Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Equities Fee Schedule To Modify Certain Connectivity and Port Fees, 29730-29750 [2023-09679]

Download as PDF ddrumheller on DSK120RN23PROD with NOTICES1 29730 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ADV–H in paper format no later than one business day after the subject filing was due, and submit the subject filing electronically through IARD no later than seven business days after the subject filing was due. The temporary hardship exemption is granted when the adviser files the completed Form ADV– H. A continuing hardship exemption provides an exemption from electronic filing for no more than one year. It is available to certain advisers registered or registering with the Commission; it is not available to exempt reporting advisers. Such adviser must be a small business and be able to demonstrate that the electronic filing requirements are prohibitively burdensome or expensive. To apply for a continuing hardship exemption, an adviser must file Form ADV–H at least ten business days before a filing is due. The Commission will grant or deny the application within ten business days after the adviser files Form ADV–H. If the Commission approves the application, the adviser may submit filings to FINRA in paper format for the period of time for which the exemption is granted. The purpose of the collection of information is to enable the Commission to process requests for temporary hardship exemptions and to determine whether to grant a continuing hardship exemption from the requirement for advisers to make Advisers Act filings electronically through IARD. Respondents are investment advisers registered or registering with the Commission, as well as exempt reporting advisers. Based on our experience and data, we estimate that there are 20,926 respondents, consisting of 15,414 registered investment advisers and 5,512 exempt reporting advisers. Of those respondents, we estimate that we would receive one response annually, and each response would take approximately one hour to complete. Therefore, we estimate an annual aggregate burden of one hour for this collection of information. The collection of information does not require recordkeeping or records retention. The collection of information requirements are mandatory. The information collected is a filing with the Commission, and is not kept confidential. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The public may view background documentation for this information collection at the following website: www.reginfo.gov. Find this particular information collection by selecting VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 ‘‘Currently under 30-day Review—Open for Public Comments’’ or by using the search function. Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice by June 7, 2023 to (i) MBX.OMB.OIRA.SEC_desk_officer@ omb.eop.gov and (ii) David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, c/o John Pezzullo, 100 F Street NE, Washington, DC 20549, or by sending an email to: PRA_Mailbox@sec.gov. Dated: May 2, 2023. Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–09674 Filed 5–5–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97417; File No. SR– PEARL–2023–18] Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Equities Fee Schedule To Modify Certain Connectivity and Port Fees May 2, 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 April 20, 2023, MIAX PEARL, LLC (‘‘MIAX Pearl’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the fee schedule (the ‘‘Fee Schedule’’) applicable to MIAX Pearl Equities, an equities trading facility, to amend certain connectivity and port fees.3 The text of the proposed rule change is available on the Exchange’s website at https://www.miaxoptions.com/rulefilings/pearl at MIAX Pearl’s principal 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 All references to the ‘‘Exchange’’ in this filing refer to MIAX Pearl Equities. Any references to the options trading facility of MIAX PEARL, LLC will specifically be referred to as ‘‘MIAX Pearl Options.’’ 2 17 PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Fee Schedule to amend fees for: (1) the 1 gigabit (‘‘Gb’’) and 10Gb ultra-low latency (‘‘ULL’’) fiber connections for Equity Members 4 and non-Members; (2) the Financial Information Exchange (‘‘FIX’’) Ports,5 and the MIAX Express Orders Interface (‘‘MEO’’) Ports.6 The Exchange adopted connectivity and port fees in September 2020,7 and has not changed those fees since they were adopted. Since that time, the Exchange experienced ongoing increases in expenses, particularly internal expenses.8 As discussed more fully below, the Exchange recently calculated increased annual aggregate costs of $18,331,650 for providing 1Gb and 10Gb ULL connectivity combined and 4 The term ‘‘Equity Member’’ means a Member authorized by the Exchange to transact business on MIAX PEARL Equities. See Exchange Rule 1901. 5 ‘‘FIX Order Interface’’ or ‘‘FOI’’ means the Financial Information Exchange interface for certain order types as set forth in Exchange Rule 2614. See the Definitions section of the Fee Schedule. 6 Each MEO interface will have one Full Service Port (‘‘FSP’’) and one Purge Port. ‘‘Full Service Port’’ or ‘‘FSP’’ means an MEO port that supports all MEO order input message types. See the Definitions section of the Fee Schedule. 7 See Securities Exchange Act Release No. 90651 (December 11, 2020), 85 FR 81971 (December 17, 2020) (SR–PEARL–2020–33). 8 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. E:\FR\FM\08MYN1.SGM 08MYN1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 $3,951,993 for providing FIX and MEO Ports.9 Much of the cost relates to monitoring and analysis of data and performance of the network via the subscriber’s connection with nanosecond granularity, and continuous improvements in network performance with the goal of improving the subscriber’s experience. The costs associated with maintaining and enhancing a state-of-the-art network is a significant expense for the Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those increased costs by amending fees for connectivity and port services. Subscribers expect the Exchange to provide this level of support so they continue to receive the performance they expect. This differentiates the Exchange from its competitors. The Exchange now proposes to amend the Fee Schedule to amend the fees for 1Gb connectivity, 10Gb ULL connectivity and FIX and MEO Ports in order to recoup ongoing costs and increased expenses set forth below in the Exchange’s cost analysis. The Exchange proposes to implement the changes to the Fee Schedule pursuant to this proposal immediately. The Exchange initially filed the proposal on December 30, 2022 (SR–PEARL–2022– 61) (the ‘‘Initial Proposal’’).10 On February 23, 2023, the Exchange withdrew the Initial Proposal and replaced it with a revised proposal (SR– PEARL–2023–06) (the ‘‘Second Proposal’’).11 On April 20, 2023, the Exchange withdrew the Second Proposal and replaced it with this revised proposal (SR–PEARL–2023–18). The Exchange previously included a cost analysis in the Initial Proposal. As described more fully below, the Exchange provides an updated cost analysis that includes, among other things, additional descriptions of how the Exchange allocated costs among it and its affiliated exchanges (separately among MIAX Pearl Options and MIAX Pearl Equities, MIAX,12 and MIAX Emerald,13 together with MIAX and MIAX Pearl Options, the ‘‘affiliated 9 For the avoidance of doubt, all references to costs in this filing, including the cost categories discussed below, refer to costs incurred by MIAX Pearl Equities only and not MIAX Pearl Options, the options trading facility. 10 See Securities Exchange Act Release No. 96631 (January 10, 2023), 88 FR 2671 (January 17, 2023) (SR–PEARL–2022–61). 11 See Securities Exchange Act Release No. 97077 (March 8, 2023), 88 FR 15746 (March 14, 2023) (SR– PEARL–2023–06). 12 The term ‘‘MIAX’’ means Miami International Securities Exchange, LLC. See Exchange Rule 100. 13 The term ‘‘MIAX Emerald’’ means MIAX Emerald, LLC. See Exchange Rule 100. VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 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 1Gb and 10Gb ULL connectivity and FIX and MEO Ports. * * * * * Starting in 2017, following the United States Court of Appeals for the District of Columbia’s Susquehanna Decision 14 and various other developments, the Commission began to undertake a heightened review of exchange filings, including non-transaction fee filings that was substantially and materially different from it prior review process (hereinafter referred to as the ‘‘Revised Review Process’’). In the Susquehanna Decision, the D.C. Circuit Court stated that the Commission could not maintain a practice of ‘‘unquestioning reliance’’ on claims made by a self-regulatory organization (‘‘SRO’’) in the course of filing a rule or fee change with the Commission.15 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.16 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’’).17 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.’’ 18 The Commission denied requests by various exchanges and plan 14 See Susquehanna International Group, LLP v. Securities & Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’). 15 Id. 16 See Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ‘‘SIFMA Decision’’). 17 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). 18 Id. at page 2. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 29731 participants for reconsideration of the Remand Order.19 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.’’ 20 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.21 Despite approving hundreds of access fee filings in the years prior to the BOX Order (described further below) utilizing a ‘‘market-based’’ test, the Commission changed course and disapproved BOX’s proposal to begin charging connectivity at one-fourth the rate of competing exchanges’ pricing. Also while the above appeal was pending, on May 21, 2019, the Commission Staff issued guidance ‘‘to assist the national securities exchanges and FINRA . . . in preparing Fee Filings that meet their burden to demonstrate that proposed fees are consistent with the requirements of the Securities Exchange Act.’’ 22 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 19 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ‘‘Order Denying Reconsideration’’). 20 Order Denying Reconsideration, 2019 WL 2022819, at *13. 21 See Securities Exchange Act Release No. 85459 (March 29, 2019), 84 FR 13363 (April 4, 2019) (SR– BOX–2018–24, SR–BOX–2018–37, and SR–BOX– 2019–04) (Order Disapproving Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC Options Facility to Establish BOX Connectivity Fees for Participants and NonParticipants Who Connect to the BOX Network). The Commission noted in the BOX Order that it ‘‘historically applied a ‘market-based’ test in its assessment of market data fees, which [the Commission] believe[s] present similar issues as the connectivity fees proposed herein.’’ Id. at page 16. Despite this admission, the Commission disapproved BOX’s proposal to begin charging $5,000 per month for 10Gb connections (while allowing legacy exchanges to charge rates equal to 3–4 times that amount utilizing ‘‘market-based’’ fee filings from years prior). 22 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’’). E:\FR\FM\08MYN1.SGM 08MYN1 29732 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices significant competitive forces.’’ 23 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.’’ 24 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 25 and remanded for further proceedings consistent with its opinion.26 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.’’ 27 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.28 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.’’ 29 Without resolving the above issues, on October 5, 2020, the Commission issued an order granting SIFMA and Bloomberg’s request to 23 Id. withdraw their applications for review and dismissed the proceedings.30 As a result of the Commission’s loss of the NASDAQ vs. SEC case noted above, the Commission never followed through with its intention to subject the over 400 fee filings to ‘‘develop a record,’’ and to ‘‘explain their conclusions, based on that record, in a written decision that is sufficient to enable us to perform our review.’’ 31 As such, all of those fees remained in place and amounted to a baseline set of fees for those exchanges that had the benefit of getting their fees in place before the Commission Staff’s fee review process materially changed. The net result of this history and lack of resolution in the D.C. Circuit Court resulted in an uneven competitive landscape where the Commission subjects all new nontransaction fee filings to the new Revised Review Process, while allowing the previously challenged fee filings, mostly submitted by incumbent exchanges prior to 2019, to remain in effect and not subject to the ‘‘record’’ or ‘‘review’’ earlier intended by the Commission. While the Exchange appreciates that the Staff Guidance articulates an important policy goal of improving 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’’).32 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 33 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.34 These fees remain in effect today. The net result is that the non-legacy exchanges are effectively now blocked by the Commission Staff from adopting or increasing fees to amounts comparable to the legacy exchanges (which were not subject to the Revised Review Process and Staff Guidance), despite providing enhanced disclosures and rationale to support their proposed fee changes that far exceed any such support provided by legacy exchanges. Simply put, legacy exchanges were able to increase their non-transaction fees during an extended period in which the Commission applied a ‘‘market-based’’ test that only relied upon the assumed presence of significant competitive forces, while exchanges today are subject to a cost-based test requiring extensive cost and revenue disclosures, a process that is complex, inconsistently applied, and rarely results in a successful outcome, i.e., nonsuspension. The Revised Review Process and Staff Guidance changed decades-long Commission Staff standards for review, resulting in unfair discrimination and placing an undue burden on inter-market competition between legacy exchanges and nonlegacy exchanges. Commission Staff now require exchange filings, including from nonlegacy exchanges such as the Exchange, to provide detailed cost-based analysis 30 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 90087 (October 5, 2020). 31 See supra note 26, at page 2. 32 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. 33 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. 34 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). ddrumheller on DSK120RN23PROD with NOTICES1 24 Id. 25 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. 26 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. 27 Id. at *2; see also id. (‘‘[T]he sole purpose of the challenged remand has disappeared.’’). 28 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’’). 29 Id. VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 E:\FR\FM\08MYN1.SGM 08MYN1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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.35 By impeding any path forward for non-legacy exchanges to establish commensurate nontransaction fees, or by failing to provide any alternative means for smaller markets to establish ‘‘fee parity’’ with legacy exchanges, the Commission is stifling competition: non-legacy exchanges are, in effect, being deprived of the revenue necessary to compete on a level playing field with legacy exchanges. This is particularly harmful, given that the costs to maintain exchange systems and operations continue to increase. The Commission Staff’s change in position impedes the ability of nonlegacy exchanges to raise revenue to invest in their systems to compete with the legacy exchanges who already enjoy disproportionate non-transaction fee based revenue. For example, the Cboe Exchange, Inc. (‘‘Cboe’’) reported ‘‘access and capacity fee’’ revenue of $70,893,000 for 2020 36 and $80,383,000 for 2021.37 Cboe C2 Exchange, Inc. (‘‘C2’’) reported ‘‘access and capacity fee’’ revenue of $19,016,000 for 2020 38 and $22,843,000 for 2021.39 Cboe BZX Exchange, Inc. (‘‘BZX’’) reported ‘‘access and capacity fee’’ revenue of $38,387,000 for 2020 40 and $44,800,000 for 2021.41 Cboe EDGX Exchange, Inc. 35 For example, the options exchange affiliates of MIAX Pearl Equities, MIAX, MIAX Pearl Options, and MIAX Emerald, have filed, and subsequently withdrawn, various forms of connectivity and port fee changes at least seven (7) times since August 2021. Each of the proposals contained hundreds of cost and revenue disclosures never previously disclosed by legacy exchanges in their access and market data fee filings prior to 2019. 36 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. 37 See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001155.pdf. 38 See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000469.pdf. 39 See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001156.pdf. 40 See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000465.pdf. 41 See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001152.pdf. VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 (‘‘EDGX’’) reported ‘‘access and capacity fee’’ revenue of $26,126,000 for 2020 42 and $30,687,000 for 2021.43 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 2019.44 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.’’ 45 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,46 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 42 See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000467.pdf. 43 See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001154.pdf. 44 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. 45 See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000475.pdf. The Exchanges notes that this type of Form 1 accounting appears to be designed to obfuscate the true financials of such exchanges and has the effect of perpetuating fee and revenue advantages of legacy exchanges. 46 See, e.g., CNBC Debuts New Set on NYSE Floor, available at https://www.cnbc.com/id/46517876. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 29733 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 . . .’’,47 this is not the reality experienced by exchanges such as MIAX Pearl. As such, non-legacy exchanges are forced to rely on an opaque cost-based justification standard. However, because the Staff Guidance is devoid of detail on what must be contained in cost-based justification, this standard is nearly impossible to meet despite repeated good-faith efforts by the Exchange to provide substantial amount of costrelated details. For example, MIAX Pearl Options has attempted to increase similar fees using a cost-based justification numerous times, having submitted over six filings.48 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 49 in a manner that is not possible to achieve. This essentially nullifies the cost-based approach for exchanges as a legitimate alternative as laid out in the Staff Guidance. By refusing to accept a reasonable costbased argument to justify nontransaction fees (in addition to refusing to accept a competition-based argument 47 See supra note 22, at note 1. e.g., Securities Exchange Act Release Nos. 92798 (August 27, 2021), 86 FR 49360 (September 2, 2021) (SR–PEARL–2021–33); 92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR–PEARL– 2021–36); 93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR–PEARL–2021–45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 2021) (SR–PEARL–2021–53); 93774 (December 14, 2021), 86 FR 71952 (December 20, 2021) (SR– PEARL–2021–57); 93894 (January 4, 2022), 87 FR 1203 (January 10, 2022) (SR–PEARL–2021–58); 94258 (February 15, 2022), 87 FR 9659 (February 22, 2022) (SR–PEARL–2022–03); 94286 (February 18, 2022), 87 FR 10860 (February 25, 2022) (SR– PEARL–2022–04); 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022) (SR–PEARL–2022–11); 94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR–PEARL–2022–12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 2022) (SR–PEARL–2022–18). 49 15 U.S.C. 78f(b)(4). 48 See, E:\FR\FM\08MYN1.SGM 08MYN1 29734 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 as described above), or by failing to provide the detail required to achieve that standard, the Commission Staff is effectively preventing non-legacy exchanges from making any nontransaction fee changes, which benefits the legacy exchanges and is anticompetitive to the non-legacy exchanges. This does not meet the fairness standard under the Act and is discriminatory. Because of the un-level playing field created by the Revised Review Process and Staff Guidance, the Exchange believes that the Commission Staff, at this point, should either (a) provide sufficient clarity on how its cost-based standard can be met, including a clear and exhaustive articulation of required data and its views on acceptable margins,50 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; 51 or (c) accept that certain competition-based arguments are applicable given the linkage between non-transaction fees and transaction fees, especially where non-transaction fees among exchanges are based upon disparate standards of review, lack parity, and impede fair competition. Considering the absence of any such framework or clarity, the Exchange believes that the Commission does not have a reasonable basis to deny the Exchange this change in fees, where the proposed change would result in fees meaningfully lower than comparable fees at competing exchanges and where the associated nontransaction revenue is meaningfully lower than competing exchanges. In light of the above, disapproval of this would not meet the fairness standard under the Act, would be discriminatory and place a substantial burden on competition. The Exchange would be uniquely disadvantaged by not being able to increase its access fees to comparable levels (or lower levels than current market rates) to those of other exchanges for connectivity. If the 50 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. 51 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. VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 Commission Staff were to disapprove this proposal, that action, and not market forces, would substantially affect whether the Exchange can be successful in its competition with other exchanges. Disapproval of this filing could also be viewed as an arbitrary and capricious decision should the Commission Staff continue to ignore its past treatment of non-transaction fee filings before implementation of the Revised Review Process and Staff Guidance and refuse to allow such filings to be approved despite significantly enhanced arguments and cost disclosures.52 Lastly, the Exchange notes that the Commission Staff has allowed similar fee increases by other exchanges to remain in effect by publishing those filings for comment and allowing the exchange to withdraw and re-file numerous times.53 Recently, the Commission Staff has not afforded the Exchange the same flexibility.54 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. * * * * * 52 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. 53 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). 54 See Securities Exchange Act Release Nos. 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022) (SR–PEARL–2022–11) and 94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR–PEARL– 2022–12). PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 1Gb and 10Gb ULL Connectivity Fee Change Sections 2a) and b) of the Fee Schedule describe network connectivity fees for the 1Gb ULL and 10Gb ULL fiber connections, which are charged to both Equity Members and non-Members for connectivity to the Exchange’s primary and secondary facilities. The Exchange offers its Equity Members the ability to connect to the Exchange in order to transmit orders to and receive information from the Exchange. Equity Members can also choose to connect to the Exchange indirectly through physical connectivity maintained by a third-party extranet. Extranet physical connections may provide access to one or multiple Equity Members on a single connection. The number of physical connections assigned to each User 55 as of March 31, 2023, ranges from one to thirteen, depending on the scope and scale of the Equity Member’s trading activity on the Exchange as determined by the Equity Member, including the Equity Member’s determination of the need for redundant connectivity. The Exchange notes that 40% of its Equity Members do not maintain a physical connection directly with the Exchange in the Primary Data Center (though many such Equity Members have connectivity through a third-party provider) and another 46% have either one or two physical ports to connect to the Exchange in the Primary Data Center. Thus, only a limited number of Equity Members, 14%, maintain three or more physical ports to connect to the Exchange in the Primary Data Center. In order to partially cover the continuous increase in aggregate costs of providing physical connectivity to Equity Members and non-Equity Members, as described below, the Exchange proposes to amend the monthly connectivity fees as follows: (a) increase the 1Gb ULL connection from $1,000 to $2,500; and (b) increase the 10Gb ULL connection from $3,500 to $8,000.56 55 The term ‘‘User’’ shall mean any Member or Sponsored Participant who is authorized to obtain access to the System pursuant to Exchange Rule 2602. See Exchange Rule 1901. 56 The Exchange notes that while its proposed fee of $8,000 per 10Gb ULL connection is higher than MEMX’s $6,000 monthly fee for its xNet Physical Connection, MEMX does not offer any other physical connectivity, such as a 1Gb connection, for a lower fee. See Securities Exchange Act Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–2022–26). See MEMX Fee Schedule, Connectivity and Application Sessions, available at https:// info.memxtrading.com/fee-schedule/ (last visited April 18, 2023). E:\FR\FM\08MYN1.SGM 08MYN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices FIX and MEO Ports Similar to other exchanges, the Exchange offers its Equity Members application sessions, also known as ports, for order entry and receipt of trade execution reports and order messages. Equity Members can also choose to connect to the Exchange indirectly through a session maintained by a third-party service bureau. Service bureau sessions may provide access to one or multiple Equity Members on a single session. The number of sessions assigned to each User as of April 18, 2023, ranges from one to more than 100, depending on the scope and scale of the Equity Member’s trading activity on the Exchange (either through a direct connection or through a service bureau) as determined by the Equity Member. For example, by using multiple sessions, Equity Members can segregate order flow from different internal desks, business lines, or customers. The Exchange does not impose any minimum or maximum requirements for how many application sessions an Equity Member or service bureau can maintain, and does not propose to impose any minimum or maximum session requirements for its Equity Members or their service bureaus. Section 2)d), Port Fees, of the Fee Schedule describes fees for access and services used by Equity Members and non-Members. The Exchange provides the following types of ports: (i) FIX Ports, which allow Equity Members to send orders and other messages using the FIX protocol; and (ii) MEO Ports, which allow Equity Members order entry capabilities to all Exchange matching engines. The Exchange operates a primary and secondary data center as well as a disaster recovery center. Each Port provides access to all Exchange data centers for a single fee. The Exchange currently provides the first twenty-five (25) FIX and MEO Ports free of charge and absorbed all associated costs since the launch of MIAX Pearl Equities. The Exchange charges the following separate monthly fees for FIX and MEO Ports: $450 for ports 26–50, $400 for ports 51– 75, $350 for ports 76–100, and $300 for ports 101 and higher. The Exchange now proposes to provide the first five (5) FIX or MEO Ports free of charge, then charge a flat rate of $450 per port for port six (6) and above.57 57 The Exchange notes that the proposed fee of $450 per port equals the amount charged by MEMX for MEMX’s application sessions (order entry and drop copy ports), but MEMX does not offer any ports free of charge. See MEMX Fee Schedule, Connectivity and Application Sessions, available at https://info.memxtrading.com/fee-schedule/ (last visited April 18, 202). See Securities Exchange Act VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 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 58 in general, and furthers the objectives of section 6(b)(4) of the Act 59 in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among Equity Members and other persons using any facility or system which the Exchange operates or controls. The Exchange also believes the proposed fees further the objectives of section 6(b)(5) of the Act 60 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 61 and the Staff Guidance, 62 the Exchange believes that the proposed fees are consistent with the Act because they are: (i) reasonable, equitably allocated, not unfairly discriminatory, and not an undue burden on competition; (ii) comply with the BOX Order and the Staff Guidance; and (iii) supported by evidence (including comprehensive revenue and cost data and analysis) that they are fair and reasonable and will not result in excessive pricing or supra-competitive profit. The Exchange believes that exchanges, in setting fees of all types, should meet high standards of transparency to demonstrate why each new fee or fee amendment meets the requirements of the Act that fees be reasonable, equitably allocated, not unfairly discriminatory, and not create an undue burden on competition among market participants. The Exchange believes this high standard is especially Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–2022–26). Unlike MEMX and other exchanges, the Exchange also continues to provide FXD Ports (i.e., Drop Copy Ports) free of charge. 58 15 U.S.C. 78f(b). 59 15 U.S.C. 78f(b)(4). 60 15 U.S.C. 78f(b)(5). 61 See supra note 21. 62 See supra note 22. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 29735 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.’’ 63 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.’’ 64 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.’’ 65 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 begin to recover its costs to provide dedicated access via 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports. As discussed above, the Revised Review Process and Staff Guidance have created an uneven playing field between legacy and nonlegacy exchanges by severely restricting non-legacy exchanges from being able to increase non-transaction relates fees to provide them with additional necessary revenue to better compete with legacy exchanges, which largely set fees prior to the Revised Review Process. The much higher non-transaction fees charged by the legacy exchanges provides them with two significant competitive advantages: (i) additional non-transaction revenue that may be used to fund areas other than the nontransaction service related to the fee, such as investments in infrastructure, advertising, new products and other innovations; and (ii) greater flexibility to lower their transaction fees by using the revenue from the higher non-transaction fees to subsidize transaction fee rates. The latter is more immediately impactful in competition for order flow and market share, given the variable nature of this cost on Equity Member firms. The absence of a reasonable path 63 Id. 64 Id. 65 Id. E:\FR\FM\08MYN1.SGM 08MYN1 29736 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices forward to increase non-transaction fees to comparable (or lower rates) limits the Exchange’s flexibility to, among other things, make additional investments in infrastructure and advertising, diminishes the ability to remain competitive on transaction fees, and hinders the ability to compete for order flow and market share. Again, while one could debate whether the pricing of non-transaction fees are subject to the same market forces as transaction fees, there is little doubt that subjecting one exchange to a materially different standard than that applied to other exchanges for non-transaction fees leaves that exchange at a disadvantage in its ability to compete with its pricing of transaction fees. The Proposed Fees Ensure Parity Among Exchange Access Fees, Which Promotes Competition The Exchange commenced operations in September 2020 and adopted its initial fee schedule, with 1Gb ULL connectivity set at $1,000, 10Gb ULL connectivity fees set at $3,500, and provided the first twenty-five (25) FIX and MEO Ports for free.66 As a new exchange entrant, the Exchange chose to offer such services at a discounted rate or free of charge to encourage market participants to trade on the Exchange and experience, among things, the quality of the Exchange’s technology and trading functionality. This practice is not uncommon. New exchanges often do not charge fees or charge lower fees for certain services such as memberships/trading permits to attract order flow to an exchange, and later amend their fees to reflect the true value of those services, absorbing all costs to provide those services in the meantime. Allowing new exchange entrants time to build and sustain market share through various pricing incentives before increasing non-transaction fees encourages market entry and fee parity, which promotes competition among exchanges. It also enables new exchanges to mature their markets and allow market participants to trade on the new exchanges without fees serving as a potential barrier to attracting memberships and order flow.67 ddrumheller on DSK120RN23PROD with NOTICES1 66 See supra note 7. 67 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 VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 The Exchange has not amended any of its non-transaction fees since its launch in September 2022. The Exchange balanced business and competitive concerns with the need to financially compete with the larger incumbent exchanges that charge higher fees for similar connectivity and use that revenue to invest in their technology and other service offerings. The proposed changes to the Fee Schedule are reasonable in several respects. As a threshold matter, the Exchange is subject to significant competitive forces, which constrains its pricing determinations for transaction fees as well as non-transaction fees. The fact that the market for order flow is competitive has long been recognized by the courts. In NetCoalition v. Securities and Exchange Commission, the D.C. Circuit stated, ‘‘[n]o one disputes that competition for order flow is ‘fierce.’ . . . As the SEC explained, ‘[i]n the U.S. national market system, buyers and sellers of securities, and the 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’. . . .’’ 68 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 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). 68 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)). PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 ‘‘has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.’’ 69 Congress directed the Commission to ‘‘rely on ‘competition, whenever possible, in meeting its regulatory responsibilities for overseeing the SROs and the national market system.’ ’’ 70 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.’’ 71 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.’’ 72 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.’’ 73 The Exchange believes the competing exchanges’ connectivity and port fees are useful examples of alternative approaches to providing and charging for access and demonstrating how such fees are competitively set and constrained. To that end, the Exchange believes the proposed fees are competitive and reasonable because the proposed fees are similar to or less than fees charged for similar connectivity and port access provided by other exchanges with comparable market shares. As such, the Exchange believes that denying its ability to institute fees that are closer to parity with legacy exchanges, in effect, impedes its ability to compete, including in its pricing of transaction fees and ability to invest in competitive infrastructure and other offerings. The following table shows how the Exchange’s proposed fees remain 69 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 70 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.’’). 71 See Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74,770 (December 9, 2008) (SR–NYSEArca–2006–21). 72 Id. 73 See Staff Guidance, supra note 22. E:\FR\FM\08MYN1.SGM 08MYN1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices similar to or less than fees charged for similar connectivity and port access provided by other exchanges with similar market share. Each of the market data rates in place at competing exchanges were filed with the Commission for immediate effectiveness and remain in place today. Monthly fee (per connection or per port) Exchange Type of connection or port MIAX Pearl Equities(as proposed) (market share of 1.54% for the month of March 2023) 74. 1Gb ULL connection ...................... $2,500. 10Gb ULL connection .................... FIX and MEO Ports ....................... $8,000. 1–5 ports: FREE 6 ports or more: $450 per port. FREE. Not available. $6,000 per connection. $450 per port. $450 per port. $2,500 per connection (plus $1,500 installation fee). $7,500 per connection (plus $1,500 installation fee). $400 per port. $400 per port. $2,500 per connection (plus $1,500 installation fee). $15,000 (plus $1,500 installation fee). $500 per port. $500 per port. MEMX 75 (market share of 3.12% for the month of March 2023) 76 ....... NASDAQ PSX LLC (‘‘PSX’’) 77 (market share of 0.48% for the month of March 2023) 78. FXD Ports (i.e., Drop Copy Ports .. 1Gb connection ............................. xNet Physical connection .............. Order Entry Ports .......................... Drop Copy Ports ............................ 1Gb connection ............................. 10Gb connection ........................... NASDAQ BX LLC (‘‘BX’’) 79 (market share of 0.37% for the month of March 2023) 80. Order Entry Ports .......................... Drop Copy Ports ............................ 1Gb Ultra connection ..................... 10Gb Ultra connection ................... Order Entry Ports .......................... Drop Copy Ports ............................ There is no requirement, regulatory or otherwise, that any broker-dealer connect to and access any (or all of) the available equity exchanges. Market participants may choose to become a member of one or more equities exchanges based on the market participant’s assessment of the business opportunity relative to the costs of the Exchange. With this, there is elasticity of demand for exchange membership. As an example, one Market Maker of MIAX Pearl Options terminated their membership effective January 1, 2023 as a direct result of the proposed fee changes to the MIAX Pearl Options fee schedule. It is not a requirement for market participants to become members of all equities exchanges, in fact, certain market participants conduct an equities business as a member of only one market.81 A very small number of ddrumheller on DSK120RN23PROD with NOTICES1 29737 74 See Market at a Glance, available at https:// www.miaxoptions.com/. 75 See MEMX Fee Schedule, Connectivity and Application Sessions, available at https:// info.memxtrading.com/fee-schedule/. 76 See supra note 74. 77 See PSX Pricing Schedule, available at https:// www.nasdaqtrader.com/Trader.aspx?id=PSX_ Pricing; and PSX Rules, General 8: Connectivity, Section 2, Direct Connectivity. 78 See supra note 74. 79 See BX Pricing Schedule, available at https:// www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; and BX Rules, General 8: Connectivity, Section 2, Direct Connectivity. 80 See supra note 74. 81 BOX recently adopted an electronic market maker trading permit fee. See Securities Exchange Release No. 94894 (May 11, 2022), 87 FR 29987 VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 market participants choose to become a member of all sixteen (16) equities exchanges. Most firms that actively trade on equities markets are not currently Equity Members of the Exchange and do not purchase connectivity or port services at the Exchange. Connectivity and ports are only available to Equity Members or service bureaus, and only an Equity Member may utilize a port.82 BOX recently noted in a proposal to amend their own trading permit fees that of the 62 market making firms that are registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access (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.’’ 82 Service Bureaus may obtain ports on behalf of Equity Members. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 only one of the three exchanges.83 For equities, the Exchange currently has 45 Equity Members. Also, MEMX noted in a January 2022 filing that it had only 66 members, and, based on publicly available information regarding a sample of the Exchange’s competitors, NYSE has 142 members, Cboe BZX has 140 members, and Investors Exchange LLC (‘‘IEX’’) has 133 members.84 For options, the Exchange and its affiliates, MIAX and MIAX Emerald, have a total of 47 members. Of those 47 total members, 35 are members of all three affiliated exchanges, four (4) are members of only two (2) affiliated exchanges, and eight (8) are members of only one affiliated exchange. The Exchange believes that significant differences in membership numbers describes by the Exchange, BOX, and MEMX demonstrate that firms can, and do, select which exchanges they wish to access, and, accordingly, exchanges must take competitive considerations into account when setting fees for such access. The Exchange also notes that no firm is an Equity Member of the Exchange only. The above data evidences that a broker-dealer need not have direct connectivity to all exchanges, let alone the Exchange and its affiliates, and broker-dealers may elect to do so based on their own 83 See Securities Exchange Act Release No. 94894 (May 11, 2022), 87 FR 29987 (May 17, 2022) (SR– BOX–2022–17). 84 See Securities Exchange Act Release No. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022) (SR–MEMX–2021–19). E:\FR\FM\08MYN1.SGM 08MYN1 29738 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 business decisions and need to directly access each exchange’s liquidity pool. Not only is there not an actual regulatory requirement to connect to every equities exchange, the Exchange believes there is also no ‘‘de facto’’ or practical requirement as well, as further evidenced by the broker-dealer membership analysis of exchanges discussed above. Indeed, broker-dealers choose if and how to access a particular exchange and because it is a choice, the Exchange must set reasonable pricing, otherwise prospective members would not connect and existing members would disconnect from the Exchange. The decision to become a member of an exchange, is complex, and not solely based on the non-transactional costs assessed by an exchange. As noted herein, specific factors include, but are not limited to: (i) an exchange’s available liquidity in equities securities; (ii) trading functionality offered on a particular market; (iii) product offerings; (iv) customer service on an exchange; and (v) transactional pricing. Becoming a member of the exchange does not ‘‘lock’’ a potential member into a market or diminish the overall competition for exchange services. In lieu of becoming a member at each exchange, a market participant may join one exchange and elect to have their orders routed in the event that a better price is available on an away market. Nothing in the Order Protection Rule requires a firm to become an Equity Member at—or establish connectivity to—the Exchange.85 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.86 With respect to the submission of orders, Equity Members may also choose not to purchase any connection at all from the Exchange, and instead rely on the port of a third party to submit an order. For example, a thirdparty broker-dealer Equity Member of the Exchange may be utilized by a retail investor to submit orders into an Exchange. An institutional investor may utilize a broker-dealer, a service 85 See 17 CFR 242.611. Members may elect to not route their orders by utilizing the Do Not Route or Post Only order type instructions. See Exchange Rule 2614(c)(1) and (2). 86 Equity VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 bureau,87 or request sponsored access 88 through a member of an exchange in order to submit a trade directly to an equities exchange.89 A market participant may either pay the costs associated with becoming a member of an exchange or, in the alternative, a market participant may elect to pay commissions to a broker-dealer, pay fees to a service bureau to submit trades, or pay a member to sponsor the market participant in order to submit trades directly to an exchange. Non-Member third-parties, such as service bureaus and extranets, resell the Exchange’s connectivity. This indirect connectivity is another viable alternative for market participants to trade on the Exchange without connecting directly to the Exchange (and thus not pay the Exchange’s connectivity fees), which alternative is already being used by non-Equity Members and further constrains the price that the Exchange is able to charge for connectivity and other access fees to its market. The Exchange notes that it could, but chooses not to, preclude market participants from reselling its connectivity. Unlike other exchanges, the Exchange also does not currently assess fees on third-party resellers on a per customer basis (i.e., fees based on the number of firms that connect to the Exchange indirectly via the thirdparty).90 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.91 Particularly, 87 Service Bureaus provide access to market participants to submit and execute orders on an exchange. On the Exchange, a Service Bureau may be an Equity Member. Some Equity Members utilize a Service Bureau for connectivity and that Service Bureau may not be an Equity Member. Some market participants utilize a Service Bureau who is an Equity Member to submit orders. 88 Sponsored Access is an arrangement whereby an Equity Member permits its customers to enter orders into an exchange’s system that bypass the Equity Member’s trading system and are routed directly to the Exchange, including routing through a service bureau or other third-party technology provider. 89 This may include utilizing a floor broker and submitting the trade to an equities trading floor. 90 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). 91 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 PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 in the event that a market participant views the Exchange’s direct connectivity and access fees as more or less attractive than competing markets, that market participant can choose to connect to the Exchange indirectly or may choose not to connect to the Exchange and connect instead to one or more of the other 15 equities markets. Accordingly, the Exchange believes that the proposed fees are fair and reasonable and constrained by competitive forces. The Exchange is obligated to regulate its Equity Members and secure access to its environment. To properly regulate its Equity Members and secure the trading environment, the Exchange takes measures to ensure access is monitored and maintained with various controls. Connectivity and ports are methods utilized by the Exchange to grant Equity Members secure access to communicate with the Exchange and exercise trading rights. When a market participant elects to be an Equity Member, and is approved for membership by the Exchange, the Equity Member is granted trading rights to enter orders and/or quotes into Exchange through secure connections. Again, there is no legal or regulatory requirement that a market participant become an Equity Member of the Exchange, or, if it is an Equity Member, to purchase connectivity beyond the one connection that is necessary to quote or submit orders on the Exchange. Equity Members may freely choose to rely on one or many connections, depending on their business model. This is again evidenced by the fact that one MIAX Pearl Options Market Maker terminated their MIAX Pearl Options membership effective January 1, 2023 as a direct result of the proposed connectivity and port fee changes on MIAX Pearl Options. If a market participant chooses to become an Equity Member, they may then choose to purchase connectivity beyond the one connection that is necessary to quote or submit orders on the Exchange. Members may freely choose to rely on one or many connections, depending on their business model. Cost Analysis In general, the Exchange believes that exchanges, in setting fees of all types, should meet very high standards of transparency to demonstrate why each new fee or fee increase meets the Exchange Act requirements that fees be reasonable, equitably allocated, not unfairly discriminatory, and not create if such fees would otherwise be considered potentially unreasonable or uncompetitive fees. E:\FR\FM\08MYN1.SGM 08MYN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices an undue burden on competition among members and markets. In particular, the Exchange believes that each exchange should take extra care to be able to demonstrate that these fees are based on its costs and reasonable business needs. In proposing to charge fees for connectivity services, the Exchange is especially diligent in assessing those fees in a transparent way against its own aggregate costs of providing the related service, and in carefully and transparently assessing the impact on Equity Members—both generally and in relation to other Equity Members, i.e., to assure the fee will not create a financial burden on any participant and will not have an undue impact in particular on smaller Equity Members and competition among Equity Members in general. The Exchange believes that this level of diligence and transparency is called for by the requirements of section 19(b)(1) under the Act,92 and Rule 19b– 4 thereunder,93 with respect to the types of information SROs should provide when filing fee changes, and section 6(b) of the Act,94 which requires, among other things, that exchange fees be reasonable and equitably allocated,95 not designed to permit unfair discrimination,96 and that they not impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act.97 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.98 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 1Gb and 10Gb ULL connectivity to the Exchange at $18,331,650 combined ($17,726,799 for 10Gb ULL connectivity and $604,851 for 1Gb connectivity) (or approximately $1,527,637 per month for combined connectivity costs, rounded to the nearest dollar when dividing the combined annual cost by 12 months). The Exchange also recently calculated 92 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 94 15 U.S.C. 78f(b). 95 15 U.S.C. 78f(b)(4). 96 15 U.S.C. 78f(b)(5). 97 15 U.S.C. 78f(b)(8). 98 See Staff Guidance, supra note 22. 93 17 VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 its aggregate annual costs for providing FIX and MEO Ports at $3,951,993 combined ($911,998 for FIX Ports and $3,039,995 for MEO Ports) (or approximately $329,333 per month for combined FIX and MEO Port costs, rounded to the nearest dollar when dividing the combined annual cost by 12 months). In order to cover a portion of the aggregate costs of providing connectivity to its Users (both Equity Members and non-Equity Members 99) going forward, as described below, the Exchange proposes to modify its Fee Schedule as described above. In 2020, the Exchange completed a study of its aggregate costs to produce market data and connectivity (the ‘‘Cost Analysis’’).100 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 99 Types of market participants that obtain connectivity services from the Exchange but are not Equity Members include service bureaus and extranets. Service bureaus offer technology-based services to other companies for a fee, including order entry services, and thus, may access application sessions on behalf of one or more Equity Members. Extranets offer physical connectivity services to Equity Members and nonEquity Members. 100 The Exchange frequently updates it Cost Analysis as strategic initiatives change, costs increase or decrease, and market participant needs and trading activity changes. The Exchange’s most recent Cost Analysis was conducted ahead of this filing. PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 29739 impact platform size,101 storage needs, dedicated infrastructure versus shared infrastructure allocated per platform based on the resources required to support each platform, number of available connections, and employees allocated time. This will result in different allocation percentages among the Exchange and its affiliated markets. Meanwhile this allocation methodology ensures that no portion of any cost was allocated twice or double-counted between the Exchange and its affiliated markets. Next, the Exchange adopted an allocation methodology with thoughtful and consistently applied principles to guide how much of a particular cost amount allocated to the Exchange pursuant to the above methodology should be allocated within the Exchange to each core service. For instance, fixed costs that are not driven by client activity (e.g., message rates), such as data center costs, were allocated more heavily to the provision of physical connectivity (62%), with smaller allocations to FIX Ports (1.2%) and MEO Ports (3.8%), and the remainder to the provision of transaction execution, membership services and market data services (33%). This next level of the allocation methodology at the individual exchange level also took into account a number of factors similar to those set forth under the first allocation methodology described above, to determine the appropriate allocation to connectivity or market data versus what is to be allocated to providing other services. The allocation methodology was developed through an assessment of costs with senior management intimately familiar with each area of the Exchange’s operations. After adopting this allocation methodology, the Exchange then applied an estimated allocation of each cost driver to each core service, resulting in the cost allocations described below. Each of the below cost allocations is unique to the Exchange and represents a percentage of overall cost that was allocated to the Exchange pursuant to the initial allocation described above. By allocating segmented costs to each core service, the Exchange was able to estimate by core service the potential margin it might earn based on different fee models. The Exchange notes that as a non-listing venue it has five primary sources of revenue that it can potentially use to fund its operations: transaction fees, fees for connectivity 101 For example, MIAX Pearl Equities maintains 24 matching engines, MIAX Pearl Options maintains 12 matching engines, MIAX maintains 24 matching engines and MIAX Emerald maintains 12 matching engines. E:\FR\FM\08MYN1.SGM 08MYN1 29740 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices and port services, membership fees, regulatory fees, and market data fees. Accordingly, the Exchange must cover its expenses from these five primary sources of revenue. The Exchange also notes that as a general matter each of these sources of revenue is based on services that are interdependent. For instance, the Exchange’s system for executing transactions is dependent on physical hardware and connectivity; only Equity Members and parties that they sponsor to participate directly on the Exchange may submit orders to the Exchange; many Equity Members (but not all) consume market data from the Exchange in order to trade on the Exchange; and the Exchange consumes market data from external sources in order to comply with regulatory obligations. Accordingly, given this interdependence, the allocation of costs to each service or revenue source required judgment of the Exchange and was weighted based on estimates of the Exchange that the Exchange believes are reasonable, as set forth below. While there is no standardized and generally accepted methodology for the allocation of an exchange’s costs, the Exchange’s methodology is the result of an extensive review and analysis and will be consistently applied going forward for any other potential fee proposals. In the absence of the Commission attempting to specify a methodology for the allocation of exchanges’ interdependent costs, the Exchange is left with its best efforts attempt to conduct such an allocation in a thoughtful and reasonable manner. Through the Exchange’s extensive updated Cost Analysis, the Exchange analyzed every expense item in the Exchange’s general expense ledger to determine whether each such expense relates to the provision of connectivity services, and, if such expense did so relate, what portion (or percentage) of such expense actually supports the provision of connectivity services, and thus bears a relationship that is, ‘‘in nature and closeness,’’ directly related to network connectivity services. In turn, the Exchange allocated certain costs more to physical connectivity and others to ports, while certain costs were only allocated to such services at a very low percentage or not at all, using consistent allocation methodologies as described above. Based on this analysis, the Exchange estimates that the cost drivers to provide 1Gb and10Gb ULL connectivity, as well as FIX and MEO Ports, result in an aggregate combined monthly cost of $1,856,970, as further detailed below. Lastly, the Exchange notes that, based on: (i) the total expense amounts contained in this filing (which are 2023 projected expenses), and (ii) the total expense amounts contained in the related MIAX Pearl Options filing (also 2023 projected expenses), MIAX PEARL, LLC’s total costs have increased at a greater rate over the last three years than the total costs of MIAX PEARL, LLC’s affiliated exchanges, MIAX and MIAX Emerald. This is also reflected in the total costs reported in MIAX PEARL, LLC’s Form 1 filings over the last three years, when comparing MIAX PEARL, LLC to MIAX PEARL, LLC’s affiliated exchanges, MIAX and MIAX Emerald. This is primarily because that MIAX PEARL, LLC operates two markets, one for options and one for equities, while MIAX and MIAX Emerald each operate only one market. This is also due to higher current expense for MIAX PEARL, LLC for 2022 and 2023, due to a hardware refresh (i.e., replacing old hardware with new equipment) for MIAX Pearl Options, as well as higher costs associated with MIAX Pearl Equities due to greater development efforts to grow that newer marketplace, all of which are discussed in more detail below. MIAX PEARL, LLC confirms that there is no double counting of expenses between the options and equities platform of MIAX PEARL, LLC; the greater expense amounts of MIAX PEARL, LLC (relative to its affiliated exchanges, MIAX and MIAX Emerald) is solely attributed to the unique factors of MIAX PEARL, LLC discussed above. Costs Related to Offering Physical 1Gb and 10Gb ULL Connectivity The following charts detail the individual line-item costs considered by the Exchange to be related to offering physical dedicated 1Gb and 10Gb ULL connectivity via an unshared network as well as the percentage of the Exchange’s overall costs that such costs represent for such area (e.g., as set forth below, the Exchange allocated approximately 47.6% of its overall Human Resources cost to offering physical 1Gb and 10Gb ULL connectivity). 10GB ULL CONNECTIVITY Annual cost 102 Cost drivers Monthly cost 103 % 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 ........................................................................................................ $5,936,741 69,451 1,818,808 1,052,797 642,112 3,448,206 4,758,684 $494,728 5,788 151,567 87,733 53,509 287,351 396,557 46.1 60 72.5 60 58 73.6 48.6 Total ...................................................................................................................................... 17,726,799 1,477,233 54 1GB ULL CONNECTIVITY Annual cost 104 ddrumheller on DSK120RN23PROD with NOTICES1 Cost drivers 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 ........................................................................................................ VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 $202,566 2,370 62,059 35,922 21,909 117,655 162,370 E:\FR\FM\08MYN1.SGM 08MYN1 Monthly cost 105 $16,880 197 5,172 2,993 1,826 9,805 13,531 % of all 1.6 2.0 2.5 2.0 2.0 2.5 1.7 29741 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices 1GB ULL CONNECTIVITY—Continued Annual cost 104 Cost drivers Total ...................................................................................................................................... ddrumheller on DSK120RN23PROD with NOTICES1 Below are additional details regarding each of the line-item costs considered by the Exchange to be related to offering physical 1Gb and 10Gb ULL connectivity. The Exchange notes that some of its cost allocation percentages for certain categories of expense differ when compared to the same categories of expense described by the Exchange’s affiliates in their similar proposed fee changes for connectivity and ports. This is because the Exchange’s cost allocation methodology utilizes the actual projected costs of the Exchange (which are specific to the Exchange, and are independent of the costs projected and utilized by the Exchange’s affiliates) to determine its actual costs. The Exchange provides additional explanation below (including the reason for the deviation) where the Exchange considers such deviation in allocations to be more than de minimis. Human Resources For personnel costs (Human Resources), the Exchange calculated an allocation of employee time for employees whose functions include providing and maintaining physical connectivity and performance thereof (primarily the Exchange’s network infrastructure team, which spends most of their time performing functions necessary to provide physical connectivity) and for which the Exchange allocated percentages of 58% for 10Gb ULL connectivity and 2.0% for 1Gb connectivity of each employee’s time assigned to the Exchange based on the above-described allocation methodology. 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 102 The Annual Cost includes figures rounded to the nearest dollar. 103 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. 104 See supra note 102. 105 See supra note 103. VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 physical connectivity) and then applied a smaller allocation to such employees (less than 37%). The Exchange notes that it and its affiliated markets have 184 employees and each department leader has direct knowledge of the time spent by those spent by each employee with respect to the various tasks necessary to operate the Exchange. Specifically, twice a year and as needed with additional new hires and new project initiatives, in consultation with each employee, managers and department heads assign a percentage of time to every employee and then allocate that time amongst the Exchange and its affiliated markets to determine that market’s individual Human Resources expense. Then, again in consultation with each employee, managers and department heads assign a percentage of each employee’s time allocated to the Exchange into buckets including, network connectivity, ports, market data, and other exchange services. This process ensures that every employee is 100% allocated, ensuring there is no double counting between the Exchange and its affiliated markets. The estimates of Human Resources cost were therefore determined by consulting with such department leaders, determining which employees are involved in tasks related to providing physical connectivity, and confirming that the proposed allocations were reasonable based on an understanding of the percentage of their time such employees devote to tasks related to providing physical connectivity. This includes personnel from the following Exchange departments that are predominately involved in providing 1Gb and 10Gb ULL connectivity: Business Systems Development, Trading Systems Development, Systems Operations and Network Monitoring, Network and Data Center Operations, Listings, Trading Operations, and Project Management. 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. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 604,851 Monthly cost 105 50,404 % of all 1.8 Lastly, the Exchange notes that the above allocation for 10Gb ULL connectivity is greater than its affiliate options exchanges by more than a de minimis amount as MIAX Pearl Equities allocated 46.1% of its Human Resources expense towards 10Gb ULL connectivity, while MIAX, MIAX Pearl Options and MIAX Emerald allocated 25%, 26.3% and 28%, respectively, to the same category of expense. This difference is due to meaningfully more current and anticipated business and technology initiatives dedicated to MIAX Pearl Equities than its affiliate options exchanges at the time of this filing. These initiatives include: enhancements to routing options, expanding the available order types, adding direct market data connectivity to competing exchanges, and adopting additional risk controls.106 MIAX Pearl Equities is a relatively new market (launched in September of 2020), and, as a result, more personnel are allocated to work on various business initiatives and enhancements to help the market grow, add new functionality, and expand its product offerings. These 106 See, e.g., Securities Exchange Act Release Nos. 94301 (February 23, 2022), 87 FR 11739 (March 2, 2022) (SR–PEARL–2022–06) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2617(b) To Adopt Two New Routing Options, and To Make Related Changes and Clarifications to Rules 2614(a)(2)(B) and 2617(b)(2)); 94851 (May 4, 2022), 87 FR 28077 (May 10, 2022) (SR–PEARL–2022–15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Exchange Rule 532, Order Price Protection Mechanisms and Risk Controls); 95298 (July 15, 2022), 87 FR 43579 (July 21, 2022) (SR– PEARL–2022–29) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC To Amend the Route to Primary Auction Routing Option Under Exchange Rule 2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR 55866 (September 12, 2022) (SR–PEARL–2022–34) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 2614, Orders and Order Instructions, To Adopt the Primary Peg Order Type); 96205 (November 1, 2022), 87 FR 67080 (November 7, 2022) (SR– PEARL–2022–43) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders and Order Instructions and Rule 2618, Risk Settings and Trading Risk Metrics To Enhance Existing Risk Controls); 96905 (February 13, 2023), 88 FR 10391 (February 17, 2023) (SR– PEARL–2023–03) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 2618 To Add Optional Risk Control Settings); 97236 (March 31, 2023), 88 FR 20597 (April 6, 2023) (SR–PEARL–2023–15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rules 2617 and 2626 Regarding Retail Orders Routed Pursuant to the Route to Primary Auction Routing Option). E:\FR\FM\08MYN1.SGM 08MYN1 29742 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 technology changes directly impact the Exchange’s interface specifications and matching engine which, in turn, impacts connectivity by requiring additional coding, testing, and other updates necessary to accommodate the above initiatives. Connectivity and Internet Services The Connectivity cost includes external fees paid to connect to other exchanges and third parties, cabling and switches required to operate the Exchange. The Connectivity line-item is more narrowly focused on technology used to complete connections to the Exchange and to connect to external markets. The Exchange notes that its connectivity to external markets is required in order to receive market data to run the Exchange’s matching engine and basic operations compliant with existing regulations, primarily Regulation NMS. The Exchange relies on various connectivity and content service providers for connectivity and data feeds for the entire U.S. equities industry, as well as content, connectivity, and infrastructure services for critical components of the network that are necessary to provide and maintain its System Networks and access to its System Networks via 1Gb and 10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity and content service providers to connect to other national securities exchanges, the NASDAQ UTP and CTA/CQ Plans, and to receive market data from other exchanges and market data providers. The Exchange understands that these service providers provide services to most, if not all, of the other U.S. exchanges and other market participants. Connectivity and market data provided these service providers is critical to the Exchanges daily operations and performance of its System Networks to which market participants connect to via 10Gb ULL connectivity. Without these services providers, the Exchange would not be able to connect to other national securities exchanges, market data providers, or the NASDAQ UTP and CTA/CQ Plans and, therefore, would not be able to operate and support its System Networks. The Exchange does not employ a separate fee to cover its connectivity and content service provider expense and recoups that expense, in part, by charging for 1Gb and 10Gb ULL connectivity. Data Center Data Center costs includes an allocation of the costs the Exchange incurs to provide physical connectivity VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 in the third-party data centers where it maintains its equipment (such as dedicated space, security services, cooling and power). The Exchange notes that it does not own the Primary Data Center or the Secondary Data Center, but instead, leases space in data centers operated by third parties. The Exchange has allocated a high percentage of the Data Center cost (62%) to physical 1Gb and 10Gb ULL connectivity because the third-party data centers and the Exchange’s physical equipment contained therein is the most direct cost in providing physical access to the Exchange. In other words, for the Exchange to operate in a dedicated space with connectivity of participants to a physical trading platform, the data centers are a very tangible cost, and in turn, if the Exchange did not maintain such a presence then physical connectivity would be of no value to market participants. External Market Data External Market Data includes fees paid to third parties, including other exchanges, to receive and consume market data from other markets. The Exchange included External Market Data fees to the provision of physical connectivity as such market data is necessary here to offer certain services related to such connectivity, such as certain risk checks that are performed prior to execution, and checking for other conditions (e.g., limit order price protection, trading collars). This allocation was included as part of the Internet Services cost described above.107 Thus, as market data from other Exchanges is consumed at the matching engine level, (to which physical connectivity provides access to) in order to validate orders before additional entering the matching engine or being executed, the Exchange believes it is reasonable to allocate a small amount of such costs to 10Gb ULL connectivity. Hardware and Software Maintenance and Licenses Hardware and Software Licenses includes hardware and software licenses used to operate and monitor physical 107 This allocation may differ from MIAX Pearl Options due to the different amount of proprietary market data feeds the Exchange purchases for its options and equities trading platforms. For options, the Exchange primarily relies on data purchased from OPRA. For equities, the Exchange does not solely rely on data purchased from the consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ plans), but rather purchases multiple proprietary market data feeds from other equities exchanges. See, e.g., Exchange Rule 2613 (setting forth the data feeds the Exchange subscribes to for each equities exchange and trading center). PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 assets necessary to offer physical connectivity to the Exchange.108 The Exchange notes that this allocation is greater than MIAX and MIAX Emerald options exchanges by more than a de minimis amount as MIAX Pearl Equities allocated 58% of its Hardware and Software Maintenance and License expense towards 10Gb ULL connectivity, while MIAX and MIAX Emerald allocated 49.8% and 50.9%, respectively, to the same category of expense. MIAX Pearl Options allocated a higher percentage of the same category of expense (58.6%) towards its Hardware and Software Maintenance and License expense for 10Gb ULL connectivity, which MIAX Pearl Options explains in its own proposal to amend its 10Gb ULL connectivity fees. This difference in allocation is because MIAX Pearl Equities maintains software licenses that are unique to its trading platform and used only for the trading of equity securities. The cost for these licenses cannot be shared with MIAX Pearl Equities’ affiliated options markets because each of those platforms trade only options, not equities. MIAX Pearl Equities’ affiliates are able to share the cost of many of their software licenses among the multiple options platforms (thus lowering the cost to each individual options platform), whereas MIAX Pearl Equites cannot share such cost and, therefore, bears the entire cost. Monthly Depreciation All physical assets and software, which also includes assets used for testing and monitoring of Exchange infrastructure, were valued at cost, depreciated or leased over periods ranging from three to five years. Thus, the depreciation cost primarily relates to servers necessary to operate the Exchange, some of which are owned by the Exchange and some of which are leased by the Exchange in order to allow efficient periodic technology refreshes. As noted above, the Exchange allocated 73.6% of all depreciation costs to providing physical 10Gb ULL connectivity and 2.5% of all depreciation costs to providing 1Gb connectivity. The Exchange notes, however, that it did not allocate depreciation costs for any depreciated software necessary to operate the Exchange to physical connectivity, as 108 This expense may be greater than the Exchange’s affiliated markets, specifically MIAX and MIAX Emerald, because, unlike MIAX and MIAX Emerald, MIAX Pearl Equities and MIAX Pearl Options both maintain an additional gateway to accommodate their Members’ and Equity Members’ access and connectivity needs. This added gateway contributes to the difference in allocations between MIAX Pearl Equities and MIAX Pearl Options and MIAX and MIAX Emerald. E:\FR\FM\08MYN1.SGM 08MYN1 29743 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices 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. Lastly, the Exchange notes that this allocation is greater than its affiliate options exchanges by more than a de minimis amount as MIAX Pearl Equities allocated 73.6% of its Depreciation expense towards 10Gb ULL connectivity, while MIAX, MIAX Pearl Options and MIAX Emerald allocated 61.6%, 58.2% and 63.8%, respectively, to the same category of expense. This is due to MIAX Pearl Equities being a newer market and having newer physical assets and software subject to depreciation than its affiliate options exchanges. The Exchange’s affiliate options exchanges are older markets that have more software and equipment that have been fully depreciated when compared to the newer software and hardware currently being depreciated by MIAX Pearl Equities at higher rates. 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.109 The Exchange notes that the 50% allocation of general shared expenses for physical connectivity is higher than that allocated to general shared expenses for FIX and MEO Ports based on its allocation methodology that weighted costs attributable to each Core Service based on an understanding of each area. While physical connectivity has several areas where certain tangible costs are heavily weighted towards providing such service (e.g., Data Centers, as described above), FIX and MEO Ports do not require as many broad or indirect resources as other Core Services. The total monthly cost for 10Gb ULL connectivity of $1,477,233 was divided by the number of physical 10Gb ULL connections the Exchange maintained at the time that proposed pricing was determined (90), to arrive at a cost of approximately $16,414 per month, per physical 10Gb ULL connection. The total monthly cost for 1Gb connectivity of $50,404 was divided by the number of physical 1Gb connections the Exchange maintained at the time that proposed pricing was determined (8), to arrive at a cost of approximately $6,301 per month, per physical 1Gb connection. Costs Related to Offering FIX and MEO Ports The following chart details the individual line-item costs considered by the Exchange to be related to offering FIX and MEO Ports as well as the percentage of the Exchange’s overall costs such costs represent for such area (e.g., as set forth below, the Exchange allocated approximately 22.4% of its overall Human Resources cost to offering FIX and MEO Ports). FIX PORTS Annual cost 110 Cost drivers Monthly cost 111 Percent of all Human Resources ....................................................................................................................... Connectivity (external fees, cabling, switches, etc.) ................................................................... Internet Services, including External Market Data ...................................................................... Data Center ................................................................................................................................. Hardware and Software Maintenance and Licenses .................................................................. Depreciation ................................................................................................................................. Allocated Shared Expenses ........................................................................................................ $665,726 535 11,574 20,262 5,108 92,114 116,679 $55,476 45 965 1,689 426 7,676 9,723 5.2 0.5 0.5 1.2 0.5 2.0 1.2 Total ...................................................................................................................................... 911,998 76,000 2.8 MEO PORTS Annual cost 112 Cost drivers ddrumheller on DSK120RN23PROD with NOTICES1 Human Resources ....................................................................................................................... Connectivity (external fees, cabling, switches, etc.) ................................................................... Internet Services, including External Market Data ...................................................................... Data Center ................................................................................................................................. Hardware and Software Maintenance and Licenses .................................................................. 109 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 its expenses at that granular a level. Instead, director costs are included as part of the overall general allocation. 110 See supra note 102 (describing rounding of Annual Costs). 111 See supra note 103 (describing rounding of Monthly Costs based on annual costs). 112 See supra note 102 (describing rounding of Annual Costs). The Exchange notes that costs to VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 provide MEO Ports are higher than the Exchange’s costs to provide FIX Ports because it is more expensive to maintain and support the MEO network due to its high performance capabilities and supporting infrastructure (including employee support). The MEO interface is a customizable binary interface that the Exchange developed inhouse and maintains on its own. The FIX interface is the industry standard for simple order entry, which requires less development, maintenance, and support than the MEO interface. The MEO interface provides best-in-class system throughput and PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 $2,219,088 1,782 38,582 67,538 17,026 Monthly cost 113 $184,924 149 3,215 5,628 1,419 Percent of all 17.2 1.5 1.5 3.8 1.5 capacity. Users of MEO Ports, which are primarily Equity Market Makers, consume the most bandwidth and resources of the network via MEO Ports. To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network consumers, resulting in greater cost to provide and maintain MEO ports. 113 See supra note 103 (describing rounding of Monthly Costs based on annual costs). E:\FR\FM\08MYN1.SGM 08MYN1 29744 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices MEO PORTS—Continued Annual cost 112 ddrumheller on DSK120RN23PROD with NOTICES1 Cost drivers Monthly cost 113 Percent of all Depreciation ................................................................................................................................. Allocated Shared Expenses ........................................................................................................ 307,048 388,931 25,587 32,411 6.6 4.0 Total ...................................................................................................................................... 3,039,995 253,333 9.3 Human Resources With respect to FIX and MEO Ports, the Exchange calculated Human Resources cost by taking an allocation of employee time for employees whose functions include providing FIX and MEO Ports and maintaining performance thereof (including a broader range of employees such as technical operations personnel, market operations personnel, and software engineering personnel) as well as a limited subset of personnel with ancillary functions related to maintaining such connectivity (such as sales, membership, and finance personnel). Just as described above for 10Gb ULL connectivity, the estimates of Human Resources cost were again determined by consulting with department leaders, determining which employees are involved in tasks related to providing application sessions and maintaining performance thereof, and confirming that the proposed allocations were reasonable based on an understanding of the percentage of their time such employees devote to tasks related to providing application sessions and maintaining performance thereof. This includes personnel from the following Exchange departments that are predominately involved in providing FIX and MEO Ports: Business Systems Development, Trading Systems Development, Systems Operations and Network Monitoring, Network and Data Center Operations, Listings, Trading Operations, and Project Management. The Exchange notes that senior level executives were only allocated Human Resources costs to the extent the Exchange believed they are involved in overseeing tasks related to providing application sessions and maintaining performance thereof. The Human Resources cost was again calculated using a blended rate of compensation reflecting salary, equity and bonus compensation, benefits, payroll taxes, and 401(k) matching contributions. Lastly, the Exchange notes that the Human Resource allocation for MEO Ports is greater than its Human Resource allocation for FIX Ports by more than a de minimis amount as MIAX Pearl Equities allocated 5.2% of its Human Resource expense towards FIX Ports and VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 17.2% of its Human Resource expense towards MEO Ports. This is because the MEO interface is a customized binary interface that the Exchange developed in-house and maintains on its own. The FIX interface is the industry standard for simple order entry which requires less development, maintenance, and support than the MEO interface. The MEO interface is performance oriented and designed to meet the needs of more latency sensitive Equity Members. Due to the in-house development of the MEO interface, the Exchange was required to expend more internal personnel to support the MEO interface than the FIX interface. Because of the materially higher cost associated with maintaining and supporting MEO Ports versus FIX Ports, the Exchange allocates a materially higher percentage of Human Resource expense to MEO Ports versus FIX Ports, which is a less complex, standardized solution. Connectivity and Internet Services The Connectivity cost includes external fees paid to connect to other exchanges, cabling and switches, as described above. For purposes of FIX and MEO Ports, the Exchange also includes a portion of its costs related to External Market Data, as described below. Data Center Data Center costs includes an allocation of the costs the Exchange incurs to provide physical connectivity in the third-party data centers where it maintains its equipment as well as related costs (the Exchange does not own the Primary Data Center or the Secondary Data Center, but instead, leases space in data centers operated by third parties). External Market Data External Market Data includes fees paid to third parties, including other exchanges, to receive and consume market data from other markets. The Exchange included External Market Data fees to the provision of application sessions as such market data is also necessary here (in addition to physical connectivity) to offer certain services related to such sessions, such as PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 validating orders on entry against the national best bid and national best offer and checking for other conditions (e.g., whether a symbol is halted or subject to a short sale circuit breaker). This allocation was included as part of the internet Services cost described above.114 Thus, as market data from other Exchanges is consumed at the application session level in order to validate orders before additional processing occurs with respect to such orders, the Exchange believes it is reasonable to allocate a small amount of such costs to application sessions. Hardware and Software Maintenance and Licenses Hardware and Software Licenses includes hardware and software licenses used to monitor the health of the order entry services provided by the Exchange, as described above. Monthly Depreciation All physical assets and software, which also includes assets used for testing and monitoring of order entry infrastructure, were valued at cost, depreciated or leased over periods ranging from three to five years. Thus, the depreciation cost primarily relates to servers necessary to operate the Exchange, some of which is owned by the Exchange and some of which is leased by the Exchange in order to allow efficient periodic technology refreshes. The Exchange allocated 8.6% of all depreciation costs to providing FIX and MEO Ports. In contrast to physical connectivity, described above, the Exchange did allocate depreciation costs for depreciated software necessary to operate the Exchange to FIX and MEO Ports because such software is related to 114 This allocation may differ from MIAX Pearl Options due to the different amount of proprietary market data feeds the Exchange purchases for its options and equities trading platforms. MIAX Pearl Options primarily relies on data purchased from OPRA. MIAX Pearl Equities does not solely rely on data purchased from the consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ plans), but rather purchases multiple proprietary market data feeds from other equities exchanges. See, e.g., Exchange Rule 2613 (setting forth the data feeds the Exchange subscribes to for each equities exchange and trading center). The Exchange separately notes that MEMX separately allocated 7.5% of its external market data costs to providing physical connectivity. E:\FR\FM\08MYN1.SGM 08MYN1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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. Lastly, the Exchange notes that the Depreciation allocation for MEO Ports is greater than the Depreciation allocation for FIX Ports by more than a de minimis amount as MIAX Pearl Equities allocated 2.00% of its Depreciation expense towards FIX Ports and 6.60% of its Depreciation expense towards MEO Ports. As discussed above, this is because the MEO interface is a customized binary interface that the Exchange developed in-house and maintains on its own. The FIX interface is the industry standard for simple order entry which requires less development, maintenance, and support than the MEO interface. The Exchange maintains more dedicated hardware per port for the MEO interface compared to the FIX interface; MEO Ports sit on their own core server, whereas for the FIX interface, three (3) to five (5) connections may go onto a single server. As a result, the MEO interface is supported by more dedicated in-house hardware and software than the FIX interface that is subject to depreciation. Thus, there is a greater amount of equipment supporting the MEO interface than the FIX interface, resulting in higher depreciation costs than the FIX interface. Allocated Shared Expenses Finally, a limited portion of general shared expenses was allocated to overall FIX and MEO Ports costs as without these general shared costs the Exchange would not be able to operate in the manner that it does and provide application sessions. The costs included in general shared expenses include general expenses of the Exchange, including office space and office expenses (e.g., occupancy and overhead expenses), utilities, recruiting and training, marketing and advertising costs, professional fees for legal, tax and accounting services (including external and internal audit expenses), and telecommunications costs. The Exchange again notes that the cost of paying directors to serve on its Board of Directors is included in the calculation of Allocated Shared Expenses, and thus a portion of such overall cost amounting to less than 20% of the overall cost for VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 directors was allocated to providing FIX and MEO Ports. The Exchange notes that the 5.2% allocation of general shared expenses for FIX and MEO Ports is lower than that allocated to general shared expenses for physical connectivity based on its allocation methodology that weighted costs attributable to each Core Service based on an understanding of each area. While FIX and MEO Ports have several areas where certain tangible costs are heavily weighted towards providing such service (e.g., Data Centers, as described above), 1Gb and 10Gb ULL connectivity requires a broader level of support from Exchange personnel in different areas, which in turn leads to a broader general level of cost to the Exchange. The total monthly cost for FIX Ports of $76,000 was divided by the number of FIX Ports the Exchange maintained at the time that proposed pricing was determined (142), to arrive at a cost of approximately $535 per month, per FIX Port (rounded to the nearest dollar when dividing the approximate monthly cost by the number of FIX Ports). The total monthly cost for MEO Ports of $253,333 was divided by the number of MEO Ports the Exchange maintained at the time that proposed pricing was determined (336), to arrive at a cost of approximately $754 per month, per MEO Port (rounded to the nearest dollar when dividing the approximate monthly cost by the number of MEO Ports). Lastly, the Exchange notes that the Allocated Shared Expense allocation for MEO Ports is greater than the same allocation for FIX Ports by more than a de minimis amount as MIAX Pearl Equities allocated 1.20% of its Allocated Shared Expense towards FIX Ports and 4.00% of its Allocated Shared Expense towards MEO Ports. As discussed above, this is because the MEO interface is a customized binary interface that the Exchange developed in-house and maintains on its own. The FIX interface is the industry standard for simple order entry which requires less development, maintenance, and support than the MEO interface. The MEO interface is performance oriented and designed to meet the needs of more latency sensitive Equity Members. This required more internal personnel and resources to support than the FIX interface. Because of the materially higher cost associated with maintaining and supporting MEO Ports versus FIX Ports, the Exchange allocates a materially higher percentage of Allocated Shared expense to MEO Ports versus FIX Ports. Cost Analysis—Additional Discussion In conducting its Cost Analysis, the Exchange did not allocate any of its PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 29745 expenses in full to any core services (including physical connectivity or FIX and MEO Ports) and did not doublecount any expenses. Instead, as described above, the Exchange allocated applicable cost drivers across its core services and used the same Cost Analysis to form the basis of this proposal and the filings the Exchange submitted proposing fees for proprietary data feeds offered by the Exchange. For instance, in calculating the Human Resources expenses to be allocated to physical connections based upon the above described methodology, the Exchange has a team of employees dedicated to network infrastructure and with respect to such employees the Exchange allocated network infrastructure personnel with a high percentage of the cost of such personnel (60%) to 1Gb and 10Gb ULL connectivity given their focus on functions necessary to provide physical connections. The salaries of those same personnel were allocated only 25% to FIX and MEO Ports and the remaining 15% was allocated to transactions and market data. The Exchange did not allocate any other Human Resources expense for providing physical connections to any other employee group, outside of a smaller allocation of 37% for 1Gb and 10Gb ULL connectivity of the cost associated with certain specified personnel who work closely with and support network infrastructure personnel. In contrast, the Exchange allocated much smaller percentages of costs (less than 21%) across a wider range of personnel groups in order to allocate Human Resources costs to providing FIX and MEO Ports. This is because a much wider range of personnel are involved in functions necessary to offer, monitor and maintain FIX and MEO Ports but the tasks necessary to do so are not a primary or full-time function. In total, the Exchange allocated 47.6% of its personnel costs to providing physical connections and 22.4% of its personnel costs to providing FIX and MEO Ports, for a total allocation of 70% Human Resources expense to provide these specific connectivity services. In turn, the Exchange allocated the remaining 30% of its Human Resources expense to membership (less than 1%) and transactions and market data (9.5%). Thus, again, the Exchange’s allocations of cost across core services were based on real costs of operating the Exchange and were not double-counted across the core services or their associated revenue streams. As another example, the Exchange allocated depreciation expense to all core services, including physical E:\FR\FM\08MYN1.SGM 08MYN1 ddrumheller on DSK120RN23PROD with NOTICES1 29746 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices connections and FIX and MEO Ports, but in different amounts. The Exchange believes it is reasonable to allocate the identified portion of such expense because such expense includes the actual cost of the computer equipment, such as dedicated servers, computers, laptops, monitors, information security appliances and storage, and network switching infrastructure equipment, including switches and taps that were purchased to operate and support the network. Without this equipment, the Exchange would not be able to operate the network and provide connectivity services to its Equity Members and nonEquity Members and their customers. However, the Exchange did not allocate all of the depreciation and amortization expense toward the cost of providing connectivity services, but instead allocated approximately 85% of the Exchange’s overall depreciation and amortization expense to connectivity services (76.185% attributed to 1Gb and 10Gb ULL physical connections and 8.6% to FIX and MEO Ports). The Exchange allocated the remaining depreciation and amortization expense (approximately 15%) toward the cost of providing transaction services, membership services and market data. The Exchange notes that its revenue estimates are based on projections across all potential revenue streams and will only be realized to the extent such revenue streams actually produce the revenue estimated. The Exchange does not yet know whether such expectations will be realized. For instance, in order to generate the revenue expected from connectivity, the Exchange will have to be successful in retaining existing clients that wish to maintain physical connectivity and/or FIX and MEO Ports or in obtaining new clients that will purchase such services. Similarly, the Exchange will have to be successful in retaining a positive net capture on transaction fees in order to realize the 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 VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 may propose to adjust fees at that time, to increase fees in the event that revenues fail to cover costs and a reasonable mark-up of such costs. Similarly, the Exchange would propose to decrease fees in the event that revenue materially exceeds our current projections. In addition, the Exchange will periodically conduct a review to inform its decision making on whether a fee change is appropriate (e.g., to monitor for costs increasing/decreasing or subscribers increasing/decreasing, etc. in ways that suggest the thencurrent fees are becoming dislocated from the prior cost-based analysis) and would propose to increase fees in the event that revenues fail to cover its costs, 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 The proposed fees will allow the Exchange to cover certain costs incurred by the Exchange associated with providing and maintaining necessary hardware and other network infrastructure as well as network monitoring and support services; without such hardware, infrastructure, monitoring and support the Exchange would be unable to provide the connectivity services. Much of the cost relates to monitoring and analysis of data and performance of the network via the subscriber’s connection(s). The above cost, namely those associated with hardware, software, and human capital, enable the Exchange to measure network performance with nanosecond granularity. These same costs are also associated with time and money spent seeking to continuously improve the network performance, improving the subscriber’s experience, based on monitoring and analysis activity. The Exchange routinely works to improve the performance of the network’s hardware and software. The costs associated with maintaining and enhancing a state-of-the-art exchange network is a significant expense for the Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those costs by amending fees for connectivity services. Subscribers, particularly those of 10Gb PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 ULL connectivity, expect the Exchange to provide this level of support to connectivity so they continue to receive the performance they expect. This differentiates the Exchange from its competitors. As detailed above, the Exchange has five primary sources of revenue that it can potentially use to fund its operations: transaction fees, fees for connectivity services, membership and regulatory fees, and market data fees. Accordingly, the Exchange must cover its expenses from these five primary sources of revenue. • The Exchange’s Cost Analysis estimates the annual cost to provide 10Gb ULL connectivity services at $17,726,799. Based on current 10Gb ULL connectivity services usage, the Exchange would generate annual revenue of approximately $9,144,000. This represents a negative margin when compared to the cost of providing 10Gb ULL connectivity services, which will decrease over time.115 • The Exchange’s Cost Analysis estimates the annual cost to provide 1Gb connectivity services at $604,851. Based on current 1Gb connectivity services usage, the Exchange would generate annual revenue of approximately $312,000. This represents a negative margin when compared to the cost of providing 1Gb connectivity services, which will decrease over time.116 • The Exchange’s Cost Analysis estimates the annual cost to provide FIX Port services at $911,998. Based on current FIX Port services usage, the Exchange would generate annual revenue of approximately $388,800. This represents a negative margin when compared to the cost of providing FIX Port services, which will decrease over time.117 • The Exchange’s Cost Analysis estimates the annual cost to provide MEO Port services at $3,039,995. Based on current MEO Port services usage, the Exchange would generate annual revenue of approximately $1,296,000. This represents a negative margin when compared to the cost of providing MEO Port services, which will decrease over time.118 Even if the Exchange earns those amounts or incrementally more, the Exchange believes the proposed fees are 115 Assuming the U.S. inflation rate continues at its current rate, the Exchange believes that the projected profit margins in this proposal will decrease; however, the Exchange cannot predict with any certainty whether the U.S. inflation rate will continue at its current rate or its impact on the Exchange’s future profits or losses. See, e.g., https:// www.usinflationcalculator.com/inflation/currentinflation-rates/ (last visited April 18, 2023). 116 Id. 117 Id. 118 Id. E:\FR\FM\08MYN1.SGM 08MYN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices fair and reasonable because they will not result in excessive pricing that deviates from that of other exchanges or supra-competitive profit, when comparing the total expense of the Exchange associated with providing 1Gb and 10Gb ULL connectivity and FIX and MEO Port services versus the total projected revenue of the Exchange associated with those services. In fact, the Exchange will generate negative margins on those connectivity and port services even with the proposed fees. * * * * * MIAX Pearl Equities has operated at a cumulative net annual loss since it launched operations in 2020.119 The Exchange has operated at a net loss due to a number of factors, one of which is choosing to forgo revenue by offering certain products, such as connectivity, at lower rates than other exchanges to attract order flow and encourage market participants to experience the high determinism, low latency, and resiliency of the Exchange’s trading systems. The Exchange should not now be penalized for seeking to raise its fees in light of necessary technology changes and its increased costs after offering such products as discounted prices. Therefore, the Exchange believes the proposed fees are reasonable because they are based on both relative costs to the Exchange to provide dedicated 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, the extent to which the product drives the Exchange’s overall costs and the relative value of the product, as well as the Exchange’s objective to make access to its Systems broadly available to market participants. The Exchange also believes the proposed fees are reasonable because they are designed to generate annual revenue to recoup the Exchange’s costs of providing dedicated 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports. The Exchange notes that its revenue estimate is based on projections and will only be realized to the extent customer activity actually produces the revenue estimated. As a competitor in the hyper-competitive exchange environment, and an exchange focused on driving competition, the Exchange does not yet know whether such projections will be realized. For instance, in order to generate the revenue expected from 1Gb and 10Gb ULL connectivity as well as FIX and 119 The Exchange has incurred a cumulative loss of $79 million since its inception in 2020. See Exchange’s Form 1/A, Application for Registration or Exemption from Registration as a National Securities Exchange, filed July 28, 2021, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000461.pdf. VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 MEO Ports, the Exchange will have to be successful in retaining existing clients that wish to utilize 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports and/or obtaining new clients that will purchase such access. To the extent the Exchange is successful in encouraging new clients, the Exchange does not believe it should be penalized for such success. To the extent the Exchange has mispriced and experiences a net loss in clients, the Exchange could experience a net reduction in revenue. While the Exchange believes in transparency around costs and potential revenue, the Exchange does not believe that these estimates should form the sole basis of whether or not a proposed fee is reasonable or can be adopted. The Exchange is part of a holding company that operates four exchange markets and, therefore, the Exchange and its affiliated markets must allocate shared costs across all of those markets accordingly, pursuant to the abovedescribed allocation methodology. In contrast, the Investors Exchange LLC (‘‘IEX’’) and MEMX, which are currently each operating only one exchange, in their recent non-transaction fee filings can allocate the entire amount of that same cost to a single exchange. This can result in lower profit margins for the non-transaction fees proposed by IEX and MEMX because the single allocated cost does not experience the efficiencies and synergies associated with shared costs across multiple platforms. The Exchange and its affiliated markets must 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 PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 29747 legacy exchanges, retroactively, if such standards are to avoid having a discriminatory effect. Further, the proposal reflects the Exchange’s efforts to control its costs, which the Exchange does on an ongoing basis as a matter of good business practice. A potential profit margin should not be judged alone based on its size, but is also indicative of costs management and whether the ultimate fee reflects the value of the services provided. For example, a profit margin on one exchange should not be deemed excessive where that exchange has been successful in controlling its costs, but not excessive where on another exchange where that exchange is charging comparable fees but has a lower profit margin due to higher costs. Doing so could have the perverse effect of not incentivizing cost control where higher costs alone could be used to justify fees increases. The Proposed Pricing Is Not Unfairly Discriminatory and Provides for the Equitable Allocation of Fees, Dues, and Other Charges The Exchange believes that the proposed fees are reasonable, fair, equitable, and not unfairly discriminatory because they are designed to align fees with services provided and will apply equally to all subscribers. 1Gb and 10Gb ULL Connectivity The Exchange believes that the proposed fees are equitably allocated among users of the network connectivity and port alternatives, as the users of 10Gb ULL connections consume substantially more bandwidth and network resources than users of 1Gb ULL connection. Specifically, the Exchange notes that 10Gb ULL connection users account for more than 99% of message traffic over the network, driving other costs that are linked to capacity utilization, as described above, while the users of the 1Gb ULL connections account for less than 1% of message traffic over the network. In the Exchange’s experience, users of the 1Gb connections do not have the same business needs for the high-performance network as 10Gb ULL users. The Exchange’s high-performance network and supporting infrastructure (including employee support), provides unparalleled system throughput with the network ability to support access to several distinct equities markets. To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network E:\FR\FM\08MYN1.SGM 08MYN1 29748 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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.120 Thus, as the number of messages an entity increases, certain other costs incurred by the Exchange that are correlated to, though not directly affected by, connection costs (e.g., storage costs, surveillance costs, service expenses) also increase. Given this difference in network utilization rate, the Exchange believes that it is reasonable, equitable, and not unfairly discriminatory that the 10Gb ULL users pay for the vast majority of the shared network resources from which all market participants’ benefit. FIX and MEO Ports To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network consumers. Billions of messages per day consume the Exchange’s resources and significantly contribute to the overall network connectivity expense for storage and 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.121 Thus, as the number of connections an Equity Member has increases, the related pull on Exchange resources also increases. The Exchange sought to design the proposed pricing structure to set the amount of the fees to relate to the number of connections a firm purchases, while continuing to provide the first five (5) ports for free. The more connections purchased by an Equity Member likely results in greater expenditure of Exchange resources and increased cost to the Exchange. The Exchange further believes that the proposed fees are reasonable, equitably allocated and not unfairly discriminatory because, for the flat fee, 120 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). 121 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 the Exchange provides each Equity Member their first five (5) ports for free, unlike other equity exchanges referenced above. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Intra-Market Competition The Exchange believes the proposed fees will not result in any burden on intra-market competition that is not necessary or appropriate in furtherance of the purposes of the Act because the proposed fees will allow the Exchange to recoup some of its costs in providing 1Gb and10Gb ULL connectivity as well as FIX and MEO Ports at below market rates to market participants since the Exchange launched operations. As described above, the Exchange has operated at a cumulative net annual loss since it launched operations in 2020 122 due to providing a low-cost alternative to attract order flow and encourage market participants to experience the high determinism and resiliency of the Exchange’s trading Systems. To do so, the Exchange chose to waive the fees for some non-transaction related services and Exchange products or provide them at a very lower fee, which was not profitable to the Exchange. This resulted in the Exchange forgoing revenue it could have generated from assessing any fees or higher fees. The Exchange could have sought to charge higher fees at the outset, but that could have served to discourage participation on the Exchange. Instead, the Exchange chose to provide a low-cost exchange alternative to the industry, which resulted in lower initial revenues. Examples of this are 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, for which the Exchange only now seeks to adopt fees at a level similar to or lower than those of other equity exchanges. Further, the Exchange does not believe that the proposed fee increase for the 1Gb or 10Gb ULL connection change would place certain market participants at the Exchange at a relative disadvantage compared to other market participants or affect the ability of such market participants to compete. The proposed fees would apply uniformly to all market participants regardless of the number of connections they choose to purchase. The proposed fees do not favor certain categories of market 122 See PO 00000 supra note 119. Frm 00128 Fmt 4703 Sfmt 4703 participants in a manner that would impose an undue burden on competition. The Exchange does not believe that the proposed rule change would place certain market participants at the Exchange at a relative disadvantage compared to other market participants or affect the ability of such market participants to compete. In particular, Exchange personnel has been informally discussing potential fees for connectivity services with a diverse group of market participants that are connected to the Exchange (including large and small firms, firms with large connectivity service footprints and small connectivity service footprints, as well as extranets and service bureaus) for several months leading up to that time. The Exchange does not believe the proposed fees for connectivity services would negatively impact the ability of Equity Members, non-Equity Members (extranets or service bureaus), thirdparties that purchase the Exchange’s connectivity and resell it, and customers of those resellers to compete with other market participants or that they are placed at a disadvantage. The Exchange does anticipate, however, that some market participants may reduce or discontinue use of connectivity services provided directly by the Exchange in response to the proposed fees. In fact, as mentioned above, one MIAX Pearl Options Market Maker terminated their MIAX Pearl Options membership on January 1, 2023 as a direct result of the proposed fee changes for that market.123 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 123 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 53. The Exchange does not believe a similar analysis would be useful here because it is amending existing fees, not proposing to charge a new fee where existing subscribers may terminate connections because they are no longer enjoying the service at no cost. In addition, despite the potential for existing subscribers to terminate connections due to the proposal, the Exchange anticipates its number of subscribers to remain generally static, resulting in an immaterial difference between a best case and worst case scenario. E:\FR\FM\08MYN1.SGM 08MYN1 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices 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. ddrumheller on DSK120RN23PROD with NOTICES1 Inter-Market Competition The Exchange also does not believe that the proposed rule change will result in any burden on inter-market competition that is not necessary or appropriate in furtherance of the purposes of the Act. As discussed above, market participants are not forced to connect to all exchanges. There is no reason to believe that our proposed price increase will harm another exchange’s ability to compete. There are other markets of which market participants may connect to trade equities at higher rates than the Exchange’s. There is also a range of alternative strategies, including routing to the exchange through another participant or market center or accessing the Exchange indirectly. Market participants are free to choose which exchange or reseller to use to satisfy their business needs. Accordingly, the Exchange does not believe its proposed fee changes impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. * * * * * In conclusion, as discussed thoroughly above, the Exchange regrettably believes that the application of the Revised Review Process and Staff Guidance has adversely affected intermarket competition among legacy and non-legacy exchanges by impeding the ability of non-legacy exchanges to adopt or increase fees for their market data VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 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 and one comment letter on the Second Proposal from the same commenter.124 In their letters, 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 letters, 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. 124 See letter from Brian Sopinsky, General Counsel, Susquehanna International Group, LLP (‘‘SIG’’), to Vanessa Countryman, Secretary, Commission, dated February 7, 2023 and letter from Gerald D. O’Connell, SIG, to Vanessa Countryman, Secretary, Commission, dated March 21, 2023. PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 29749 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,125 and Rule 19b–4(f)(2) 126 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– PEARL–2023–18 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–PEARL–2023–18. 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 125 15 126 17 E:\FR\FM\08MYN1.SGM U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). 08MYN1 29750 Federal Register / Vol. 88, No. 88 / Monday, May 8, 2023 / Notices 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. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to File Number SR–PEARL–2023–18 and should be submitted on or before May 30, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.127 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–09679 Filed 5–5–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97422; File No. SR– EMERALD–2023–12] Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX Emerald, LLC To Amend the Fee Schedule To Modify Certain Connectivity and Port Fees May 2, 2023. ddrumheller on DSK120RN23PROD with NOTICES1 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 April 20, 2023, MIAX Emerald, LLC (‘‘MIAX Emerald’’ 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 Emerald Fee Schedule (the ‘‘Fee Schedule’’) to amend certain connectivity and port fees. The text of the proposed rule change is available on the Exchange’s website at https://www.miaxoptions.com/rule127 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 21:48 May 05, 2023 Jkt 259001 filings/emerald, at MIAX’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the Fee Schedule as follows: (1) increase the fees for a 10 gigabit (‘‘Gb’’) ultra-low latency (‘‘ULL’’) fiber connection for Members 3 and non-Members; and (2) adopt a tiered-pricing structure for Limited Service MIAX Emerald Express Interface (‘‘MEI’’) Ports 4 available to Market Makers.5 The Exchange last increased the fees for both 10Gb ULL fiber connections and Limited Service MEI Ports beginning with a series of filings on October 1, 2020 (with the final filing made on March 24, 2021).6 Prior to that fee change, the Exchange provided Limited Service MEI Ports for $50 per port, after the first two Limited Service MEI Ports that are provided free of charge, and the Exchange incurred all the costs associated to provide those first two Limited Service MEI Ports 3 The term ‘‘Member’’ means an individual or organization approved to exercise the trading rights associated with a Trading Permit. Members are deemed ‘‘members’’ under the Exchange Act. See Exchange Rule 100. 4 The MIAX Emerald Express Interface (‘‘MEI’’) is a connection to the MIAX Emerald System that enables Market Makers to submit simple and complex electronic quotes to MIAX Emerald. See the Definitions Section of the Fee Schedule. 5 The term ‘‘Market Makers’’ refers to Lead Market Makers (‘‘LMMs’’), Primary Lead Market Makers (‘‘PLMMs’’), and Registered Market Makers (‘‘RMMs’’) collectively. See the Definitions Section of the Fee Schedule and Exchange Rule 100. 6 See Securities Exchange Act Release Nos. 91460 (April 1, 2021), 86 FR 18349 (April 8, 2021) (SR– EMERALD–2021–11); 90184 (October 14, 2020), 85 FR 66636 (October 20, 2020) (SR–EMERALD–2020– 12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR–EMERALD–2020–17); 91032 (February 1, 2021), 86 FR 8428 (February 5, 2021) (SR–EMERALD–2021–02); and 91200 (February 24, 2021), 86 FR 12221 (March 2, 2021) (SR–EMERALD–2021–07). PO 00000 Frm 00130 Fmt 4703 Sfmt 4703 since it commenced operations in March 2019. The Exchange then increased the fee by $50 to a modest $100 fee per Limited Service MEI Port and increased the fee for 10Gb ULL fiber connections from $6,000 to $10,000 per month. Also, in that fee change, the Exchange adopted fees for providing five different types of ports for the first time. These ports were FIX Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and Purge Ports.7 Again, the Exchange absorbed all costs associated with providing these ports since its launch in March 2019. As explained in that filing, expenditures, as well as research and development (‘‘R&D’’) in numerous areas resulted in a material increase in expense to the Exchange and were the primary drivers for that proposed fee change. In that filing, the Exchange allocated a total of $9.3 million in expenses to providing 10Gb ULL fiber connectivity, additional Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and Purge Ports.8 Since the time of 2021 increase discussed above, the Exchange experienced ongoing increases in expenses, particularly internal expenses.9 As discussed more fully below, the Exchange recently calculated increased annual aggregate costs of $11,361,586 for providing 10Gb ULL connectivity and $1,779,066 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 7 See id. for a description of each of these ports. 8 Id. 9 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. E:\FR\FM\08MYN1.SGM 08MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 88 (Monday, May 8, 2023)]
[Notices]
[Pages 29730-29750]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09679]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97417; File No. SR-PEARL-2023-18]

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

May 2, 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 April 20, 2023, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange is filing a proposal to amend the fee schedule (the
``Fee Schedule'') applicable to MIAX Pearl Equities, an equities
trading facility, to amend certain connectivity and port fees.\3\
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\3\ All references to the ``Exchange'' in this filing refer to
MIAX Pearl Equities. Any references to the options trading facility
of MIAX PEARL, LLC will specifically be referred to as ``MIAX Pearl
Options.''
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The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/pearl at MIAX
Pearl's principal office, and at the Commission's Public Reference
Room.

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

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

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

1. Purpose
The Exchange proposes to amend the Fee Schedule to amend fees for:
(1) the 1 gigabit (``Gb'') and 10Gb ultra-low latency (``ULL'') fiber
connections for Equity Members \4\ and non-Members; (2) the Financial
Information Exchange (``FIX'') Ports,\5\ and the MIAX Express Orders
Interface (``MEO'') Ports.\6\ The Exchange adopted connectivity and
port fees in September 2020,\7\ and has not changed those fees since
they were adopted. Since that time, the Exchange experienced ongoing
increases in expenses, particularly internal expenses.\8\ As discussed
more fully below, the Exchange recently calculated increased annual
aggregate costs of $18,331,650 for providing 1Gb and 10Gb ULL
connectivity combined and

[[Page 29731]]

$3,951,993 for providing FIX and MEO Ports.\9\
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\4\ The term ``Equity Member'' means a Member authorized by the
Exchange to transact business on MIAX PEARL Equities. See Exchange
Rule 1901.
\5\ ``FIX Order Interface'' or ``FOI'' means the Financial
Information Exchange interface for certain order types as set forth
in Exchange Rule 2614. See the Definitions section of the Fee
Schedule.
\6\ Each MEO interface will have one Full Service Port (``FSP'')
and one Purge Port. ``Full Service Port'' or ``FSP'' means an MEO
port that supports all MEO order input message types. See the
Definitions section of the Fee Schedule.
\7\ See Securities Exchange Act Release No. 90651 (December 11,
2020), 85 FR 81971 (December 17, 2020) (SR-PEARL-2020-33).
\8\ 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\ For the avoidance of doubt, all references to costs in this
filing, including the cost categories discussed below, refer to
costs incurred by MIAX Pearl Equities only and not MIAX Pearl
Options, the options trading facility.
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Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity and port
services. Subscribers expect the Exchange to provide this level of
support so they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 1Gb connectivity, 10Gb ULL connectivity and FIX and MEO Ports
in order to recoup ongoing costs and increased expenses set forth below
in the Exchange's cost analysis. The Exchange proposes to implement the
changes to the Fee Schedule pursuant to this proposal immediately. The
Exchange initially filed the proposal on December 30, 2022 (SR-PEARL-
2022-61) (the ``Initial Proposal'').\10\ On February 23, 2023, the
Exchange withdrew the Initial Proposal and replaced it with a revised
proposal (SR-PEARL-2023-06) (the ``Second Proposal'').\11\ On April 20,
2023, the Exchange withdrew the Second Proposal and replaced it with
this revised proposal (SR-PEARL-2023-18).
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\10\ See Securities Exchange Act Release No. 96631 (January 10,
2023), 88 FR 2671 (January 17, 2023) (SR-PEARL-2022-61).
\11\ See Securities Exchange Act Release No. 97077 (March 8,
2023), 88 FR 15746 (March 14, 2023) (SR-PEARL-2023-06).
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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 (separately among MIAX Pearl Options and MIAX
Pearl Equities, MIAX,\12\ and MIAX Emerald,\13\ together with MIAX and
MIAX Pearl Options, the ``affiliated markets'') to ensure no cost was
allocated more than once, as well as additional detail supporting its
cost allocation processes and explanations as to why a cost allocation
in this proposal may differ from the same cost allocation in a similar
proposal submitted by one of its affiliated exchanges. Although the
baseline cost analysis used to justify the proposed fees was made in
the Initial Proposal, the fees themselves have not changed since the
Initial Proposal and the Exchange still proposes fees that are intended
to cover the Exchange's cost of providing 1Gb and 10Gb ULL connectivity
and FIX and MEO Ports.
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\12\ The term ``MIAX'' means Miami International Securities
Exchange, LLC. See Exchange Rule 100.
\13\ The term ``MIAX Emerald'' means MIAX Emerald, LLC. See
Exchange Rule 100.
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* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \14\ and various other
developments, the Commission began to undertake a heightened review of
exchange filings, including non-transaction fee filings that was
substantially and materially different from it prior review process
(hereinafter referred to as the ``Revised Review Process''). In the
Susquehanna Decision, the D.C. Circuit Court stated that the Commission
could not maintain a practice of ``unquestioning reliance'' on claims
made by a self-regulatory organization (``SRO'') in the course of
filing a rule or fee change with the Commission.\15\ 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.\16\ 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'').\17\ 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.'' \18\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\19\ 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.'' \20\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
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\14\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\15\ Id.
\16\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\17\ 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).
\18\ Id. at page 2.
\19\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\20\ 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.\21\ 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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\21\ 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.'' \22\ 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

[[Page 29732]]

significant competitive forces.'' \23\ 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.'' \24\
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\22\ 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'').
\23\ Id.
\24\ 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 \25\ and remanded for further proceedings consistent
with its opinion.\26\ 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.'' \27\
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.\28\ 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.''
\29\ 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.\30\
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\25\ 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.
\26\ 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.
\27\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\28\ 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'').
\29\ Id.
\30\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ vs. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \31\
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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\31\ See supra note 26, 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'').\32\ 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 \33\ 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.\34\ These fees
remain in effect today.
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\32\ 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.
\33\ 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.
\34\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
---------------------------------------------------------------------------

The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis

[[Page 29733]]

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.\35\ 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.
---------------------------------------------------------------------------

\35\ For example, the options exchange affiliates of MIAX Pearl
Equities, MIAX, MIAX Pearl Options, and MIAX Emerald, have filed,
and subsequently withdrawn, various forms of connectivity and port
fee changes at least seven (7) times since August 2021. Each of the
proposals contained hundreds of cost and revenue disclosures never
previously disclosed by legacy exchanges in their access and market
data fee filings prior to 2019.
---------------------------------------------------------------------------

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 \36\ and $80,383,000 for 2021.\37\ Cboe C2 Exchange, Inc.
(``C2'') reported ``access and capacity fee'' revenue of $19,016,000
for 2020 \38\ and $22,843,000 for 2021.\39\ Cboe BZX Exchange, Inc.
(``BZX'') reported ``access and capacity fee'' revenue of $38,387,000
for 2020 \40\ and $44,800,000 for 2021.\41\ Cboe EDGX Exchange, Inc.
(``EDGX'') reported ``access and capacity fee'' revenue of $26,126,000
for 2020 \42\ and $30,687,000 for 2021.\43\ 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.\44\ 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.'' \45\
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\36\ 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.
\37\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\38\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\39\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\40\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\41\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\42\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\43\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\44\ 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.
\45\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf. The Exchanges
notes that this type of Form 1 accounting appears to be designed to
obfuscate the true financials of such exchanges and has the effect
of perpetuating fee and revenue advantages of legacy exchanges.
---------------------------------------------------------------------------

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,\46\ 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.
---------------------------------------------------------------------------

\46\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
---------------------------------------------------------------------------

While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its content . . .'',\47\ this is not the reality experienced by
exchanges such as MIAX Pearl. As such, non-legacy exchanges are forced
to rely on an opaque cost-based justification standard. However,
because the Staff Guidance is devoid of detail on what must be
contained in cost-based justification, this standard is nearly
impossible to meet despite repeated good-faith efforts by the Exchange
to provide substantial amount of cost-related details. For example,
MIAX Pearl Options has attempted to increase similar fees using a cost-
based justification numerous times, having submitted over six
filings.\48\ 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 \49\ 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

[[Page 29734]]

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.
---------------------------------------------------------------------------

\47\ See supra note 22, at note 1.
\48\ See, e.g., Securities Exchange Act Release Nos. 92798
(August 27, 2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-
33); 92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-
PEARL-2021-36); 93162 (September 28, 2021), 86 FR 54739 (October 4,
2021) (SR-PEARL-2021-45); 93556 (November 10, 2021), 86 FR 64235
(November 17, 2021) (SR-PEARL-2021-53); 93774 (December 14, 2021),
86 FR 71952 (December 20, 2021) (SR-PEARL-2021-57); 93894 (January
4, 2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58); 94258
(February 15, 2022), 87 FR 9659 (February 22, 2022) (SR-PEARL-2022-
03); 94286 (February 18, 2022), 87 FR 10860 (February 25, 2022) (SR-
PEARL-2022-04); 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022)
(SR-PEARL-2022-11); 94722 (April 14, 2022), 87 FR 23660 (April 20,
2022) (SR-PEARL-2022-12); 94888 (May 11, 2022), 87 FR 29892 (May 17,
2022) (SR-PEARL-2022-18).
\49\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\50\ 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; \51\ 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.
---------------------------------------------------------------------------

\50\ 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.
\51\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
---------------------------------------------------------------------------

In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and place a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other exchanges for connectivity. If the Commission Staff were to
disapprove this proposal, that action, and not market forces, would
substantially affect whether the Exchange can be successful in its
competition with other exchanges. Disapproval of this filing could also
be viewed as an arbitrary and capricious decision should the Commission
Staff continue to ignore its past treatment of non-transaction fee
filings before implementation of the Revised Review Process and Staff
Guidance and refuse to allow such filings to be approved despite
significantly enhanced arguments and cost disclosures.\52\
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\52\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever-increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
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Lastly, the Exchange notes that the Commission Staff has allowed
similar fee increases by other exchanges to remain in effect by
publishing those filings for comment and allowing the exchange to
withdraw and re-file numerous times.\53\ Recently, the Commission Staff
has not afforded the Exchange the same flexibility.\54\ 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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\53\ 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).
\54\ See Securities Exchange Act Release Nos. 94721 (April 14,
2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11) and 94722
(April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-12).
---------------------------------------------------------------------------

* * * * *
1Gb and 10Gb ULL Connectivity Fee Change
Sections 2a) and b) of the Fee Schedule describe network
connectivity fees for the 1Gb ULL and 10Gb ULL fiber connections, which
are charged to both Equity Members and non-Members for connectivity to
the Exchange's primary and secondary facilities. The Exchange offers
its Equity Members the ability to connect to the Exchange in order to
transmit orders to and receive information from the Exchange. Equity
Members can also choose to connect to the Exchange indirectly through
physical connectivity maintained by a third-party extranet. Extranet
physical connections may provide access to one or multiple Equity
Members on a single connection. The number of physical connections
assigned to each User \55\ as of March 31, 2023, ranges from one to
thirteen, depending on the scope and scale of the Equity Member's
trading activity on the Exchange as determined by the Equity Member,
including the Equity Member's determination of the need for redundant
connectivity. The Exchange notes that 40% of its Equity Members do not
maintain a physical connection directly with the Exchange in the
Primary Data Center (though many such Equity Members have connectivity
through a third-party provider) and another 46% have either one or two
physical ports to connect to the Exchange in the Primary Data Center.
Thus, only a limited number of Equity Members, 14%, maintain three or
more physical ports to connect to the Exchange in the Primary Data
Center.
---------------------------------------------------------------------------

\55\ The term ``User'' shall mean any Member or Sponsored
Participant who is authorized to obtain access to the System
pursuant to Exchange Rule 2602. See Exchange Rule 1901.
---------------------------------------------------------------------------

In order to partially cover the continuous increase in aggregate
costs of providing physical connectivity to Equity Members and non-
Equity Members, as described below, the Exchange proposes to amend the
monthly connectivity fees as follows: (a) increase the 1Gb ULL
connection from $1,000 to $2,500; and (b) increase the 10Gb ULL
connection from $3,500 to $8,000.\56\
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\56\ The Exchange notes that while its proposed fee of $8,000
per 10Gb ULL connection is higher than MEMX's $6,000 monthly fee for
its xNet Physical Connection, MEMX does not offer any other physical
connectivity, such as a 1Gb connection, for a lower fee. See
Securities Exchange Act Release No. 95936 (September 27, 2022), 87
FR 59845 (October 3, 2022) (SR-MEMX-2022-26). See MEMX Fee Schedule,
Connectivity and Application Sessions, available at https://info.memxtrading.com/fee-schedule/ (last visited April 18, 2023).

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[[Page 29735]]

FIX and MEO Ports
Similar to other exchanges, the Exchange offers its Equity Members
application sessions, also known as ports, for order entry and receipt
of trade execution reports and order messages. Equity Members can also
choose to connect to the Exchange indirectly through a session
maintained by a third-party service bureau. Service bureau sessions may
provide access to one or multiple Equity Members on a single session.
The number of sessions assigned to each User as of April 18, 2023,
ranges from one to more than 100, depending on the scope and scale of
the Equity Member's trading activity on the Exchange (either through a
direct connection or through a service bureau) as determined by the
Equity Member. For example, by using multiple sessions, Equity Members
can segregate order flow from different internal desks, business lines,
or customers. The Exchange does not impose any minimum or maximum
requirements for how many application sessions an Equity Member or
service bureau can maintain, and does not propose to impose any minimum
or maximum session requirements for its Equity Members or their service
bureaus.
Section 2)d), Port Fees, of the Fee Schedule describes fees for
access and services used by Equity Members and non-Members. The
Exchange provides the following types of ports: (i) FIX Ports, which
allow Equity Members to send orders and other messages using the FIX
protocol; and (ii) MEO Ports, which allow Equity Members order entry
capabilities to all Exchange matching engines.
The Exchange operates a primary and secondary data center as well
as a disaster recovery center. Each Port provides access to all
Exchange data centers for a single fee. The Exchange currently provides
the first twenty-five (25) FIX and MEO Ports free of charge and
absorbed all associated costs since the launch of MIAX Pearl Equities.
The Exchange charges the following separate monthly fees for FIX and
MEO Ports: $450 for ports 26-50, $400 for ports 51-75, $350 for ports
76-100, and $300 for ports 101 and higher. The Exchange now proposes to
provide the first five (5) FIX or MEO Ports free of charge, then charge
a flat rate of $450 per port for port six (6) and above.\57\
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\57\ The Exchange notes that the proposed fee of $450 per port
equals the amount charged by MEMX for MEMX's application sessions
(order entry and drop copy ports), but MEMX does not offer any ports
free of charge. See MEMX Fee Schedule, Connectivity and Application
Sessions, available at https://info.memxtrading.com/fee-schedule/
(last visited April 18, 202). See Securities Exchange Act Release
No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-
MEMX-2022-26). Unlike MEMX and other exchanges, the Exchange also
continues to provide FXD Ports (i.e., Drop Copy Ports) free of
charge.
---------------------------------------------------------------------------

Implementation
The proposed fee changes are immediately effective.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
section 6(b) of the Act \58\ in general, and furthers the objectives of
section 6(b)(4) of the Act \59\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Equity Members and other persons using any facility or system
which the Exchange operates or controls. The Exchange also believes the
proposed fees further the objectives of section 6(b)(5) of the Act \60\
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.
---------------------------------------------------------------------------

\58\ 15 U.S.C. 78f(b).
\59\ 15 U.S.C. 78f(b)(4).
\60\ 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 \61\ and
the Staff Guidance,\62\ the Exchange believes that the proposed fees
are consistent with the Act because they are: (i) reasonable, equitably
allocated, not unfairly discriminatory, and not an undue burden on
competition; (ii) comply with the BOX Order and the Staff Guidance; and
(iii) supported by evidence (including comprehensive revenue and cost
data and analysis) that they are fair and reasonable and will not
result in excessive pricing or supra-competitive profit.
---------------------------------------------------------------------------

\61\ See supra note 21.
\62\ See supra note 22.
---------------------------------------------------------------------------

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.''
\63\ 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.'' \64\ 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.'' \65\
---------------------------------------------------------------------------

\63\ Id.
\64\ Id.
\65\ 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 begin to recover its costs to provide
dedicated access via 1Gb and 10Gb ULL connectivity as well as FIX and
MEO Ports. As discussed above, the Revised Review Process and Staff
Guidance have created an uneven playing field between legacy and non-
legacy exchanges by severely restricting non-legacy exchanges from
being able to increase non-transaction relates fees to provide them
with additional necessary revenue to better compete with legacy
exchanges, which largely set fees prior to the Revised Review Process.
The much higher non-transaction fees charged by the legacy exchanges
provides them with two significant competitive advantages: (i)
additional non-transaction revenue that may be used to fund areas other
than the non-transaction service related to the fee, such as
investments in infrastructure, advertising, new products and other
innovations; and (ii) greater flexibility to lower their transaction
fees by using the revenue from the higher non-transaction fees to
subsidize transaction fee rates. The latter is more immediately
impactful in competition for order flow and market share, given the
variable nature of this cost on Equity Member firms. The absence of a
reasonable path

[[Page 29736]]

forward to increase non-transaction fees to comparable (or lower rates)
limits the Exchange's flexibility to, among other things, make
additional investments in infrastructure and advertising, diminishes
the ability to remain competitive on transaction fees, and hinders the
ability to compete for order flow and market share. Again, while one
could debate whether the pricing of non-transaction fees are subject to
the same market forces as transaction fees, there is little doubt that
subjecting one exchange to a materially different standard than that
applied to other exchanges for non-transaction fees leaves that
exchange at a disadvantage in its ability to compete with its pricing
of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations in September 2020 and adopted its
initial fee schedule, with 1Gb ULL connectivity set at $1,000, 10Gb ULL
connectivity fees set at $3,500, and provided the first twenty-five
(25) FIX and MEO Ports for free.\66\ As a new exchange entrant, the
Exchange chose to offer such services at a discounted rate or free of
charge to encourage market participants to trade on the Exchange and
experience, among things, the quality of the Exchange's technology and
trading functionality. This practice is not uncommon. New exchanges
often do not charge fees or charge lower fees for certain services such
as memberships/trading permits to attract order flow to an exchange,
and later amend their fees to reflect the true value of those services,
absorbing all costs to provide those services in the meantime. Allowing
new exchange entrants time to build and sustain market share through
various pricing incentives before increasing non-transaction fees
encourages market entry and fee parity, which promotes competition
among exchanges. It also enables new exchanges to mature their markets
and allow market participants to trade on the new exchanges without
fees serving as a potential barrier to attracting memberships and order
flow.\67\
---------------------------------------------------------------------------

\66\ See supra note 7.
\67\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX. . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
---------------------------------------------------------------------------

The Exchange has not amended any of its non-transaction fees since
its launch in September 2022. The Exchange balanced business and
competitive concerns with the need to financially compete with the
larger incumbent exchanges that charge higher fees for similar
connectivity and use that revenue to invest in their technology and
other service offerings.
The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
competitive forces, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. The fact that the
market for order flow is competitive has long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .'' \68\
---------------------------------------------------------------------------

\68\ 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.'' \69\
---------------------------------------------------------------------------

\69\ 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.' '' \70\ 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.'' \71\ 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.'' \72\ 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.'' \73\
---------------------------------------------------------------------------

\70\ 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.'').
\71\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\72\ Id.
\73\ See Staff Guidance, supra note 22.
---------------------------------------------------------------------------

The Exchange believes the competing exchanges' connectivity and
port fees are useful examples of alternative approaches to providing
and charging for access and demonstrating how such fees are
competitively set and constrained. To that end, the Exchange believes
the proposed fees are competitive and reasonable because the proposed
fees are similar to or less than fees charged for similar connectivity
and port access provided by other exchanges with comparable market
shares. As such, the Exchange believes that denying its ability to
institute fees that are closer to parity with legacy exchanges, in
effect, impedes its ability to compete, including in its pricing of
transaction fees and ability to invest in competitive infrastructure
and other offerings.
The following table shows how the Exchange's proposed fees remain

[[Page 29737]]

similar to or less than fees charged for similar connectivity and port
access provided by other exchanges with similar market share. Each of
the market data rates in place at competing exchanges were filed with
the Commission for immediate effectiveness and remain in place today.

------------------------------------------------------------------------
Monthly fee (per
Exchange Type of connection connection or per
or port port)
------------------------------------------------------------------------
MIAX Pearl Equities(as proposed) 1Gb ULL connection $2,500.
(market share of 1.54% for the
month of March 2023) \74\.
10Gb ULL $8,000.
connection.
FIX and MEO Ports. 1-5 ports: FREE 6
ports or more:
$450 per port.
FXD Ports (i.e., FREE.
Drop Copy Ports.
MEMX \75\ (market share of 3.12% 1Gb connection.... Not available.
for the month of March 2023)
\76\.
xNet Physical $6,000 per
connection. connection.
Order Entry Ports. $450 per port.
Drop Copy Ports... $450 per port.
NASDAQ PSX LLC (``PSX'') \77\ 1Gb connection.... $2,500 per
(market share of 0.48% for the connection (plus
month of March 2023) \78\. $1,500
installation
fee).
10Gb connection... $7,500 per
connection (plus
$1,500
installation
fee).
Order Entry Ports. $400 per port.
Drop Copy Ports... $400 per port.
NASDAQ BX LLC (``BX'') \79\ 1Gb Ultra $2,500 per
(market share of 0.37% for the connection. connection (plus
month of March 2023) \80\. $1,500
installation
fee).
10Gb Ultra $15,000 (plus
connection. $1,500
installation
fee).
Order Entry Ports. $500 per port.
Drop Copy Ports... $500 per port.
------------------------------------------------------------------------

There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available equity
exchanges. Market participants may choose to become a member of one or
more equities exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, one Market Maker of MIAX Pearl Options terminated their
membership effective January 1, 2023 as a direct result of the proposed
fee changes to the MIAX Pearl Options fee schedule.
---------------------------------------------------------------------------

\74\ See Market at a Glance, available at https://www.miaxoptions.com/.
\75\ See MEMX Fee Schedule, Connectivity and Application
Sessions, available at https://info.memxtrading.com/fee-schedule/.
\76\ See supra note 74.
\77\ See PSX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing; and PSX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
\78\ See supra note 74.
\79\ See BX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; and BX Rules,
General 8: Connectivity, Section 2, Direct Connectivity.
\80\ See supra note 74.
---------------------------------------------------------------------------

It is not a requirement for market participants to become members
of all equities exchanges, in fact, certain market participants conduct
an equities business as a member of only one market.\81\ A very small
number of market participants choose to become a member of all sixteen
(16) equities exchanges. Most firms that actively trade on equities
markets are not currently Equity Members of the Exchange and do not
purchase connectivity or port services at the Exchange. Connectivity
and ports are only available to Equity Members or service bureaus, and
only an Equity Member may utilize a port.\82\
---------------------------------------------------------------------------

\81\ 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.''
\82\ Service Bureaus may obtain ports on behalf of Equity
Members.
---------------------------------------------------------------------------

BOX recently noted in a proposal to amend their own trading permit
fees that of the 62 market making firms that are registered as Market
Makers across Cboe, MIAX, and BOX, 42 firms access only one of the
three exchanges.\83\ For equities, the Exchange currently has 45 Equity
Members. Also, MEMX noted in a January 2022 filing that it had only 66
members, and, based on publicly available information regarding a
sample of the Exchange's competitors, NYSE has 142 members, Cboe BZX
has 140 members, and Investors Exchange LLC (``IEX'') has 133
members.\84\ For options, the Exchange and its affiliates, MIAX and
MIAX Emerald, have a total of 47 members. Of those 47 total members, 35
are members of all three affiliated exchanges, four (4) are members of
only two (2) affiliated exchanges, and eight (8) are members of only
one affiliated exchange. The Exchange believes that significant
differences in membership numbers describes by the Exchange, BOX, and
MEMX demonstrate that firms can, and do, select which exchanges they
wish to access, and, accordingly, exchanges must take competitive
considerations into account when setting fees for such access. The
Exchange also notes that no firm is an Equity Member of the Exchange
only. The above data evidences that a broker-dealer need not have
direct connectivity to all exchanges, let alone the Exchange and its
affiliates, and broker-dealers may elect to do so based on their own

[[Page 29738]]

business decisions and need to directly access each exchange's
liquidity pool.
---------------------------------------------------------------------------

\83\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17).
\84\ See Securities Exchange Act Release No. 93927 (January 7,
2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19).
---------------------------------------------------------------------------

Not only is there not an actual regulatory requirement to connect
to every equities exchange, the Exchange believes there is also no ``de
facto'' or practical requirement as well, as further evidenced by the
broker-dealer membership analysis of exchanges discussed above. Indeed,
broker-dealers choose if and how to access a particular exchange and
because it is a choice, the Exchange must set reasonable pricing,
otherwise prospective members would not connect and existing members
would disconnect from the Exchange. The decision to become a member of
an exchange, is complex, and not solely based on the non-transactional
costs assessed by an exchange. As noted herein, specific factors
include, but are not limited to: (i) an exchange's available liquidity
in equities securities; (ii) trading functionality offered on a
particular market; (iii) product offerings; (iv) customer service on an
exchange; and (v) transactional pricing. Becoming a member of the
exchange does not ``lock'' a potential member into a market or diminish
the overall competition for exchange services.
In lieu of becoming a member at each exchange, a market participant
may join one exchange and elect to have their orders routed in the
event that a better price is available on an away market. Nothing in
the Order Protection Rule requires a firm to become an Equity Member
at--or establish connectivity to--the Exchange.\85\ 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.\86\
---------------------------------------------------------------------------

\85\ See 17 CFR 242.611.
\86\ Equity Members may elect to not route their orders by
utilizing the Do Not Route or Post Only order type instructions. See
Exchange Rule 2614(c)(1) and (2).
---------------------------------------------------------------------------

With respect to the submission of orders, Equity Members may also
choose not to purchase any connection at all from the Exchange, and
instead rely on the port of a third party to submit an order. For
example, a third-party broker-dealer Equity Member of the Exchange may
be utilized by a retail investor to submit orders into an Exchange. An
institutional investor may utilize a broker-dealer, a service
bureau,\87\ or request sponsored access \88\ through a member of an
exchange in order to submit a trade directly to an equities
exchange.\89\ 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.
---------------------------------------------------------------------------

\87\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be an Equity Member. Some Equity Members utilize a
Service Bureau for connectivity and that Service Bureau may not be
an Equity Member. Some market participants utilize a Service Bureau
who is an Equity Member to submit orders.
\88\ Sponsored Access is an arrangement whereby an Equity Member
permits its customers to enter orders into an exchange's system that
bypass the Equity Member's trading system and are routed directly to
the Exchange, including routing through a service bureau or other
third-party technology provider.
\89\ This may include utilizing a floor broker and submitting
the trade to an equities trading floor.
---------------------------------------------------------------------------

Non-Member third-parties, such as service bureaus and extranets,
resell the Exchange's connectivity. This indirect connectivity is
another viable alternative for market participants to trade on the
Exchange without connecting directly to the Exchange (and thus not pay
the Exchange's connectivity fees), which alternative is already being
used by non-Equity Members and further constrains the price that the
Exchange is able to charge for connectivity and other access fees to
its market. The Exchange notes that it could, but chooses not to,
preclude market participants from reselling its connectivity. Unlike
other exchanges, the Exchange also does not currently assess fees on
third-party resellers on a per customer basis (i.e., fees based on the
number of firms that connect to the Exchange indirectly via the third-
party).\90\ 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.\91\ Particularly, in the
event that a market participant views the Exchange's direct
connectivity and access fees as more or less attractive than competing
markets, that market participant can choose to connect to the Exchange
indirectly or may choose not to connect to the Exchange and connect
instead to one or more of the other 15 equities markets. Accordingly,
the Exchange believes that the proposed fees are fair and reasonable
and constrained by competitive forces.
---------------------------------------------------------------------------

\90\ 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).
\91\ The Exchange notes that resellers, such as SFTI, are not
required to publicize, let alone justify or file with the Commission
their fees, and as such could charge the market participant any fees
it deems appropriate (including connectivity fees higher than the
Exchange's connectivity fees), even if such fees would otherwise be
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------

The Exchange is obligated to regulate its Equity Members and secure
access to its environment. To properly regulate its Equity Members and
secure the trading environment, the Exchange takes measures to ensure
access is monitored and maintained with various controls. Connectivity
and ports are methods utilized by the Exchange to grant Equity Members
secure access to communicate with the Exchange and exercise trading
rights. When a market participant elects to be an Equity Member, and is
approved for membership by the Exchange, the Equity Member is granted
trading rights to enter orders and/or quotes into Exchange through
secure connections.
Again, there is no legal or regulatory requirement that a market
participant become an Equity Member of the Exchange, or, if it is an
Equity Member, to purchase connectivity beyond the one connection that
is necessary to quote or submit orders on the Exchange. Equity Members
may freely choose to rely on one or many connections, depending on
their business model. This is again evidenced by the fact that one MIAX
Pearl Options Market Maker terminated their MIAX Pearl Options
membership effective January 1, 2023 as a direct result of the proposed
connectivity and port fee changes on MIAX Pearl Options. If a market
participant chooses to become an Equity Member, they may then choose to
purchase connectivity beyond the one connection that is necessary to
quote or submit orders on the Exchange. Members may freely choose to
rely on one or many connections, depending on their business model.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create

[[Page 29739]]

an undue burden on competition among members and markets. In
particular, the Exchange believes that each exchange should take extra
care to be able to demonstrate that these fees are based on its costs
and reasonable business needs.
In proposing to charge fees for connectivity services, the Exchange
is especially diligent in assessing those fees in a transparent way
against its own aggregate costs of providing the related service, and
in carefully and transparently assessing the impact on Equity Members--
both generally and in relation to other Equity Members, i.e., to assure
the fee will not create a financial burden on any participant and will
not have an undue impact in particular on smaller Equity Members and
competition among Equity Members in general. The Exchange believes that
this level of diligence and transparency is called for by the
requirements of section 19(b)(1) under the Act,\92\ and Rule 19b-4
thereunder,\93\ with respect to the types of information SROs should
provide when filing fee changes, and section 6(b) of the Act,\94\ which
requires, among other things, that exchange fees be reasonable and
equitably allocated,\95\ not designed to permit unfair
discrimination,\96\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\97\ 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.\98\ 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.
---------------------------------------------------------------------------

\92\ 15 U.S.C. 78s(b)(1).
\93\ 17 CFR 240.19b-4.
\94\ 15 U.S.C. 78f(b).
\95\ 15 U.S.C. 78f(b)(4).
\96\ 15 U.S.C. 78f(b)(5).
\97\ 15 U.S.C. 78f(b)(8).
\98\ See Staff Guidance, supra note 22.
---------------------------------------------------------------------------

As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 1Gb and 10Gb ULL connectivity to
the Exchange at $18,331,650 combined ($17,726,799 for 10Gb ULL
connectivity and $604,851 for 1Gb connectivity) (or approximately
$1,527,637 per month for combined connectivity costs, rounded to the
nearest dollar when dividing the combined annual cost by 12 months).
The Exchange also recently calculated its aggregate annual costs for
providing FIX and MEO Ports at $3,951,993 combined ($911,998 for FIX
Ports and $3,039,995 for MEO Ports) (or approximately $329,333 per
month for combined FIX and MEO Port costs, rounded to the nearest
dollar when dividing the combined annual cost by 12 months). In order
to cover a portion of the aggregate costs of providing connectivity to
its Users (both Equity Members and non-Equity Members \99\) going
forward, as described below, the Exchange proposes to modify its Fee
Schedule as described above.
---------------------------------------------------------------------------

\99\ Types of market participants that obtain connectivity
services from the Exchange but are not Equity Members include
service bureaus and extranets. Service bureaus offer technology-
based services to other companies for a fee, including order entry
services, and thus, may access application sessions on behalf of one
or more Equity Members. Extranets offer physical connectivity
services to Equity Members and non-Equity Members.
---------------------------------------------------------------------------

In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\100\ 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'').
---------------------------------------------------------------------------

\100\ 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,\101\ 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.
---------------------------------------------------------------------------

\101\ For example, MIAX Pearl Equities maintains 24 matching
engines, MIAX Pearl Options maintains 12 matching engines, MIAX
maintains 24 matching engines and MIAX Emerald maintains 12 matching
engines.
---------------------------------------------------------------------------

Next, the Exchange adopted an allocation methodology with
thoughtful and consistently applied principles to guide how much of a
particular cost amount allocated to the Exchange pursuant to the above
methodology should be allocated within the Exchange to each core
service. For instance, fixed costs that are not driven by client
activity (e.g., message rates), such as data center costs, were
allocated more heavily to the provision of physical connectivity (62%),
with smaller allocations to FIX Ports (1.2%) and MEO Ports (3.8%), and
the remainder to the provision of transaction execution, membership
services and market data services (33%). This next level of the
allocation methodology at the individual exchange level also took into
account a number of factors similar to those set forth under the first
allocation methodology described above, to determine the appropriate
allocation to connectivity or market data versus what is to be
allocated to providing other services. The allocation methodology was
developed through an assessment of costs with senior management
intimately familiar with each area of the Exchange's operations. After
adopting this allocation methodology, the Exchange then applied an
estimated allocation of each cost driver to each core service,
resulting in the cost allocations described below. Each of the below
cost allocations is unique to the Exchange and represents a percentage
of overall cost that was allocated to the Exchange pursuant to the
initial allocation described above.
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity

[[Page 29740]]

and port services, membership fees, regulatory fees, and market data
fees. Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue. The Exchange also notes that as a general
matter each of these sources of revenue is based on services that are
interdependent. For instance, the Exchange's system for executing
transactions is dependent on physical hardware and connectivity; only
Equity Members and parties that they sponsor to participate directly on
the Exchange may submit orders to the Exchange; many Equity Members
(but not all) consume market data from the Exchange in order to trade
on the Exchange; and the Exchange consumes market data from external
sources in order to comply with regulatory obligations. Accordingly,
given this interdependence, the allocation of costs to each service or
revenue source required judgment of the Exchange and was weighted based
on estimates of the Exchange that the Exchange believes are reasonable,
as set forth below. While there is no standardized and generally
accepted methodology for the allocation of an exchange's costs, the
Exchange's methodology is the result of an extensive review and
analysis and will be consistently applied going forward for any other
potential fee proposals. In the absence of the Commission attempting to
specify a methodology for the allocation of exchanges' interdependent
costs, the Exchange is left with its best efforts attempt to conduct
such an allocation in a thoughtful and reasonable manner.
Through the Exchange's extensive updated Cost Analysis, the
Exchange analyzed every expense item in the Exchange's general expense
ledger to determine whether each such expense relates to the provision
of connectivity services, and, if such expense did so relate, what
portion (or percentage) of such expense actually supports the provision
of connectivity services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to network connectivity
services. In turn, the Exchange allocated certain costs more to
physical connectivity and others to ports, while certain costs were
only allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the cost drivers to provide
1Gb and10Gb ULL connectivity, as well as FIX and MEO Ports, result in
an aggregate combined monthly cost of $1,856,970, as further detailed
below.
Lastly, the Exchange notes that, based on: (i) the total expense
amounts contained in this filing (which are 2023 projected expenses),
and (ii) the total expense amounts contained in the related MIAX Pearl
Options filing (also 2023 projected expenses), MIAX PEARL, LLC's total
costs have increased at a greater rate over the last three years than
the total costs of MIAX PEARL, LLC's affiliated exchanges, MIAX and
MIAX Emerald. This is also reflected in the total costs reported in
MIAX PEARL, LLC's Form 1 filings over the last three years, when
comparing MIAX PEARL, LLC to MIAX PEARL, LLC's affiliated exchanges,
MIAX and MIAX Emerald. This is primarily because that MIAX PEARL, LLC
operates two markets, one for options and one for equities, while MIAX
and MIAX Emerald each operate only one market. This is also due to
higher current expense for MIAX PEARL, LLC for 2022 and 2023, due to a
hardware refresh (i.e., replacing old hardware with new equipment) for
MIAX Pearl Options, as well as higher costs associated with MIAX Pearl
Equities due to greater development efforts to grow that newer
marketplace, all of which are discussed in more detail below. MIAX
PEARL, LLC confirms that there is no double counting of expenses
between the options and equities platform of MIAX PEARL, LLC; the
greater expense amounts of MIAX PEARL, LLC (relative to its affiliated
exchanges, MIAX and MIAX Emerald) is solely attributed to the unique
factors of MIAX PEARL, LLC discussed above.
Costs Related to Offering Physical 1Gb and 10Gb ULL Connectivity
The following charts detail the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
1Gb and 10Gb ULL connectivity via an unshared network as well as the
percentage of the Exchange's overall costs that such costs represent
for such area (e.g., as set forth below, the Exchange allocated
approximately 47.6% of its overall Human Resources cost to offering
physical 1Gb and 10Gb ULL connectivity).

10Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \102\ \103\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $5,936,741 $494,728 46.1
Connectivity (external fees, cabling, switches, etc.)........... 69,451 5,788 60
Internet Services, including External Market Data............... 1,818,808 151,567 72.5
Data Center..................................................... 1,052,797 87,733 60
Hardware and Software Maintenance and Licenses.................. 642,112 53,509 58
Depreciation.................................................... 3,448,206 287,351 73.6
Allocated Shared Expenses....................................... 4,758,684 396,557 48.6
-----------------------------------------------
Total....................................................... 17,726,799 1,477,233 54
----------------------------------------------------------------------------------------------------------------

1Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \104\ \105\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $202,566 $16,880 1.6
Connectivity (external fees, cabling, switches, etc.)........... 2,370 197 2.0
Internet Services, including External Market Data............... 62,059 5,172 2.5
Data Center..................................................... 35,922 2,993 2.0
Hardware and Software Maintenance and Licenses.................. 21,909 1,826 2.0
Depreciation.................................................... 117,655 9,805 2.5
Allocated Shared Expenses....................................... 162,370 13,531 1.7
-----------------------------------------------

[[Page 29741]]

Total....................................................... 604,851 50,404 1.8
----------------------------------------------------------------------------------------------------------------

Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 1Gb and
10Gb ULL connectivity. The Exchange notes that some of its cost
allocation percentages for certain categories of expense differ when
compared to the same categories of expense described by the Exchange's
affiliates in their similar proposed fee changes for connectivity and
ports. This is because the Exchange's cost allocation methodology
utilizes the actual projected costs of the Exchange (which are specific
to the Exchange, and are independent of the costs projected and
utilized by the Exchange's affiliates) to determine its actual costs.
The Exchange provides additional explanation below (including the
reason for the deviation) where the Exchange considers such deviation
in allocations to be more than de minimis.
---------------------------------------------------------------------------

\102\ The Annual Cost includes figures rounded to the nearest
dollar.
\103\ 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.
\104\ See supra note 102.
\105\ See supra note 103.
---------------------------------------------------------------------------

Human Resources
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity) and for which the Exchange allocated percentages of 58%
for 10Gb ULL connectivity and 2.0% for 1Gb connectivity of each
employee's time assigned to the Exchange based on the above-described
allocation methodology. The Exchange also allocated Human Resources
costs to provide physical connectivity to a limited subset of personnel
with ancillary functions related to establishing and maintaining such
connectivity (such as information security and finance personnel), for
which the Exchange allocated cost on an employee-by-employee basis
(i.e., only including those personnel who do support functions related
to providing physical connectivity) and then applied a smaller
allocation to such employees (less than 37%). The Exchange notes that
it and its affiliated markets have 184 employees and each department
leader has direct knowledge of the time spent by those spent by each
employee with respect to the various tasks necessary to operate the
Exchange. Specifically, twice a year and as needed with additional new
hires and new project initiatives, in consultation with each employee,
managers and department heads assign a percentage of time to every
employee and then allocate that time amongst the Exchange and its
affiliated markets to determine that market's individual Human
Resources expense. Then, again in consultation with each employee,
managers and department heads assign a percentage of each employee's
time allocated to the Exchange into buckets including, network
connectivity, ports, market data, and other exchange services. This
process ensures that every employee is 100% allocated, ensuring there
is no double counting between the Exchange and its affiliated markets.
The estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing physical connectivity, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of their time such employees devote to
tasks related to providing physical connectivity. This includes
personnel from the following Exchange departments that are
predominately involved in providing 1Gb and 10Gb ULL connectivity:
Business Systems Development, Trading Systems Development, Systems
Operations and Network Monitoring, Network and Data Center Operations,
Listings, Trading Operations, and Project Management. 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.
Lastly, the Exchange notes that the above allocation for 10Gb ULL
connectivity is greater than its affiliate options exchanges by more
than a de minimis amount as MIAX Pearl Equities allocated 46.1% of its
Human Resources expense towards 10Gb ULL connectivity, while MIAX, MIAX
Pearl Options and MIAX Emerald allocated 25%, 26.3% and 28%,
respectively, to the same category of expense. This difference is due
to meaningfully more current and anticipated business and technology
initiatives dedicated to MIAX Pearl Equities than its affiliate options
exchanges at the time of this filing. These initiatives include:
enhancements to routing options, expanding the available order types,
adding direct market data connectivity to competing exchanges, and
adopting additional risk controls.\106\ MIAX Pearl Equities is a
relatively new market (launched in September of 2020), and, as a
result, more personnel are allocated to work on various business
initiatives and enhancements to help the market grow, add new
functionality, and expand its product offerings. These

[[Page 29742]]

technology changes directly impact the Exchange's interface
specifications and matching engine which, in turn, impacts connectivity
by requiring additional coding, testing, and other updates necessary to
accommodate the above initiatives.
---------------------------------------------------------------------------

\106\ See, e.g., Securities Exchange Act Release Nos. 94301
(February 23, 2022), 87 FR 11739 (March 2, 2022) (SR-PEARL-2022-06)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Rule 2617(b) To Adopt Two New Routing Options, and
To Make Related Changes and Clarifications to Rules 2614(a)(2)(B)
and 2617(b)(2)); 94851 (May 4, 2022), 87 FR 28077 (May 10, 2022)
(SR-PEARL-2022-15) (Notice of Filing and Immediate Effectiveness of
a Proposed Rule Change To Adopt Exchange Rule 532, Order Price
Protection Mechanisms and Risk Controls); 95298 (July 15, 2022), 87
FR 43579 (July 21, 2022) (SR-PEARL-2022-29) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC
To Amend the Route to Primary Auction Routing Option Under Exchange
Rule 2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR 55866
(September 12, 2022) (SR-PEARL-2022-34) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend Exchange
Rule 2614, Orders and Order Instructions, To Adopt the Primary Peg
Order Type); 96205 (November 1, 2022), 87 FR 67080 (November 7,
2022) (SR-PEARL-2022-43) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders
and Order Instructions and Rule 2618, Risk Settings and Trading Risk
Metrics To Enhance Existing Risk Controls); 96905 (February 13,
2023), 88 FR 10391 (February 17, 2023) (SR-PEARL-2023-03) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Exchange Rule 2618 To Add Optional Risk Control Settings);
97236 (March 31, 2023), 88 FR 20597 (April 6, 2023) (SR-PEARL-2023-
15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Exchange Rules 2617 and 2626 Regarding Retail Orders
Routed Pursuant to the Route to Primary Auction Routing Option).
---------------------------------------------------------------------------

Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges and third parties, cabling and switches required to
operate the Exchange. The Connectivity line-item is more narrowly
focused on technology used to complete connections to the Exchange and
to connect to external markets. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity and content service
providers for connectivity and data feeds for the entire U.S. equities
industry, as well as content, connectivity, and infrastructure services
for critical components of the network that are necessary to provide
and maintain its System Networks and access to its System Networks via
1Gb and 10Gb ULL connectivity. Specifically, the Exchange utilizes
connectivity and content service providers to connect to other national
securities exchanges, the NASDAQ UTP and CTA/CQ Plans, and to receive
market data from other exchanges and market data providers. The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity and market data provided these service
providers is critical to the Exchanges daily operations and performance
of its System Networks to which market participants connect to via 10Gb
ULL connectivity. Without these services providers, the Exchange would
not be able to connect to other national securities exchanges, market
data providers, or the NASDAQ UTP and CTA/CQ Plans and, therefore,
would not be able to operate and support its System Networks. The
Exchange does not employ a separate fee to cover its connectivity and
content service provider expense and recoups that expense, in part, by
charging for 1Gb and 10Gb ULL connectivity.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (62%) to
physical 1Gb and 10Gb ULL connectivity because the third-party data
centers and the Exchange's physical equipment contained therein is the
most direct cost in providing physical access to the Exchange. In other
words, for the Exchange to operate in a dedicated space with
connectivity of participants to a physical trading platform, the data
centers are a very tangible cost, and in turn, if the Exchange did not
maintain such a presence then physical connectivity would be of no
value to market participants.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
physical connectivity as such market data is necessary here to offer
certain services related to such connectivity, such as certain risk
checks that are performed prior to execution, and checking for other
conditions (e.g., limit order price protection, trading collars). This
allocation was included as part of the Internet Services cost described
above.\107\ Thus, as market data from other Exchanges is consumed at
the matching engine level, (to which physical connectivity provides
access to) in order to validate orders before additional entering the
matching engine or being executed, the Exchange believes it is
reasonable to allocate a small amount of such costs to 10Gb ULL
connectivity.
---------------------------------------------------------------------------

\107\ This allocation may differ from MIAX Pearl Options due to
the different amount of proprietary market data feeds the Exchange
purchases for its options and equities trading platforms. For
options, the Exchange primarily relies on data purchased from OPRA.
For equities, the Exchange does not solely rely on data purchased
from the consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ
plans), but rather purchases multiple proprietary market data feeds
from other equities exchanges. See, e.g., Exchange Rule 2613
(setting forth the data feeds the Exchange subscribes to for each
equities exchange and trading center).
---------------------------------------------------------------------------

Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.\108\ The Exchange notes that
this allocation is greater than MIAX and MIAX Emerald options exchanges
by more than a de minimis amount as MIAX Pearl Equities allocated 58%
of its Hardware and Software Maintenance and License expense towards
10Gb ULL connectivity, while MIAX and MIAX Emerald allocated 49.8% and
50.9%, respectively, to the same category of expense. MIAX Pearl
Options allocated a higher percentage of the same category of expense
(58.6%) towards its Hardware and Software Maintenance and License
expense for 10Gb ULL connectivity, which MIAX Pearl Options explains in
its own proposal to amend its 10Gb ULL connectivity fees. This
difference in allocation is because MIAX Pearl Equities maintains
software licenses that are unique to its trading platform and used only
for the trading of equity securities. The cost for these licenses
cannot be shared with MIAX Pearl Equities' affiliated options markets
because each of those platforms trade only options, not equities. MIAX
Pearl Equities' affiliates are able to share the cost of many of their
software licenses among the multiple options platforms (thus lowering
the cost to each individual options platform), whereas MIAX Pearl
Equites cannot share such cost and, therefore, bears the entire cost.
---------------------------------------------------------------------------

\108\ This expense may be greater than the Exchange's affiliated
markets, specifically MIAX and MIAX Emerald, because, unlike MIAX
and MIAX Emerald, MIAX Pearl Equities and MIAX Pearl Options both
maintain an additional gateway to accommodate their Members' and
Equity Members' access and connectivity needs. This added gateway
contributes to the difference in allocations between MIAX Pearl
Equities and MIAX Pearl Options and MIAX and MIAX Emerald.
---------------------------------------------------------------------------

Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of Exchange infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 73.6% of all depreciation costs to providing physical 10Gb
ULL connectivity and 2.5% of all depreciation costs to providing 1Gb
connectivity. The Exchange notes, however, that it did not allocate
depreciation costs for any depreciated software necessary to operate
the Exchange to physical connectivity, as

[[Page 29743]]

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.
Lastly, the Exchange notes that this allocation is greater than its
affiliate options exchanges by more than a de minimis amount as MIAX
Pearl Equities allocated 73.6% of its Depreciation expense towards 10Gb
ULL connectivity, while MIAX, MIAX Pearl Options and MIAX Emerald
allocated 61.6%, 58.2% and 63.8%, respectively, to the same category of
expense. This is due to MIAX Pearl Equities being a newer market and
having newer physical assets and software subject to depreciation than
its affiliate options exchanges. The Exchange's affiliate options
exchanges are older markets that have more software and equipment that
have been fully depreciated when compared to the newer software and
hardware currently being depreciated by MIAX Pearl Equities at higher
rates.
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.\109\ The Exchange notes that the
50% allocation of general shared expenses for physical connectivity is
higher than that allocated to general shared expenses for FIX and MEO
Ports based on its allocation methodology that weighted costs
attributable to each Core Service based on an understanding of each
area. While physical connectivity has several areas where certain
tangible costs are heavily weighted towards providing such service
(e.g., Data Centers, as described above), FIX and MEO Ports do not
require as many broad or indirect resources as other Core Services. The
total monthly cost for 10Gb ULL connectivity of $1,477,233 was divided
by the number of physical 10Gb ULL connections the Exchange maintained
at the time that proposed pricing was determined (90), to arrive at a
cost of approximately $16,414 per month, per physical 10Gb ULL
connection. The total monthly cost for 1Gb connectivity of $50,404 was
divided by the number of physical 1Gb connections the Exchange
maintained at the time that proposed pricing was determined (8), to
arrive at a cost of approximately $6,301 per month, per physical 1Gb
connection.
---------------------------------------------------------------------------

\109\ 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 its expenses at that
granular a level. Instead, director costs are included as part of
the overall general allocation.
---------------------------------------------------------------------------

Costs Related to Offering FIX and MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering FIX and MEO Ports
as well as the percentage of the Exchange's overall costs such costs
represent for such area (e.g., as set forth below, the Exchange
allocated approximately 22.4% of its overall Human Resources cost to
offering FIX and MEO Ports).
---------------------------------------------------------------------------

\110\ See supra note 102 (describing rounding of Annual Costs).
\111\ See supra note 103 (describing rounding of Monthly Costs
based on annual costs).
\112\ See supra note 102 (describing rounding of Annual Costs).
The Exchange notes that costs to provide MEO Ports are higher than
the Exchange's costs to provide FIX Ports because it is more
expensive to maintain and support the MEO network due to its high
performance capabilities and supporting infrastructure (including
employee support). The MEO interface is a customizable binary
interface that the Exchange developed in-house and maintains on its
own. The FIX interface is the industry standard for simple order
entry, which requires less development, maintenance, and support
than the MEO interface. The MEO interface provides best-in-class
system throughput and capacity. Users of MEO Ports, which are
primarily Equity Market Makers, consume the most bandwidth and
resources of the network via MEO Ports. To achieve a consistent,
premium network performance, the Exchange must build out and
maintain a network that has the capacity to handle the message rate
requirements of its most heavy network consumers, resulting in
greater cost to provide and maintain MEO ports.
\113\ See supra note 103 (describing rounding of Monthly Costs
based on annual costs).

FIX Ports
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \110\ \111\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $665,726 $55,476 5.2
Connectivity (external fees, cabling, switches, etc.)........... 535 45 0.5
Internet Services, including External Market Data............... 11,574 965 0.5
Data Center..................................................... 20,262 1,689 1.2
Hardware and Software Maintenance and Licenses.................. 5,108 426 0.5
Depreciation.................................................... 92,114 7,676 2.0
Allocated Shared Expenses....................................... 116,679 9,723 1.2
-----------------------------------------------
Total....................................................... 911,998 76,000 2.8
----------------------------------------------------------------------------------------------------------------

MEO Ports
----------------------------------------------------------------------------------------------------------------
Annual cost Monthly cost
Cost drivers \112\ \113\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $2,219,088 $184,924 17.2
Connectivity (external fees, cabling, switches, etc.)........... 1,782 149 1.5
Internet Services, including External Market Data............... 38,582 3,215 1.5
Data Center..................................................... 67,538 5,628 3.8
Hardware and Software Maintenance and Licenses.................. 17,026 1,419 1.5

[[Page 29744]]

Depreciation.................................................... 307,048 25,587 6.6
Allocated Shared Expenses....................................... 388,931 32,411 4.0
-----------------------------------------------
Total....................................................... 3,039,995 253,333 9.3
----------------------------------------------------------------------------------------------------------------

Human Resources
With respect to FIX and MEO Ports, the Exchange calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing FIX and MEO Ports and maintaining
performance thereof (including a broader range of employees such as
technical operations personnel, market operations personnel, and
software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). Just
as described above for 10Gb ULL connectivity, the estimates of Human
Resources cost were again determined by consulting with department
leaders, determining which employees are involved in tasks related to
providing application sessions and maintaining performance thereof, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of their time such employees devote to
tasks related to providing application sessions and maintaining
performance thereof. This includes personnel from the following
Exchange departments that are predominately involved in providing FIX
and MEO Ports: Business Systems Development, Trading Systems
Development, Systems Operations and Network Monitoring, Network and
Data Center Operations, Listings, Trading Operations, and Project
Management. The Exchange notes that senior level executives were only
allocated Human Resources costs to the extent the Exchange believed
they are involved in overseeing tasks related to providing application
sessions and maintaining performance thereof. The Human Resources cost
was again calculated using a blended rate of compensation reflecting
salary, equity and bonus compensation, benefits, payroll taxes, and
401(k) matching contributions.
Lastly, the Exchange notes that the Human Resource allocation for
MEO Ports is greater than its Human Resource allocation for FIX Ports
by more than a de minimis amount as MIAX Pearl Equities allocated 5.2%
of its Human Resource expense towards FIX Ports and 17.2% of its Human
Resource expense towards MEO Ports. This is because the MEO interface
is a customized binary interface that the Exchange developed in-house
and maintains on its own. The FIX interface is the industry standard
for simple order entry which requires less development, maintenance,
and support than the MEO interface. The MEO interface is performance
oriented and designed to meet the needs of more latency sensitive
Equity Members. Due to the in-house development of the MEO interface,
the Exchange was required to expend more internal personnel to support
the MEO interface than the FIX interface. Because of the materially
higher cost associated with maintaining and supporting MEO Ports versus
FIX Ports, the Exchange allocates a materially higher percentage of
Human Resource expense to MEO Ports versus FIX Ports, which is a less
complex, standardized solution.
Connectivity and Internet Services
The Connectivity cost includes external fees paid to connect to
other exchanges, cabling and switches, as described above. For purposes
of FIX and MEO Ports, the Exchange also includes a portion of its costs
related to External Market Data, as described below.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties).
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange included External Market Data fees to the provision of
application sessions as such market data is also necessary here (in
addition to physical connectivity) to offer certain services related to
such sessions, such as validating orders on entry against the national
best bid and national best offer and checking for other conditions
(e.g., whether a symbol is halted or subject to a short sale circuit
breaker). This allocation was included as part of the internet Services
cost described above.\114\ Thus, as market data from other Exchanges is
consumed at the application session level in order to validate orders
before additional processing occurs with respect to such orders, the
Exchange believes it is reasonable to allocate a small amount of such
costs to application sessions.
---------------------------------------------------------------------------

\114\ This allocation may differ from MIAX Pearl Options due to
the different amount of proprietary market data feeds the Exchange
purchases for its options and equities trading platforms. MIAX Pearl
Options primarily relies on data purchased from OPRA. MIAX Pearl
Equities does not solely rely on data purchased from the
consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ plans), but
rather purchases multiple proprietary market data feeds from other
equities exchanges. See, e.g., Exchange Rule 2613 (setting forth the
data feeds the Exchange subscribes to for each equities exchange and
trading center). The Exchange separately notes that MEMX separately
allocated 7.5% of its external market data costs to providing
physical connectivity.
---------------------------------------------------------------------------

Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
Monthly Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of order entry infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 8.6% of
all depreciation costs to providing FIX and MEO Ports. In contrast to
physical connectivity, described above, the Exchange did allocate
depreciation costs for depreciated software necessary to operate the
Exchange to FIX and MEO Ports because such software is related to

[[Page 29745]]

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.
Lastly, the Exchange notes that the Depreciation allocation for MEO
Ports is greater than the Depreciation allocation for FIX Ports by more
than a de minimis amount as MIAX Pearl Equities allocated 2.00% of its
Depreciation expense towards FIX Ports and 6.60% of its Depreciation
expense towards MEO Ports. As discussed above, this is because the MEO
interface is a customized binary interface that the Exchange developed
in-house and maintains on its own. The FIX interface is the industry
standard for simple order entry which requires less development,
maintenance, and support than the MEO interface. The Exchange maintains
more dedicated hardware per port for the MEO interface compared to the
FIX interface; MEO Ports sit on their own core server, whereas for the
FIX interface, three (3) to five (5) connections may go onto a single
server. As a result, the MEO interface is supported by more dedicated
in-house hardware and software than the FIX interface that is subject
to depreciation. Thus, there is a greater amount of equipment
supporting the MEO interface than the FIX interface, resulting in
higher depreciation costs than the FIX interface.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall FIX and MEO Ports costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 20% of the overall cost for
directors was allocated to providing FIX and MEO Ports. The Exchange
notes that the 5.2% allocation of general shared expenses for FIX and
MEO Ports is lower than that allocated to general shared expenses for
physical connectivity based on its allocation methodology that weighted
costs attributable to each Core Service based on an understanding of
each area. While FIX and MEO Ports have several areas where certain
tangible costs are heavily weighted towards providing such service
(e.g., Data Centers, as described above), 1Gb and 10Gb ULL connectivity
requires a broader level of support from Exchange personnel in
different areas, which in turn leads to a broader general level of cost
to the Exchange. The total monthly cost for FIX Ports of $76,000 was
divided by the number of FIX Ports the Exchange maintained at the time
that proposed pricing was determined (142), to arrive at a cost of
approximately $535 per month, per FIX Port (rounded to the nearest
dollar when dividing the approximate monthly cost by the number of FIX
Ports). The total monthly cost for MEO Ports of $253,333 was divided by
the number of MEO Ports the Exchange maintained at the time that
proposed pricing was determined (336), to arrive at a cost of
approximately $754 per month, per MEO Port (rounded to the nearest
dollar when dividing the approximate monthly cost by the number of MEO
Ports).
Lastly, the Exchange notes that the Allocated Shared Expense
allocation for MEO Ports is greater than the same allocation for FIX
Ports by more than a de minimis amount as MIAX Pearl Equities allocated
1.20% of its Allocated Shared Expense towards FIX Ports and 4.00% of
its Allocated Shared Expense towards MEO Ports. As discussed above,
this is because the MEO interface is a customized binary interface that
the Exchange developed in-house and maintains on its own. The FIX
interface is the industry standard for simple order entry which
requires less development, maintenance, and support than the MEO
interface. The MEO interface is performance oriented and designed to
meet the needs of more latency sensitive Equity Members. This required
more internal personnel and resources to support than the FIX
interface. Because of the materially higher cost associated with
maintaining and supporting MEO Ports versus FIX Ports, the Exchange
allocates a materially higher percentage of Allocated Shared expense to
MEO Ports versus FIX Ports.
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or FIX and MEO Ports) and did not double- count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections based upon the above described
methodology, the Exchange has a team of employees dedicated to network
infrastructure and with respect to such employees the Exchange
allocated network infrastructure personnel with a high percentage of
the cost of such personnel (60%) to 1Gb and 10Gb ULL connectivity given
their focus on functions necessary to provide physical connections. The
salaries of those same personnel were allocated only 25% to FIX and MEO
Ports and the remaining 15% was allocated to transactions and market
data. The Exchange did not allocate any other Human Resources expense
for providing physical connections to any other employee group, outside
of a smaller allocation of 37% for 1Gb and 10Gb ULL connectivity of the
cost associated with certain specified personnel who work closely with
and support network infrastructure personnel. In contrast, the Exchange
allocated much smaller percentages of costs (less than 21%) across a
wider range of personnel groups in order to allocate Human Resources
costs to providing FIX and MEO Ports. This is because a much wider
range of personnel are involved in functions necessary to offer,
monitor and maintain FIX and MEO Ports but the tasks necessary to do so
are not a primary or full-time function.
In total, the Exchange allocated 47.6% of its personnel costs to
providing physical connections and 22.4% of its personnel costs to
providing FIX and MEO Ports, for a total allocation of 70% Human
Resources expense to provide these specific connectivity services. In
turn, the Exchange allocated the remaining 30% of its Human Resources
expense to membership (less than 1%) and transactions and market data
(9.5%). Thus, again, the Exchange's allocations of cost across core
services were based on real costs of operating the Exchange and were
not double-counted across the core services or their associated revenue
streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical

[[Page 29746]]

connections and FIX and MEO Ports, but in different amounts. The
Exchange believes it is reasonable to allocate the identified portion
of such expense because such expense includes the actual cost of the
computer equipment, such as dedicated servers, computers, laptops,
monitors, information security appliances and storage, and network
switching infrastructure equipment, including switches and taps that
were purchased to operate and support the network. Without this
equipment, the Exchange would not be able to operate the network and
provide connectivity services to its Equity Members and non-Equity
Members and their customers. However, the Exchange did not allocate all
of the depreciation and amortization expense toward the cost of
providing connectivity services, but instead allocated approximately
85% of the Exchange's overall depreciation and amortization expense to
connectivity services (76.185% attributed to 1Gb and 10Gb ULL physical
connections and 8.6% to FIX and MEO Ports). The Exchange allocated the
remaining depreciation and amortization expense (approximately 15%)
toward the cost of providing transaction services, membership services
and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or FIX and MEO Ports or in obtaining new clients that
will purchase such services. Similarly, the Exchange will have to be
successful in retaining a positive net capture on transaction fees in
order to realize the 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, 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
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity services. Much of the cost relates to monitoring and
analysis of data and performance of the network via the subscriber's
connection(s). The above cost, namely those associated with hardware,
software, and human capital, enable the Exchange to measure network
performance with nanosecond granularity. These same costs are also
associated with time and money spent seeking to continuously improve
the network performance, improving the subscriber's experience, based
on monitoring and analysis activity. The Exchange routinely works to
improve the performance of the network's hardware and software. The
costs associated with maintaining and enhancing a state-of-the-art
exchange network is a significant expense for the Exchange, and thus
the Exchange believes that it is reasonable and appropriate to help
offset those costs by amending fees for connectivity services.
Subscribers, particularly those of 10Gb ULL connectivity, expect the
Exchange to provide this level of support to connectivity so they
continue to receive the performance they expect. This differentiates
the Exchange from its competitors. As detailed above, the Exchange has
five primary sources of revenue that it can potentially use to fund its
operations: transaction fees, fees for connectivity services,
membership and regulatory fees, and market data fees. Accordingly, the
Exchange must cover its expenses from these five primary sources of
revenue.
The Exchange's Cost Analysis estimates the annual cost to
provide 10Gb ULL connectivity services at $17,726,799. Based on current
10Gb ULL connectivity services usage, the Exchange would generate
annual revenue of approximately $9,144,000. This represents a negative
margin when compared to the cost of providing 10Gb ULL connectivity
services, which will decrease over time.\115\
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\115\ Assuming the U.S. inflation rate continues at its current
rate, the Exchange believes that the projected profit margins in
this proposal will decrease; however, the Exchange cannot predict
with any certainty whether the U.S. inflation rate will continue at
its current rate or its impact on the Exchange's future profits or
losses. See, e.g., https://www.usinflationcalculator.com/inflation/current-inflation-rates/ (last visited April 18, 2023).
---------------------------------------------------------------------------

The Exchange's Cost Analysis estimates the annual cost to
provide 1Gb connectivity services at $604,851. Based on current 1Gb
connectivity services usage, the Exchange would generate annual revenue
of approximately $312,000. This represents a negative margin when
compared to the cost of providing 1Gb connectivity services, which will
decrease over time.\116\
---------------------------------------------------------------------------

\116\ Id.
---------------------------------------------------------------------------

The Exchange's Cost Analysis estimates the annual cost to
provide FIX Port services at $911,998. Based on current FIX Port
services usage, the Exchange would generate annual revenue of
approximately $388,800. This represents a negative margin when compared
to the cost of providing FIX Port services, which will decrease over
time.\117\
---------------------------------------------------------------------------

\117\ Id.
---------------------------------------------------------------------------

The Exchange's Cost Analysis estimates the annual cost to
provide MEO Port services at $3,039,995. Based on current MEO Port
services usage, the Exchange would generate annual revenue of
approximately $1,296,000. This represents a negative margin when
compared to the cost of providing MEO Port services, which will
decrease over time.\118\
---------------------------------------------------------------------------

\118\ Id.
---------------------------------------------------------------------------

Even if the Exchange earns those amounts or incrementally more, the
Exchange believes the proposed fees are

[[Page 29747]]

fair and reasonable because they will not result in excessive pricing
that deviates from that of other exchanges or supra-competitive profit,
when comparing the total expense of the Exchange associated with
providing 1Gb and 10Gb ULL connectivity and FIX and MEO Port services
versus the total projected revenue of the Exchange associated with
those services. In fact, the Exchange will generate negative margins on
those connectivity and port services even with the proposed fees.
* * * * *
MIAX Pearl Equities has operated at a cumulative net annual loss
since it launched operations in 2020.\119\ The Exchange has operated at
a net loss due to a number of factors, one of which is choosing to
forgo revenue by offering certain products, such as connectivity, at
lower rates than other exchanges to attract order flow and encourage
market participants to experience the high determinism, low latency,
and resiliency of the Exchange's trading systems. The Exchange should
not now be penalized for seeking to raise its fees in light of
necessary technology changes and its increased costs after offering
such products as discounted prices. Therefore, the Exchange believes
the proposed fees are reasonable because they are based on both
relative costs to the Exchange to provide dedicated 1Gb and 10Gb ULL
connectivity as well as FIX and MEO Ports, the extent to which the
product drives the Exchange's overall costs and the relative value of
the product, as well as the Exchange's objective to make access to its
Systems broadly available to market participants. The Exchange also
believes the proposed fees are reasonable because they are designed to
generate annual revenue to recoup the Exchange's costs of providing
dedicated 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports.
---------------------------------------------------------------------------

\119\ The Exchange has incurred a cumulative loss of $79 million
since its inception in 2020. See Exchange's Form 1/A, Application
for Registration or Exemption from Registration as a National
Securities Exchange, filed July 28, 2021, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
---------------------------------------------------------------------------

The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 1Gb and 10Gb ULL connectivity as well as FIX and MEO
Ports, the Exchange will have to be successful in retaining existing
clients that wish to utilize 1Gb and 10Gb ULL connectivity as well as
FIX and MEO Ports and/or obtaining new clients that will purchase such
access. To the extent the Exchange is successful in encouraging new
clients, the Exchange does not believe it should be penalized for such
success. To the extent the Exchange has mispriced and experiences a net
loss in clients, the Exchange could experience a net reduction in
revenue. While the Exchange believes in transparency around costs and
potential revenue, the Exchange does not believe that these estimates
should form the sole basis of whether or not a proposed fee is
reasonable or can be adopted.
The Exchange is part of a holding company that operates four
exchange markets and, therefore, the Exchange and its affiliated
markets must allocate shared costs across all of those markets
accordingly, pursuant to the above-described allocation methodology. In
contrast, the Investors Exchange LLC (``IEX'') and MEMX, which are
currently each operating only one exchange, in their recent non-
transaction fee filings can allocate the entire amount of that same
cost to a single exchange. This can result in lower profit margins for
the non-transaction fees proposed by IEX and MEMX because the single
allocated cost does not experience the efficiencies and synergies
associated with shared costs across multiple platforms. The Exchange
and its affiliated markets must share a single cost, which results in
cost efficiencies that cause a broader gap between the allocated cost
amount and projected revenue, even though the fee levels being proposed
are lower or similar to competing markets (as described above). To the
extent that the application of a cost-based standard results in
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Commission Staff must consider whether the
proposed fee level is comparable to, or on parity with, the same fee
charged by competing exchanges and how different cost allocation
methodologies (such as across multiple markets) may result in different
profit margins for comparable fee levels. If it is the case that the
Commission Staff is making determinations as to appropriate profit
margins, the Exchange believes that Staff should be clear to all market
participants as to what they determine is an appropriate profit margin
and should apply such determinations consistently and, in the case of
certain legacy exchanges, retroactively, if such standards are to avoid
having a discriminatory effect.
Further, the proposal reflects the Exchange's efforts to control
its costs, which the Exchange does on an ongoing basis as a matter of
good business practice. A potential profit margin should not be judged
alone based on its size, but is also indicative of costs management and
whether the ultimate fee reflects the value of the services provided.
For example, a profit margin on one exchange should not be deemed
excessive where that exchange has been successful in controlling its
costs, but not excessive where on another exchange where that exchange
is charging comparable fees but has a lower profit margin due to higher
costs. Doing so could have the perverse effect of not incentivizing
cost control where higher costs alone could be used to justify fees
increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
1Gb and 10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have the same business
needs for the high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct equities markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network

[[Page 29748]]

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.\120\ 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.
---------------------------------------------------------------------------

\120\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

FIX and MEO Ports
To achieve a consistent, premium network performance, the Exchange
must build out and maintain a network that has the capacity to handle
the message rate requirements of its most heavy network consumers.
Billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. The Exchange must also
purchase additional storage capacity on an ongoing basis to ensure it
has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\121\ Thus, as the number of connections an
Equity Member has increases, the related pull on Exchange resources
also increases. The Exchange sought to design the proposed pricing
structure to set the amount of the fees to relate to the number of
connections a firm purchases, while continuing to provide the first
five (5) ports for free. The more connections purchased by an Equity
Member likely results in greater expenditure of Exchange resources and
increased cost to the Exchange. The Exchange further believes that the
proposed fees are reasonable, equitably allocated and not unfairly
discriminatory because, for the flat fee, the Exchange provides each
Equity Member their first five (5) ports for free, unlike other equity
exchanges referenced above.
---------------------------------------------------------------------------

\121\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 1Gb
and10Gb ULL connectivity as well as FIX and MEO Ports at below market
rates to market participants since the Exchange launched operations. As
described above, the Exchange has operated at a cumulative net annual
loss since it launched operations in 2020 \122\ due to providing a low-
cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems. To do so, the Exchange chose to waive the
fees for some non-transaction related services and Exchange products or
provide them at a very lower fee, which was not profitable to the
Exchange. This resulted in the Exchange forgoing revenue it could have
generated from assessing any fees or higher fees. The Exchange could
have sought to charge higher fees at the outset, but that could have
served to discourage participation on the Exchange. Instead, the
Exchange chose to provide a low-cost exchange alternative to the
industry, which resulted in lower initial revenues. Examples of this
are 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, for
which the Exchange only now seeks to adopt fees at a level similar to
or lower than those of other equity exchanges.
---------------------------------------------------------------------------

\122\ See supra note 119.
---------------------------------------------------------------------------

Further, the Exchange does not believe that the proposed fee
increase for the 1Gb or 10Gb ULL connection change would place certain
market participants at the Exchange at a relative disadvantage compared
to other market participants or affect the ability of such market
participants to compete. The proposed fees would apply uniformly to all
market participants regardless of the number of connections they choose
to purchase. The proposed fees do not favor certain categories of
market participants in a manner that would impose an undue burden on
competition.
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Equity Members, non-Equity Members (extranets or service
bureaus), third-parties that purchase the Exchange's connectivity and
resell it, and customers of those resellers to compete with other
market participants or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Options Market Maker
terminated their MIAX Pearl Options membership on January 1, 2023 as a
direct result of the proposed fee changes for that market.\123\ 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

[[Page 29749]]

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.
---------------------------------------------------------------------------

\123\ 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 53. The
Exchange does not believe a similar analysis would be useful here
because it is amending existing fees, not proposing to charge a new
fee where existing subscribers may terminate connections because
they are no longer enjoying the service at no cost. In addition,
despite the potential for existing subscribers to terminate
connections due to the proposal, the Exchange anticipates its number
of subscribers to remain generally static, resulting in an
immaterial difference between a best case and worst case scenario.
---------------------------------------------------------------------------

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

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

The Exchange received one comment letter on the Initial Proposal
and one comment letter on the Second Proposal from the same
commenter.\124\ In their letters, 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 letters, 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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\124\ See letter from Brian Sopinsky, General Counsel,
Susquehanna International Group, LLP (``SIG''), to Vanessa
Countryman, Secretary, Commission, dated February 7, 2023 and letter
from Gerald D. O'Connell, SIG, to Vanessa Countryman, Secretary,
Commission, dated March 21, 2023.
---------------------------------------------------------------------------

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,\125\ and Rule 19b-4(f)(2) \126\ 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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\125\ 15 U.S.C. 78s(b)(3)(A)(ii).
\126\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-PEARL-2023-18 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-PEARL-2023-18. 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

[[Page 29750]]

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. Do not include personal identifiable
information in submissions; you should submit only information that you
wish to make available publicly. We may redact in part or withhold
entirely from publication submitted material that is obscene or subject
to copyright protection. All submissions should refer to File Number
SR-PEARL-2023-18 and should be submitted on or before May 30, 2023.
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\127\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\127\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-09679 Filed 5-5-23; 8:45 am]
BILLING CODE 8011-01-P

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