir.
2017), meaning that such fee filings
were subject to the same (and current)
standard for SEC review and approval as
this proposal. In summary, the
Exchange requests the Commission
apply the same standard of review to
this proposal which was applied to the
various Cboe and Cboe affiliated
markets’ filings with respect to non2022) (SR–Cboe–2022–011). Cboe offers BOE and
FIX Logical Ports, BOE Bulk Logical Ports, DROP
Logical Ports, Purge Ports, GRP Ports and Multicast
PITCH/Top Spin Server Ports. For each type of the
aforementioned logical ports that are used in the
production environment, the Exchange also offers
corresponding ports which provide Trading Permit
Holders and non-TPHs access to the Exchange’s
certification environment to test proprietary
systems and applications (i.e., ‘‘Certification Logical
Ports’’).
144 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
2022) (SR–Cboe–2022–011).
145 Id. at 18426.
146 Id.
147 Id.
148 See Securities Exchange Act Release No.
94507 (March 24, 2002), 87 FR 18439 (March 30,
2022) (SR–CboeBYX–2022–004).
149 See Securities Exchange Act Release No.
94511 (March 24, 2002), 87 FR 18411 (March 30,
2022) (SR–CboeBZX–2022–021).
150 See Securities Exchange Act Release No.
94517 (March 25, 2002), 87 FR 18848 (March 31,
2022) (SR–CboeEDGA–2022–004).
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ddrumheller on DSK120RN23PROD with NOTICES1
transaction fees. If the Commission were
to apply a different standard of review
to this proposal than it applied to other
exchange fee filings it would create a
burden on competition such that it
would impair the Exchange’s ability to
make necessary technology driven
changes, such as bifurcating its 10Gb
ULL network, because it would be
unable to monetize or recoup costs
related to that change and compete with
larger, non-legacy exchanges.
*
*
*
*
*
In conclusion, as discussed
thoroughly above, the Exchange
regrettably believes that the application
of the Revised Review Process and Staff
Guidance has adversely affected 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
The Exchange received one comment
letter on the Initial Proposal.151 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
151 See letter from Brian Sopinsky, General
Counsel, Susquehanna International Group, LLP to
Vanessa Countryman, Secretary, Commission, dated
February 7, 2023.
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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.
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,152 and Rule
19b–4(f)(2) 153 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–
MIAX–2023–08 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2023–08. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–MIAX–2023–08 and should
be submitted on or before April 4, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.154
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–05128 Filed 3–13–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97080; File No. SR–MIAX–
2023–07]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Fees for the ToM
Market Data Product and Establish
Fees for the cToM Market Data Product
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, Miami International Securities
Exchange, LLC (‘‘MIAX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
154 17
152 15
U.S.C. 78s(b)(3)(A)(ii).
153 17 CFR 240.19b–4(f)(2).
PO 00000
Frm 00165
Fmt 4703
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15803
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 88, Number 49 (Tuesday, March 14, 2023)]
[Notices]
[Pages 15782-15803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05128]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97081; File No. SR-MIAX-2023-08]
Self-Regulatory Organizations; Miami International Securities
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Its 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, Miami International Securities Exchange, LLC
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Fee Schedule
(``Fee Schedule'') to amend certain connectivity and port fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings, at MIAX's principal
office, and at the Commission's Public Reference Room.
[[Page 15783]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule as follows: (1)
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'')
fiber connection for Members \3\ and non-Members; and (2) amend the
fees for Limited Service MIAX Express Interface (``MEI'') Ports \4\
available to Market Makers.\5\ The Exchange and its affiliate, MIAX
PEARL, LLC (``MIAX Pearl'') operated 10Gb ULL connectivity (for MIAX
Pearl's options market) on a single shared network that provided access
to both exchanges via a single 10Gb ULL connection. The Exchange last
increased fees for 10Gb ULL connections from $9,300 to $10,000 per
month on January 1, 2021.\6\ At the same time, MIAX Pearl also
increased its 10Gb ULL connectivity fee from $9,300 to $10,000 per
month.\7\ The Exchange and MIAX Pearl shared a combined cost analysis
in those filings due to the single shared 10Gb ULL connectivity network
for both exchanges. In those filings, the Exchange and MIAX Pearl
allocated a combined total of $17.9 million in expenses to providing
10Gb ULL connectivity.\8\
---------------------------------------------------------------------------
\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ MIAX Express Interface is a connection to MIAX systems that
enables Market Makers to submit simple and complex electronic quotes
to MIAX. See Fee Schedule, note 26.
\5\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See Exchange Rule 100.
\6\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
\7\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
\8\ See id.
---------------------------------------------------------------------------
Beginning in late January 2023, the Exchange also recently
determined a substantial operational need to no longer operate 10Gb ULL
connectivity on a single shared network with MIAX Pearl. The Exchange
is bifurcating 10Gb ULL connectivity due to ever-increasing capacity
constraints and to enable it to continue to satisfy the anticipated
access needs for Members and other market participants.\9\ Since the
time of 2021 increase discussed above, the Exchange experienced ongoing
increases in expenses, particularly internal expenses.\10\ As discussed
more fully below, the Exchange recently calculated increased annual
aggregate costs of $12,034,554 for providing 10Gb ULL connectivity on a
single unshared network (an overall increase over its prior cost to
provide 10Gb ULL connectivity on a shared network with MIAX Pearl) and
$2,157,178 for providing Limited Service MEI Ports.
---------------------------------------------------------------------------
\9\ See MIAX Options and MIAX Pearl Options--Announce planned
network changes related to shared 10G ULL extranet, issued August
12, 2022, available at https://www.miaxoptions.com/alerts/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-related-0. The Exchange will continue to provide access to
both the Exchange and MIAX Pearl over a single shared 1Gb
connection. See Securities Exchange Act Release Nos. 96553 (December
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
\10\ 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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Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity services.
Subscribers expect the Exchange to provide this level of support so
they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and Limited Service MEI Ports in order
to recoup cost related to bifurcating 10Gb connectivity to the Exchange
and MIAX Pearl as well as the ongoing costs and increase in expenses
set forth below in the Exchange's cost analysis.\11\ 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-MIAX-2022-50) (the ``Initial Proposal'').\12\ The
Exchange recently withdrew the Initial Proposal and replaced it with
this current proposal (SR-MIAX-2023-08).
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\11\ The Exchange notes that MIAX Pearl will make a similar
filing to increase its 10Gb ULL connectivity fees.
\12\ See Securities Exchange Act Release No. 96629 (January 10,
2023), 88 FR 2729 (January 17, 2023) (SR-MIAX-2022-50).
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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 (MIAX Pearl (separately among MIAX Pearl Options
and MIAX Pearl Equities) and MIAX Emerald, LLC (``MIAX Emerald,''
together with MIAX Pearl Options and MIAX Pearl Equities, 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
Limited Service MEI 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 \13\ 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
[[Page 15784]]
a practice of ``unquestioning reliance'' on claims made by a self-
regulatory organization (``SRO'') in the course of filing a rule or fee
change with the Commission.\14\ 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.\15\ 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'').\16\ 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.'' \17\ The Commission denied requests
by various exchanges and plan participants for reconsideration of the
Remand Order.\18\ 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.'' \19\ Both the Remand Order and
the Order Denying Reconsideration were appealed to the D.C. Circuit.
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\13\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\14\ Id.
\15\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\16\ 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).
\17\ Id. at page 2.
\18\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\19\ 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.\20\ 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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\20\ 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.'' \21\ 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.'' \22\ 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.'' \23\
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\21\ 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'').
\22\ Id.
\23\ 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 \24\ and remanded for further proceedings consistent
with its opinion.\25\ 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.'' \26\
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.\27\ 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.''
\28\ 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.\29\
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\24\ 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.
\25\ 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.
\26\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\27\ 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'').
\28\ Id.
\29\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ v. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \30\
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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\30\ See supra note 16, at page 2.
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[[Page 15785]]
While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\31\ 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 \32\ 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.\33\ These fees
remain in effect today.
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\31\ 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.
\32\ 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.
\33\ 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.\34\
By impeding any path forward for non-legacy exchanges to establish
commensurate non-transaction fees, or by failing to provide any
alternative means for smaller markets to establish ``fee parity'' with
legacy exchanges, the Commission is stifling competition: non-legacy
exchanges are, in effect, being deprived of the revenue necessary to
compete on a level playing field with legacy exchanges. This is
particularly harmful, given that the costs to maintain exchange systems
and operations continue to increase. The Commission Staff's change in
position impedes the ability of non-legacy exchanges to raise revenue
to invest in their systems to compete with the legacy exchanges who
already enjoy disproportionate non-transaction fee based revenue. For
example, the Cboe Exchange, Inc. (``Cboe'') reported ``access and
capacity fee'' revenue of $70,893,000 for 2020 \35\ and $80,383,000 for
2021.\36\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \37\ and $22,843,000 for
2021.\38\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \39\ and $44,800,000 for
2021.\40\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \41\ and $30,687,000 for
2021.\42\ 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.\43\ 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.'' \44\
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\34\ The Exchange has filed, and subsequently withdrawn, various
forms of this proposed fee change numerous times since August 2021
with each proposal containing hundreds of cost and revenue
disclosures never previously disclosed by legacy exchanges in their
access and market data fee filings prior to 2019.
\35\ 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.
\36\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\37\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\38\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\39\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\40\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\41\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\42\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\43\ 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.
\44\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf. The Exchange
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 15786]]
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,\45\ 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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\45\ 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 . . .'',\46\ this is not the reality experienced by
exchanges such as MIAX. As such, non-legacy exchanges are forced to
rely on an opaque cost-based justification standard. However, because
the Staff Guidance is devoid of detail on what must be contained in
cost-based justification, this standard is nearly impossible to meet
despite repeated good-faith efforts by the Exchange to provide
substantial amount of cost-related details. The Exchange has attempted
to increase fees using a cost-based justification numerous times,
having submitted over six filings.\47\ 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 \48\ 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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\46\ See supra note 21, at note 1.
\47\ See Securities Exchange Act Release Nos. 94890 (May 11,
2022), 87 FR 29945 (May 17, 2022) (SR-MIAX-2022-20); 94720 (April
14, 2022), 87 FR 23586 (April 20, 2022) (SR-MIAX-2022-16); 94719
(April 14, 2022), 87 FR 23600 (April 20, 2022) (SR-MIAX-2022-14);
94259 (February 15, 2022), 87 FR 9747 (February 22, 2022) (SR-MIAX-
2022-08); 94256 (February 15, 2022), 87 FR9711 (February 22, 2022)
(SR-MIAX-2022-07); 93771 (December 14, 2021), 86 FR 71940 (December
20, 2021) (SR-MIAX-2021-60); 93775 (December 14, 2021), 86 FR 71996
(December 20, 2021) (SR-MIAX-2021-59); 93185 (September 29, 2021),
86 FR 55093 (October 5, 2021) (SR-MIAX-2021-43); 93165 (September
28, 2021), 86 FR 54750 (October 4, 2021) (SR-MIAX-2021-41); 92661
(August 13, 2021), 86 FR 46737 (August 19, 2021) (SR-MIAX-2021-37);
92643 (August 11, 2021), 86 FR 46034 (August 17, 2021) (SR-MIAX-
2021-35).
\48\ 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,\49\ 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; \50\ 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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\49\ 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.
\50\ 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 places a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other options exchanges for connectivity. If the Commission Staff
were to disapprove this proposal, that action, and not market forces,
would substantially affect whether the Exchange can be successful in
its competition with other options exchanges. Disapproval of this
filing could also be viewed as an arbitrary and capricious decision
should the Commission Staff continue to ignore its past treatment of
non-transaction fee filings before implementation of the Revised Review
Process and Staff Guidance and refuse to allow such filings to be
approved despite significantly enhanced arguments and cost
disclosures.\51\
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\51\ 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
[[Page 15787]]
fee increases by other exchanges to remain in effect by publishing
those filings for comment and allowing the exchange to withdraw and re-
file numerous times.\52\ Recently, the Commission Staff has not
afforded the Exchange the same flexibility.\53\ 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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\52\ 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).
\53\ See Securities Exchange Act Release Nos. 94719 (April 14,
2022), 87 FR 23600 (April 20, 2022) (SR-MIAX-2022-14) and 94720
(April 14, 2022), 87 FR 23586 (April 20, 2022) (SR-MIAX-2022-16).
---------------------------------------------------------------------------
* * * * *
10Gb ULL Connectivity Fee Change
The Exchange recently filed a proposal to no longer operate 10Gb
connectivity to the Exchange on a single shared network with its
affiliate, MIAX Pearl. This change is an operational necessity due to
ever-increasing capacity constraints and to accommodate anticipated
access needs for Members and other market participants.\54\ This
proposal: (i) sets forth the applicable fees for the bifurcated 10Gb
ULL network; and (ii) removes provisions in the Fee Schedule that
provides for a shared 10Gb ULL network; and (iii) specifies that market
participants may continue to connect to both the Exchange and MIAX
Pearl via the 1Gb network.
---------------------------------------------------------------------------
\54\ See supra note 9.
---------------------------------------------------------------------------
The Exchange bifurcated the Exchange and MIAX Pearl 10Gb ULL
networks on January 23, 2023. The Exchange issued an alert on August
12, 2022 publicly announcing the planned network change and
implementation plan and dates to provide market participants adequate
time to prepare.\55\ Upon bifurcation of the 10Gb ULL network,
subscribers would need to purchase separate connections to the Exchange
and MIAX at the applicable rate. The Exchange's proposed amended rate
for 10Gb ULL connectivity is described below. Until the 10Gb ULL
network is bifurcated, subscribers to 10Gb ULL connectivity would be
able to connect to both the Exchange and MIAX Pearl at the applicable
rate set forth below.
---------------------------------------------------------------------------
\55\ Id.
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The Exchange, therefore, proposes to amend the Fee Schedule to
increase the fees for Members and non-Members to access the Exchange's
system networks \56\ via a 10Gb ULL fiber connection and to specify
that this fee is for a dedicated connection to the Exchange and no
longer provides access to MIAX Pearl. Specifically, the Exchange
proposes to amend Sections 5(a)-(b) of the Fee Schedule to increase the
10Gb ULL connectivity fee for Members and non-Members from $10,000 per
month to $13,500 per month (``10Gb ULL Fee'').\57\ The Exchange also
proposes to amend the Fee Schedule to reflect the bifurcation of the
10Gb ULL network and specify that only the 1Gb network provides access
to both the Exchange and MIAX Pearl.
---------------------------------------------------------------------------
\56\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\57\ Market participants that purchase additional 10Gb ULL
connections as a result of this change will not be subject to the
Exchange's Member Network Connectivity Testing and Certification Fee
under Section 4(c) of the Exchange's fee schedule. See Section 4(c)
of the Exchange's fee schedule available at https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10192022.pdf (providing that ``Network
Connectivity Testing and Certification Fees will not be assessed in
situations where the Exchange initiates a mandatory change to the
Exchange's system that requires testing and certification. Member
Network Connectivity Testing and Certification Fees will not be
assessed for testing and certification of connectivity to the
Exchange's Disaster Recovery Facility.'').
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The Exchange proposes to make the following changes to reflect the
bifurcated 10Gb ULL network for the Exchange and MIAX Pearl. The
Exchange proposes to amend the explanatory paragraphs below the network
connectivity fee tables in Sections 5(a)-(b) of the Fee Schedule to
specify that, with the bifurcated 10Gb ULL network, Members (and non-
Members) utilizing the MENI to connect to the trading platforms, market
data systems, test systems, and disaster recovery facilities of the
Exchange and MIAX Pearl via a single, can only do so via a shared 1Gb
connection.
The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange will continue to pro-rate the fees when a
Member or non-Member makes a change to the connectivity (by adding or
deleting connections) with such pro-rated fees based on the number of
trading days that the Member or non-Member has been credentialed to
utilize any of the Exchange APIs or market data feeds in the production
environment through such connection, divided by the total number of
trading days in such month multiplied by the applicable monthly rate.
Limited Service MEI Ports
Background
The Exchange also proposes to amend Section 5(d) of the Fee
Schedule to adopt a tiered-pricing structure for Limited Service MEI
Ports available to Market Makers. The Exchange allocates two (2) Full
Service MEI Ports \58\ and two (2) Limited Service MEI Ports \59\ per
matching engine \60\ to which each Market Maker connects. Market Makers
may also request additional Limited Service MEI Ports for each matching
engine to which they connect. The Full Service MEI Ports and Limited
Service MEI Ports all include access to the Exchange's primary and
secondary data centers and its disaster recovery center. Market Makers
may request additional Limited Service MEI Ports. Currently, Market
Makers are assessed a $100 monthly fee for each Limited Service MEI
Port for each matching engine above the first two Limited Service MEI
[[Page 15788]]
Ports that are included for free. This fee was unchanged since
2016.\61\
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\58\ Full Service MEI Ports provide Market Makers with the
ability to send Market Maker quotes, eQuotes, and quote purge
messages to the MIAX System. Full Service MEI Ports are also capable
of receiving administrative information. Market Makers are limited
to two Full Service MEI Ports per matching engine. See Fee Schedule,
Section 5(d)(ii), note 27.
\59\ Limited Service MEI Ports provide Market Makers with the
ability to send eQuotes and quote purge messages only, but not
Market Maker Quotes, to the MIAX System. Limited Service MEI Ports
are also capable of receiving administrative information. Market
Makers initially receive two Limited Service MEI Ports per matching
engine. See Fee Schedule, Section 5(d)(ii), note 28.
\60\ A ``matching engine'' is a part of the MIAX electronic
system that processes options quotes and trades on a symbol-by-
symbol basis. Some matching engines will process option classes with
multiple root symbols, and other matching engines will be dedicated
to one single option root symbol (for example, options on SPY will
be processed by one single matching engine that is dedicated only to
SPY). A particular root symbol may only be assigned to a single
designated matching engine. A particular root symbol may not be
assigned to multiple matching engines. See Fee Schedule, Section
5(d)(ii), note 29.
\61\ See Securities Exchange Act Release No. 79666 (December 22,
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47).
---------------------------------------------------------------------------
Limited Service MEI Port Fee Changes
The Exchange now proposes to move from a flat monthly fee per
Limited Service MEI Port for each matching engine to a tiered-pricing
structure for Limited Service MEI Ports for each matching engine under
which the monthly fee would vary depending on the number of Limited
Service MEI Ports each Market Maker elects to purchase. Specifically,
the Exchange will continue to provide the first and second Limited
Service MEI Ports for each matching engine free of charge. For Limited
Service MEI Ports, the Exchange proposes to adopt the following tiered-
pricing structure: (i) the third and fourth Limited Service MEI Ports
for each matching engine will increase from the current flat monthly
fee of $100 to $150 per port; (ii) the fifth and sixth Limited Service
MEI Ports for each matching engine will increase from the current flat
monthly fee of $100 to $200 per port; and (iii) the seventh or more
Limited Service MEI Ports will increase from the current monthly flat
fee of $100 to $250 per port. The Exchange believes a tiered-pricing
structure will encourage Market Makers to be more efficient when
determining how to connect to the Exchange. This should also enable the
Exchange to better monitor and provide access to the Exchange's network
to ensure sufficient capacity and headroom in the System \62\ in
accordance with its fair access requirements under Section 6(b)(5) of
the Act.\63\
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\62\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
\63\ See 15 U.S.C. 78f(b). The Exchange may offer access on
terms that are not unfairly discriminatory among its Members, and
ensure sufficient capacity and headroom in the System. The Exchange
monitors the System's performance and makes adjustments to its
System based on market conditions and Member demand.
---------------------------------------------------------------------------
The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, Market Makers who take the maximum amount of Limited
Service MEI Ports account for approximately greater than 99% of message
traffic over the network, while Market Makers with fewer Limited
Service MEI Ports account for approximately less than 1% of message
traffic over the network. In the Exchange's experience, Market Makers
who only utilize the two free Limited Service MEI Ports do not have a
business need for the high performance network solutions required by
Market Makers who take the maximum amount of Limited Service MEI Ports.
The Exchange's high performance network solutions and supporting
infrastructure (including employee support), provides unparalleled
system throughput and the capacity to handle approximately 18 million
quote messages per second. Based on November 2022 trading results, on
an average day, the Exchange handles over approximately 8.8 billion
quotes, and more than 185 billion quotes over the entire month. Of that
total, Market Makers with the maximum amount of Limited Service MEI
Ports generated approximately 5 billion quotes, and Market Makers who
utilized the two free Limited Service MEI Ports generated approximately
1.5 billion quotes. Also for November 2022, Market Makers who utilized
3 to 4 Limited Service MEI ports submitted an average of 1,152,654,133
quotes per day and Market Makers who utilized 5 to 9 Limited Service
MEI ports submitted an average of 1,172,105,181 quotes per day. To
achieve a consistent, premium network performance, the Exchange must
build out and maintain a network that has the capacity to handle the
message rate requirements of its most heavy network consumers. These
billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. The Exchange must also
purchase additional storage capacity on an ongoing basis to ensure it
has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\64\ Thus, as the number of connections a Market
Maker has increases, certain other costs incurred by the Exchange that
are correlated to, though not directly affected by, connection costs
(e.g., storage costs, surveillance costs, service expenses) also
increase. The Exchange sought to design the proposed tiered-pricing
structure to set the amount of the fees to relate to the number of
connections a firm purchases. The more connections purchased by a
Market Maker likely results in greater expenditure of Exchange
resources and increased cost to the Exchange. With this in mind, the
Exchange proposes no fee or lower fees for those Market Makers who
receive fewer Limited Service MEI Ports since those Market Makers
generally tend to send the least amount of orders and messages over
those connections. Given this difference in network utilization rate,
the Exchange believes that it is reasonable, equitable, and not
unfairly discriminatory that Market Makers who take the most Limited
Service MEI Ports pay for the vast majority of the shared network
resources from which all Member and non-Member users benefit, but is
designed and maintained from a capacity standpoint to specifically
handle the message rate and performance requirements of those Market
Makers.
---------------------------------------------------------------------------
\64\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange proposes to increase its monthly Limited Service MEI
Port fees since it has not done so since 2016,\65\ which is designed to
recover a portion of the costs associated with directly accessing the
Exchange.
---------------------------------------------------------------------------
\65\ See Securities Exchange Act Release No. 79666 (December 22,
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47).
---------------------------------------------------------------------------
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 \66\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \67\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of Section 6(b)(5) of the Act \68\ 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.
---------------------------------------------------------------------------
\66\ 15 U.S.C. 78f(b).
\67\ 15 U.S.C. 78f(b)(4).
\68\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes under the Revised Review Process and as set
forth in recent Staff Guidance. Based on both the BOX Order \69\ and
the Staff Guidance,\70\ the Exchange believes that the proposed
[[Page 15789]]
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.
---------------------------------------------------------------------------
\69\ See supra note 20.
\70\ See supra note 21.
---------------------------------------------------------------------------
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.''
\71\ 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.'' \72\ 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.'' \73\
---------------------------------------------------------------------------
\71\ Id.
\72\ Id.
\73\ Id.
---------------------------------------------------------------------------
The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 10Gb ULL connectivity (driven by the bifurcation of the 10Gb ULL
network) and Limited Service MEI Ports. As discussed above, the Revised
Review Process and Staff Guidance have created an uneven playing field
between legacy and non-legacy exchanges by severely restricting non-
legacy exchanges from being able to increase non-transaction related
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 Member firms. The absence of a
reasonable path forward to increase non-transaction fees to comparable
(or lower rates) limits the Exchange's flexibility to, among other
things, make additional investments in infrastructure and advertising,
diminishes the ability to remain competitive on transaction fees, and
hinders the ability to compete for order flow and market share. Again,
while one could debate whether the pricing of non-transaction fees are
subject to the same market forces as transaction fees, there is little
doubt that subjecting one exchange to a materially different standard
than that applied to other exchanges for non-transaction fees leaves
that exchange at a disadvantage in its ability to compete with its
pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations in 2012 and adopted its initial
fee schedule, with all connectivity and port fees set at $0.00 (the
Exchange originally had a non-ULL 10Gb connectivity option, which it
has since removed).\74\ As a new exchange entrant, the Exchange chose
to offer connectivity and ports free of charge to encourage market
participants to trade on the Exchange and experience, among things, the
quality of the Exchange's technology and trading functionality. This
practice is not uncommon. New exchanges often do not charge fees or
charge lower fees for certain services such as memberships/trading
permits to attract order flow to an exchange, and later amend their
fees to reflect the true value of those services, absorbing all costs
to provide those services in the meantime. Allowing new exchange
entrants time to build and sustain market share through various pricing
incentives before increasing non-transaction fees encourages market
entry and fee parity, which promotes competition among exchanges. It
also enables new exchanges to mature their markets and allow market
participants to trade on the new exchanges without fees serving as a
potential barrier to attracting memberships and order flow.\75\
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\74\ See Securities Exchange Act Release No. 68415 (December 12,
2012), 77 FR 74905 (December 18, 2012) (SR-MIAX-2012-01).
\75\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX . . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
---------------------------------------------------------------------------
Later in 2013, as the Exchange's market share increased,\76\ the
Exchange adopted a nominal $10 fee for each additional Limited Service
MEI Port.\77\ The Exchange last increased the fees for its 10Gb ULL
fiber connections from $9,300 to $10,000 per month on January 1,
2021.\78\ 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.
---------------------------------------------------------------------------
\76\ The Exchange experienced a monthly average equity options
trading volume of 1.87% for the month of November 2013. See Market
at a Glance, available at www.miaxoptions.com.
\77\ See Securities Exchange Act Release No. 70903 (November 20,
2013), 78 FR 70615 (November 26, 2013) (SR-MIAX-2013-52).
\78\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
---------------------------------------------------------------------------
The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
[[Page 15790]]
competitive forces, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. The fact that the
market for order flow is competitive has long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers' . . . .'' \79\
---------------------------------------------------------------------------
\79\ 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.'' \80\
---------------------------------------------------------------------------
\80\ 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.' '' \81\ 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.'' \82\ 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.'' \83\ 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.'' \84\
---------------------------------------------------------------------------
\81\ 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.'').
\82\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\83\ Id.
\84\ See supra note 21.
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The Exchange believes the competing exchanges' 10Gb connectivity
and port fees are useful examples of alternative approaches to
providing and charging for access and demonstrating how such fees are
competitively set and constrained. To that end, the Exchange believes
the proposed fees are competitive and reasonable because the proposed
fees are similar to or less than fees charged for similar connectivity
and port access provided by other options exchanges with comparable
market shares. As such, the Exchange believes that denying its ability
to institute fees that allow us to recoup our costs and some margin in
a manner that is 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 options exchanges with similar market share.
Each of the market data rates in place at competing options exchanges
were filed with the Commission for immediate effectiveness and remain
in place today.
----------------------------------------------------------------------------------------------------------------
Type of connection
Exchange or port Monthly fee (per connection or per port)
----------------------------------------------------------------------------------------------------------------
MIAX (as proposed) (equity options market 10Gb ULL connection $13,500.
share of 5.64% for the month of November Limited Service MEI 1-2 ports: FREE (not changed in this
2022) \85\. Ports. proposal).
3-4 ports: $150 each.
5-6 ports: $200 each.
7 or more ports: $250 each.
NASDAQ \86\ (equity options market share of 10Gb Ultra fiber $15,000 per connection.
6.61% for the month of November 2022) \87\. connection. 1-5 ports: $1,500 per port.
SQF Port \88\...... 6-20 ports: $1,000 per port.
21 or more ports: $500 per port.
NASDAQ ISE LLC (``ISE'') \89\ (equity options 10Gb Ultra fiber $15,000 per connection.
market share of 5.76% for the month of connection. $1,100 per port.
November 2022) \90\. SQF Port...........
NYSE American LLC (``NYSE American'') \91\ 10Gb LX LCN $22,000 per connection.
(equity options market share of 6.41% for connection. 1-40 ports: $450 per port.
the month of November 2022) \92\. Order/Quote Entry 41 or more ports: $150 per port.
Port.
NASDAQ GEMX, LLC (``GEMX'') \93\ (equity 10Gb Ultra $15,000 per connection.
options market share of 1.79% for the month connection. $1,250 per port.
of November 2022) \94\. SQF Port...........
----------------------------------------------------------------------------------------------------------------
There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options
exchanges. Market participants may choose to become a member of one or
more options exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, the Exchange's affiliate,
[[Page 15791]]
MIAX PEARL, LLC (``MIAX Pearl''), experienced a decrease in membership
as the result of similar fees proposed herein. One MIAX Pearl 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.
---------------------------------------------------------------------------
\85\ See supra note 76.
\86\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\87\ See supra note 76.
\88\ Similar to the Exchange's MEI Ports, SQF ports are
primarily utilized by Market Makers.
\89\ See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8: Connectivity.
\90\ See supra note 76.
\91\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
\92\ See supra note 76.
\93\ See GEMX Pricing Schedule, Options 7, Section 6,
Connectivity Fees and GEMX Rules, General 8: Connectivity.
\94\ See supra note 76.
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It is not a requirement for market participants to become members
of all options exchanges, in fact, certain market participants conduct
an options business as a member of only one options market.\95\ A very
small number of market participants choose to become a member of all
sixteen options exchanges. Most firms that actively trade on options
markets are not currently Members of the Exchange and do not purchase
connectivity or port services at the Exchange. Connectivity and ports
are only available to Members or service bureaus, and only a Member may
utilize a port.\96\
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\95\ 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.''
\96\ Service Bureaus may obtain ports on behalf of Members.
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One other exchange recently noted in a proposal to amend their own
trading permit fees that of the 62 market making firms that are
registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access
only one of the three exchanges.\97\ The Exchange and its affiliates,
MIAX Pearl and MIAX Emerald, have a total of 47 members. Of those 47
total members, 35 are members of all three affiliated exchanges, four
are members of only two (2) affiliated exchanges, and eight (8) are
members of only one affiliated exchange. The Exchange also notes that
no firm is a Member of the Exchange only. The above data evidences that
a broker-dealer need not have direct connectivity to all options
exchanges, let alone the Exchange and its two affiliates, and broker-
dealers may elect to do so based on their own business decisions and
need to directly access each exchange's liquidity pool.
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\97\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change to Amend the
Fee Schedule on the BOX Options Market LLC Facility To Adopt
Electronic Market Maker Trading Permit Fees). The Exchange believes
that BOX's observation demonstrates that market making firms can,
and do, select which exchanges they wish to access, and,
accordingly, options exchanges must take competitive considerations
into account when setting fees for such access.
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Not only is there not an actual regulatory requirement to connect
to every options exchange, the Exchange believes there is also no ``de
facto'' or practical requirement as well, as further evidenced by the
broker-dealer membership analysis of the options exchanges discussed
above. As noted above, this is evidenced by the fact that one MIAX
Pearl 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 (which are similar to the changes
proposed herein). Indeed, broker-dealers choose if and how to access a
particular exchange and because it is a choice, the Exchange must set
reasonable pricing, otherwise prospective members would not connect and
existing members would disconnect from the Exchange. The decision to
become a member of an exchange, particularly for registered market
makers, is complex, and not solely based on the non-transactional costs
assessed by an exchange. As noted herein, specific factors include, but
are not limited to: (i) an exchange's available liquidity in options
series; (ii) trading functionality offered on a particular market;
(iii) product offerings; (iv) customer service on an exchange; and (v)
transactional pricing. Becoming a member of the exchange does not
``lock'' a potential member into a market or diminish the overall
competition for exchange services.
In lieu of becoming a member at each options exchange, a market
participant may join one exchange and elect to have their orders routed
in the event that a better price is available on an away market.
Nothing in the Order Protection Rule requires a firm to become a Member
at--or establish connectivity to--the Exchange.\98\ 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.\99\
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\98\ See Options Order Protection and Locked/Crossed Market Plan
(August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
\99\ Members may elect to not route their orders by utilizing
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------
With respect to the submission of orders, Members may also choose
not to purchase any connection at all from the Exchange, and instead
rely on the port of a third party to submit an order. For example, a
third-party broker-dealer Member of the Exchange may be utilized by a
retail investor to submit orders into an Exchange. An institutional
investor may utilize a broker-dealer, a service bureau,\100\ or request
sponsored access \101\ through a member of an exchange in order to
submit a trade directly to an options exchange.\102\ A market
participant may either pay the costs associated with becoming a member
of an exchange or, in the alternative, a market participant may elect
to pay commissions to a broker-dealer, pay fees to a service bureau to
submit trades, or pay a member to sponsor the market participant in
order to submit trades directly to an exchange.
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\100\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be a Member. Some Members utilize a Service Bureau for
connectivity and that Service Bureau may not be a Member. Some
market participants utilize a Service Bureau who is a Member to
submit orders.
\101\ Sponsored Access is an arrangement whereby a Member
permits its customers to enter orders into an exchange's system that
bypass the Member's trading system and are routed directly to the
Exchange, including routing through a service bureau or other third-
party technology provider.
\102\ This may include utilizing a floor broker and submitting
the trade to one of the five options trading floors.
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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-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-
[[Page 15792]]
party).\103\ Indeed, the Exchange does not receive any connectivity
revenue when connectivity is resold by a third-party, which often is
resold to multiple customers, some of whom are agency broker-dealers
that have numerous customers of their own.\104\ Particularly, in the
event that a market participant views the Exchange's direct
connectivity and access fees as more or less attractive than competing
markets, that market participant can choose to connect to the Exchange
indirectly or may choose not to connect to the Exchange and connect
instead to one or more of the other 16 options markets. Accordingly,
the Exchange believes that the proposed fees are fair and reasonable
and constrained by competitive forces.
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\103\ 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).
\104\ 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 Exchange is obligated to regulate its Members and secure access
to its environment. In order to properly regulate its Members and
secure the trading environment, the Exchange takes measures to ensure
access is monitored and maintained with various controls. Connectivity
and ports are methods utilized by the Exchange to grant Members secure
access to communicate with the Exchange and exercise trading rights.
When a market participant elects to be a Member, and is approved for
membership by the Exchange, the Member is granted trading rights to
enter orders and/or quotes into Exchange through secure connections.
Again, there is no legal or regulatory requirement that a market
participant become a Member of the Exchange. This is again evidenced by
the fact that one MIAX Pearl 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. If a market
participant chooses to become a 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.
Bifurcation of 10Gb ULL Connectivity and Related Fees
The Exchange began to operate on a single shared network with MIAX
Pearl when MIAX Pearl commenced operations as a national securities
exchange on February 7, 2017.\105\ The Exchange and MIAX Pearl have
operated on a single shared network to provide Members with a single
convenient set of access points for both exchanges. Both the Exchange
and MIAX Pearl offer two methods of connectivity, 1Gb and 10Gb ULL
connections. The 1Gb connection services are supported by a discrete
set of switches providing 1Gb access ports to Members. The 10Gb ULL
connection services are supported by a second and mutually exclusive
set of switches providing 10Gb ULL access ports to Members. Previously,
both the 1Gb and 10Gb ULL shared extranet ports allow Members to use
one connection to access both exchanges, namely their trading
platforms, market data systems, test systems, and disaster recovery
facilities.
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\105\ See Securities Exchange Act Release No. 80061 (February
17, 2017), 82 FR 11676 (February 24, 2017) (establishing MIAX Pearl
Fee Schedule and establishing that the MENI can also be configured
to provide network connectivity to the trading platforms, market
data systems, test systems, and disaster recovery facility of the
MIAX Pearl's affiliate, MIAX, via a single, shared connection).
---------------------------------------------------------------------------
The Exchange stresses that bifurcating the 10Gb ULL connectivity
between the Exchange and MIAX Pearl was not designed with the objective
to generate an overall increase in access fee revenue. Rather, the
proposed change was necessitated by 10Gb ULL connectivity experiencing
a significant decrease in port availability mostly driven by
connectivity demands of latency sensitive Members that seek to maintain
multiple 10Gb ULL connections on every switch in the network. Operating
two separate national securities exchanges on a single shared network
provided certain benefits, such as streamlined connectivity to multiple
exchanges, and simplified exchange infrastructure. However, doing so
was no longer sustainable due to ever-increasing capacity constraints
and current system limitations. The network is not an unlimited
resource. As described more fully in the proposal to bifurcate the 10Gb
ULL network,\106\ the connectivity needs of Members and market
participants has increased every year since the launch of MIAX Pearl
and the operations of the Exchange and MIAX Pearl on a single shared
10Gb ULL network is no longer feasible. This required constant System
expansion to meet Member demand for additional ports and 10Gb ULL
connections has resulted in limited available System headroom, which
eventually became operationally problematic for both the Exchange and
its customers.
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\106\ See Securities Exchange Act Release Nos. 96553 (December
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
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As stated above, the shared network is not an unlimited resource
and its expansion was constrained by MIAX's and MIAX Pearl's ability to
provide fair and equitable access to all market participants of both
markets. Due to the ever-increasing connectivity demands, the Exchange
found it necessary to bifurcate 10Gb ULL connectivity to the Exchange's
and MIAX Pearl's Systems and networks to be able to continue to meet
ongoing and future 10Gb ULL connectivity and access demands.\107\
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\107\ Currently, the Exchange maintains sufficient headroom to
meet ongoing and future requests for 1Gb connectivity. Therefore,
the Exchange did not propose to alter 1Gb connectivity and continues
to provide 1Gb connectivity over a shared network.
---------------------------------------------------------------------------
Unlike the switches that provide 1Gb connectivity, the availability
for additional 10Gb ULL connections on each switch had significantly
decreased. This was mostly driven by the connectivity demands of
latency sensitive Members (e.g., Market Makers and liquidity removers)
that sought to maintain connectivity across multiple 10Gb ULL switches.
Based on the Exchange's experience, such Members did not typically use
a shared 10Gb ULL connection to reach both the Exchange and MIAX Pearl
due to related latency concerns. Instead, those Members maintain
dedicated separate 10Gb ULL connections for the Exchange and separate
dedicated 10Gb ULL connections for MIAX Pearl. This resulted in a much
higher 10Gb ULL usage per switch by those Members on the shared 10Gb
ULL network than would otherwise be needed if the Exchange and MIAX
Pearl had their own dedicated 10Gb ULL networks. Separation of the
Exchange and MIAX Pearl 10Gb ULL networks naturally lends itself to
reduced 10Gb ULL port consumption on each switch and, therefore,
increased 10Gb ULL port availability for current Members and new
Members.
Prior to bifurcating the 10Gb ULL network, the Exchange and MIAX
Pearl continued to add switches to meet ongoing demand for 10Gb ULL
connectivity. That was no longer sustainable because simply adding
additional switches to expand the current shared 10Gb ULL network
[[Page 15793]]
would not adequately alleviate the issue of limited available port
connectivity. While it would have resulted in a gain in overall port
availability, the existing switches on the shared 10Gb ULL network in
use would have continued to suffer from lack of port headroom given
many latency sensitive Members' needs for a presence on each switch to
reach both the Exchange and MIAX Pearl. This was because those latency
sensitive Members sought to have a presence on each switch to maximize
the probability of experiencing the best network performance. Those
Members routinely decide to rebalance orders and/or messages over their
various connections to ensure each connection is operating with maximum
efficiency. Simply adding switches to the extranet would not have
resolved the port availability needs on the shared 10Gb ULL network
since many of the latency sensitive Members were unwilling to relocate
their connections to a new switch due to the potential detrimental
performance impact. As such, the impact of adding new switches and
rebalancing ports would not have been effective or responsive to
customer needs. The Exchange has found that ongoing and continued
rebalancing once additional switches are added has had, and would have
continued to have had, a diminishing return on increasing available
10Gb ULL connectivity.
Based on its experience and expertise, the Exchange found the most
practical way to increase connectivity availability on its switches was
to bifurcate the existing 10Gb ULL networks for the Exchange and MIAX
Pearl by migrating the exchanges' connections from the shared network
onto their own set of switches. Such changes accordingly necessitated a
review of the Exchange's previous 10Gb ULL connectivity fees and
related costs. The proposed fees are necessary to allow the Exchange to
cover ongoing costs related to providing and maintaining such
connectivity, described more fully below. The ever increasing
connectivity demands that necessitated this change further support that
the proposed fees are reasonable because this demand reflects that
Members and non-Members believe they are getting value from the 10Gb
ULL connections they purchase.
The Exchange announced on August 12, 2022 the planned network
change and the January 23, 2023 implementation date to provide market
participants adequate time to prepare.\108\ Since August 12, 2022, the
Exchange has worked with current 10Gb ULL subscribers to address their
connectivity needs ahead of the January 23, 2023 date. Based on those
interactions and subscriber feedback, the Exchange experienced a
minimal net increase of approximately six (6) overall 10Gb ULL
connectivity subscriptions across the Exchange and MIAX Pearl. This
anticipated immaterial increase in overall connections reflect a
minimal fee impact for all types of subscribers and reflects that
subscribers elected to reallocate existing 10Gb ULL connectivity
directly to the Exchange or MIAX Pearl, or chose to decrease or cease
connectivity as a result of the change.
---------------------------------------------------------------------------
\108\ See supra note 9.
---------------------------------------------------------------------------
Should the Commission Staff disapprove such fees, it would
effectively dictate how an exchange manages its technology and would
hamper the Exchange's ability to continue to invest in and fund access
services in a manner that allows it to meet existing and anticipated
access demands of market participants. Disapproval could also have the
adverse effect of discouraging exchanges from optimizing its operations
and deploying innovative technology to the benefit of market
participants if it believes the Commission would later prevent that
exchange from covering its costs and monetizing operational
enhancements, thus adversely impacting competition. Also, as noted
above, the economic consequences of not being able to better establish
fee parity with other exchanges for non-transaction fees hampers the
Exchange's ability to compete on transaction fees.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
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 Members--both
generally and in relation to other Members, i.e., to assure the fee
will not create a financial burden on any participant and will not have
an undue impact in particular on smaller Members and competition among
Members in general. The Exchange believes that this level of diligence
and transparency is called for by the requirements of Section 19(b)(1)
under the Act,\109\ and Rule 19b-4 thereunder,\110\ with respect to the
types of information SROs should provide when filing fee changes, and
Section 6(b) of the Act,\111\ which requires, among other things, that
exchange fees be reasonable and equitably allocated,\112\ not designed
to permit unfair discrimination,\113\ and that they not impose a burden
on competition not necessary or appropriate in furtherance of the
purposes of the Act.\114\ 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.\115\ 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.
---------------------------------------------------------------------------
\109\ 15 U.S.C. 78s(b)(1).
\110\ 17 CFR 240.19b-4.
\111\ 15 U.S.C. 78f(b).
\112\ 15 U.S.C. 78f(b)(4).
\113\ 15 U.S.C. 78f(b)(5).
\114\ 15 U.S.C. 78f(b)(8).
\115\ See supra note 21.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $12,034,554 (or approximately $1,002,880 per month, rounded
up to the nearest dollar when dividing the annual cost by 12 months)
and its aggregate annual costs for providing Limited Service MEI Ports
at $2,157,178 (or approximately $179,765 per month, rounded down to the
nearest dollar when dividing the annual cost by 12 months). In order to
cover the aggregate costs of providing connectivity to its Users (both
Members and non-Members \116\) going forward and to make a modest
profit, as described below, the Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per month for each physical 10Gb
ULL connection and to remove language providing for a shared 10Gb ULL
network between the Exchange and
[[Page 15794]]
MIAX Pearl. The Exchange also proposes to modify its Fee Schedule to
charge tiered rates for additional Limited Service MEI Ports.
---------------------------------------------------------------------------
\116\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services, and thus, may access Limited Service MEI Ports on behalf
of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
---------------------------------------------------------------------------
In 2019, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\117\ 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'').
---------------------------------------------------------------------------
\117\ 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
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,\118\ 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.
---------------------------------------------------------------------------
\118\ For example, the Exchange maintains 24 matching engines,
MIAX Pearl Options maintains 12 matching engines, MIAX Pearl
Equities 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 1Gb and 10Gb ULL
connectivity (62%), with smaller allocations to all ports (15%), and
the remainder to the provision of transaction execution, membership
services and market data services (23%). 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
Members and parties that they sponsor to participate directly on the
Exchange may submit orders to the Exchange; many Members (but not all)
consume market data from the Exchange in order to trade on the
Exchange; and, the Exchange consumes market data from external sources
in order to comply with regulatory obligations. Accordingly, given this
interdependence, the allocation of costs to each service or revenue
source required judgment of the Exchange and was weighted based on
estimates of the Exchange that the Exchange believes are reasonable, as
set forth below. While there is no standardized and generally accepted
methodology 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 will continue to be left with its best efforts to 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
10Gb ULL connectivity and Limited Service MEI Port services, including
both physical 10Gb connections and Limited Service MEI Ports, result in
an aggregate monthly cost of approximately $1,182,645 (utilizing the
rounded numbers when dividing the annual cost for 10Gb ULL connectivity
and annual cost for Limited Service MEI Ports by 12 months, then adding
both numbers together), as further detailed below.
Costs Related to Offering Physical 10Gb ULL Connectivity
The following chart details the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
10Gb ULL connectivity via an unshared network as well as the percentage
of the Exchange's overall costs that such costs represent for such area
(e.g., as set forth below, the Exchange allocated approximately
[[Page 15795]]
25.6% of its overall Human Resources cost to offering physical
connectivity).
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \119\ Monthly cost \120\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources............................................... $3,867,297 $322,275 25
Connectivity (external fees, cabling, switches, etc.)......... 70,163 5,847 60.6
Internet Services, including External Market Data............. 424,584 35,382 73.3
Data Center................................................... 718,950 59,912 60.6
Hardware and Software Maintenance and Licenses................ 727,734 60,645 49.8
Depreciation.................................................. 2,310,898 192,575 61.6
Allocated Shared Expenses..................................... 3,914,928 326,244 49.1
-------------------------------------------------
Total..................................................... 12,034,554 1,002,880 39.4
----------------------------------------------------------------------------------------------------------------
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 10Gb ULL
connectivity.
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\119\ The Annual Cost includes figures rounded to the nearest
dollar.
\120\ The Monthly Cost was determined by dividing the Annual
Cost for each line item by twelve (12) months and rounding up or
down to the nearest dollar.
---------------------------------------------------------------------------
Human Resources
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity) and for which the Exchange allocated a percentage of 42%
of each employee's time. The Exchange also allocated Human Resources
costs to provide physical connectivity to a limited subset of personnel
with ancillary functions related to establishing and maintaining such
connectivity (such as information security and finance personnel), for
which the Exchange allocated cost on an employee-by-employee basis
(i.e., only including those personnel who do support functions related
to providing physical connectivity) and then applied a smaller
allocation to such employees (less than 18%). The Exchange notes that
it 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 employees as
needed, 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 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. options
industry, as well as content, connectivity, and infrastructure services
for critical components of the network that are necessary to provide
and maintain its System Networks and access to its System Networks via
10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity
and content service providers to connect to other national securities
exchanges, the Options Price Reporting Authority (``OPRA''), and to
receive market data from other exchanges and market data providers. The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity and market data provided these service
providers is critical to the Exchanges daily operations and performance
of its System Networks to which market participants connect to via 10Gb
ULL connectivity. Without these services providers, the Exchange would
not be able to connect to other national securities exchanges, market
data providers, or OPRA and, therefore, would not be able to operate
and support its System Networks. The Exchange does not employ a
separate fee to cover its connectivity and content service provider
expense and recoups that expense, in part, by charging for 10Gb ULL
connectivity.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (60.6%) to
physical 10Gb ULL connectivity because the third-party data centers and
the
[[Page 15796]]
Exchange's physical equipment contained therein is the most direct cost
in providing physical access to the Exchange. In other words, for the
Exchange to operate in a dedicated space with connectivity of
participants to a physical trading platform, the data centers are a
very tangible cost, and in turn, if the Exchange did not maintain such
a presence then physical connectivity would be of no value to market
participants.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
10Gb ULL connectivity as such market data is necessary here to offer
certain services related to such connectivity, such as certain risk
checks that are performed prior to execution, and checking for other
conditions (e.g., re-pricing of orders to avoid lock or crossed
markets, trading collars). This allocation was included as part of the
internet Services cost described above. Thus, as market data from other
exchanges is consumed at the matching engine level, (to which 10Gb ULL
connectivity provides access to) in order to validate orders before
additional entering the matching engine or being executed, the Exchange
believes it is reasonable to allocate a small amount of such costs to
10Gb ULL connectivity.
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.\121\
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\121\ This expense may be less than the Exchange's affiliated
markets, specifically MIAX Pearl, because, unlike the Exchange, 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 Pearl.
---------------------------------------------------------------------------
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of Exchange infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 61.6% of all depreciation costs to providing physical 10Gb
ULL connectivity. The Exchange notes, however, that it did not allocate
depreciation costs for any depreciated software necessary to operate
the Exchange to physical connectivity, as such software does not impact
the provision of physical connectivity. 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.\122\ The Exchange notes that the
49.1% allocation of general shared expenses for physical 10Gb ULL
connectivity is higher than that allocated to general shared expenses
for Limited Service MEI Ports based on its allocation methodology that
weighted costs attributable to each Core Service based on an
understanding of each area. While physical connectivity has several
areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Centers, as described above),
Limited Service MEI Ports do not require as many broad or indirect
resources as other Core Services. The total monthly cost for 10Gb ULL
connectivity of $1,002,880 was divided by the number of physical 10Gb
ULL connections the Exchange maintained at the time that proposed
pricing was determined (93), to arrive at a cost of approximately
$10,784 per month, per physical 10Gb ULL connection.
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\122\ 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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Costs Related to Offering Limited Service MEI Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Limited Service
MEO Ports as well as the percentage of the Exchange's overall costs
such costs represent for such area (e.g., as set forth below, the
Exchange allocated approximately 5.8% of its overall Human Resources
cost to offering Limited Service MEI Ports).
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\123\ See supra note 119 (describing rounding of Annual Costs).
\124\ See supra note 120 (describing rounding of Monthly Costs
based on Annual Costs).
----------------------------------------------------------------------------------------------------------------
Cost drivers Annual cost \123\ Monthly cost \124\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources............................................... $898,480 $74,873 5.8
Connectivity (external fees, cabling, switches, etc.)......... 4,435 370 3.8
Internet Services, including External Market Data............. 41,601 3,467 7.2
Data Center................................................... 85,214 7,101 7.2
Hardware and Software Maintenance and Licenses................ 104,859 8,738 7.2
Depreciation.................................................. 237,335 19,778 6.3
Allocated Shared Expenses..................................... 785,254 65,438 9.8
-------------------------------------------------
Total..................................................... 2,157,178 179,765 7.1
----------------------------------------------------------------------------------------------------------------
[[Page 15797]]
Human Resources
With respect to Limited Service MEI Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Limited Service MEI Ports
and maintaining performance thereof (including a broader range of
employees such as technical operations personnel, market operations
personnel, and software engineering personnel) as well as a limited
subset of personnel with ancillary functions related to maintaining
such connectivity (such as sales, membership, and finance personnel).
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 Limited Service MEI Ports and maintaining
performance thereof, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing Limited Service MEI
Ports and maintaining performance thereof. The Exchange notes that
senior level executives were only allocated Human Resources costs to
the extent the Exchange believed they are involved in overseeing tasks
related to providing Limited Service MEI Ports and maintaining
performance thereof. The Human Resources cost was again calculated
using a blended rate of compensation reflecting salary, equity and
bonus compensation, benefits, payroll taxes, and 401(k) matching
contributions.
Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges, cabling and switches, as described above. For purposes
of Limited Service MEI Ports, the Exchange also includes a portion of
its costs related to External Market Data, as described below.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
Limited Service MEI Ports as such market data is also necessary here
(in addition to physical connectivity) to offer certain services
related to such ports, such as validating orders on entry against the
national best bid and national best offer and checking for other
conditions (e.g., whether a symbol is halted). This allocation was
included as part of the internet Services cost described above.\125\
Thus, as market data from other Exchanges is consumed at the Limited
Service MEI Port level in order to validate orders before additional
processing occurs with respect to such orders, the Exchange believes it
is reasonable to allocate a small amount of such costs to Limited
Service MEI Ports.
---------------------------------------------------------------------------
\125\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of order entry infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 6.3% of
all depreciation costs to providing Limited Service MEI Ports. In
contrast to physical connectivity, described above, the Exchange did
allocate depreciation costs for depreciated software necessary to
operate the Exchange to Limited Service MEI Ports because such software
is related to the provision of such connectivity. 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 Limited Service MEI Ports costs as without these general
shared costs the Exchange would not be able to operate in the manner
that it does and provide Limited Service MEI Ports. The costs included
in general shared expenses include general expenses of the Exchange,
including office space and office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 10% of the overall cost for
directors was allocated to providing Limited Service MEI Ports. The
Exchange notes that the 9.8% allocation of general shared expenses for
Limited Service MEI Ports is lower than that allocated to general
shared expenses for physical connectivity based on its allocation
methodology that weighted costs attributable to each Core Service based
on an understanding of each area. While Limited Service MEI Ports have
several areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Centers, as described above), 10Gb
ULL connectivity requires a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange. The total monthly cost of $179,765 was
divided by the number of chargeable Limited Service MEI Ports
(excluding the two free Limited Service MEI Ports per matching engine
that each Member receives) the Exchange maintained at the time that
proposed pricing was determined (1303), to arrive at a cost of
approximately $138 per month, per charged Limited Service MEI Port.
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or Limited Service MEI Ports) and did not double-count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary
[[Page 15798]]
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 (42%) given their focus
on functions necessary to provide physical connections. The salaries of
those same personnel were allocated only 8.4% to Limited Service MEI
Ports and the remaining 49.6% was allocated to 1Gb connectivity, other
port services, transaction services, membership services and market
data. The Exchange did not allocate any other Human Resources expense
for providing physical connections to any other employee group, outside
of a smaller allocation of 17.8% for 10Gb ULL connectivity or 18.2% for
the entire network, of the cost associated with certain specified
personnel who work closely with and support network infrastructure
personnel. In contrast, the Exchange allocated much smaller percentages
of costs (5% or less) across a wider range of personnel groups in order
to allocate Human Resources costs to providing Limited Service MEI
Ports. This is because a much wider range of personnel are involved in
functions necessary to offer, monitor and maintain Limited Service MEI
Ports but the tasks necessary to do so are not a primary or full-time
function.
In total, the Exchange allocated 25.6% of its personnel costs to
providing physical connections and 5.8% of its personnel costs to
providing Limited Service MEI Ports, for a total allocation of 31.4%
Human Resources expense to provide these specific connectivity
services. In turn, the Exchange allocated the remaining 68.6% of its
Human Resources expense to membership services, transaction services,
other port services and market data. Thus, again, the Exchange's
allocations of cost across core services were based on real costs of
operating the Exchange and were not double-counted across the core
services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and Limited Service
MEI Ports, but in different amounts. The Exchange believes it is
reasonable to allocate the identified portion of such expense because
such expense includes the actual cost of the computer equipment, such
as dedicated servers, computers, laptops, monitors, information
security appliances and storage, and network switching infrastructure
equipment, including switches and taps that were purchased to operate
and support the network. Without this equipment, the Exchange would not
be able to operate the network and provide connectivity services to its
Members and non-Members and their customers. However, the Exchange did
not allocate all of the depreciation and amortization expense toward
the cost of providing connectivity services, but instead allocated
approximately 67.9% of the Exchange's overall depreciation and
amortization expense to connectivity services (61.6% attributed to 10Gb
ULL physical connections and 6.3% to Limited Service MEI Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 32.1%) toward the cost of providing transaction
services, membership services, other port services and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or Limited Service MEI Ports or in obtaining new
clients that will purchase such services. Similarly, the Exchange will
have to be successful in retaining a positive net capture on
transaction fees in order to realize the anticipated revenue from
transaction pricing.
The Exchange notes that the Cost Analysis is based on the
Exchange's 2023 fiscal year of operations and projections. It is
possible however that such costs will either decrease or increase. To
the extent the Exchange sees growth in use of connectivity services it
will receive additional revenue to offset future cost increases.
However, if use of connectivity services is static or decreases,
the Exchange might not realize the revenue that it anticipates or needs
in order to cover applicable costs. Accordingly, the Exchange is
committing to conduct a one-year review after implementation of these
fees. The Exchange expects that it may propose to adjust fees at that
time, to increase fees in the event that revenues fail to cover costs
and a reasonable mark-up of such costs. Similarly, the Exchange would
propose to decrease fees in the event that revenue materially exceeds
our current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, the Exchange believes that it is appropriate for an
exchange to refresh and update information about its relevant costs and
revenues in seeking any future changes to fees, and the Exchange
commits to do so.
Projected Revenue \126\
---------------------------------------------------------------------------
\126\ For purposes of calculating revenue for 10Gb ULL
connectivity, the Exchange used projected revenues for February
2023, the first full month for which it will provide dedicated 10Gb
ULL connectivity to the Exchange and cease operating a shared 10Gb
ULL network with MIAX Pearl.
---------------------------------------------------------------------------
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity services. Much of the cost relates to monitoring and
analysis of data and performance of the network via the subscriber's
connection(s). The above cost, namely those associated with hardware,
software, and human capital, enable the Exchange to measure network
performance with nanosecond granularity. These same costs are also
associated with time and money spent seeking to continuously improve
the network performance, improving the subscriber's experience, based
on monitoring and analysis activity. The Exchange routinely works to
improve the performance of the network's hardware and software. The
costs associated with maintaining and enhancing a state-of-the-art
exchange network is a significant expense for the Exchange, and thus
the Exchange believes that it is reasonable and appropriate to help
offset those costs by amending fees for connectivity services.
[[Page 15799]]
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 $12,034,554. Based on current 10Gb
ULL connectivity services usage, the Exchange would generate annual
revenue of approximately $15,066,000. This represents a modest profit
of 20% when compared to the cost of providing 10Gb ULL connectivity
services, which will decrease over time.\127\ The Exchange's Cost
Analysis estimates the annual cost to provide Limited Service MEI Port
services at $2,157,178. Based on current Limited Service MEI Port
services usage, the Exchange would generate annual revenue of
approximately $3,300,600. This represents an estimated profit margin of
35% when compared to the cost of providing Limited Service MEI Port
services, which will decrease over time.\128\ Even if the Exchange
earns those amounts or incrementally more or less, the Exchange
believes the proposed fees are fair and reasonable because they will
not result in pricing that deviates from that of other exchanges or
supra-competitive profit, when comparing the total expense of the
Exchange associated with providing 10Gb ULL connectivity and Limited
Service MEI Port services versus the total projected revenue of the
Exchange associated with network 10Gb ULL connectivity and Limited
Service MEI Port services.
---------------------------------------------------------------------------
\127\ Assuming the U.S. inflation rate continues at its current
rate, the projected profit margins in this proposal will decrease
and may reach single to negative digit levels in approximately 18 to
24 months. See, e.g., https://www.usinflationcalculator.com/inflation/current-inflation-rates/ (last visited February 15, 2023).
\128\ Id.
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* * * * *
The Exchange has operated at a cumulative net annual loss since it
launched operations in 2012.\129\ The Exchange has operated at a net
loss due to a number of factors, one of which is choosing to forgo
revenue by offering certain products, such as connectivity, at lower
rates than other options exchanges to attract order flow and encourage
market participants to experience the high determinism, low latency,
and resiliency of the Exchange's trading systems. The Exchange should
not now be penalized for seeking to raise its fees in light of
necessary technology changes and its increased costs after offering
such products as discounted prices. Therefore, the Exchange believes
the proposed fees are reasonable because they are based on both
relative costs to the Exchange to provide dedicated 10Gb ULL
connectivity and Limited Service MEI Ports, the extent to which the
product drives the Exchange's overall costs and the relative value of
the product, as well as the Exchange's objective to make access to its
Systems broadly available to market participants. The Exchange also
believes the proposed fees are reasonable because they are designed to
generate annual revenue to recoup the Exchange's costs of providing
dedicated 10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------
\129\ The Exchange has incurred a cumulative loss of $121
million since its inception in 2012 through full year 2021. See
Exchange's Form 1/A, Application for Registration or Exemption from
Registration as a National Securities Exchange, filed June 29, 2022,
available at https://www.sec.gov/Archives/edgar/vprr/2200/22001163.pdf.
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The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 10Gb ULL connectivity and Limited Service MEI Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports
and/or obtaining new clients that will purchase such access. To the
extent the Exchange is successful in encouraging new clients to utilize
10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does
not believe it should be penalized for such success. 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 owned by a holding company that is the parent
company of 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
[[Page 15800]]
higher costs alone could be used to justify fees increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have the same business
needs for the high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct options markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages to satisfy its record keeping requirements under
the Exchange Act.\130\ 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.
---------------------------------------------------------------------------
\130\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
Limited Service MEI Ports
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity alternatives, as the
users of the Limited Service MEI Ports consume the most bandwidth and
resources of the network. Specifically, like above for the 10Gb ULL
connectivity, the Exchange notes that the Market Makers who take the
maximum amount of Limited Service MEI Ports account for approximately
greater than 99% of message traffic over the network, while Market
Makers with fewer Limited Service MEI Ports account for approximately
less than 1% of message traffic over the network. In the Exchange's
experience, Market Makers who only utilize the two free Limited Service
MEI Ports do not have a business need for the high performance network
solutions required by Market Makers who take the maximum amount of
Limited Service MEI Ports. The Exchange's high performance network
solutions and supporting infrastructure (including employee support),
provides unparalleled system throughput and the capacity to handle
approximately 18 million quote messages per second. Based on November
2022 trading results, on an average day, the Exchange handles over
approximately 8.8 billion quotes, and more than 185 billion quotes over
the entire month. Of that total, Market Makers with the maximum amount
of Limited Service MEI Ports generate approximately 5 billion quotes,
and Market Makers who utilize the two free Limited Service MEI Ports
generate approximately 1.5 billion quotes. Also for November 2022,
Market Makers who utilized 3 to 4 Limited Service MEI ports submitted
an average of 1,152,654,133 quotes per day and Market Makers who
utilized 5 to 9 Limited Service MEI ports submitted an average of
1,172,105,181 quotes per day. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages as part of it surveillance program and to satisfy
its record keeping requirements under the Exchange Act.\131\ Thus, as
the number of connections a Market Maker has increases, certain other
costs incurred by the Exchange that are correlated to, though not
directly affected by, connection costs (e.g., storage costs,
surveillance costs, service expenses) also increase. The Exchange
sought to design the proposed tiered-pricing structure to set the
amount of the fees to relate to the number of connections a firm
purchases. The more connections purchased by a Market Maker likely
results in greater expenditure of Exchange resources and increased cost
to the Exchange. With this in mind, the Exchange proposes no fee or
lower fees for those Market Makers who receive fewer Limited Service
MEI Ports since those Market Makers generally tend to send the least
amount of orders and messages over those connections. Given this
difference in network utilization rate, the Exchange believes that it
is reasonable, equitable, and not unfairly discriminatory that Market
Makers who take the most Limited Service MEI Ports pay for the vast
majority of the shared network resources from which all Member and non-
Member users benefit, but is designed and maintained from a capacity
standpoint to specifically handle the message rate and performance
requirements of those Market Makers.
---------------------------------------------------------------------------
\131\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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To achieve a consistent, premium network performance, the Exchange
must build out and maintain a network that has the capacity to handle
the message rate requirements of its most heavy network consumers.
Billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. The Exchange must also
purchase additional storage capacity on an ongoing basis to ensure it
has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\132\ Thus, as the number of connections a
Market Maker has increases, the related pull on Exchange
[[Page 15801]]
resources also increases. The Exchange sought to design the proposed
tiered-pricing structure to set the amount of the fees to relate to the
number of connections a firm purchases. The more connections purchased
by a Market Maker likely results in greater expenditure of Exchange
resources and increased cost to the Exchange.
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\132\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Limited Service MEI Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange has operated at a cumulative net annual
loss since it launched operations in 2012 \133\ due to providing a low-
cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems. To do so, the Exchange chose to waive the
fees for some non-transaction related services and Exchange products or
provide them at a very lower fee, which was not profitable to the
Exchange. This resulted in the Exchange forgoing revenue it could have
generated from assessing any fees or higher fees. The Exchange could
have sought to charge higher fees at the outset, but that could have
served to discourage participation on the Exchange. Instead, the
Exchange chose to provide a low-cost exchange alternative to the
options industry, which resulted in lower initial revenues. Examples of
this are 10Gb ULL connectivity and Limited Service MEI Ports, for which
the Exchange only now seeks to adopt fees at a level similar to or
lower than those of other options exchanges.
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\133\ See supra note 129.
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Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As is the case with the current proposed flat
fee, the proposed fee would apply uniformly to all market participants
regardless of the number of connections they choose to purchase. The
proposed fee does not favor certain categories of market participants
in a manner that would impose an undue burden on competition.
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and
customers of those resellers to compete with other market participants
or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Market Maker terminated their
MIAX Pearl membership on January 1, 2023 as a direct result of the
similar proposed fee changes by MIAX Pearl.\134\ 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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\134\ 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 52. 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.
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Inter-Market Competition
The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. There is no reason to believe that our
proposed price increase will harm another exchange's ability to
compete. There are other options markets of which market participants
may connect to trade options at higher rates than the Exchange's. There
is also a range of alternative strategies, including routing to the
exchange through another participant or market center or accessing the
Exchange indirectly. Market participants are free to choose which
exchange or reseller to use to satisfy their business needs.
Accordingly, the Exchange does not believe its proposed fee changes
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
The Exchange also believes that the proposed fees for 10Gb
connectivity are appropriate and warranted in light of it bifurcating
10Gb connectivity between the Exchange and MIAX Pearl and would not
impose any burden on competition because this is a technology driven
change that would assist the Exchange in recovering costs related to
providing dedicating 10Gb connectivity
[[Page 15802]]
to the Exchange while enabling it to continue to meet current and
anticipated demands for connectivity by its Members and other market
participants. Separating its 10Gb network from MIAX Pearl would enable
the Exchange to better compete with other exchanges by ensuring it can
continue to provide adequate connectivity to existing and new Members,
which may increase in ability to compete for order flow and deepen its
liquidity pool, improving the overall quality of its market.
The proposed rates for 10Gb ULL connectivity are also driven by the
Exchange's need to bifurcate its 10Gb ULL network shared with MIAX
Pearl so that it can continue to meet current and anticipated
connectivity demands of all market participants. Similarly, and also in
connection with a technology change, Cboe Exchange, Inc. (``Cboe'')
amended access and connectivity fees, including port fees.\135\
Specifically, Cboe adopted certain logical ports to allow for the
delivery and/or receipt of trading messages--i.e., orders, accepts,
cancels, transactions, etc. Cboe established tiered pricing for BOE and
FIX logical ports, tiered pricing for BOE Bulk ports, and flat prices
for DROP, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server
Ports. Cboe argued in its fee proposal that the proposed pricing more
closely aligned its access fees to those of its affiliated exchanges,
and reasonably so, as the affiliated exchanges offer substantially
similar connectivity and functionality and are on the same platform
that Cboe migrated to.\136\ Cboe also justified its proposal by stating
that, ``. . . the Exchange believes substitutable products and services
are in fact available to market participants, including, among other
things, other options exchanges a market participant may connect to in
lieu of the Exchange, indirect connectivity to the Exchange via a
third-party reseller of connectivity and/or trading of any options
product, including proprietary products, in the Over-the-Counter (OTC)
markets.'' \137\ Cboe stated in its proposal that,
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\135\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105). The
Exchange notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
\136\ Id. at 71676.
\137\ Id.
The rule structure for options exchanges are also fundamentally
different from those of equities exchanges. In particular, options
market participants are not forced to connect to (and purchase
market data from) all options exchanges. For example, there are many
order types that are available in the equities markets that are not
utilized in the options markets, which relate to mid-point pricing
and pegged pricing which require connection to the SIPs and each of
the equities exchanges in order to properly execute those orders in
compliance with best execution obligations. Additionally, in the
options markets, the linkage routing and trade through protection
are handled by the exchanges, not by the individual members. Thus
not connecting to an options exchange or disconnecting from an
options exchange does not potentially subject a broker-dealer to
violate order protection requirements. Gone are the days when the
retail brokerage firms (such as Fidelity, Schwab, and eTrade) were
members of the options exchanges--they are not members of the
Exchange or its affiliates, they do not purchase connectivity to the
Exchange, and they do not purchase market data from the Exchange.
Accordingly, not only is there not an actual regulatory requirement
to connect to every options exchange, the Exchange believes there is
also no ``de facto'' or practical requirement as well, as further
evidenced by the recent significant reduction in the number of
broker-dealers that are members of all options exchanges.\138\
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\138\ Id. at 71676.
The proposal also referenced the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\139\ wherein
the Commission discussed the existence of competition in the
marketplace generally, and particularly for exchanges with unique
business models. The Commission acknowledged that, even if an exchange
were to exit the marketplace due to its proposed fee-related change, it
would not significantly impact competition in the market for exchange
trading services because these markets are served by multiple
competitors.\140\ Further, the Commission explicitly stated that
``[c]onsequently, demand for these services in the event of the exit of
a competitor is likely to be swiftly met by existing competitors.''
\141\ Finally, the Commission recognized that while some exchanges may
have a unique business model that is not currently offered by
competitors, a competitor could create similar business models if
demand were adequate, and if a competitor did not do so, the Commission
believes it would be likely that new entrants would do so if the
exchange with that unique business model was otherwise profitable.\142\
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\139\ See Securities Exchange Act Release No. 86901 (September
9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
\140\ Id.
\141\ Id.
\142\ Id.
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Cboe also filed to establish a monthly fee for Certification
Logical Ports of $250 per Certification Logical Port.\143\ Cboe
reasoned that purchasing additional Certification Logical Ports, beyond
the one Certification Logical Port per logical port type offered in the
production environment free of charge, is voluntary and not required in
order to participate in the production environment, including live
production trading on the Exchange.\144\
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\143\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011). Cboe offers
BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical
Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server
Ports. For each type of the aforementioned logical ports that are
used in the production environment, the Exchange also offers
corresponding ports which provide Trading Permit Holders and non-
TPHs access to the Exchange's certification environment to test
proprietary systems and applications (i.e., ``Certification Logical
Ports'').
\144\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011).
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In its statutory basis, Cboe justified the new port fee by stating
that it believed the Certification Logical Port fee were reasonable
because while such ports were no longer completely free, TPHs and non-
TPHs would continue to be entitled to receive free of charge one
Certification Logical Port for each type of logical port that is
currently offered in the production environment.\145\ Cboe noted that
other exchanges assess similar fees and cited to NASDAQ LLC and
MIAX.\146\ Cboe also noted that the decision to purchase additional
ports is optional and no market participant is required or under any
regulatory obligation to purchase excess Certification Logical Ports in
order to access the Exchange's certification environment.\147\ Finally,
similar proposals to adopt a Certification Logical Port monthly fee
were filed by Cboe BYX Exchange, Inc.,\148\ BZX,\149\ and Cboe EDGA
Exchange, Inc.\150\
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\145\ Id. at 18426.
\146\ Id.
\147\ Id.
\148\ See Securities Exchange Act Release No. 94507 (March 24,
2002), 87 FR 18439 (March 30, 2022) (SR-CboeBYX-2022-004).
\149\ See Securities Exchange Act Release No. 94511 (March 24,
2002), 87 FR 18411 (March 30, 2022) (SR-CboeBZX-2022-021).
\150\ See Securities Exchange Act Release No. 94517 (March 25,
2002), 87 FR 18848 (March 31, 2022) (SR-CboeEDGA-2022-004).
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The Cboe fee proposals described herein were filed subsequent to
the D.C. Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866
F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject
to the same (and current) standard for SEC review and approval as this
proposal. In summary, the Exchange requests the Commission apply the
same standard of review to this proposal which was applied to the
various Cboe and Cboe affiliated markets' filings with respect to non-
[[Page 15803]]
transaction fees. If the Commission were to apply a different standard
of review to this proposal than it applied to other exchange fee
filings it would create a burden on competition such that it would
impair the Exchange's ability to make necessary technology driven
changes, such as bifurcating its 10Gb ULL network, because it would be
unable to monetize or recoup costs related to that change and compete
with larger, non-legacy exchanges.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange received one comment letter on the Initial
Proposal.\151\ 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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\151\ 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,\152\ and Rule 19b-4(f)(2) \153\ 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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\152\ 15 U.S.C. 78s(b)(3)(A)(ii).
\153\ 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-MIAX-2023-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MIAX-2023-08. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-MIAX-2023-08 and should be submitted on
or before April 4, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\154\
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\154\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05128 Filed 3-13-23; 8:45 am]
BILLING CODE 8011-01-P
