Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule To Modify Certain Connectivity and Port Fees, 42785-42807 [2023-13997]

Download as PDF Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 related to that change and compete with larger, non-legacy exchanges. * * * * * In conclusion, as discussed thoroughly above, the Exchange regrettably believes that the application of the Revised Review Process and Staff Guidance has adversely affected intermarket competition among legacy and non-legacy exchanges by impeding the ability of non-legacy exchanges to adopt or increase fees for their market data and access services (including connectivity and port products and services) that are on parity or commensurate with fee levels previously established by legacy exchanges. Since the adoption of the Revised Review Process and Staff Guidance, and even more so recently, it has become extraordinarily difficult to adopt or increase fees to generate revenue necessary to invest in systems, provide innovative trading products and solutions, and improve competitive standing to the benefit of non-legacy exchanges’ market participants. Although the Staff Guidance served an important policy goal of improving disclosures and requiring exchanges to justify that their market data and access fee proposals are fair and reasonable, it has also negatively impacted non-legacy exchanges in particular in their efforts to adopt or increase fees that would enable them to more fairly compete with legacy exchanges, despite providing enhanced disclosures and rationale under both competitive and cost basis approaches provided for by the Revised Review Process and Staff Guidance to support their proposed fee changes. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange received one comment letter on the Initial Proposal, one comment letter on the Second Proposal, and one comment letter on the Third Proposal, all from the same commenter.161 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 161 See letter from Brian Sopinsky, General Counsel, Susquehanna International Group, LLP (‘‘SIG’’), to Vanessa Countryman, Secretary, Commission, dated February 7, 2023, and letters from Gerald D. O’Connell, SIG, to Vanessa Countryman, Secretary, Commission, dated March 21, 2023 and May 24, 2023. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 issues with the current environment surrounding exchange non-transaction fee proposals that should be addressed by the Commission through rule making, or Congress, more holistically and not through an individual exchange fee filing. Among other things, the commenter is requesting additional data and information that is both opaque and a moving target and would constitute a level of disclosure materially over and above that provided by any competitor exchanges. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act,162 and Rule 19b–4(f)(2) 163 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–2023–27 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–2023–27. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 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–2023–27 and should be submitted on or before July 24, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.164 Vanessa A. Countryman, Secretary. [FR Doc. 2023–14020 Filed 6–30–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97813; File No. SR– EMERALD–2023–14] Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fee Schedule To Modify Certain Connectivity and Port Fees June 27, 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 June 16, 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 164 17 162 15 U.S.C. 78s(b)(3)(A)(ii). 163 17 CFR 240.19b–4(f)(2). PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 42785 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\03JYN1.SGM 03JYN1 42786 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices 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/rulefilings/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 lotter on DSK11XQN23PROD with NOTICES1 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 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 Exapress 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– VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 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 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 the 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 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). 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. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 improvements in network performance with the goal of improving the subscriber’s experience. The costs associated with maintaining and enhancing a state-of-the-art network is a significant expense for the Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those increased costs by amending fees for connectivity services. Subscribers expect the Exchange to provide this level of support so they continue to receive the performance they expect. This differentiates the Exchange from its competitors. The Exchange now proposes to amend the Fee Schedule to amend the fees for 10Gb ULL connectivity and Limited Service MEI Ports in order to recoup ongoing costs and increase in expenses set forth below in the Exchange’s cost analysis. The Exchange initially filed this proposal on December 30, 2022 as SR–EMERALD–2022–38. On January 9, 2023, the Exchange withdrew SR– EMERALD–2022–38 and resubmitted this proposal as SR–EMERALD–2023– 01 (the ‘‘Initial Proposal’’).10 On, February 23, 2023, the Exchange withdrew the Initial Proposal and replaced it with a revised proposal (SR– EMERALD–2023–05) (the ‘‘Second Proposal’’).11 On April 20, 2023, the Exchange withdrew the Second Proposal and replaced it with a revised proposal (SR–EMERALD–2023–12) (the ‘‘Third Proposal’’).12 On June 16, 2023, the Exchange withdrew the Third Proposal and replaced it with this further revised proposal (SR– EMERALD–2023–14).13 The Exchange previously included a cost analysis in the Initial, Second and 10 See Securities Exchange Act Release No. 96628 (January 10, 2023), 88 FR 2651 (January 17, 2023) (SR–EMERALD–2023–01). 11 See Securities Exchange Act Release No. 97079 (March 8, 2023), 88 FR 15764 (March 14, 2023) (SR– EMERALD–2023–05). 12 See Securities Exchange Act Release No. 97422 (May 2, 2023), 88 FR 29750 (May 8, 2023) (SR– EMERALD–2023–12). 13 The Exchange met with Commission Staff to discuss the Third Proposal during which the Commission Staff provided feedback and requested additional information, including, most recently, information about total costs related to certain third party vendors. Such vendor cost information is subject to confidentiality restrictions. The Exchange has provided this information to Commission Staff under separate cover with a request for confidentiality. While the Exchange will continue to be responsive to Commission Staff’s information requests, the Exchange believes that the Commission should, at this point, issue substantially more detailed guidance for exchanges to follow in the process of pursuing a cost-based approach to fee filings, and that, for the purposes of fair competition, detailed disclosures by exchanges, such as those that the Exchange is providing now, should be consistent across all exchanges, including for those that have resisted a cost-based approach to fee filings, in the interests of fair and even disclosure and fair competition. E:\FR\FM\03JYN1.SGM 03JYN1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 Third Proposals. As described more fully below, the Exchange provides an updated cost analysis that includes, among other things, additional descriptions of how the Exchange allocated costs among it and its affiliated exchanges (MIAX PEARL, LLC (‘‘MIAX Pearl’’) (separately among MIAX Pearl Options and MIAX Pearl Equities) and MIAX 14 (together with MIAX Pearl Options and MIAX Pearl Equities, the ‘‘affiliated markets’’)) to ensure no cost was allocated more than once, as well as additional detail supporting its cost allocation processes and explanations as to why a cost allocation in this proposal may differ from the same cost allocation in a similar proposal submitted by one of its affiliated exchanges. Although the baseline cost analysis used to justify the proposed fees was made in the Initial, Second, and Third Proposals, the fees themselves have not changed since the Initial, Second, or Third Proposals and the Exchange still proposes fees that are intended to cover the Exchange’s cost of providing 10Gb ULL connectivity and Limited Service MEI Ports with a reasonable mark-up over those costs. * * * * * Starting in 2017, following the United States Court of Appeals for the District of Columbia’s Susquehanna Decision 15 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.16 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.17 On that same day, the Commission issued an order remanding to various exchanges and national market system (‘‘NMS’’) plans 14 The term ‘‘MIAX’’ means Miami International Securities Exchange, LLC. See Exchange Rule 100. 15 See Susquehanna International Group, LLP v. Securities & Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’). 16 Id. 17 See Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ‘‘SIFMA Decision’’). VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 challenges to over 400 rule changes and plan amendments that were asserted in 57 applications for review (the ‘‘Remand Order’’).18 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.’’ 19 The Commission denied requests by various exchanges and plan participants for reconsideration of the Remand Order.20 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.’’ 21 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.22 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 18 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). 19 Id. at page 2. 20 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ‘‘Order Denying Reconsideration’’). 21 Order Denying Reconsideration, 2019 WL 2022819, at *13. 22 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). PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 42787 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.’’ 23 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.’’ 24 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.’’ 25 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 26 and remanded for further proceedings consistent with its opinion.27 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.’’ 28 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 23 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’’). 24 Id. 25 Id. 26 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. 27 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. 28 Id. at *2; see also id. (‘‘[T]he sole purpose of the challenged remand has disappeared.’’). E:\FR\FM\03JYN1.SGM 03JYN1 42788 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 previously remanded.29 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.’’ 30 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.31 As a result of the Commission’s loss of the NASDAQ v. SEC case noted above, the Commission never followed through with its intention to subject the over 400 fee filings to ‘‘develop a record,’’ and to ‘‘explain their conclusions, based on that record, in a written decision that is sufficient to enable us to perform our review.’’ 32 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’’).33 The 29 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’’). 30 Id. 31 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 90087 (October 5, 2020). 32 See supra note 27, at page 2. 33 Commission Chair Gary Gensler recently reiterated the Commission’s mandate to ensure VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 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 34 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.35 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 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. 34 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. 35 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). PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 extensive cost and revenue disclosures, a process that is complex, inconsistently applied, and rarely results in a successful outcome, i.e., nonsuspension. The Revised Review Process and Staff Guidance changed decades-long Commission Staff standards for review, resulting in unfair discrimination and placing an undue burden on inter-market competition between legacy exchanges and nonlegacy exchanges. Commission Staff now require exchange filings, including from nonlegacy exchanges such as the Exchange, to provide detailed cost-based analysis in place of competition-based arguments to support such changes. However, even with the added detailed cost and expense disclosures, the Commission Staff continues to either suspend such filings and institute disapproval proceedings, or put the exchanges in the unenviable position of having to repeatedly withdraw and re-file with additional detail in order to continue to charge those fees.36 By impeding any path forward for non-legacy exchanges to establish commensurate nontransaction fees, or by failing to provide any alternative means for smaller markets to establish ‘‘fee parity’’ with legacy exchanges, the Commission is stifling competition: non-legacy exchanges are, in effect, being deprived of the revenue necessary to compete on a level playing field with legacy exchanges. This is particularly harmful, given that the costs to maintain exchange systems and operations continue to increase. The Commission Staff’s change in position impedes the ability of non-legacy exchanges to raise revenue to invest in their systems to compete with the legacy exchanges who already enjoy disproportionate nontransaction fee based revenue. For example, the Cboe Exchange, Inc. (‘‘Cboe’’) reported ‘‘access and capacity fee’’ revenue of $70,893,000 for 2020 37 and $80,383,000 for 2021.38 Cboe C2 Exchange, Inc. (‘‘C2’’) reported ‘‘access and capacity fee’’ revenue of 36 The Exchange has filed, and subsequently withdrawn, various forms of this proposed fee numerous times since August 2021 with each proposal containing hundreds of cost and revenue disclosures never previously disclosed by legacy exchanges in their access and market data fee filings prior to 2019. 37 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. 38 See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001155.pdf. E:\FR\FM\03JYN1.SGM 03JYN1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 $19,016,000 for 2020 39 and $22,843,000 for 2021.40 Cboe BZX Exchange, Inc. (‘‘BZX’’) reported ‘‘access and capacity fee’’ revenue of $38,387,000 for 2020 41 and $44,800,000 for 2021.42 Cboe EDGX Exchange, Inc. (‘‘EDGX’’) reported ‘‘access and capacity fee’’ revenue of $26,126,000 for 2020 43 and $30,687,000 for 2021.44 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 2019.45 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.’’ 46 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,47 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 39 See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000469.pdf. 40 See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001156.pdf. 41 See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000465.pdf. 42 See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001152.pdf. 43 See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000467.pdf. 44 See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001154.pdf. 45 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. 46 See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000475.pdf. The Exchange notes that this type of Form 1 accounting appears to be designed to obfuscate the true financials of such exchanges and has the effect of perpetuating fee and revenue advantages of legacy exchanges. 47 See, e.g., CNBC Debuts New Set on NYSE Floor, available at https://www.cnbc.com/id/46517876. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 fees to subsidize transaction fee rates), which are more immediately impactful in competition for order flow and market share, given the variable nature of this cost on member firms. The prohibition of a reasonable path forward denies the Exchange (and other nonlegacy exchanges) this flexibility, eliminates the ability to remain competitive on transaction fees, and hinders the ability to compete for order flow and market share with legacy exchanges. While one could debate whether the pricing of non-transaction fees are subject to the same market forces as transaction fees, there is little doubt that subjecting one exchange to a materially different standard than that historically applied to legacy exchanges for non-transaction fees leaves that exchange at a disadvantage in its ability to compete with its pricing of transaction fees. While the Commission has clearly noted that the Staff Guidance is merely guidance and ‘‘is not a rule, regulation or statement of the . . . Commission . . . the Commission has neither approved nor disapproved its content . . .’’,48 this is not the reality experienced by exchanges such as MIAX Emerald. As such, non-legacy exchanges are forced to rely on an opaque cost-based justification standard. However, because the Staff Guidance is devoid of detail on what must be contained in cost-based justification, this standard is nearly impossible to meet despite repeated good-faith efforts by the Exchange to provide substantial amount of costrelated details. For example, the Exchange has attempted to increase fees using a cost-based justification numerous times, having submitted over six filings.49 However, despite providing 100+ page filings describing in extensive detail its costs associated with providing the services described in 48 See supra note 23, at note 1. Securities Exchange Act Release Nos. 94889 (May 11, 2022), 87 FR 29928 (May 17, 2022) (SR–EMERALD–2022–19); 94718 (April 14, 2022), 87 FR 23633 (April 20, 2022) (SR–EMERALD–2022– 15); 94717 (April 14, 2022), 87 FR 23648 (April 20, 2022) (SR–EMERALD–2022–13); 94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR– EMERALD–2022–05); 94257 (February 15, 2022), 87 FR 9678 (February 22, 2022) (SR–EMERALD–2022– 04); 93772 (December 14, 2021), 86 FR 71965 (December 20, 2021) (SR–EMERALD–2021–43); 93776 (December 14, 2021), 86 FR 71983 (December 20, 2021) (SR–EMERALD–2021–42); 93188 (September 29, 2021), 86 FR 55052 (October 5, 2021) (SR–EMERALD–2021–31); (SR–EMERALD– 2021–30) (withdrawn without being noticed by the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4, 2021) (SR–EMERALD–2021–29); 92662 (August 13, 2021), 86 FR 46726 (August 19, 2021) (SR–EMERALD–2021–25); 92645 (August 11, 2021), 86 FR 46048 (August 17, 2021) (SR– EMERALD–2021–23). 49 See PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 42789 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 50 in a manner that is not possible to achieve. This essentially nullifies the cost-based approach for exchanges as a legitimate alternative as laid out in the Staff Guidance. By refusing to accept a reasonable costbased argument to justify nontransaction fees (in addition to refusing to accept a competition-based argument as described above), or by failing to provide the detail required to achieve that standard, the Commission Staff is effectively preventing non-legacy exchanges from making any nontransaction fee changes, which benefits the legacy exchanges and is anticompetitive to the non-legacy exchanges. This does not meet the fairness standard under the Act and is discriminatory. Because of the un-level playing field created by the Revised Review Process and Staff Guidance, the Exchange believes that the Commission Staff, at this point, should either (a) provide sufficient clarity on how its cost-based standard can be met, including a clear and exhaustive articulation of required data and its views on acceptable margins,51 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; 52 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 50 15 U.S.C. 78f(b)(4). 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. 52 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. 51 To E:\FR\FM\03JYN1.SGM 03JYN1 42790 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices Exchange believes that the Commission does not have a reasonable basis to deny the Exchange this change in fees, where the proposed change would result in fees meaningfully lower than comparable fees at competing exchanges and where the associated nontransaction revenue is meaningfully lower than competing exchanges. In light of the above, disapproval of this would not meet the fairness standard under the Act, would be discriminatory and places a substantial burden on competition. The Exchange would be uniquely disadvantaged by not being able to increase its access fees to comparable levels (or lower levels than current market rates) to those of other options exchanges for connectivity. If the Commission Staff were to disapprove this proposal, that action, and not market forces, would substantially affect whether the Exchange can be successful in its competition with other options exchanges. Disapproval of this filing could also be viewed as an arbitrary and capricious decision should the Commission Staff continue to ignore its past treatment of non-transaction fee filings before implementation of the Revised Review Process and Staff Guidance and refuse to allow such filings to be approved despite significantly enhanced arguments and cost disclosures.53 * * * * * 10Gb ULL Connectivity Fee Change lotter on DSK11XQN23PROD with NOTICES1 The Exchange proposes to amend the Fee Schedule to increase the fees for Members and non-Members to access the Exchange’s system networks 54 via a 10Gb ULL fiber connection. Specifically, the Exchange proposes to amend Sections (5)(a)–(b) of the Fee Schedule to increase the 10Gb ULL connectivity fee for Members and nonMembers from $10,000 per month to $13,500 per month (‘‘10Gb ULL Fee’’).55 53 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. 54 The Exchange’s system networks consist of the Exchange’s extranet, internal network, and external network. 55 Market participants that purchase additional 10Gb ULL connections as a result of this change VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 The Exchange will continue to assess monthly Member and non-Member network connectivity fees for connectivity to the primary and secondary facilities in any month the Member or non-Member is credentialed to use any of the Exchange APIs or market data feeds in the production environment. The Exchange will continue to pro-rate the fees when a Member or non-Member makes a change to the connectivity (by adding or deleting connections) with such prorated fees based on the number of trading days that the Member or nonMember has been credentialed to utilize any of the Exchange APIs or market data feeds in the production environment through such connection, divided by the total number of trading days in such month multiplied by the applicable monthly rate. Limited Service MEI Ports Background The Exchange also proposes to amend Section (5)(d) of the Fee Schedule to adopt a tiered-pricing structure for Limited Service MEI Ports available to Market Makers. The Exchange allocates two (2) Full Service MEI Ports 56 and two (2) Limited Service MEI Ports 57 per matching engine 58 to which each will not be subject to the Exchange’s Member Network Connectivity Testing and Certification Fee under Section (4)(c) of the Exchange’s Fee Schedule. See Section (4)(c) of the Exchange’s fee schedule available at https://www.miaxglobal.com/ markets/us-options/miax-options/fees (providing that ‘‘Network Connectivity Testing and Certification Fees will not be assessed in situations where the Exchange initiates a mandatory change to the Exchange’s system that requires testing and certification. Member Network Connectivity Testing and Certification Fees will not be assessed for testing and certification of connectivity to the Exchange’s Disaster Recovery Facility.’’). 56 The term ‘‘Full Service MEI Ports’’ means a port which provides Market Makers with the ability to send Market Maker simple and complex quotes, eQuotes, and quote purge messages to the MIAX Emerald System. Full Service MEI Ports are also capable of receiving administrative information. Market Makers are limited to two Full Service MEI Ports per Matching Engine. See the Definitions Section of the Fee Schedule. 57 The term ‘‘Limited Service MEI Ports’’ means a port which provides Market Makers with the ability to send simple and complex eQuotes and quote purge messages only, but not Market Maker Quotes, to the MIAX Emerald System. Limited Service MEI Ports are also capable of receiving administrative information. Market Makers initially receive two Limited Service MEI Ports per Matching Engine. See the Definitions Section of the Fee Schedule. 58 The term ‘‘Matching Engine’’ means a part of the MIAX Emerald electronic system that processes options orders and trades on a symbol-by-symbol basis. Some Matching Engines will process option classes with multiple root symbols, and other Matching Engines may be dedicated to one single option root symbol (for example, options on SPY may be processed by one single Matching Engine that is dedicated only to SPY). A particular root PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 Market Maker connects. Market Makers may also request additional Limited Service MEI Ports for each matching engine to which they connect. The Full Service MEI Ports and Limited Service MEI Ports all include access to the Exchange’s primary and secondary data centers and its disaster recovery center. Market Makers may request additional Limited Service MEI Ports. Currently, Market Makers are assessed a $100 monthly fee for each Limited Service MEI Port for each matching engine above the first two Limited Service MEI Ports that are included for free. Limited Service MEI Port Fee Changes The Exchange now proposes to move from a flat monthly fee per Limited Service MEI Port for each matching engine to a tiered-pricing structure for Limited Service MEI Ports for each matching engine under which the monthly fee would vary depending on the number of Limited Service MEI Ports each Market Maker elects to purchase. Specifically, the Exchange will continue to provide the first and second Limited Service MEI Ports for each matching engine free of charge. For Limited Service MEI Ports, the Exchange proposes to adopt the following tiered-pricing structure: (i) the third and fourth Limited Service MEI Ports for each matching engine will increase from the current flat monthly fee of $100 to $200 per port; (ii) the fifth and sixth Limited Service MEI Ports for each matching engine will increase from the current flat monthly fee of $100 to $300 per port; and (iii) the seventh or more Limited Service MEI Ports will increase from the current monthly flat fee of $100 to $400 per port.59 The Exchange believes a tiered-pricing structure will encourage Market Makers to be more efficient when determining how to connect to the Exchange. This should also enable the Exchange to better monitor and provide access to the Exchange’s network to ensure sufficient capacity and headroom in the System 60 symbol may only be assigned to a single designated Matching Engine. A particular root symbol may not be assigned to multiple Matching Engines. See the Definitions Section of the Fee Schedule. 59 As noted in the Fee Schedule, Market Makers will continue to be limited to fourteen Limited Service MEI Ports per Matching Engine. The Exchange also proposes to make a ministerial clarifying change to remove the defined term ‘‘Additional Limited Service MEI Ports’’ as a result of moving to a tiered pricing structure where the first two Limited Service MEI Ports continue to be provided free of charge. The Exchange proposes to make a related change to add the term ‘‘Limited Service MEI Ports’’ after the word ‘‘fourteen’’ in the Fee Schedule. 60 The term ‘‘System’’ means the automated trading system used by the Exchange for the trading of securities. See the Definitions Section of the Fee Schedule and Exchange Rule 100. E:\FR\FM\03JYN1.SGM 03JYN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices in accordance with its fair access requirements under Section 6(b)(5) of the Act.61 The Exchange offers various types of ports with differing prices because each port accomplishes different tasks, are suited to different types of Members, and consume varying capacity amounts of the network. For instance, Market Makers who take the maximum amount of Limited Service MEI Ports account for approximately greater than 99% of message traffic over the network, while Market Makers with fewer Limited Service MEI Ports account for approximately less than 1% of message traffic over the network. In the Exchange’s experience, Market Makers who only utilize the two free Limited Service MEI Ports do not have a business need for the high performance network solutions required by Market Makers who take the maximum amount of Limited Service MEI Ports. The Exchange’s high performance network solutions and supporting infrastructure (including employee support), provides unparalleled system throughput and the capacity to handle approximately 18 million quote messages per second. Based on May 2023 trading results, the Exchange handles over approximately 8.6 billion quotes on an average day, and more than 189 billion quotes over the entire month. Of that total, Market Makers with the maximum amount of Limited Service MEI Ports generated more than 111 billion quotes (and more than 5 billion quotes on an average day), and Market Makers who utilized only the two free Limited Service MEI Ports generated approximately 40 billion quotes (and approximately 1.8 billion quotes on an average day). Also for May 2023, Market Makers who utilized 7 to 9 Limited Service MEI ports submitted an average of 936 million quotes per day; Market Makers who utilized 5–6 Limited Service MEI Ports submitted an average of 578 million quotes on an average day; and Market Makers who utilized 3–4 Limited Service MEI Ports submitted an average of 176 million quotes on an average day. To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network consumers. These billions of messages per day consume the Exchange’s resources and 61 See 15 U.S.C. 78f(b). The Exchange may offer access on terms that are not unfairly discriminatory among its Members, and ensure sufficient capacity and headroom in the System. The Exchange monitors the System’s performance and makes adjustments to its System based on market conditions and Member demand. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 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.62 Thus, as the number of connections a Market Maker has increases, certain other costs incurred by the Exchange that are correlated to, though not directly affected by, connection costs (e.g., storage costs, surveillance costs, service expenses) also increase. The Exchange sought to design the proposed tiered-pricing structure to set the amount of the fees to relate to the number of connections a firm purchases. The more connections purchased by a Market Maker likely results in greater expenditure of Exchange resources and increased cost to the Exchange. With this in mind, the Exchange proposes no fee or lower fees for those Market Makers who receive fewer Limited Service MEI Ports since those Market Makers generally tend to send the least amount of orders and messages over those connections. Given this difference in network utilization rate, the Exchange believes that it is reasonable, equitable, and not unfairly discriminatory that Market Makers who take the most Limited Service MEI Ports pay for the vast majority of the shared network resources from which all Member and non-Member users benefit, but is designed and maintained from a capacity standpoint to specifically handle the message rate and performance requirements of those Market Makers. The Exchange proposes to increase its monthly Limited Service MEI Port fees to recover a portion of the costs associated with directly accessing the Exchange. Implementation. The proposed fee changes are immediately effective. 2. Statutory Basis The Exchange believes that the proposed fees are consistent with Section 6(b) of the Act 63 in general, and furthers the objectives of Section 6(b)(4) of the Act 64 in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among Members and other persons using any facility or system which the 62 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). 63 15 U.S.C. 78f(b). 64 15 U.S.C. 78f(b)(4). PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 42791 Exchange operates or controls. The Exchange also believes the proposed fees further the objectives of Section 6(b)(5) of the Act 65 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 66 and the Staff Guidance,67 the Exchange believes that the proposed fees are consistent with the Act because they are: (i) reasonable, equitably allocated, not unfairly discriminatory, and not an undue burden on competition; (ii) comply with the BOX Order and the Staff Guidance; and (iii) supported by evidence (including comprehensive revenue and cost data and analysis) that they are fair and reasonable and will not result in excessive pricing or supra-competitive profit. The Exchange believes that exchanges, in setting fees of all types, should meet high standards of transparency to demonstrate why each new fee or fee amendment meets the requirements of the Act that fees be reasonable, equitably allocated, not unfairly discriminatory, and not create an undue burden on competition among market participants. The Exchange believes this high standard is especially important when an exchange imposes various fees for market participants to access an exchange’s marketplace. In the Staff Guidance, the Commission Staff states that, ‘‘[a]s an initial step in assessing the reasonableness of a fee, staff considers whether the fee is constrained by significant competitive forces.’’ 68 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.’’ 69 In the Staff Guidance, the Commission Staff further states that, ‘‘[i]f an SRO 65 15 U.S.C. 78f(b)(5). supra note 22. 67 See supra note 23. 68 Id. 69 Id. 66 See E:\FR\FM\03JYN1.SGM 03JYN1 lotter on DSK11XQN23PROD with NOTICES1 42792 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices 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.’’ 70 The proposed fees are reasonable because they promote parity among exchange pricing for access, which promotes competition, including in the Exchanges’ ability to competitively price transaction fees, invest in infrastructure, new products and other innovations, all while allowing the Exchange to recover its costs to provide dedicated access via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed above, the Revised Review Process and Staff Guidance have created an uneven playing field between legacy and non-legacy exchanges by severely restricting non-legacy exchanges from being able to increase non-transaction 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 Member firms. The absence of a reasonable path forward to increase non-transaction fees to comparable (or lower rates) limits the Exchange’s flexibility to, among other things, make additional investments in infrastructure and advertising, diminishes the ability to remain competitive on transaction fees, and hinders the ability to compete for order flow and market share. Again, while one could debate whether the pricing of non-transaction fees are subject to the same market forces as transaction fees, there is little doubt that subjecting one exchange to a materially different standard than that applied to other exchanges for non-transaction fees leaves that exchange at a disadvantage in its ability to compete with its pricing of transaction fees. 70 Id. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 The Proposed Fees Ensure Parity Among Exchange Access Fees, Which Promotes Competition The Exchange initially adopted a fee of $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 since it commenced operations in March 2019. At that same time, the Exchange only charged $6,000 per month for each 10Gb ULL connection. As a new exchange entrant, the Exchange chose to offer connectivity and ports at very low fees 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.71 71 See Securities Exchange Act Release No. 94894 (May 11, 2022), 87 FR 29987 (May 17, 2022) (SR– BOX–2022–17) (stating, ‘‘[t]he Exchange established this lower (when compared to other options exchanges in the industry) Participant Fee in order to encourage market participants to become Participants of BOX. . .’’). See also Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR 63620 (October 8, 2020) (SR–MEMX–2020– 10) (proposing to adopt the initial fee schedule and stating that ‘‘[u]nder the initial proposed Fee Schedule, the Exchange proposes to make clear that it does not charge any fees for membership, market data products, physical connectivity or application sessions.’’). MEMX’s market share has increased and recently proposed to adopt numerous nontransaction fees, including fees for membership, market data, and connectivity. See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022) (SR–MEMX–2021– 19) (proposing to adopt membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7, 2022) (SR–MEMX–2022–32) and 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR– MEMX–2022–26) (proposing to adopt fees for connectivity). See also, e.g., Securities Exchange Act Release No. 88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR–NYSENAT–2020–05), available at https://www.nyse.com/publicdocs/ nyse/markets/nyse-national/rule-filings/filings/ 2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange after initially setting such fees at zero). PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 Later in 2020, as the Exchange’s market share increased,72 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.73 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’. . . .’’ 74 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 72 The Exchange experienced a monthly average trading volume of 3.43% for the month of October 2020. See the ‘‘Market Share’’ section of the Exchange’s website, available at https:// www.miaxglobal.com/. 73 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). 74 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)). E:\FR\FM\03JYN1.SGM 03JYN1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices promoting market competition in its broader forms that are most important to investors and listed companies.’’ 75 Congress directed the Commission to ‘‘rely on ‘competition, whenever possible, in meeting its regulatory responsibilities for overseeing the SROs and the national market system.’ ’’ 76 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.’’ 77 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.’’ 78 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.’’ 79 The Exchange believes the competing exchanges’ 10Gb connectivity and port fees are useful examples of alternative approaches to providing and charging for access and demonstrating how such fees are competitively set and constrained. To that end, the Exchange believes the proposed fees are competitive and reasonable because the proposed fees are similar to or less than fees charged for similar connectivity and port access provided by other options exchanges with comparable market shares. As such, the Exchange believes that denying its ability to institute fees that allow the Exchange to recoup its costs with a reasonable margin in a manner that is closer to parity with legacy exchanges, in effect, impedes its ability to compete, including in its pricing of transaction fees and ability to invest in competitive infrastructure and other offerings. The following table shows how the Exchange’s proposed fees remain similar to or less than fees charged for similar connectivity and port access provided by other options exchanges with similar market share. Each of the connectivity or port rates in place at competing options exchanges were filed with the Commission for immediate effectiveness and remain in place today. Type of connection or port Monthly fee (per connection or per port) MIAX Emerald (as proposed) (equity options market share of 3.04% for the month of May 2023).80 10Gb ULL connection .............................. Limited Service MEI Ports ....................... NASDAQ 81 (equity options market share of 6.59% for the month of May 2023).82 10Gb Ultra fiber connection ..................... SQF Port .................................................. NASDAQ ISE LLC (‘‘ISE’’) 83 (equity options market share of 6.18% for the month of May 2023).84 NYSE American LLC (‘‘NYSE American’’) 86 (equity options market share of 7.34% for the month of May 2023).87 10Gb Ultra fiber connection ..................... SQF Port 85 .............................................. 10Gb LX LCN connection ........................ Order/Quote Entry Port ............................ NASDAQ GEMX, LLC (‘‘GEMX’’) 88 (equity options market share of 2.00% for the month of May 2023).89 10Gb Ultra connection ............................. SQF Port .................................................. $13,500. 1–2 ports: FREE (not changed in this proposal). 3–4 ports: $200 each. 5–6 ports: $300 each. 7 or more ports: $400 each. $15,000 per connection. 1–5 ports: $1,500 per port. 6–20 ports: $1,000 per port. 21 or more ports: $500 per port. $15,000 per connection. $1,100 per port. $22,000 per connection. 1–40 Ports: $450 per port. 41 or more Ports: $150 per port. $15,000 per connection. $1,250 per port. Exchange lotter on DSK11XQN23PROD with NOTICES1 42793 There is no requirement, regulatory or otherwise, that any broker-dealer connect to and access any (or all of) the available options exchanges. Market participants may choose to become a member of one or more options exchanges based on the market participant’s assessment of the business opportunity relative to the costs of the Exchange. With this, there is elasticity of demand for exchange membership. As an example, the Exchange’s affiliate, MIAX Pearl Options, experienced a decrease in membership as the result of similar fees proposed herein. 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 proposed by MIAX Pearl Options. It is not a requirement for market participants to become members of all options exchanges; in fact, certain market participants conduct an options business as a member of only one options market.90 A very small number of market participants choose to become a member of all sixteen options 75 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 76 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.’’). 77 See Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74,770 (December 9, 2008) (SR–NYSEArca–2006–21). 78 Id. 79 See Staff Guidance, supra note 23. 80 See supra note 72. 81 See NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other Services and NASDAQ Rules, General 8: Connectivity, Section 1. CoLocation Services. 82 See supra note 72. 83 See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE Rules, General 8: Connectivity. 84 See supra note 72. 85 Similar to the Exchange’s MEI Ports, SQF ports are primarily utilized by Market Makers. 86 See NYSE American Options Fee Schedule, Section V.A. Port Fees and Section V.B. CoLocation Fees. 87 See supra note 72. 88 See GEMX Pricing Schedule, Options 7, Section 6, Connectivity Fees and GEMX Rules, General 8: Connectivity. 89 See supra note 72. 90 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.’’ VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 E:\FR\FM\03JYN1.SGM 03JYN1 42794 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 exchanges. Most firms that actively trade on options markets are not currently Members of the Exchange and do not purchase connectivity or port services at the Exchange. Connectivity and ports are only available to Members or service bureaus, and only a Member may utilize a port.91 One other exchange recently noted in a proposal to amend their own trading permit fees that of the 62 market making firms that are registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access only one of the three exchanges.92 The Exchange and its affiliates, MIAX Pearl and MIAX, have a total of 47 members. Of those 47 total members, 35 are members of all three affiliated exchanges, four are members of only two (2) affiliated exchanges, and eight (8) are members of only one affiliated exchange. The Exchange also notes that no firm is a Member of the Exchange only. The above data evidences that a broker-dealer need not have direct connectivity to all options exchanges, let alone the Exchange and its two affiliates, and broker-dealers may elect to do so based on their own business decisions and need to directly access each exchange’s liquidity pool. Not only is there not an actual regulatory requirement to connect to every options exchange, the Exchange believes there is also no ‘‘de facto’’ or practical requirement as well, as further evidenced by the broker-dealer membership analysis of the options exchanges discussed above. As noted above, this is evidenced by the fact that one MIAX Options Pearl 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 (which are similar to the changes proposed herein). Indeed, broker-dealers choose if and how to access a particular exchange and because it is a choice, the Exchange must set reasonable pricing, otherwise prospective members would not connect and existing members would disconnect from the Exchange. The decision to become a member of an exchange, particularly for registered market 91 Service Bureaus may obtain ports on behalf of Members. 92 See Securities Exchange Act Release No. 94894 (May 11, 2022), 87 FR 29987 (May 17, 2022) (SR– BOX–2022–17) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Amend the Fee Schedule on the BOX Options Market LLC Facility To Adopt Electronic Market Maker Trading Permit Fees). The Exchange believes that BOX’s observation demonstrates that market making firms can, and do, select which exchanges they wish to access, and, accordingly, options exchanges must take competitive considerations into account when setting fees for such access. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 makers, is complex, and not solely based on the non-transactional costs assessed by an exchange. As noted herein, specific factors include, but are not limited to: (i) an exchange’s available liquidity in options series; (ii) trading functionality offered on a particular market; (iii) product offerings; (iv) customer service on an exchange; and (v) transactional pricing. Becoming a member of the exchange does not ‘‘lock’’ a potential member into a market or diminish the overall competition for exchange services. In lieu of becoming a member at each options exchange, a market participant may join one exchange and elect to have their orders routed in the event that a better price is available on an away market. Nothing in the Order Protection Rule requires a firm to become a Member at—or establish connectivity to—the Exchange.93 If the Exchange is not at the national best bid or offer (‘‘NBBO’’),94 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.95 With respect to the submission of orders, Members may also choose not to purchase any connection from the Exchange, and instead rely on the port of a third party to submit an order. For example, a third-party broker-dealer Member of the Exchange may be utilized by a retail investor to submit orders into an exchange. An institutional investor may utilize a broker-dealer, a service bureau,96 or request sponsored access 97 through a member of an exchange in order to submit a trade directly to an options exchange.98 A market participant may either pay the costs associated with becoming a member of an exchange or, 93 See Options Order Protection and Locked/ Crossed Market Plan (August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e544b99-9f11-c0e4db1a2266/options_order_protection_ plan.pdf. 94 See Exchange Rule 100. 95 Members may elect to not route their orders by utilizing the Do Not Route order type. See Exchange Rule 516(g). 96 Service Bureaus provide access to market participants to submit and execute orders on an exchange. On the Exchange, a Service Bureau may be a Member. Some Members utilize a Service Bureau for connectivity and that Service Bureau may not be a Member. Some market participants utilize a Service Bureau who is a Member to submit orders. 97 Sponsored Access is an arrangement whereby a Member permits its customers to enter orders into an exchange’s system that bypass the Member’s trading system and are routed directly to the Exchange, including routing through a service bureau or other third-party technology provider. 98 This may include utilizing a floor broker and submitting the trade to one of the five options trading floors. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 in the alternative, a market participant may elect to pay commissions to a broker-dealer, pay fees to a service bureau to submit trades, or pay a member to sponsor the market participant in order to submit trades directly to an exchange. Non-Member third-parties, such as service bureaus and extranets, resell the Exchange’s connectivity. This indirect connectivity is another viable alternative for market participants to trade on the Exchange without connecting directly to the Exchange (and thus not pay the Exchange’s connectivity fees), which alternative is already being used by non-Members and further constrains the price that the Exchange is able to charge for connectivity and other access fees to its market. The Exchange notes that it could, but chooses not to, preclude market participants from reselling its connectivity. Unlike other exchanges, the Exchange also does not currently assess fees on third-party resellers on a per customer basis (i.e., fees based on the number of firms that connect to the Exchange indirectly via the thirdparty).99 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.100 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 options markets. Accordingly, the Exchange believes that the proposed fees are fair and reasonable and constrained by competitive forces. The Exchange is obligated to regulate its Members and secure access to its environment. In order to properly regulate its Members and secure the trading environment, the Exchange takes measures to ensure access is 99 See, e.g., Nasdaq Price List—U.S. Direct Connection and Extranet Fees, available at, U.S. 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). 100 The Exchange notes that resellers, such as SFTI, are not required to publicize, let alone justify or file with the Commission their fees, and as such could charge the market participant any fees it deems appropriate (including connectivity fees higher than the Exchange’s connectivity fees), even if such fees would otherwise be considered potentially unreasonable or uncompetitive fees. E:\FR\FM\03JYN1.SGM 03JYN1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 monitored and maintained with various controls. Connectivity and ports are methods utilized by the Exchange to grant Members secure access to communicate with the Exchange and exercise trading rights. When a market participant elects to be a Member, and is approved for membership by the Exchange, the Member is granted trading rights to enter orders and/or quotes into Exchange through secure connections. Again, there is no legal or regulatory requirement that a market participant become a Member of the Exchange. This is again evidenced by the fact that one MIAX Pearl 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 a Member, they may then choose to purchase connectivity beyond the one connection that is necessary to quote or submit orders on the Exchange. Members may freely choose to rely on one or many connections, depending on their business model. Cost Analysis In general, the Exchange believes that exchanges, in setting fees of all types, should meet very high standards of transparency to demonstrate why each new fee or fee increase meets the Exchange Act requirements that fees be reasonable, equitably allocated, not unfairly discriminatory, and not create an undue burden on competition among members and markets. In particular, the Exchange believes that each exchange should take extra care to be able to demonstrate that these fees are based on its costs and reasonable business needs. In proposing to charge fees for connectivity and port services, the Exchange is especially diligent in assessing those fees in a transparent way against its own aggregate costs of providing the related service, and in carefully and transparently assessing the impact on Members—both generally and in relation to other Members, i.e., to assure the fee will not create a financial burden on any participant and will not have an undue impact in particular on smaller Members and competition among Members in general. The Exchange believes that this level of diligence and transparency is called for by the requirements of Section 19(b)(1) under the Act,101 and Rule 19b–4 thereunder,102 with respect to the types of information exchanges should 101 15 102 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 provide when filing fee changes, and Section 6(b) of the Act,103 which requires, among other things, that exchange fees be reasonable and equitably allocated,104 not designed to permit unfair discrimination,105 and that they not impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act.106 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.107 The Exchange reiterates that the legacy exchanges with whom the Exchange vigorously competes for order flow and market share, were not subject to any such diligence or transparency in setting their baseline non-transaction fees, most of which were put in place before the Revised Review Process and Staff Guidance. As detailed below, the Exchange recently calculated its aggregate annual costs for providing physical 10Gb ULL connectivity to the Exchange at $11,361,586 (or approximately $946,799 per month, rounded to the nearest dollar when dividing the annual cost by 12 months) and its aggregate annual costs for providing Limited Service MEI Ports at $1,799,066 (or approximately $148,255 per month, rounded to the nearest dollar when dividing the annual cost by 12 months). In order to cover the aggregate costs of providing connectivity to its users (both Members and non-Members) 108 going forward and to make a modest profit, as described below, the Exchange proposes to modify its Fee Schedule to charge a fee of $13,500 per month for each physical 10Gb ULL connection. The Exchange also proposes to modify its Fee Schedule to charge tiered rates for additional Limited Service MEI Ports. In 2020, the Exchange completed a study of its aggregate costs to produce market data and connectivity (the ‘‘Cost Analysis’’).109 The Cost Analysis 103 15 U.S.C. 78f(b). U.S.C. 78f(b)(4). 105 15 U.S.C. 78f(b)(5). 106 15 U.S.C. 78f(b)(8). 107 See Staff Guidance, supra note 23. 108 Types of market participants that obtain connectivity services from the Exchange but are not Members include service bureaus and extranets. Service bureaus offer technology-based services to other companies for a fee, including order entry services, and thus, may access Limited Service MEI Ports on behalf of one or more Members. Extranets offer physical connectivity services to Members and non-Members. 109 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. 104 15 PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 42795 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 for each cost driver as part of its 2023 budget review process. The 2023 budget review is a company-wide process that occurs over the course of many months, includes meetings among senior management, department heads, and the Finance Team. Each department head is required to send a ‘‘bottom up’’ budget to the Finance Team allocating costs at the profit and loss account and vendor levels for the Exchange and 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, simple only or simple and complex markets, auction functionality, etc.), which may impact message traffic, individual system architectures that impact platform size,110 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. All of these factors result in different allocation percentages among the Exchange and its affiliated markets, i.e., the different percentages of the overall cost driver allocated to the Exchange and its affiliated markets will cause the dollar amount of the overall cost allocated among the Exchange and its affiliated markets to also differ. Because the Exchange’s parent company currently owns and operates four separate and distinct marketplaces, the 110 For example, the Exchange maintains 12 matching engines, MIAX Pearl Options maintains 12 matching engines, MIAX Pearl Equities maintains 24 matching engines, and MIAX maintains 24 matching engines. E:\FR\FM\03JYN1.SGM 03JYN1 42796 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 Exchange must determine the costs associated with each actual market—as opposed to the Exchange’s parent company simply concluding that all costs drivers are the same at each individual marketplace and dividing total cost by four (4) (evenly for each marketplace). Rather, the Exchange’s parent company determines an accurate cost for each marketplace, which results in different allocations and amounts across exchanges for the same cost drivers, due to the unique factors of each marketplace as described above. This allocation methodology also ensures that no cost would be allocated twice or double-counted between the Exchange and its affiliated markets. The Finance Team then consolidates the budget and sends it to senior management, including the Chief Financial Officer and Chief Executive Officer, for review and approval. Next, the budget is presented to the Board of Directors and the Finance and Audit Committees for each exchange for their approval. The above steps encompass the first step of the cost allocation process. The next step involves determining what portion of the cost allocated to the Exchange pursuant to the above methodology is to be allocated to each core service, e.g., connectivity and ports, market data, and transaction services. The Exchange and its affiliated markets adopted an allocation methodology with thoughtful and consistently applied principles to guide how much of a particular cost amount allocated to the Exchange should be allocated within the Exchange to each core service. This is the final step in the cost allocation process and is applied to each of the cost drivers set forth below. 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 (61.9% of total expense amount allocated to 10Gb connectivity), with smaller allocations to additional Limited Service MEI Ports (4.6%), and the remainder to the provision of other connectivity, other ports, transaction execution, membership services and market data services (33.5%). This next level of the allocation methodology at the individual exchange level also took into account factors similar to those set forth under the first step of the allocation methodology process described above, to determine the appropriate allocation to connectivity or market data versus allocations for other services. This 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 allocation of each cost driver to each core service, resulting in the cost allocations described below. Each of the below cost allocations is unique to the Exchange and represents a percentage of overall cost that was allocated to the Exchange pursuant to the initial allocation described above. By allocating segmented costs to each core service, the Exchange was able to estimate by core service the potential margin it might earn based on different fee models. The Exchange notes that as a non-listing venue it has five primary sources of revenue that it can potentially use to fund its operations: transaction fees, fees for connectivity and port services, membership fees, regulatory fees, and market data fees. Accordingly, the Exchange must cover its expenses from these five primary sources of revenue. The Exchange also notes that as a general matter each of these sources of revenue is based on services that are interdependent. For instance, the Exchange’s system for executing transactions is dependent on physical hardware and connectivity; only Members and parties that they sponsor to participate directly on the Exchange may submit orders to the Exchange; many Members (but not all) consume market data from the Exchange in order to trade on the Exchange; and the Exchange consumes market data from external sources in order to comply with regulatory obligations. Accordingly, given this interdependence, the allocation of costs to each service or revenue source required judgment of the Exchange and was weighted based on estimates of the Exchange that the Exchange believes are reasonable, as set forth below. While there is no standardized and generally accepted methodology for the allocation of an exchange’s costs, the Exchange’s methodology is the result of an extensive review and analysis and will be consistently applied going forward for any other potential fee proposals. In the absence of the Commission attempting to specify a methodology for the allocation of exchanges’ interdependent costs, the Exchange will continue to be left with its best efforts to attempt to conduct such an allocation in a thoughtful and reasonable manner. Through the Exchange’s extensive updated Cost Analysis, which was again recently further refined, 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 and port services, and, if such expense did so relate, what portion (or percentage) of such expense actually supports the provision of connectivity and port services, and thus bears a relationship that is, ‘‘in nature and closeness,’’ directly related to network connectivity and port 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 aggregate monthly cost to provide 10Gb ULL connectivity and Limited Service MEI Port services, including both physical 10Gb connections and Limited Service MEI Ports, is $1,095,054 (utilizing the rounded numbers when dividing the annual cost for 10Gb ULL connectivity and annual cost for Limited Service MEI Ports by 12 months, then adding both numbers together), as further detailed below. Costs Related to Offering Physical 10Gb ULL Connectivity The following chart details the individual line-item costs considered by the Exchange to be related to offering physical dedicated 10Gb ULL connectivity via an unshared network as well as the percentage of the Exchange’s overall costs that such costs represent for each cost driver (e.g., as set forth below, the Exchange allocated approximately 28.1% of its overall Human Resources cost to offering physical connectivity). Allocated annual cost 111 Cost drivers Human Resources ................................................................................................................................... 111 The Annual Cost includes figures rounded to the nearest dollar. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 112 The Monthly Cost was determined by dividing the Annual Cost for each line item by twelve (12) PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 $3,520,856 Allocated monthly cost 112 % Of all $293,405 months and rounding up or down to the nearest dollar. E:\FR\FM\03JYN1.SGM 03JYN1 28 42797 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices Allocated annual cost 111 Cost drivers % Of all Connectivity (external fees, cabling, switches, etc.) ............................................................................... Internet Services and External Market Data ........................................................................................... Data Center ............................................................................................................................................. Hardware and Software Maintenance and Licenses .............................................................................. Depreciation ............................................................................................................................................. Allocated Shared Expenses .................................................................................................................... 71,675 373,249 752,545 666,208 1,929,118 4,047,935 5,973 31,104 62,712 55,517 160,760 337,328 61.9 84.8 61.9 50.9 63.8 51.3 Total .................................................................................................................................................. 11,361,586 946,799 42.8 Below are additional details regarding each of the line-item costs considered by the Exchange to be related to offering physical 10Gb ULL connectivity. While some costs were attempted to be allocated as equally as possible among the Exchange and its affiliated markets, the Exchange notes that some of its cost allocation percentages for certain cost drivers differ when compared to the same cost drives for the Exchange’s affiliated markets 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 affiliated markets) to determine its actual costs, which may vary across the Exchange and its affiliated markets based on factors that are unique to each marketplace. The Exchange provides additional explanation below (including the reason for the deviation) for the significant differences. Human Resources lotter on DSK11XQN23PROD with NOTICES1 Allocated monthly cost 112 For personnel costs (Human Resources), the Exchange calculated an allocation of employee time for employees whose functions include providing and maintaining physical connectivity and performance thereof (primarily the Exchange’s network infrastructure team, which spends most of their time performing functions necessary to provide physical connectivity) and for which the Exchange allocated a weighted average of 42.4% of each employee’s time from the above group 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, sales, membership and finance personnel), for which the Exchange allocated cost on an employee-by- VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 employee basis (i.e., only including those personnel who support functions related to providing physical connectivity) and then applied a smaller allocation to such employees (less than 20%). The Exchange notes that it and its affiliated markets have 184 employees (excluding employees at non-options/ equities exchange subsidiaries of Miami International Holdings, Inc. (‘‘MIH’’), the holding company of the Exchange and its affiliated markets), and each department leader has direct knowledge of the time spent by each employee with respect to the various tasks necessary to operate the Exchange. Specifically, twice a year and as needed with additional new hires and new project initiatives, in consultation with employees as needed, managers and department heads assign a percentage of time to every employee and then allocate that time amongst the Exchange and its affiliated markets to determine each market’s individual Human Resources expense. Then, 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.113 This includes personnel from the Exchange departments that are 113 The Exchange notes that while 11.7 full time equivalents (‘‘FTEs’’) were allocated in this filing to the Exchange and a similar number of FTEs in a similar filing by the Exchange’s affiliate, MIAX (12.9 FTEs), the overall cost percentage allocated for each differs due to the individual level of compensation for each employee assigned to work on projects for the exchanges. PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 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, of which the Exchange allocated 42.4% of each of their employee’s time assigned to the Exchange, as stated above. The Exchange notes that senior level executives’ times was only allocated to the Human Resources costs to the extent that they are involved in overseeing tasks related to providing physical connectivity. The Human Resources cost was calculated using a blended rate of compensation reflecting salary, equity and bonus compensation, benefits, payroll taxes, and 401(k) matching contributions. Connectivity (External Fees, Cabling, Switches, etc.) The Connectivity cost driver includes external fees paid to connect to other exchanges and third parties, cabling and switches required to operate the Exchange. The Connectivity cost driver 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 providers for connectivity to the entire U.S. options industry, and infrastructure services for critical components of the network that are necessary to provide and maintain its System Networks and access to its System Networks via 10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity providers to connect to other national securities exchanges and the Options Price Reporting Authority (‘‘OPRA’’). The Exchange understands that these service providers provide services to most, if E:\FR\FM\03JYN1.SGM 03JYN1 42798 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 not all, of the other U.S. exchanges and other market participants. Connectivity provided by these service providers is critical to the Exchanges daily operations and performance of its System Networks to which market participants connect to via 10Gb ULL connectivity. Without these services providers, the Exchange would not be able to connect to other national securities exchanges, market data providers or OPRA and, therefore, would not be able to operate and support its System Networks. The Exchange does not employ a separate fee to cover its connectivity provider expense and recoups that expense, in part, by charging for 10Gb ULL connectivity. Internet Services and External Market Data The next cost driver consists of internet Services and external market data. The internet services cost driver includes third-party service providers that provide the internet, fiber and bandwidth connections between the Exchange’s networks, primary and secondary data centers, and office locations in Princeton and Miami. External market data includes fees paid to third parties, including other exchanges, to receive market data. The Exchange includes external market data fee costs towards the provision of 10Gb ULL connectivity because such market data is necessary for certain services related to connectivity, including pretrade risk checks and checks for other conditions (e.g., re-pricing of orders to avoid locked or crossed markets and trading collars). Since external market data from other exchanges is consumed at the Exchange’s matching engine level, (to which 10Gb ULL connectivity provides access) in order to validate orders before additional orders enter the matching engine or are executed, the Exchange believes it is reasonable to allocate a small amount of such costs to 10Gb ULL connectivity. The Exchange relies on various content service providers for data feeds for the entire U.S. options industry, as well as content for critical components of the network that are necessary to provide and maintain its System Networks and access to its System Networks via 10Gb ULL connectivity. Specifically, the Exchange utilizes content service providers to receive market data from OPRA, 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. Market data provided these VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 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 receive market data and, therefore, would not be able to operate and support its System Networks. The Exchange does not employ a separate fee to cover its content service provider expense and recoups that expense, in part, by charging for 10Gb ULL connectivity. Lastly, the Exchange notes that the actual dollar amounts allocated as part of the second step of the 2023 budget process differ among the Exchange and its affiliated markets for the internet Services and External Market Data cost driver, even though, but for the Exchange, the allocation percentages are generally consistent across markets (e.g., MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl Equities allocated 84.8%, 73.3%, 73.3% and 72.5%, respectively, to the same cost driver). This is because: (i) a different percentage of the overall internet Services and External Market Data cost driver was allocated to the Exchange and its affiliated markets due to the factors set forth under the first step of the 2023 budget review process described above (unique technical architecture, market structure, and business requirements of each marketplace); and (ii) the Exchange itself allocated a larger portion of this cost driver to 10Gb ULL connectivity because of recent initiatives to improve the latency and determinism of its systems. The Exchange notes while the percentage it allocated to the internet Services and External Market Data cost driver is greater than its affiliated markets, the overall dollar amount allocated to the Exchange under the initial step of the 2023 budget process is lower than its affiliated markets. However, the Exchange believes that this is not, in dollar amounts, a significant difference. This is because the total dollar amount of expense covered by this cost driver is relatively small compared to other cost drivers and is due to nuances in exchange architecture that require different initial allocation amount under the first step of the 2023 budget process described above. Thus, non-significant differences in percentage allocation amounts in a smaller cost driver create the appearance of a significant difference, even though the actual difference in dollar amounts is small. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 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 (61.9%) to physical 10Gb ULL connectivity because the third-party data centers and the Exchange’s physical equipment contained therein is the most direct cost in providing physical access to the Exchange. In other words, for the Exchange to operate in a dedicated space with connectivity by market 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. 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.114 Depreciation All physical assets, software, and hardware used to provide 10Gb ULL connectivity, which also includes assets used for testing and monitoring of Exchange infrastructure, were valued at cost, and 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. The Exchange also included in the 114 This expense may be less than the Exchange’s affiliated markets, specifically MIAX Pearl (the options and equities markets), because, unlike the Exchange, MIAX Pearl (the options and equities markets) maintains an additional gateway to accommodate its member’s access and connectivity needs. This added gateway contributes to the difference in allocations between the Exchange and MIAX Pearl. This expense also differs in dollar amount among the Exchange, MIAX Pearl (options and equities), and MIAX because each market may maintain and utilize a different amount of hardware and software based on its market model and infrastructure needs. The Exchange allocated a percentage of the overall cost based on actual amounts of hardware and software utilized by that market, which resulted in different cost allocations and dollar amounts. E:\FR\FM\03JYN1.SGM 03JYN1 42799 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices Depreciation cost driver certain budgeted improvements that the Exchange intends to capitalize and depreciate with respect to 10Gb ULL connectivity in the near-term. As with the other allocated costs in the Exchange’s updated Cost Analysis, the Depreciation cost was therefore narrowly tailored to depreciation related to 10Gb ULL connectivity. As noted above, the Exchange allocated 63.8% of its allocated depreciation costs to providing physical 10Gb ULL 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. For example, the percentages the Exchange and its affiliate, MIAX, allocated to the depreciation of hardware and software used to provide 10Gb ULL connectivity are nearly identical. However, the Exchange’s dollar amount is lower than that of MIAX by approximately $32,000 per month due to two factors: first, MIAX has undergone a technology refresh since the time MIAX Emerald launched in February 2019, leading MIAX to have more hardware that software that is subject to depreciation. Second, MIAX maintains 24 matching engines while MIAX Emerald maintains only 12 matching engines. This also results in more of MIAX’s hardware and software being subject to depreciation than MIAX Emerald’s hardware and software due to the greater amount of equipment and software necessary to support the greater number of matching engines on MIAX. Allocated Shared Expenses Finally, a limited portion of general shared expenses was allocated to overall physical connectivity costs because 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. Similarly, the cost of paying directors to serve on the Exchange’s Board of Directors is also included in the Exchange’s general shared expenses cost driver.115 The Exchange notes that the 51.3% allocation of general shared expenses for physical 10Gb ULL connectivity is higher than that allocated to general shared expenses for Limited Service MEI Ports based on its allocation methodology that weighted costs attributable to each core service based on an understanding of each area. While physical connectivity has several areas where certain tangible costs are heavily weighted towards providing such service (e.g., Data Center, as described above), Limited Service MEI Ports do not require as many broad or indirect resources as other core services. * * * * * Approximate Cost per 10Gb ULL Connection per Month After determining the approximate allocated monthly cost related to 10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of $946,799 was divided by the number of physical 10Gb ULL connections the Exchange maintained at the time that proposed pricing was determined (102), to arrive at a cost of approximately $9,282 per month, per physical 10Gb ULL connection. Due to the nature of this particular cost, this allocation methodology results in an allocation among the Exchange and its affiliated markets based on set quantifiable criteria, i.e., actual number of 10Gb ULL connections. * * * * * Costs Related to Offering Limited Service MEI Ports The following chart details the individual line-item costs considered by the Exchange to be related to offering Limited Service MEI Ports as well as the percentage of the Exchange’s overall costs such costs represent for such area (e.g., as set forth below, the Exchange allocated approximately 5.9% of its overall Human Resources cost to offering Limited Service MEI Ports). Allocated annual cost 116 lotter on DSK11XQN23PROD with NOTICES1 Cost drivers Allocated monthly cost 117 % Of all Human Resources ................................................................................................................................... Connectivity (external fees, cabling, switches, etc.) ............................................................................... Internet Services and External Market Data ........................................................................................... Data Center ............................................................................................................................................. Hardware and Software Maintenance and Licenses .............................................................................. Depreciation ............................................................................................................................................. Allocated Shared Expenses .................................................................................................................... $737,784 3,713 14,102 55,686 41,951 112,694 813,136 $61,482 309 1,175 4,641 3,496 9,391 67,761 5.9 3.2 3.2 4.6 3.2 3.7 10.3 Total .................................................................................................................................................. 1,779,066 148,255 6.7 Below are additional details regarding each of the line-item costs considered by the Exchange to be related to offering Limited Service MEI Ports. While some costs were attempted to be allocated as equally as possible among the Exchange and its affiliated markets, the Exchange notes that some of its cost allocation percentages for certain cost drivers differ when compared to the same cost drivers described by the Exchange’s affiliated markets 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 affiliated markets) to determine its actual costs, which may vary across the Exchange and its affiliated markets based on factors that are unique to each marketplace. The 115 The Exchange notes that MEMX allocated a precise amount of 10% of the overall cost for directors to providing physical connectivity. The Exchange does not calculate is expenses at that granular a level. Instead, director costs are included as part of the overall general allocation. 116 See supra note 111 (describing rounding of Annual Costs). 117 See supra note 112 (describing rounding of Monthly Costs based on Annual Costs). VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 E:\FR\FM\03JYN1.SGM 03JYN1 42800 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices Exchange provides additional explanation below (including the reason for the deviation) for the significant differences. lotter on DSK11XQN23PROD with NOTICES1 Human Resources With respect to Limited Service MEI Ports, the Exchange calculated Human Resources cost by taking an allocation of employee time for employees whose functions include providing Limited Service MEI Ports and maintaining performance thereof (including a broader range of employees such as technical operations personnel, market operations personnel, and software engineering personnel) as well as a limited subset of personnel with ancillary functions related to maintaining such connectivity (such as sales, membership, and finance personnel). Just as described above for 10Gb ULL connectivity, the estimates of Human Resources cost were again determined by consulting with department leaders, determining which employees are involved in tasks related to providing Limited Service MEI Ports and maintaining performance thereof, and confirming that the proposed allocations were reasonable based on an understanding of the percentage of their time such employees devote to tasks related to providing Limited Service MEI Ports and maintaining performance thereof. The Exchange notes that senior level executives were allocated Human Resources costs to the extent they are involved in overseeing tasks specifically related to providing Limited Service MEI Ports.118 This includes personnel from the following Exchange departments that are predominately involved in providing Limited Service MEI Ports: Business Systems Development, Trading Systems Development, Systems Operations and Network Monitoring, Network and Data Center Operations, Listings, Trading Operations, and Project Management. Senior level executives were only allocated Human Resources costs to the extent that they are involved in managing personnel responsible for tasks integral to providing and maintaining Limited Service MEI Ports. The Human Resources cost was again calculated using a blended rate of compensation reflecting salary, equity and bonus compensation, benefits, 118 The Exchange notes that while 2.5 FTEs were allocated in this filing to the Exchange and a similar number of FTEs in a similar filing by the Exchange’s affiliate, MIAX (3.0 FTEs), the overall cost percentage allocated for each differs due to the individual level of compensation for each employee assigned to work on projects for the exchanges. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 payroll taxes, and 401(k) matching contributions. Connectivity (External Fees, Cabling, Switches, etc.) The Connectivity cost includes external fees paid to connect to other exchanges and cabling and switches, as described above. Internet Services and External Market Data The next cost driver consists of internet services and external market data. Internet services includes thirdparty service providers that provide the internet, fiber and bandwidth connections between the Exchange’s networks, primary and secondary data centers, and office locations in Princeton and Miami. For purposes of Limited Service MEI Ports, the Exchange also includes a portion of its costs related to 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 includes external market data costs towards the provision of Limited Service MEI Ports because such market data is necessary (in addition to physical connectivity) to offer certain services related to such ports, such as validating orders on entry against the NBBO and checking for other conditions (e.g., halted securities).119 Thus, since market data from other exchanges is consumed at the Exchange’s Limited Service MEI Port level in order to validate orders, before additional processing occurs with respect to such orders, the Exchange believes it is reasonable to allocate a small amount of such costs to Limited Service MEI Ports. The Exchange notes that the allocation for the internet Services and External Market Data cost driver is greater than that of its affiliate, MIAX Pearl Options, as MIAX Emerald allocated 3.2% of its internet Services and External Market Data expense towards Limited Service MEI Ports, while MIAX Pearl Options allocated 1.4% to its Full Service MEO Ports for the same cost driver. The allocation percentages set forth above differ because they directly correspond with the number of applicable ports utilized on each exchange. For March 2023, MIAX Emerald Market Makers utilized 1,028 Limited Service MEI ports and MIAX Market Makers utilized 1,782 Limited Service MEI ports. When compared to Full Service Port (Bulk and 119 The Exchange notes that MEMX separately allocated 7.5% of its external market data costs to providing physical connectivity. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 Single) usage, for March 2023, MIAX Pearl Options Members utilized only 432 Full Service MEO Ports (Bulk and Single), far fewer than number of Limited Service MEI Ports utilized by Market Makers on MIAX and MIAX Emerald, thus resulting in a smaller cost allocation. There is increased cost associated with supporting a higher number of ports (requiring more hardware and other technical infrastructure and internet Service), thus the Exchange allocates a higher percentage of expense than MIAX Pearl Options, which has a lower port count. Data Center Data Center costs includes an allocation of the costs the Exchange incurs to provide Limited Service MEI Ports in the third-party data centers where it maintains its equipment as well as related costs for market data to then enter the Exchange’s system via Limited Service MEI Ports (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). 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. The Exchange notes that this allocation is greater than its affiliate, MIAX Pearl Options, as MIAX Emerald allocated 3.2% of its Hardware and Software Maintenance and License expense towards Limited Service MEI Ports, while MIAX Pearl Options allocated 1.4% to its Full Service MEO Ports (Bulk and Single) for the same category of expense. The allocation percentages set forth above differ because they correspond with the number of applicable ports utilized on each exchange. For March 2023, MIAX Market Makers utilized 1,782 Limited Service MEI ports and MIAX Emerald Market Makers utilized 1,028 Limited Service MEI Ports. When compared to Full Service Port (Bulk and Single) usage, for March 2023, MIAX Pearl Options Members utilized only 432 Full Service MEO Ports (Bulk and Single), far fewer than number of Limited Service MEI Ports utilized by Market Makers on MIAX and MIAX Emerald, thus resulting in a smaller cost allocation. There is increased cost associated with supporting a higher number of ports (requiring more hardware and other technical infrastructure), thus the Exchange allocates a higher percentage E:\FR\FM\03JYN1.SGM 03JYN1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 of expense than MIAX Pearl Options, which has a lower port count. Depreciation The vast majority of the software the Exchange uses to provide Limited Service MEI Ports has been developed in-house and the cost of such development, which takes place over an extended period of time and includes not just development work, but also quality assurance and testing to ensure the software works as intended, is depreciated over time once the software is activated in the production environment. Hardware used to provide Limited Service MEI Ports includes equipment used for testing and monitoring of order entry infrastructure and other physical equipment the Exchange purchased and is also depreciated over time. All hardware and software were valued at cost, depreciated or leased over periods ranging from three to five years. Thus, the depreciation cost primarily relates to servers necessary to operate the Exchange, some of which is owned by the Exchange and some of which is leased by the Exchange in order to allow efficient periodic technology refreshes. The Exchange allocated 3.7% of all depreciation costs to providing Limited Service MEI Ports. The Exchange allocated depreciation costs for depreciated software necessary to operate the Exchange because such software is related to the provision of Limited Service MEI Ports. As with the other allocated costs in the Exchange’s updated Cost Analysis, the Depreciation cost driver was therefore narrowly tailored to depreciation related to Limited Service MEI Ports. The Exchange 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. For example, the Exchange notes that the percentages it and its affiliate, MIAX, allocated to the depreciation cost driver for Limited Service MEI Ports differ by only 2.6%. However, MIAX’s approximate dollar amount is greater than that of MIAX Emerald by approximately $10,000 per month. This is due to two primary factors. First, MIAX has under gone a technology refresh since the time MIAX Emerald launched in February 2019, leading to it having more hardware that software that is subject to depreciation. Second, VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 MIAX maintains 24 matching engines while MIAX Emerald maintains only 12 matching engines. This also results in more of MIAX’s hardware and software being subject to depreciation than MIAX Emerald’s hardware and software due to the greater amount of equipment and software necessary to support the greater number of matching engines on the Exchange. Allocated Shared Expenses Finally, a limited portion of general shared expenses was allocated to overall Limited Service MEI Ports costs as without these general shared costs the Exchange would not be able to operate in the manner that it does and provide Limited Service MEI Ports. The costs included in general shared expenses include general expenses of the Exchange, including office space and office expenses (e.g., occupancy and overhead expenses), utilities, recruiting and training, marketing and advertising costs, professional fees for legal, tax and accounting services (including external and internal audit expenses), and telecommunications costs. The Exchange again notes that the cost of paying directors to serve on its Board of Directors is included in the calculation of Allocated Shared Expenses, and thus a portion of such overall cost amounting to less than 11% of the overall cost for directors was allocated to providing Limited Service MEI Ports. The Exchange notes that the 10.3% allocation of general shared expenses for Limited Service MEI Ports is lower than that allocated to general shared expenses for physical connectivity based on its allocation methodology that weighted costs attributable to each Core Service based on an understanding of each area. While Limited Service MEI Ports have several areas where certain tangible costs are heavily weighted towards providing such service (e.g., Data Center, as described above), 10Gb ULL connectivity requires a broader level of support from Exchange personnel in different areas, which in turn leads to a broader general level of cost to the Exchange. Lastly, the Exchange notes that this allocation is greater than its affiliate, MIAX Pearl Options, as MIAX Emerald allocated 10.3% of its Allocated Shared Expense towards Limited Service MEI Ports, while MIAX Pearl Options allocated 3.6% to its Full Service MEO Ports (Bulk and Single) for the same category of expense. The allocation percentages set forth above differ because they correspond with the number of applicable ports utilized on each exchange. For March 2023, MIAX Market Makers utilized 1,782 Limited PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 42801 Service MEI ports and MIAX Emerald Market Makers utilized 1,028 Limited Service MEI Ports. When compared to Full Service Port (Bulk and Single) usage, for March 2023, MIAX Pearl Options Members utilized only 432 Full Service MEO Ports (Bulk and Single), far fewer than number of Limited Service MEI Ports utilized by Market Makers on MIAX Emerald, thus resulting in a smaller cost allocation. There is increased cost associated with supporting a higher number of ports (requiring more hardware and other technical infrastructure), thus the Exchange allocates a higher percentage of expense than MIAX Pearl Options which has a lower port count.120 * * * * * Approximate Cost per Limited Service MEI Port per Month The total monthly cost of $148,255 was divided by the number of chargeable Limited Service MEI Ports (excluding the two free Limited Service MEI Ports per matching engine that each Member receives) the Exchange maintained at the time that proposed pricing was determined (706), to arrive at a cost of approximately $210 per month, per charged Limited Service MEI Port. * * * * * Cost Analysis—Additional Discussion In conducting its Cost Analysis, the Exchange did not allocate any of its expenses in full to any core services (including physical connectivity or Limited Service MEI Ports) and did not double-count any expenses. Instead, as described above, the Exchange allocated applicable cost drivers across its core services and used the same Cost Analysis to form the basis of this proposal and the filings the Exchange submitted proposing fees for proprietary 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 120 MIAX allocated a slightly lower amount (9.8%) of this cost as compared to MIAX Emerald (10.3%). This is not a significant difference. However, both allocations resulted in an identical cost amount of $0.8 million, despite MIAX having a higher number of Limited Service MEI Ports. MIAX Emerald was allocated a higher cost per Limited Service MEI Port due to the additional resources and expenditures associated with maintaining its recently enhanced low latency network. E:\FR\FM\03JYN1.SGM 03JYN1 lotter on DSK11XQN23PROD with NOTICES1 42802 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices (42.4%) given their focus on functions necessary to provide physical connections. The salaries of those same personnel were allocated only 8.0% to Limited Service MEI Ports and the remaining 49.6% was allocated to 1Gb connectivity, other port services, transaction services, membership services and market data. The Exchange did not allocate any other Human Resources expense for providing physical connections to any other employee group, outside of a smaller allocation of 19.8% for 10Gb ULL connectivity or 19.9% for the entire network, of the cost associated with certain specified personnel who work closely with and support network infrastructure personnel. In contrast, the Exchange allocated much smaller percentages of costs (5% or less) across a wider range of personnel groups in order to allocate Human Resources costs to providing Limited Service MEI Ports. This is because a much wider range of personnel are involved in functions necessary to offer, monitor and maintain Limited Service MEI Ports but the tasks necessary to do so are not a primary or full-time function. In total, the Exchange allocated 28.1% of its personnel costs to providing 10Gb ULL and 1Gb connectivity and 5.9% of its personnel costs to providing Limited Service MEI Ports, for a total allocation of 34% Human Resources expense to provide these specific connectivity and port services. In turn, the Exchange allocated the remaining 66% of its Human Resources expense to membership services, transaction services, other port services and market data. Thus, again, the Exchange’s allocations of cost across core services were based on real costs of operating the Exchange and were not double-counted across the core services or their associated revenue streams. As another example, the Exchange allocated depreciation expense to all core services, including physical connections and Limited Service MEI Ports, but in different amounts. The Exchange believes it is reasonable to allocate the identified portion of such expense because such expense includes the actual cost of the computer equipment, such as dedicated servers, computers, laptops, monitors, information security appliances and storage, and network switching infrastructure equipment, including switches and taps that were purchased to operate and support the network. Without this equipment, the Exchange would not be able to operate the network and provide connectivity services to its Members and nonMembers and their customers. However, VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 the Exchange did not allocate all of the depreciation and amortization expense toward the cost of providing connectivity services, but instead allocated approximately 67.5% of the Exchange’s overall depreciation and amortization expense to connectivity services (63.8% attributed to 10Gb ULL physical connections and 3.7% to Limited Service MEI Ports). The Exchange allocated the remaining depreciation and amortization expense (approximately 32.5%) toward the cost of providing transaction services, membership services, other port services and market data. The Exchange notes that its revenue estimates are based on projections across all potential revenue streams and will only be realized to the extent such revenue streams actually produce the revenue estimated. The Exchange does not yet know whether such expectations will be realized. For instance, in order to generate the revenue expected from connectivity, the Exchange will have to be successful in retaining existing clients that wish to maintain physical connectivity and/or Limited Service MEI Ports or in obtaining new clients that will purchase such services. Similarly, the Exchange will have to be successful in retaining a positive net capture on transaction fees in order to realize the anticipated revenue from transaction pricing. The Exchange notes that the Cost Analysis is based on the Exchange’s 2023 fiscal year of operations and projections. It is possible, however, that actual costs may be higher or lower. 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 may 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 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 would propose to increase fees in the event that revenues fail to cover its costs and a reasonable mark-up, or decrease fees in the event that revenue or the mark-up materially exceeds our current projections. In the event that the Exchange determines to propose a fee change, the results of a timely review, including an updated cost estimate, will be included in the rule filing proposing the fee change. More generally, the Exchange believes that it is appropriate for an exchange to refresh and update information about its relevant costs and revenues in seeking any future changes to fees, and the Exchange commits to do so. Projected Revenue 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 and port 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. E:\FR\FM\03JYN1.SGM 03JYN1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 The Exchange’s Cost Analysis estimates the annual cost to provide 10Gb ULL connectivity services will equal $11,361,586. Based on current 10Gb ULL connectivity services usage, the Exchange would generate annual revenue of approximately $16,524,000. The Exchange believes this represents a modest profit of 31% when compared to the cost of providing 10Gb ULL connectivity services which could decrease over time.121 The Exchange’s Cost Analysis estimates the annual cost to provide Limited Service MEI Port services will equal $1,779,066. Based on current Limited Service MEI Port services usage, the Exchange would generate annual revenue of approximately $2,809,200. The Exchange believes this would result in an estimated profit margin of 37% after calculating the cost of providing Limited Service MEI Port services, which profit margin could decrease over time.122 The Exchange notes that the cost to provide Limited Service MEI Ports is higher than the cost for the Exchange’s affiliate, MIAX Pearl Options, to provide Full Service MEO Ports due to the substantially higher number of Limited Service MEI Ports used by Exchange Members. For example, the Exchange’s Members are currently allocated 1,028 Limited Service MEI Ports compared to only 432 Full Service MEO Ports (Bulk and Single combined) allocated to MIAX Pearl Options members. Based on the above discussion, the Exchange believes that even if the Exchange earns the above revenue or incrementally more or less, the proposed fees are fair and reasonable because they will not result in pricing that deviates from that of other exchanges or a supra-competitive profit, when comparing the total expense of the Exchange associated with providing 10Gb ULL connectivity and Limited Service MEI Port services versus the total projected revenue of the Exchange associated with network 10Gb ULL connectivity and Limited Service MEI Port services. The Exchange also notes that this the resultant profit margin differs slightly from the profit margins set forth in similar fee filings by its affiliated markets. This is not atypical among 121 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 June 14, 2023). 122 Id. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 exchanges and is due to a number of factors that differ between these four markets, including: different market models, market structures, and product offerings (equities, options, price-time, pro-rata, simple, and complex); different pricing models; different number of market participants and connectivity subscribers; different maintenance and operations costs, as described in the cost allocation methodology above; different technical architecture (e.g., the number of matching engines per exchange, i.e., the Exchange maintains only 12 matching engines while MIAX maintains 24 matching engines); and different maturity phase of the Exchange and its affiliated markets (i.e., start-up versus growth versus more mature). All of these factors contribute to a unique and differing level of profit margin per exchange. Further, the Exchange proposes to charge rates that are comparable to, or lower than, similar fees for similar products charged by competing exchanges. For example, for 10Gb ULL connectivity, the Exchange proposes a lower fee than the fee charged by Nasdaq for its comparable 10Gb Ultra fiber connection ($13,500 per month for the Exchange vs. $15,000 per month for Nasdaq).123 NYSE American charges even higher fees for its comparable 10GB LX LCN connection than the Exchange’s proposed fees ($13,500 per month for the Exchange vs. $22,000 per month for NYSE American).124 Accordingly, the Exchange believes that comparable and competitive pricing are key factors in determining whether a proposed fee meets the requirements of the Act, regardless of whether that same fee across the Exchange’s affiliated markets leads to slightly different profit margins due to factors outside of the Exchange’s control (i.e., more subscribers to 10Gb ULL connectivity on the Exchange than its affiliated markets or vice versa). * * * * * The Exchange has operated at a cumulative net annual loss since it launched operations in 2019.125 This is due to a number of factors, one of which is choosing to forgo revenue by offering 123 See NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other Services and NASDAQ Rules, General 8: Connectivity, Section 1. CoLocation Services. 124 See NYSE American Options Fee Schedule, Section V.A. Port Fees and Section V.B. CoLocation Fees. 125 The Exchange has incurred a cumulative loss of $9 million since its inception in 2019. See Exchange’s Form 1/A, Application for Registration or Exemption from Registration as a National Securities Exchange, filed June 29, 2022, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001164.pdf. PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 42803 certain products, such as low latency connectivity, at lower rates than other options exchanges to attract order flow and encourage market participants to experience the high determinism, low latency, and resiliency of the Exchange’s trading systems. The Exchange does not believe that it should now be penalized for seeking to raise its fees as it now needs to upgrades its technology and absorb increased costs. Therefore, the Exchange believes the proposed fees are reasonable because they are based on both relative costs to the Exchange to provide dedicated 10Gb ULL connectivity and Limited Service MEI Ports, the extent to which the product drives the Exchange’s overall costs and the relative value of the product, as well as the Exchange’s objective to make access to its Systems broadly available to market participants. The Exchange also believes the proposed fees are reasonable because they are designed to generate annual revenue to recoup the Exchange’s costs of providing dedicated 10Gb ULL connectivity and Limited Service MEI Ports. The Exchange notes that its revenue estimate is based on projections and will only be realized to the extent customer activity produces the revenue estimated. As a competitor in the hypercompetitive exchange environment, and an exchange focused on driving competition, the Exchange does not yet know whether such projections will be realized. For instance, in order to generate the revenue expected from 10Gb ULL connectivity and Limited Service MEI Ports, the Exchange will have to be successful in retaining existing clients that wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports and/or obtaining new clients that will purchase such access. To the extent the Exchange is successful in encouraging new clients to utilize 10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does not believe it should be penalized for such success. To the extent the Exchange has mispriced and experiences a net loss in connectivity clients or in transaction activity, the Exchange could experience a net reduction in revenue. While the Exchange is supportive of transparency around costs and potential margins (applied across all exchanges), as well as periodic review of revenues and applicable costs (as discussed below), 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. Instead, the Exchange believes that the information should be used solely to confirm that an Exchange is not E:\FR\FM\03JYN1.SGM 03JYN1 lotter on DSK11XQN23PROD with NOTICES1 42804 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices earning—or seeking to earn—supracompetitive profits. The Exchange believes the Cost Analysis and related projections in this filing demonstrate this fact. The Exchange is owned by a holding company that is the parent company of four Exchange markets and, therefore, the Exchange and its affiliated markets must allocate shared costs across all of those markets accordingly, pursuant to the above-described allocation methodology. In contrast, the Investors Exchange LLC (‘‘IEX’’) and MEMX, which are currently each operating only one exchange, in their recent nontransaction fee filings 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 that result from sharing costs across multiple platforms. The Exchange and its affiliated markets often share a single cost, which results in cost efficiencies that can cause a broader gap between the allocated cost amount and projected revenue, even though the fee levels being proposed are lower or competitive with 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 Exchange believes that Commission Staff should also consider whether the proposed fee level is comparable to, or competitive 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. Further, if Commission Staff is making determinations as to appropriate profit margins in their approval of exchange fees, the Exchange believes that the Commission should be clear to all market participants as to what they have determined 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, as is reflected in the proposal, the Exchange continuously and aggressively works to control its costs as a matter of good business practice. A potential profit margin should not be evaluated solely on its size; that assessment should also consider cost management and whether the ultimate fee reflects the value of the services provided. For example, a profit margin on one exchange should not be VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 deemed excessive where that exchange has been successful in controlling its costs, but not excessive on another exchange where that exchange is charging comparable fees but has a lower profit margin due to higher costs. Doing so could have the perverse effect of not incentivizing cost control where higher costs alone could be used to justify fees increases. The Proposed Pricing Is Not Unfairly Discriminatory and Provides for the Equitable Allocation of Fees, Dues, and Other Charges The Exchange believes that the proposed fees are reasonable, fair, equitable, and not unfairly discriminatory because they are designed to align fees with services provided and will apply equally to all subscribers. 10Gb ULL Connectivity The Exchange believes that the proposed fees are equitably allocated among users of the network connectivity and port alternatives, as the users of 10Gb ULL connections consume substantially more bandwidth and network resources than users of 1Gb ULL connection. Specifically, the Exchange notes that 10Gb ULL connection users account for more than 99% of message traffic over the network, driving other costs that are linked to capacity utilization, as described above, while the users of the 1Gb ULL connections account for less than 1% of message traffic over the network. In the Exchange’s experience, users of the 1Gb connections do not have the same business needs for the high-performance network as 10Gb ULL users. The Exchange’s high-performance network and supporting infrastructure (including employee support), provides unparalleled system throughput with the network ability to support access to several distinct options markets. To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network consumers. These billions of messages per day consume the Exchange’s resources and significantly contribute to the overall network connectivity expense for storage and network transport capabilities. The Exchange must also purchase additional storage capacity on an ongoing basis to ensure it has sufficient capacity to store these messages to satisfy its record keeping requirements under the Exchange PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 Act.126 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. Limited Service MEI Ports The Exchange believes that the proposed fees are equitably allocated among users of the network connectivity alternatives, as the users of the Limited Service MEI Ports consume the most bandwidth and resources of the network. Specifically, as noted above for 10Gb ULL connectivity, Market Makers who take the maximum amount of Limited Service MEI Ports account for greater than 99% of message traffic over the network, while Market Makers with fewer Limited Service MEI Ports account for less than 1% of message traffic over the network. In the Exchange’s experience, Market Makers who only utilize the two free Limited Service MEI Ports do not have a business need for the high performance network solutions required by Market Makers who take the maximum amount of Limited Service MEI Ports. The Exchange’s high performance network solutions and supporting infrastructure (including employee support), provides unparalleled system throughput and the capacity to handle approximately 18 million quote messages per second. Based on May 2023 trading results, the Exchange handles over approximately 8.6 billion quotes on an average day, and more than 189 billion quotes over the entire month. Of that total, Market Makers with the maximum amount of Limited Service MEI Ports generated more than 111 billion quotes (and more than 5 billion quotes on an average day), and Market Makers who utilized only the two free Limited Service MEI Ports generated approximately 40 billion quotes (and approximately 1.8 billion quotes on an average day). Also for May 2023, Market Makers who utilized 7 to 9 Limited Service MEI ports submitted an average of 936 million quotes per day; Market Makers who utilized 5–6 Limited Service MEI Ports submitted an 126 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). E:\FR\FM\03JYN1.SGM 03JYN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices average of 578 million quotes on an average day; and Market Makers who utilized 3–4 Limited Service MEI Ports submitted an average of 176 million quotes on an average day. To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network consumers during anticipated peak market conditions. The need to support 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.127 Thus, as the number of connections a Market Maker has increases, certain other costs incurred by the Exchange that are correlated to, though not directly affected by, connection costs (e.g., storage costs, surveillance costs, service expenses) also increase. The Exchange sought to design the proposed tiered-pricing structure to set the amount of the fees to relate to the number of connections a firm purchases. The more connections purchased by a Market Maker likely results in greater expenditure of Exchange resources and increased cost to the Exchange. With this in mind, the Exchange proposes no fee or lower fees for those Market Makers who receive fewer Limited Service MEI Ports since those Market Makers generally tend to send the least amount of orders and messages over those connections. Meanwhile, the Exchange proposes incrementally higher fees for those that purchase additional Limited Service MEI Ports because those with the greatest number of Limited Service MEI Ports generate a disproportionate amount of messages and order traffic, usually billions per day across the Exchange. The firms that purchase numerous Limited Service MEI Ports do so for competitive reasons and based on their business needs, which include a desire to access the market more quickly using the lowest latency connections. These firms are generally engaged in sending liquidity removing orders to the Exchange and may require more connections as they compete to access resting liquidity. Consider the following example: a Member has just sent numerous messages and/or orders over one of their Limited Service MEI Ports that are now in queue to be processed. That same Member then seeks to enter an order to remove liquidity from the Exchange’s Book. That Member may choose to send that order over another Limited Service MEI Port it maintains with less message traffic to help ensure that their liquidity taking order accesses the Exchange more quickly because that connection’s queue is shorter. In addition, Members frequently add and drop connections mid-month to determine which connections have the least latency (and engage in the same practice with Limited Service MEI Ports). This results in increased costs to the Exchange to frequently make changes in the data center (or its network) and provide the additional technical and personnel support necessary to satisfy these requests. Given the difference in network utilization and technical support provided, the Exchange believes that it is reasonable, equitable, and not unfairly discriminatory that Market Makers who utilize the most Limited Service MEI Ports pay for the vast majority of the shared network resources from which all Member and non-Member users benefit, because the network is largely designed and maintained to specifically handle the message rate, capacity and performance requirements of those Market Makers. To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network consumers. Billions of messages per day consume the Exchange’s resources and significantly contribute to the overall network connectivity expense for storage and network transport capabilities. The Exchange must also purchase and maintain 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.128 Thus, as the number of connections a Market Maker has increases, the related demand on Exchange resources also increases. The Exchange sought to design the proposed tiered-pricing structure to set the amount of the fees to relate to the 127 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). 128 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 17:10 Jun 30, 2023 Jkt 259001 PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 42805 number of connections a firm purchases. The more connections purchased by a Market Maker likely results in greater expenditure of Exchange resources and increased cost to the Exchange. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Intra-Market Competition The Exchange believes the proposed fees will not result in any burden on intra-market competition that is not necessary or appropriate in furtherance of the purposes of the Act because the proposed fees will allow the Exchange to recoup some of its costs in providing 10Gb ULL connectivity and Limited Service MEI Ports at below market rates to market participants since the Exchange launched operations. As described above, the Exchange operated at a cumulative net annual loss since its launch in 2019 129 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 nontransaction related services and Exchange products or provide them at a very lower fee, which was not profitable to the Exchange. This resulted in the Exchange forgoing revenue it could have generated from assessing any fees or higher fees. The Exchange could have sought to charge higher fees at the outset, but that could have served to discourage participation on the Exchange. Instead, the Exchange chose to provide a low-cost exchange alternative to the options industry, which resulted in lower initial revenues. Examples of this are 10Gb ULL connectivity and Limited Service MEI Ports, for which the Exchange only now seeks to adopt fees at a level similar to or lower than those of other options exchanges. Further, the Exchange does not believe that the proposed fee increase for the 10Gb ULL connection change would place certain market participants at the Exchange at a relative disadvantage compared to other market participants or affect the ability of such market participants to compete. As is the case with the current proposed flat fee, the proposed fee would apply uniformly to all market participants 129 See E:\FR\FM\03JYN1.SGM supra note 125. 03JYN1 42806 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 regardless of the number of connections they choose to purchase. The proposed fee does not favor certain categories of market participants in a manner that would impose an undue burden on competition. The Exchange does not believe that the proposed rule change would place certain market participants at the Exchange at a relative disadvantage compared to other market participants or affect the ability of such market participants to compete. In particular, Exchange personnel has been informally discussing potential fees for connectivity services with a diverse group of market participants that are connected to the Exchange (including large and small firms, firms with large connectivity service footprints and small connectivity service footprints, as well as extranets and service bureaus) for several months leading up to that time. The Exchange does not believe the proposed fees for connectivity services would negatively impact the ability of Members, non-Members (extranets or service bureaus), third-parties that purchase the Exchange’s connectivity and resell it, and customers of those resellers to compete with other market participants or that they are placed at a disadvantage. The Exchange does anticipate, however, that some market participants may reduce or discontinue use of connectivity services provided directly by the Exchange in response to the proposed fees. In fact, as mentioned above, one MIAX Pearl Market Maker terminated their MIAX Pearl membership on January 1, 2023 as a direct result of the similar proposed fee changes by MIAX Pearl.130 The Exchange does not believe that the proposed fees for connectivity services place certain market participants at a relative disadvantage to other market participants because the proposed connectivity pricing is associated with relative usage of the Exchange by each market participant and does not impose a barrier to entry to smaller participants. The Exchange believes its proposed pricing is reasonable and, when coupled 130 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 71. 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. VerDate Sep<11>2014 17:10 Jun 30, 2023 Jkt 259001 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. Lastly, the Exchange does not believe its proposal to implement incrementally higher fees for those that purchase more Limited Service MEI Ports will place certain market participants at a relative disadvantage to other market participants because those with the greatest number of Limited Service MEI Ports tend generate a disproportionate amount of messages and order traffic, usually billions per day across the Exchange, resulting in greater demands and additional burdens on Exchange resources (as described above). The firms that purchase numerous Limited Service MEI Ports do so for competitive reasons and choose to utilize numerous connections based on their business needs, which include a desire to attempt to access the market quicker using the lowest latency connections. These firms are generally engaged in sending liquidity removing orders to the Exchange and seek to add more connections to competitively access resting liquidity. All firms purchase the amount of Limited Service MEI Ports they require based on their own business decisions and similarly situated firms are subject to the same fees. Inter-Market Competition The Exchange also does not believe that the proposed rule change and price increase will result in any burden on inter-market competition that is not necessary or appropriate in furtherance of the purposes of the Act. As this is a fee increase, arguably if set too high, this fee would make it easier for other exchanges to compete with the Exchange. Only if this were a PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 substantial fee decrease could this be considered a form of predatory pricing. In contrast, the Exchange believes that, without this fee increase, we are potentially at a competitive disadvantage to certain other exchanges that have in place higher fees for similar services. As we have noted, the Exchange believes that connectivity fees can be used to foster more competitive transaction pricing and additional infrastructure investment and there are other options markets of which market participants may connect to trade options at higher rates than the Exchange’s. Accordingly, the Exchange does not believe its proposed fee changes impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. * * * * * In conclusion, as discussed thoroughly above, the Exchange regrettably believes that the application of the Revised Review Process and Staff Guidance has adversely affected intermarket competition among legacy and non-legacy exchanges by impeding the ability of non-legacy exchanges to adopt or increase fees for their market data and access services (including connectivity and port products and services) that are on parity or commensurate with fee levels previously established by legacy exchanges. Since the adoption of the Revised Review Process and Staff Guidance, and even more so recently, it has become extraordinarily difficult to adopt or increase fees to generate revenue necessary to invest in systems, provide innovative trading products and solutions, and improve competitive standing to the benefit of non-legacy exchanges’ market participants. Although the Staff Guidance served an important policy goal of improving disclosures and requiring exchanges to justify that their market data and access fee proposals are fair and reasonable, it has also negatively impacted non-legacy exchanges in particular in their efforts to adopt or increase fees that would enable them to more fairly compete with legacy exchanges, despite providing enhanced disclosures and rationale under both competitive and cost basis approaches provided for by the Revised Review Process and Staff Guidance to support their proposed fee changes. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange received one comment letter on the Initial Proposal, one E:\FR\FM\03JYN1.SGM 03JYN1 Federal Register / Vol. 88, No. 126 / Monday, July 3, 2023 / Notices comment letter on the Second Proposal, and on comment letter on the Third Proposal, all from the same commenter.131 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. 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,132 and Rule 19b–4(f)(2) 133 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: lotter on DSK11XQN23PROD with NOTICES1 Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or 17:10 Jun 30, 2023 Jkt 259001 Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–EMERALD–2023–14. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 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–EMERALD–2023–14 and should be submitted on or before July 24, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.134 Vanessa A. Countryman, Secretary. [FR Doc. 2023–13997 Filed 6–30–23; 8:45 am] BILLING CODE 8011–01–P 131 See letter from Brian Sopinsky, General Counsel, Susquehanna International Group, LLP (‘‘SIG’’), to Vanessa Countryman, Secretary, Commission, dated February 7, 2023, and letters from Gerald D. O’Connell, SIG, to Vanessa Countryman, Secretary, Commission, dated March 21, 2023 and May 24, 2023. 132 15 U.S.C. 78s(b)(3)(A)(ii). 133 17 CFR 240.19b–4(f)(2). VerDate Sep<11>2014 • Send an email to rule-comments@ sec.gov. Please include file number SR– EMERALD–2023–14 on the subject line. 42807 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–97808; File No. SR–ICC– 2023–010] Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Clearance of Additional Credit Default Swap Contracts June 27, 2023. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,1 and Rule 19b–4,2 notice is hereby given that on June 13, 2023, ICE Clear Credit LLC (‘‘ICC’’) filed with the Securities and Exchange Commission the proposed rule change as described in Items I, II and III below, which Items have been prepared primarily by ICC. On June 19, 2023, ICC filed Amendment No. 1 to the proposed rule change.3 The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1 (the ‘‘proposed rule change’’), from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The principal purpose of the proposed rule change is to revise the ICC Rulebook (the ‘‘Rules’’) to provide for the clearance of additional Standard Emerging Market Sovereign CDS contracts and Standard Western European Sovereign Single Name CDS contracts (collectively, the ‘‘Sovereign Contracts’’). II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, ICC 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. ICC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change (a) Purpose The purpose of the proposed rule change is to adopt rules that will 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 In Amendment No. 1, ICC provided an updated version of the Exhibit 5. 2 17 134 17 PO 00000 CFR 200.30–3(a)(12). Frm 00130 Fmt 4703 Sfmt 4703 E:\FR\FM\03JYN1.SGM 03JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 126 (Monday, July 3, 2023)]
[Notices]
[Pages 42785-42807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13997]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97813; File No. SR-EMERALD-2023-14]


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

June 27, 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 June 16, 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

[[Page 42786]]

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 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/rule-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 
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.
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    \3\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \4\ The MIAX Emerald Exapress 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).
---------------------------------------------------------------------------

    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 the 
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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    Much of the cost relates to monitoring and analysis of data and 
performance of the network via the subscriber's connection with 
nanosecond granularity, and continuous improvements in network 
performance with the goal of improving the subscriber's experience. The 
costs associated with maintaining and enhancing a state-of-the-art 
network is a significant expense for the Exchange, and thus the 
Exchange believes that it is reasonable and appropriate to help offset 
those increased costs by amending fees for connectivity services. 
Subscribers expect the Exchange to provide this level of support so 
they continue to receive the performance they expect. This 
differentiates the Exchange from its competitors.
    The Exchange now proposes to amend the Fee Schedule to amend the 
fees for 10Gb ULL connectivity and Limited Service MEI Ports in order 
to recoup ongoing costs and increase in expenses set forth below in the 
Exchange's cost analysis. The Exchange initially filed this proposal on 
December 30, 2022 as SR-EMERALD-2022-38. On January 9, 2023, the 
Exchange withdrew SR-EMERALD-2022-38 and resubmitted this proposal as 
SR-EMERALD-2023-01 (the ``Initial Proposal'').\10\ On, February 23, 
2023, the Exchange withdrew the Initial Proposal and replaced it with a 
revised proposal (SR-EMERALD-2023-05) (the ``Second Proposal'').\11\ On 
April 20, 2023, the Exchange withdrew the Second Proposal and replaced 
it with a revised proposal (SR-EMERALD-2023-12) (the ``Third 
Proposal'').\12\ On June 16, 2023, the Exchange withdrew the Third 
Proposal and replaced it with this further revised proposal (SR-
EMERALD-2023-14).\13\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 96628 (January 10, 
2023), 88 FR 2651 (January 17, 2023) (SR-EMERALD-2023-01).
    \11\ See Securities Exchange Act Release No. 97079 (March 8, 
2023), 88 FR 15764 (March 14, 2023) (SR-EMERALD-2023-05).
    \12\ See Securities Exchange Act Release No. 97422 (May 2, 
2023), 88 FR 29750 (May 8, 2023) (SR-EMERALD-2023-12).
    \13\ The Exchange met with Commission Staff to discuss the Third 
Proposal during which the Commission Staff provided feedback and 
requested additional information, including, most recently, 
information about total costs related to certain third party 
vendors. Such vendor cost information is subject to confidentiality 
restrictions. The Exchange has provided this information to 
Commission Staff under separate cover with a request for 
confidentiality. While the Exchange will continue to be responsive 
to Commission Staff's information requests, the Exchange believes 
that the Commission should, at this point, issue substantially more 
detailed guidance for exchanges to follow in the process of pursuing 
a cost-based approach to fee filings, and that, for the purposes of 
fair competition, detailed disclosures by exchanges, such as those 
that the Exchange is providing now, should be consistent across all 
exchanges, including for those that have resisted a cost-based 
approach to fee filings, in the interests of fair and even 
disclosure and fair competition.
---------------------------------------------------------------------------

    The Exchange previously included a cost analysis in the Initial, 
Second and

[[Page 42787]]

Third Proposals. As described more fully below, the Exchange provides 
an updated cost analysis that includes, among other things, additional 
descriptions of how the Exchange allocated costs among it and its 
affiliated exchanges (MIAX PEARL, LLC (``MIAX Pearl'') (separately 
among MIAX Pearl Options and MIAX Pearl Equities) and MIAX \14\ 
(together with MIAX Pearl Options and MIAX Pearl Equities, the 
``affiliated markets'')) to ensure no cost was allocated more than 
once, as well as additional detail supporting its cost allocation 
processes and explanations as to why a cost allocation in this proposal 
may differ from the same cost allocation in a similar proposal 
submitted by one of its affiliated exchanges. Although the baseline 
cost analysis used to justify the proposed fees was made in the 
Initial, Second, and Third Proposals, the fees themselves have not 
changed since the Initial, Second, or Third Proposals and the Exchange 
still proposes fees that are intended to cover the Exchange's cost of 
providing 10Gb ULL connectivity and Limited Service MEI Ports with a 
reasonable mark-up over those costs.
---------------------------------------------------------------------------

    \14\ The term ``MIAX'' means Miami International Securities 
Exchange, LLC. See Exchange Rule 100.
---------------------------------------------------------------------------

* * * * *
    Starting in 2017, following the United States Court of Appeals for 
the District of Columbia's Susquehanna Decision \15\ 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.\16\ 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.\17\ 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'').\18\ 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.'' \19\ The Commission 
denied requests by various exchanges and plan participants for 
reconsideration of the Remand Order.\20\ 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.'' \21\ Both the 
Remand Order and the Order Denying Reconsideration were appealed to the 
D.C. Circuit.
---------------------------------------------------------------------------

    \15\ See Susquehanna International Group, LLP v. Securities & 
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the 
``Susquehanna Decision'').
    \16\ Id.
    \17\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA 
Decision'').
    \18\ 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).
    \19\ Id. at page 2.
    \20\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order 
Denying Reconsideration'').
    \21\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
---------------------------------------------------------------------------

    While the above appeal to the D.C. Circuit was pending, on March 
29, 2019, the Commission issued an order disapproving a proposed fee 
change by BOX Exchange LLC (``BOX'') to establish connectivity fees 
(the ``BOX Order''), which significantly increased the level of 
information needed for the Commission to believe that an exchange's 
filing satisfied its obligations under the Act with respect to changing 
a fee.\22\ 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.
---------------------------------------------------------------------------

    \22\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to 
Amend the Fee Schedule on the BOX Market LLC Options Facility to 
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted 
in the BOX Order that it ``historically applied a `market-based' 
test in its assessment of market data fees, which [the Commission] 
believe[s] present similar issues as the connectivity fees proposed 
herein.'' Id. at page 16. Despite this admission, the Commission 
disapproved BOX's proposal to begin charging $5,000 per month for 
10Gb connections (while allowing legacy exchanges to charge rates 
equal to 3-4 times that amount utilizing ``market-based'' fee 
filings from years prior).
---------------------------------------------------------------------------

    Also while the above appeal was pending, on May 21, 2019, the 
Commission Staff issued guidance ``to assist the national securities 
exchanges and FINRA . . . in preparing Fee Filings that meet their 
burden to demonstrate that proposed fees are consistent with the 
requirements of the Securities Exchange Act.'' \23\ 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.'' \24\ 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.'' \25\
---------------------------------------------------------------------------

    \23\ 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'').
    \24\ Id.
    \25\ Id.
---------------------------------------------------------------------------

    Following the BOX Order and Staff Guidance, on August 6, 2020, the 
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock 
Market, LLC v. SEC \26\ and remanded for further proceedings consistent 
with its opinion.\27\ 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.'' \28\ 
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

[[Page 42788]]

previously remanded.\29\ 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.'' \30\ 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.\31\
---------------------------------------------------------------------------

    \26\ 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.
    \27\ 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.
    \28\ Id. at *2; see also id. (``[T]he sole purpose of the 
challenged remand has disappeared.'').
    \29\ 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'').
    \30\ Id.
    \31\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 90087 (October 5, 2020).
---------------------------------------------------------------------------

    As a result of the Commission's loss of the NASDAQ v. SEC case 
noted above, the Commission never followed through with its intention 
to subject the over 400 fee filings to ``develop a record,'' and to 
``explain their conclusions, based on that record, in a written 
decision that is sufficient to enable us to perform our review.'' \32\ 
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.
---------------------------------------------------------------------------

    \32\ See supra note 27, at page 2.
---------------------------------------------------------------------------

    While the Exchange appreciates that the Staff Guidance articulates 
an important policy goal of improving disclosures and requiring 
exchanges to justify that their market data and access fee proposals 
are fair and reasonable, the practical effect of the Revised Review 
Process, Staff Guidance, and the Commission's related practice of 
continuous suspension of new fee filings, is anti-competitive, 
discriminatory, and has put in place an un-level playing field, which 
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched, 
legacy exchanges (``legacy exchanges'').\33\ 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 \34\ 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.\35\ These fees 
remain in effect today.
---------------------------------------------------------------------------

    \33\ 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.
    \34\ 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.
    \35\ 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 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.\36\ 
By impeding any path forward for non-legacy exchanges to establish 
commensurate non-transaction fees, or by failing to provide any 
alternative means for smaller markets to establish ``fee parity'' with 
legacy exchanges, the Commission is stifling competition: non-legacy 
exchanges are, in effect, being deprived of the revenue necessary to 
compete on a level playing field with legacy exchanges. This is 
particularly harmful, given that the costs to maintain exchange systems 
and operations continue to increase. The Commission Staff's change in 
position impedes the ability of non-legacy exchanges to raise revenue 
to invest in their systems to compete with the legacy exchanges who 
already enjoy disproportionate non-transaction fee based revenue. For 
example, the Cboe Exchange, Inc. (``Cboe'') reported ``access and 
capacity fee'' revenue of $70,893,000 for 2020 \37\ and $80,383,000 for 
2021.\38\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and 
capacity fee'' revenue of

[[Page 42789]]

$19,016,000 for 2020 \39\ and $22,843,000 for 2021.\40\ Cboe BZX 
Exchange, Inc. (``BZX'') reported ``access and capacity fee'' revenue 
of $38,387,000 for 2020 \41\ and $44,800,000 for 2021.\42\ Cboe EDGX 
Exchange, Inc. (``EDGX'') reported ``access and capacity fee'' revenue 
of $26,126,000 for 2020 \43\ and $30,687,000 for 2021.\44\ 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.\45\ 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.'' \46\
---------------------------------------------------------------------------

    \36\ The Exchange has filed, and subsequently withdrawn, various 
forms of this proposed fee numerous times since August 2021 with 
each proposal containing hundreds of cost and revenue disclosures 
never previously disclosed by legacy exchanges in their access and 
market data fee filings prior to 2019.
    \37\ 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.
    \38\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
    \39\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
    \40\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
    \41\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \42\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
    \43\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
    \44\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
    \45\ 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.
    \46\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf. The Exchange 
notes that this type of Form 1 accounting appears to be designed to 
obfuscate the true financials of such exchanges and has the effect 
of perpetuating fee and revenue advantages of legacy exchanges.
---------------------------------------------------------------------------

    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,\47\ 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.
---------------------------------------------------------------------------

    \47\ 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 . . .'',\48\ this is not the reality experienced by 
exchanges such as MIAX Emerald. As such, non-legacy exchanges are 
forced to rely on an opaque cost-based justification standard. However, 
because the Staff Guidance is devoid of detail on what must be 
contained in cost-based justification, this standard is nearly 
impossible to meet despite repeated good-faith efforts by the Exchange 
to provide substantial amount of cost-related details. For example, the 
Exchange has attempted to increase fees using a cost-based 
justification numerous times, having submitted over six filings.\49\ 
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 
\50\ in a manner that is not possible to achieve. This essentially 
nullifies the cost-based approach for exchanges as a legitimate 
alternative as laid out in the Staff Guidance. By refusing to accept a 
reasonable cost-based argument to justify non-transaction fees (in 
addition to refusing to accept a competition-based argument as 
described above), or by failing to provide the detail required to 
achieve that standard, the Commission Staff is effectively preventing 
non-legacy exchanges from making any non-transaction fee changes, which 
benefits the legacy exchanges and is anticompetitive to the non-legacy 
exchanges. This does not meet the fairness standard under the Act and 
is discriminatory.
---------------------------------------------------------------------------

    \48\ See supra note 23, at note 1.
    \49\ See Securities Exchange Act Release Nos. 94889 (May 11, 
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April 
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15); 94717 
(April 14, 2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13); 
94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-
EMERALD-2022-05); 94257 (February 15, 2022), 87 FR 9678 (February 
22, 2022) (SR-EMERALD-2022-04); 93772 (December 14, 2021), 86 FR 
71965 (December 20, 2021) (SR-EMERALD-2021-43); 93776 (December 14, 
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42); 93188 
(September 29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-
2021-31); (SR-EMERALD-2021-30) (withdrawn without being noticed by 
the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4, 
2021) (SR-EMERALD-2021-29); 92662 (August 13, 2021), 86 FR 46726 
(August 19, 2021) (SR-EMERALD-2021-25); 92645 (August 11, 2021), 86 
FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
    \50\ 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,\51\ 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; \52\ 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

[[Page 42790]]

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

    \51\ 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.
    \52\ 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 places a 
substantial burden on competition. The Exchange would be uniquely 
disadvantaged by not being able to increase its access fees to 
comparable levels (or lower levels than current market rates) to those 
of other options exchanges for connectivity. If the Commission Staff 
were to disapprove this proposal, that action, and not market forces, 
would substantially affect whether the Exchange can be successful in 
its competition with other options exchanges. Disapproval of this 
filing could also be viewed as an arbitrary and capricious decision 
should the Commission Staff continue to ignore its past treatment of 
non-transaction fee filings before implementation of the Revised Review 
Process and Staff Guidance and refuse to allow such filings to be 
approved despite significantly enhanced arguments and cost 
disclosures.\53\
---------------------------------------------------------------------------

    \53\ 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.
---------------------------------------------------------------------------

* * * * *
10Gb ULL Connectivity Fee Change
    The Exchange proposes to amend the Fee Schedule to increase the 
fees for Members and non-Members to access the Exchange's system 
networks \54\ via a 10Gb ULL fiber connection. Specifically, the 
Exchange proposes to amend Sections (5)(a)-(b) of the Fee Schedule to 
increase the 10Gb ULL connectivity fee for Members and non-Members from 
$10,000 per month to $13,500 per month (``10Gb ULL Fee'').\55\
---------------------------------------------------------------------------

    \54\ The Exchange's system networks consist of the Exchange's 
extranet, internal network, and external network.
    \55\ Market participants that purchase additional 10Gb ULL 
connections as a result of this change will not be subject to the 
Exchange's Member Network Connectivity Testing and Certification Fee 
under Section (4)(c) of the Exchange's Fee Schedule. See Section 
(4)(c) of the Exchange's fee schedule available at https://www.miaxglobal.com/markets/us-options/miax-options/fees (providing 
that ``Network Connectivity Testing and Certification Fees will not 
be assessed in situations where the Exchange initiates a mandatory 
change to the Exchange's system that requires testing and 
certification. Member Network Connectivity Testing and Certification 
Fees will not be assessed for testing and certification of 
connectivity to the Exchange's Disaster Recovery Facility.'').
---------------------------------------------------------------------------

    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the Exchange APIs or market data feeds in the production 
environment. The Exchange will continue to pro-rate the fees when a 
Member or non-Member makes a change to the connectivity (by adding or 
deleting connections) with such pro-rated fees based on the number of 
trading days that the Member or non-Member has been credentialed to 
utilize any of the Exchange APIs or market data feeds in the production 
environment through such connection, divided by the total number of 
trading days in such month multiplied by the applicable monthly rate.
Limited Service MEI Ports
Background
    The Exchange also proposes to amend Section (5)(d) of the Fee 
Schedule to adopt a tiered-pricing structure for Limited Service MEI 
Ports available to Market Makers. The Exchange allocates two (2) Full 
Service MEI Ports \56\ and two (2) Limited Service MEI Ports \57\ per 
matching engine \58\ to which each Market Maker connects. Market Makers 
may also request additional Limited Service MEI Ports for each matching 
engine to which they connect. The Full Service MEI Ports and Limited 
Service MEI Ports all include access to the Exchange's primary and 
secondary data centers and its disaster recovery center. Market Makers 
may request additional Limited Service MEI Ports. Currently, Market 
Makers are assessed a $100 monthly fee for each Limited Service MEI 
Port for each matching engine above the first two Limited Service MEI 
Ports that are included for free.
---------------------------------------------------------------------------

    \56\ The term ``Full Service MEI Ports'' means a port which 
provides Market Makers with the ability to send Market Maker simple 
and complex quotes, eQuotes, and quote purge messages to the MIAX 
Emerald System. Full Service MEI Ports are also capable of receiving 
administrative information. Market Makers are limited to two Full 
Service MEI Ports per Matching Engine. See the Definitions Section 
of the Fee Schedule.
    \57\ The term ``Limited Service MEI Ports'' means a port which 
provides Market Makers with the ability to send simple and complex 
eQuotes and quote purge messages only, but not Market Maker Quotes, 
to the MIAX Emerald System. Limited Service MEI Ports are also 
capable of receiving administrative information. Market Makers 
initially receive two Limited Service MEI Ports per Matching Engine. 
See the Definitions Section of the Fee Schedule.
    \58\ The term ``Matching Engine'' means a part of the MIAX 
Emerald electronic system that processes options orders and trades 
on a symbol-by-symbol basis. Some Matching Engines will process 
option classes with multiple root symbols, and other Matching 
Engines may be dedicated to one single option root symbol (for 
example, options on SPY may be processed by one single Matching 
Engine that is dedicated only to SPY). A particular root symbol may 
only be assigned to a single designated Matching Engine. A 
particular root symbol may not be assigned to multiple Matching 
Engines. See the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------

Limited Service MEI Port Fee Changes
    The Exchange now proposes to move from a flat monthly fee per 
Limited Service MEI Port for each matching engine to a tiered-pricing 
structure for Limited Service MEI Ports for each matching engine under 
which the monthly fee would vary depending on the number of Limited 
Service MEI Ports each Market Maker elects to purchase. Specifically, 
the Exchange will continue to provide the first and second Limited 
Service MEI Ports for each matching engine free of charge. For Limited 
Service MEI Ports, the Exchange proposes to adopt the following tiered-
pricing structure: (i) the third and fourth Limited Service MEI Ports 
for each matching engine will increase from the current flat monthly 
fee of $100 to $200 per port; (ii) the fifth and sixth Limited Service 
MEI Ports for each matching engine will increase from the current flat 
monthly fee of $100 to $300 per port; and (iii) the seventh or more 
Limited Service MEI Ports will increase from the current monthly flat 
fee of $100 to $400 per port.\59\ The Exchange believes a tiered-
pricing structure will encourage Market Makers to be more efficient 
when determining how to connect to the Exchange. This should also 
enable the Exchange to better monitor and provide access to the 
Exchange's network to ensure sufficient capacity and headroom in the 
System \60\

[[Page 42791]]

in accordance with its fair access requirements under Section 6(b)(5) 
of the Act.\61\
---------------------------------------------------------------------------

    \59\ As noted in the Fee Schedule, Market Makers will continue 
to be limited to fourteen Limited Service MEI Ports per Matching 
Engine. The Exchange also proposes to make a ministerial clarifying 
change to remove the defined term ``Additional Limited Service MEI 
Ports'' as a result of moving to a tiered pricing structure where 
the first two Limited Service MEI Ports continue to be provided free 
of charge. The Exchange proposes to make a related change to add the 
term ``Limited Service MEI Ports'' after the word ``fourteen'' in 
the Fee Schedule.
    \60\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See the Definitions 
Section of the Fee Schedule and Exchange Rule 100.
    \61\ See 15 U.S.C. 78f(b). The Exchange may offer access on 
terms that are not unfairly discriminatory among its Members, and 
ensure sufficient capacity and headroom in the System. The Exchange 
monitors the System's performance and makes adjustments to its 
System based on market conditions and Member demand.
---------------------------------------------------------------------------

    The Exchange offers various types of ports with differing prices 
because each port accomplishes different tasks, are suited to different 
types of Members, and consume varying capacity amounts of the network. 
For instance, Market Makers who take the maximum amount of Limited 
Service MEI Ports account for approximately greater than 99% of message 
traffic over the network, while Market Makers with fewer Limited 
Service MEI Ports account for approximately less than 1% of message 
traffic over the network. In the Exchange's experience, Market Makers 
who only utilize the two free Limited Service MEI Ports do not have a 
business need for the high performance network solutions required by 
Market Makers who take the maximum amount of Limited Service MEI Ports. 
The Exchange's high performance network solutions and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput and the capacity to handle approximately 18 million 
quote messages per second. Based on May 2023 trading results, the 
Exchange handles over approximately 8.6 billion quotes on an average 
day, and more than 189 billion quotes over the entire month. Of that 
total, Market Makers with the maximum amount of Limited Service MEI 
Ports generated more than 111 billion quotes (and more than 5 billion 
quotes on an average day), and Market Makers who utilized only the two 
free Limited Service MEI Ports generated approximately 40 billion 
quotes (and approximately 1.8 billion quotes on an average day). Also 
for May 2023, Market Makers who utilized 7 to 9 Limited Service MEI 
ports submitted an average of 936 million quotes per day; Market Makers 
who utilized 5-6 Limited Service MEI Ports submitted an average of 578 
million quotes on an average day; and Market Makers who utilized 3-4 
Limited Service MEI Ports submitted an average of 176 million quotes on 
an average day.
    To achieve a consistent, premium network performance, the Exchange 
must build out and maintain a network that has the capacity to handle 
the message rate requirements of its most heavy network consumers. 
These billions of messages per day consume the Exchange's resources and 
significantly contribute to the overall network connectivity expense 
for storage and network transport capabilities. The Exchange must also 
purchase additional storage capacity on an ongoing basis to ensure it 
has sufficient capacity to store these messages as part of it 
surveillance program and to satisfy its record keeping requirements 
under the Exchange Act.\62\ Thus, as the number of connections a Market 
Maker has increases, certain other costs incurred by the Exchange that 
are correlated to, though not directly affected by, connection costs 
(e.g., storage costs, surveillance costs, service expenses) also 
increase. The Exchange sought to design the proposed tiered-pricing 
structure to set the amount of the fees to relate to the number of 
connections a firm purchases. The more connections purchased by a 
Market Maker likely results in greater expenditure of Exchange 
resources and increased cost to the Exchange. With this in mind, the 
Exchange proposes no fee or lower fees for those Market Makers who 
receive fewer Limited Service MEI Ports since those Market Makers 
generally tend to send the least amount of orders and messages over 
those connections. Given this difference in network utilization rate, 
the Exchange believes that it is reasonable, equitable, and not 
unfairly discriminatory that Market Makers who take the most Limited 
Service MEI Ports pay for the vast majority of the shared network 
resources from which all Member and non-Member users benefit, but is 
designed and maintained from a capacity standpoint to specifically 
handle the message rate and performance requirements of those Market 
Makers.
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    The Exchange proposes to increase its monthly Limited Service MEI 
Port fees to recover a portion of the costs associated with directly 
accessing the Exchange.
    Implementation. The proposed fee changes are immediately effective.
2. Statutory Basis
    The Exchange believes that the proposed fees are consistent with 
Section 6(b) of the Act \63\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \64\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among Members and other persons using any facility or system which the 
Exchange operates or controls. The Exchange also believes the proposed 
fees further the objectives of Section 6(b)(5) of the Act \65\ 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.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78f(b).
    \64\ 15 U.S.C. 78f(b)(4).
    \65\ 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 \66\ and 
the Staff Guidance,\67\ 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.
---------------------------------------------------------------------------

    \66\ See supra note 22.
    \67\ See supra note 23.
---------------------------------------------------------------------------

    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.'' 
\68\ 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.'' \69\ In the Staff Guidance, the Commission Staff further states 
that, ``[i]f an SRO

[[Page 42792]]

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.'' \70\
---------------------------------------------------------------------------

    \68\ Id.
    \69\ Id.
    \70\ Id.
---------------------------------------------------------------------------

    The proposed fees are reasonable because they promote parity among 
exchange pricing for access, which promotes competition, including in 
the Exchanges' ability to competitively price transaction fees, invest 
in infrastructure, new products and other innovations, all while 
allowing the Exchange to recover its costs to provide dedicated access 
via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed 
above, the Revised Review Process and Staff Guidance have created an 
uneven playing field between legacy and non-legacy exchanges by 
severely restricting non-legacy exchanges from being able to increase 
non-transaction 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 Member firms. The absence of 
a reasonable path forward to increase non-transaction fees to 
comparable (or lower rates) limits the Exchange's flexibility to, among 
other things, make additional investments in infrastructure and 
advertising, diminishes the ability to remain competitive on 
transaction fees, and hinders the ability to compete for order flow and 
market share. Again, while one could debate whether the pricing of non-
transaction fees are subject to the same market forces as transaction 
fees, there is little doubt that subjecting one exchange to a 
materially different standard than that applied to other exchanges for 
non-transaction fees leaves that exchange at a disadvantage in its 
ability to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which 
Promotes Competition
    The Exchange initially adopted a fee of $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 since it commenced operations in 
March 2019. At that same time, the Exchange only charged $6,000 per 
month for each 10Gb ULL connection. As a new exchange entrant, the 
Exchange chose to offer connectivity and ports at very low fees 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.\71\
---------------------------------------------------------------------------

    \71\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he 
Exchange established this lower (when compared to other options 
exchanges in the industry) Participant Fee in order to encourage 
market participants to become Participants of BOX. . .''). See also 
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR 
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the 
initial fee schedule and stating that ``[u]nder the initial proposed 
Fee Schedule, the Exchange proposes to make clear that it does not 
charge any fees for membership, market data products, physical 
connectivity or application sessions.''). MEMX's market share has 
increased and recently proposed to adopt numerous non-transaction 
fees, including fees for membership, market data, and connectivity. 
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87 
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt 
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7, 
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845 
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for 
connectivity). See also, e.g., Securities Exchange Act Release No. 
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange 
after initially setting such fees at zero).
---------------------------------------------------------------------------

    Later in 2020, as the Exchange's market share increased,\72\ 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.\73\ 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.
---------------------------------------------------------------------------

    \72\ The Exchange experienced a monthly average trading volume 
of 3.43% for the month of October 2020. See the ``Market Share'' 
section of the Exchange's website, available at https://www.miaxglobal.com/.
    \73\ 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).
---------------------------------------------------------------------------

    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'. . . .'' \74\
---------------------------------------------------------------------------

    \74\ 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

[[Page 42793]]

promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \75\
---------------------------------------------------------------------------

    \75\ 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.' '' \76\ 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.'' \77\ 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.'' \78\ 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.'' \79\
---------------------------------------------------------------------------

    \76\ 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.'').
    \77\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \78\ Id.
    \79\ See Staff Guidance, supra note 23.
---------------------------------------------------------------------------

    The Exchange believes the competing exchanges' 10Gb connectivity 
and port fees are useful examples of alternative approaches to 
providing and charging for access and demonstrating how such fees are 
competitively set and constrained. To that end, the Exchange believes 
the proposed fees are competitive and reasonable because the proposed 
fees are similar to or less than fees charged for similar connectivity 
and port access provided by other options exchanges with comparable 
market shares. As such, the Exchange believes that denying its ability 
to institute fees that allow the Exchange to recoup its costs with a 
reasonable margin in a manner that is closer to parity with legacy 
exchanges, in effect, impedes its ability to compete, including in its 
pricing of transaction fees and ability to invest in competitive 
infrastructure and other offerings.
    The following table shows how the Exchange's proposed fees remain 
similar to or less than fees charged for similar connectivity and port 
access provided by other options exchanges with similar market share. 
Each of the connectivity or port rates in place at competing options 
exchanges were filed with the Commission for immediate effectiveness 
and remain in place today.

----------------------------------------------------------------------------------------------------------------
                                                                                             Monthly fee (per
              Exchange                            Type of connection or port                 connection or per
                                                                                                   port)
----------------------------------------------------------------------------------------------------------------
MIAX Emerald (as proposed) (equity    10Gb ULL connection...............................  $13,500.
 options market share of 3.04% for    Limited Service MEI Ports.........................  1-2 ports: FREE (not
 the month of May 2023).\80\                                                               changed in this
                                                                                           proposal).
                                                                                          3-4 ports: $200 each.
                                                                                          5-6 ports: $300 each.
                                                                                          7 or more ports: $400
                                                                                           each.
NASDAQ \81\ (equity options market    10Gb Ultra fiber connection.......................  $15,000 per
 share of 6.59% for the month of May  SQF Port..........................................   connection.
 2023).\82\                                                                               1-5 ports: $1,500 per
                                                                                           port.
                                                                                          6-20 ports: $1,000 per
                                                                                           port.
                                                                                          21 or more ports: $500
                                                                                           per port.
NASDAQ ISE LLC (``ISE'') \83\         10Gb Ultra fiber connection.......................  $15,000 per
 (equity options market share of      SQF Port \85\.....................................   connection.
 6.18% for the month of May                                                               $1,100 per port.
 2023).\84\
NYSE American LLC (``NYSE             10Gb LX LCN connection............................  $22,000 per
 American'') \86\ (equity options     Order/Quote Entry Port............................   connection.
 market share of 7.34% for the month                                                      1-40 Ports: $450 per
 of May 2023).\87\                                                                         port.
                                                                                          41 or more Ports: $150
                                                                                           per port.
NASDAQ GEMX, LLC (``GEMX'') \88\      10Gb Ultra connection.............................  $15,000 per
 (equity options market share of      SQF Port..........................................   connection.
 2.00% for the month of May                                                               $1,250 per port.
 2023).\89\
----------------------------------------------------------------------------------------------------------------

    There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options 
exchanges. Market participants may choose to become a member of one or 
more options exchanges based on the market participant's assessment of 
the business opportunity relative to the costs of the Exchange. With 
this, there is elasticity of demand for exchange membership. As an 
example, the Exchange's affiliate, MIAX Pearl Options, experienced a 
decrease in membership as the result of similar fees proposed herein. 
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 proposed by MIAX Pearl 
Options.
---------------------------------------------------------------------------

    \80\ See supra note 72.
    \81\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \82\ See supra note 72.
    \83\ See ISE Pricing Schedule, Options 7, Section 7, 
Connectivity Fees and ISE Rules, General 8: Connectivity.
    \84\ See supra note 72.
    \85\ Similar to the Exchange's MEI Ports, SQF ports are 
primarily utilized by Market Makers.
    \86\ See NYSE American Options Fee Schedule, Section V.A. Port 
Fees and Section V.B. Co-Location Fees.
    \87\ See supra note 72.
    \88\ See GEMX Pricing Schedule, Options 7, Section 6, 
Connectivity Fees and GEMX Rules, General 8: Connectivity.
    \89\ See supra note 72.
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    It is not a requirement for market participants to become members 
of all options exchanges; in fact, certain market participants conduct 
an options business as a member of only one options market.\90\ A very 
small number of market participants choose to become a member of all 
sixteen options

[[Page 42794]]

exchanges. Most firms that actively trade on options markets are not 
currently Members of the Exchange and do not purchase connectivity or 
port services at the Exchange. Connectivity and ports are only 
available to Members or service bureaus, and only a Member may utilize 
a port.\91\
---------------------------------------------------------------------------

    \90\ 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.''
    \91\ Service Bureaus may obtain ports on behalf of Members.
---------------------------------------------------------------------------

    One other exchange recently noted in a proposal to amend their own 
trading permit fees that of the 62 market making firms that are 
registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access 
only one of the three exchanges.\92\ The Exchange and its affiliates, 
MIAX Pearl and MIAX, have a total of 47 members. Of those 47 total 
members, 35 are members of all three affiliated exchanges, four are 
members of only two (2) affiliated exchanges, and eight (8) are members 
of only one affiliated exchange. The Exchange also notes that no firm 
is a Member of the Exchange only. The above data evidences that a 
broker-dealer need not have direct connectivity to all options 
exchanges, let alone the Exchange and its two affiliates, and broker-
dealers may elect to do so based on their own business decisions and 
need to directly access each exchange's liquidity pool.
---------------------------------------------------------------------------

    \92\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change to Amend the 
Fee Schedule on the BOX Options Market LLC Facility To Adopt 
Electronic Market Maker Trading Permit Fees). The Exchange believes 
that BOX's observation demonstrates that market making firms can, 
and do, select which exchanges they wish to access, and, 
accordingly, options exchanges must take competitive considerations 
into account when setting fees for such access.
---------------------------------------------------------------------------

    Not only is there not an actual regulatory requirement to connect 
to every options exchange, the Exchange believes there is also no ``de 
facto'' or practical requirement as well, as further evidenced by the 
broker-dealer membership analysis of the options exchanges discussed 
above. As noted above, this is evidenced by the fact that one MIAX 
Options Pearl 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 (which are 
similar to the changes proposed herein). Indeed, broker-dealers choose 
if and how to access a particular exchange and because it is a choice, 
the Exchange must set reasonable pricing, otherwise prospective members 
would not connect and existing members would disconnect from the 
Exchange. The decision to become a member of an exchange, particularly 
for registered market makers, is complex, and not solely based on the 
non-transactional costs assessed by an exchange. As noted herein, 
specific factors include, but are not limited to: (i) an exchange's 
available liquidity in options series; (ii) trading functionality 
offered on a particular market; (iii) product offerings; (iv) customer 
service on an exchange; and (v) transactional pricing. Becoming a 
member of the exchange does not ``lock'' a potential member into a 
market or diminish the overall competition for exchange services.
    In lieu of becoming a member at each options exchange, a market 
participant may join one exchange and elect to have their orders routed 
in the event that a better price is available on an away market. 
Nothing in the Order Protection Rule requires a firm to become a Member 
at--or establish connectivity to--the Exchange.\93\ If the Exchange is 
not at the national best bid or offer (``NBBO''),\94\ 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.\95\
---------------------------------------------------------------------------

    \93\ See Options Order Protection and Locked/Crossed Market Plan 
(August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
    \94\ See Exchange Rule 100.
    \95\ Members may elect to not route their orders by utilizing 
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------

    With respect to the submission of orders, Members may also choose 
not to purchase any connection from the Exchange, and instead rely on 
the port of a third party to submit an order. For example, a third-
party broker-dealer Member of the Exchange may be utilized by a retail 
investor to submit orders into an exchange. An institutional investor 
may utilize a broker-dealer, a service bureau,\96\ or request sponsored 
access \97\ through a member of an exchange in order to submit a trade 
directly to an options exchange.\98\ 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.
---------------------------------------------------------------------------

    \96\ Service Bureaus provide access to market participants to 
submit and execute orders on an exchange. On the Exchange, a Service 
Bureau may be a Member. Some Members utilize a Service Bureau for 
connectivity and that Service Bureau may not be a Member. Some 
market participants utilize a Service Bureau who is a Member to 
submit orders.
    \97\ Sponsored Access is an arrangement whereby a Member permits 
its customers to enter orders into an exchange's system that bypass 
the Member's trading system and are routed directly to the Exchange, 
including routing through a service bureau or other third-party 
technology provider.
    \98\ This may include utilizing a floor broker and submitting 
the trade to one of the five options trading floors.
---------------------------------------------------------------------------

    Non-Member third-parties, such as service bureaus and extranets, 
resell the Exchange's connectivity. This indirect connectivity is 
another viable alternative for market participants to trade on the 
Exchange without connecting directly to the Exchange (and thus not pay 
the Exchange's connectivity fees), which alternative is already being 
used by non-Members and further constrains the price that the Exchange 
is able to charge for connectivity and other access fees to its market. 
The Exchange notes that it could, but chooses not to, preclude market 
participants from reselling its connectivity. Unlike other exchanges, 
the Exchange also does not currently assess fees on third-party 
resellers on a per customer basis (i.e., fees based on the number of 
firms that connect to the Exchange indirectly via the third-party).\99\ 
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.\100\ 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 options markets. Accordingly, the Exchange 
believes that the proposed fees are fair and reasonable and constrained 
by competitive forces.
---------------------------------------------------------------------------

    \99\ See, e.g., Nasdaq Price List--U.S. Direct Connection and 
Extranet Fees, available at, U.S. 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).
    \100\ The Exchange notes that resellers, such as SFTI, are not 
required to publicize, let alone justify or file with the Commission 
their fees, and as such could charge the market participant any fees 
it deems appropriate (including connectivity fees higher than the 
Exchange's connectivity fees), even if such fees would otherwise be 
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------

    The Exchange is obligated to regulate its Members and secure access 
to its environment. In order to properly regulate its Members and 
secure the trading environment, the Exchange takes measures to ensure 
access is

[[Page 42795]]

monitored and maintained with various controls. Connectivity and ports 
are methods utilized by the Exchange to grant Members secure access to 
communicate with the Exchange and exercise trading rights. When a 
market participant elects to be a Member, and is approved for 
membership by the Exchange, the Member is granted trading rights to 
enter orders and/or quotes into Exchange through secure connections.
    Again, there is no legal or regulatory requirement that a market 
participant become a Member of the Exchange. This is again evidenced by 
the fact that one MIAX Pearl 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 a Member, they may 
then choose to purchase connectivity beyond the one connection that is 
necessary to quote or submit orders on the Exchange. Members may freely 
choose to rely on one or many connections, depending on their business 
model.
Cost Analysis
    In general, the Exchange believes that exchanges, in setting fees 
of all types, should meet very high standards of transparency to 
demonstrate why each new fee or fee increase meets the Exchange Act 
requirements that fees be reasonable, equitably allocated, not unfairly 
discriminatory, and not create an undue burden on competition among 
members and markets. In particular, the Exchange believes that each 
exchange should take extra care to be able to demonstrate that these 
fees are based on its costs and reasonable business needs.
    In proposing to charge fees for connectivity and port services, the 
Exchange is especially diligent in assessing those fees in a 
transparent way against its own aggregate costs of providing the 
related service, and in carefully and transparently assessing the 
impact on Members--both generally and in relation to other Members, 
i.e., to assure the fee will not create a financial burden on any 
participant and will not have an undue impact in particular on smaller 
Members and competition among Members in general. The Exchange believes 
that this level of diligence and transparency is called for by the 
requirements of Section 19(b)(1) under the Act,\101\ and Rule 19b-4 
thereunder,\102\ with respect to the types of information exchanges 
should provide when filing fee changes, and Section 6(b) of the 
Act,\103\ which requires, among other things, that exchange fees be 
reasonable and equitably allocated,\104\ not designed to permit unfair 
discrimination,\105\ and that they not impose a burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Act.\106\ 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.\107\ 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.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78s(b)(1).
    \102\ 17 CFR 240.19b-4.
    \103\ 15 U.S.C. 78f(b).
    \104\ 15 U.S.C. 78f(b)(4).
    \105\ 15 U.S.C. 78f(b)(5).
    \106\ 15 U.S.C. 78f(b)(8).
    \107\ See Staff Guidance, supra note 23.
---------------------------------------------------------------------------

    As detailed below, the Exchange recently calculated its aggregate 
annual costs for providing physical 10Gb ULL connectivity to the 
Exchange at $11,361,586 (or approximately $946,799 per month, rounded 
to the nearest dollar when dividing the annual cost by 12 months) and 
its aggregate annual costs for providing Limited Service MEI Ports at 
$1,799,066 (or approximately $148,255 per month, rounded to the nearest 
dollar when dividing the annual cost by 12 months). In order to cover 
the aggregate costs of providing connectivity to its users (both 
Members and non-Members) \108\ going forward and to make a modest 
profit, as described below, the Exchange proposes to modify its Fee 
Schedule to charge a fee of $13,500 per month for each physical 10Gb 
ULL connection. The Exchange also proposes to modify its Fee Schedule 
to charge tiered rates for additional Limited Service MEI Ports.
---------------------------------------------------------------------------

    \108\ Types of market participants that obtain connectivity 
services from the Exchange but are not Members include service 
bureaus and extranets. Service bureaus offer technology-based 
services to other companies for a fee, including order entry 
services, and thus, may access Limited Service MEI Ports on behalf 
of one or more Members. Extranets offer physical connectivity 
services to Members and non-Members.
---------------------------------------------------------------------------

    In 2020, the Exchange completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis'').\109\ 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'').
---------------------------------------------------------------------------

    \109\ 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 for each cost driver as part of its 
2023 budget review process. The 2023 budget review is a company-wide 
process that occurs over the course of many months, includes meetings 
among senior management, department heads, and the Finance Team. Each 
department head is required to send a ``bottom up'' budget to the 
Finance Team allocating costs at the profit and loss account and vendor 
levels for the Exchange and 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, simple only or simple and complex markets, auction functionality, 
etc.), which may impact message traffic, individual system 
architectures that impact platform size,\110\ 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.
---------------------------------------------------------------------------

    \110\ For example, the Exchange maintains 12 matching engines, 
MIAX Pearl Options maintains 12 matching engines, MIAX Pearl 
Equities maintains 24 matching engines, and MIAX maintains 24 
matching engines.
---------------------------------------------------------------------------

    All of these factors result in different allocation percentages 
among the Exchange and its affiliated markets, i.e., the different 
percentages of the overall cost driver allocated to the Exchange and 
its affiliated markets will cause the dollar amount of the overall cost 
allocated among the Exchange and its affiliated markets to also differ. 
Because the Exchange's parent company currently owns and operates four 
separate and distinct marketplaces, the

[[Page 42796]]

Exchange must determine the costs associated with each actual market--
as opposed to the Exchange's parent company simply concluding that all 
costs drivers are the same at each individual marketplace and dividing 
total cost by four (4) (evenly for each marketplace). Rather, the 
Exchange's parent company determines an accurate cost for each 
marketplace, which results in different allocations and amounts across 
exchanges for the same cost drivers, due to the unique factors of each 
marketplace as described above. This allocation methodology also 
ensures that no cost would be allocated twice or double-counted between 
the Exchange and its affiliated markets. The Finance Team then 
consolidates the budget and sends it to senior management, including 
the Chief Financial Officer and Chief Executive Officer, for review and 
approval. Next, the budget is presented to the Board of Directors and 
the Finance and Audit Committees for each exchange for their approval. 
The above steps encompass the first step of the cost allocation 
process.
    The next step involves determining what portion of the cost 
allocated to the Exchange pursuant to the above methodology is to be 
allocated to each core service, e.g., connectivity and ports, market 
data, and transaction services. The Exchange and its affiliated markets 
adopted an allocation methodology with thoughtful and consistently 
applied principles to guide how much of a particular cost amount 
allocated to the Exchange should be allocated within the Exchange to 
each core service. This is the final step in the cost allocation 
process and is applied to each of the cost drivers set forth below. 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 (61.9% of total expense 
amount allocated to 10Gb connectivity), with smaller allocations to 
additional Limited Service MEI Ports (4.6%), and the remainder to the 
provision of other connectivity, other ports, transaction execution, 
membership services and market data services (33.5%). This next level 
of the allocation methodology at the individual exchange level also 
took into account factors similar to those set forth under the first 
step of the allocation methodology process described above, to 
determine the appropriate allocation to connectivity or market data 
versus allocations for other services. This 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 
allocation of each cost driver to each core service, resulting in the 
cost allocations described below. Each of the below cost allocations is 
unique to the Exchange and represents a percentage of overall cost that 
was allocated to the Exchange pursuant to the initial allocation 
described above.
    By allocating segmented costs to each core service, the Exchange 
was able to estimate by core service the potential margin it might earn 
based on different fee models. The Exchange notes that as a non-listing 
venue it has five primary sources of revenue that it can potentially 
use to fund its operations: transaction fees, fees for connectivity and 
port services, membership fees, regulatory fees, and market data fees. 
Accordingly, the Exchange must cover its expenses from these five 
primary sources of revenue. The Exchange also notes that as a general 
matter each of these sources of revenue is based on services that are 
interdependent. For instance, the Exchange's system for executing 
transactions is dependent on physical hardware and connectivity; only 
Members and parties that they sponsor to participate directly on the 
Exchange may submit orders to the Exchange; many Members (but not all) 
consume market data from the Exchange in order to trade on the 
Exchange; and the Exchange consumes market data from external sources 
in order to comply with regulatory obligations. Accordingly, given this 
interdependence, the allocation of costs to each service or revenue 
source required judgment of the Exchange and was weighted based on 
estimates of the Exchange that the Exchange believes are reasonable, as 
set forth below. While there is no standardized and generally accepted 
methodology for the allocation of an exchange's costs, the Exchange's 
methodology is the result of an extensive review and analysis and will 
be consistently applied going forward for any other potential fee 
proposals. In the absence of the Commission attempting to specify a 
methodology for the allocation of exchanges' interdependent costs, the 
Exchange will continue to be left with its best efforts to attempt to 
conduct such an allocation in a thoughtful and reasonable manner.
    Through the Exchange's extensive updated Cost Analysis, which was 
again recently further refined, 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 and port 
services, and, if such expense did so relate, what portion (or 
percentage) of such expense actually supports the provision of 
connectivity and port services, and thus bears a relationship that is, 
``in nature and closeness,'' directly related to network connectivity 
and port 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 aggregate monthly cost 
to provide 10Gb ULL connectivity and Limited Service MEI Port services, 
including both physical 10Gb connections and Limited Service MEI Ports, 
is $1,095,054 (utilizing the rounded numbers when dividing the annual 
cost for 10Gb ULL connectivity and annual cost for Limited Service MEI 
Ports by 12 months, then adding both numbers together), as further 
detailed below.
Costs Related to Offering Physical 10Gb ULL Connectivity
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering physical dedicated 
10Gb ULL connectivity via an unshared network as well as the percentage 
of the Exchange's overall costs that such costs represent for each cost 
driver (e.g., as set forth below, the Exchange allocated approximately 
28.1% of its overall Human Resources cost to offering physical 
connectivity).
---------------------------------------------------------------------------

    \111\ The Annual Cost includes figures rounded to the nearest 
dollar.
    \112\ 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.

------------------------------------------------------------------------
                                    Allocated    Allocated
           Cost drivers            annual cost    monthly      % Of all
                                      \111\      cost \112\
------------------------------------------------------------------------
Human Resources..................   $3,520,856     $293,405           28

[[Page 42797]]

 
Connectivity (external fees,            71,675        5,973         61.9
 cabling, switches, etc.)........
Internet Services and External         373,249       31,104         84.8
 Market Data.....................
Data Center......................      752,545       62,712         61.9
Hardware and Software Maintenance      666,208       55,517         50.9
 and Licenses....................
Depreciation.....................    1,929,118      160,760         63.8
Allocated Shared Expenses........    4,047,935      337,328         51.3
                                  --------------------------------------
    Total........................   11,361,586      946,799         42.8
------------------------------------------------------------------------

    Below are additional details regarding each of the line-item costs 
considered by the Exchange to be related to offering physical 10Gb ULL 
connectivity. While some costs were attempted to be allocated as 
equally as possible among the Exchange and its affiliated markets, the 
Exchange notes that some of its cost allocation percentages for certain 
cost drivers differ when compared to the same cost drives for the 
Exchange's affiliated markets 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 affiliated markets) to 
determine its actual costs, which may vary across the Exchange and its 
affiliated markets based on factors that are unique to each 
marketplace. The Exchange provides additional explanation below 
(including the reason for the deviation) for the significant 
differences.
Human Resources
    For personnel costs (Human Resources), the Exchange calculated an 
allocation of employee time for employees whose functions include 
providing and maintaining physical connectivity and performance thereof 
(primarily the Exchange's network infrastructure team, which spends 
most of their time performing functions necessary to provide physical 
connectivity) and for which the Exchange allocated a weighted average 
of 42.4% of each employee's time from the above group 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, sales, membership and finance personnel), for 
which the Exchange allocated cost on an employee-by-employee basis 
(i.e., only including those personnel who support functions related to 
providing physical connectivity) and then applied a smaller allocation 
to such employees (less than 20%). The Exchange notes that it and its 
affiliated markets have 184 employees (excluding employees at non-
options/equities exchange subsidiaries of Miami International Holdings, 
Inc. (``MIH''), the holding company of the Exchange and its affiliated 
markets), and each department leader has direct knowledge of the time 
spent by each employee with respect to the various tasks necessary to 
operate the Exchange. Specifically, twice a year and as needed with 
additional new hires and new project initiatives, in consultation with 
employees as needed, managers and department heads assign a percentage 
of time to every employee and then allocate that time amongst the 
Exchange and its affiliated markets to determine each market's 
individual Human Resources expense. Then, 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.\113\ This includes 
personnel from the 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, of which the Exchange 
allocated 42.4% of each of their employee's time assigned to the 
Exchange, as stated above. The Exchange notes that senior level 
executives' times was only allocated to the Human Resources costs to 
the extent that 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.
---------------------------------------------------------------------------

    \113\ The Exchange notes that while 11.7 full time equivalents 
(``FTEs'') were allocated in this filing to the Exchange and a 
similar number of FTEs in a similar filing by the Exchange's 
affiliate, MIAX (12.9 FTEs), the overall cost percentage allocated 
for each differs due to the individual level of compensation for 
each employee assigned to work on projects for the exchanges.
---------------------------------------------------------------------------

Connectivity (External Fees, Cabling, Switches, etc.)
    The Connectivity cost driver includes external fees paid to connect 
to other exchanges and third parties, cabling and switches required to 
operate the Exchange. The Connectivity cost driver 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 providers for 
connectivity to the entire U.S. options industry, and infrastructure 
services for critical components of the network that are necessary to 
provide and maintain its System Networks and access to its System 
Networks via 10Gb ULL connectivity. Specifically, the Exchange utilizes 
connectivity providers to connect to other national securities 
exchanges and the Options Price Reporting Authority (``OPRA''). The 
Exchange understands that these service providers provide services to 
most, if

[[Page 42798]]

not all, of the other U.S. exchanges and other market participants. 
Connectivity provided by these service providers is critical to the 
Exchanges daily operations and performance of its System Networks to 
which market participants connect to via 10Gb ULL connectivity. Without 
these services providers, the Exchange would not be able to connect to 
other national securities exchanges, market data providers or OPRA and, 
therefore, would not be able to operate and support its System 
Networks. The Exchange does not employ a separate fee to cover its 
connectivity provider expense and recoups that expense, in part, by 
charging for 10Gb ULL connectivity.
Internet Services and External Market Data
    The next cost driver consists of internet Services and external 
market data. The internet services cost driver includes third-party 
service providers that provide the internet, fiber and bandwidth 
connections between the Exchange's networks, primary and secondary data 
centers, and office locations in Princeton and Miami.
    External market data includes fees paid to third parties, including 
other exchanges, to receive market data. The Exchange includes external 
market data fee costs towards the provision of 10Gb ULL connectivity 
because such market data is necessary for certain services related to 
connectivity, including pre-trade risk checks and checks for other 
conditions (e.g., re-pricing of orders to avoid locked or crossed 
markets and trading collars). Since external market data from other 
exchanges is consumed at the Exchange's matching engine level, (to 
which 10Gb ULL connectivity provides access) in order to validate 
orders before additional orders enter the matching engine or are 
executed, the Exchange believes it is reasonable to allocate a small 
amount of such costs to 10Gb ULL connectivity.
    The Exchange relies on various content service providers for data 
feeds for the entire U.S. options industry, as well as content for 
critical components of the network that are necessary to provide and 
maintain its System Networks and access to its System Networks via 10Gb 
ULL connectivity. Specifically, the Exchange utilizes content service 
providers to receive market data from OPRA, 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. 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 receive market data and, therefore, would not be able to 
operate and support its System Networks. The Exchange does not employ a 
separate fee to cover its content service provider expense and recoups 
that expense, in part, by charging for 10Gb ULL connectivity.
    Lastly, the Exchange notes that the actual dollar amounts allocated 
as part of the second step of the 2023 budget process differ among the 
Exchange and its affiliated markets for the internet Services and 
External Market Data cost driver, even though, but for the Exchange, 
the allocation percentages are generally consistent across markets 
(e.g., MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl Equities 
allocated 84.8%, 73.3%, 73.3% and 72.5%, respectively, to the same cost 
driver). This is because: (i) a different percentage of the overall 
internet Services and External Market Data cost driver was allocated to 
the Exchange and its affiliated markets due to the factors set forth 
under the first step of the 2023 budget review process described above 
(unique technical architecture, market structure, and business 
requirements of each marketplace); and (ii) the Exchange itself 
allocated a larger portion of this cost driver to 10Gb ULL connectivity 
because of recent initiatives to improve the latency and determinism of 
its systems. The Exchange notes while the percentage it allocated to 
the internet Services and External Market Data cost driver is greater 
than its affiliated markets, the overall dollar amount allocated to the 
Exchange under the initial step of the 2023 budget process is lower 
than its affiliated markets. However, the Exchange believes that this 
is not, in dollar amounts, a significant difference. This is because 
the total dollar amount of expense covered by this cost driver is 
relatively small compared to other cost drivers and is due to nuances 
in exchange architecture that require different initial allocation 
amount under the first step of the 2023 budget process described above. 
Thus, non-significant differences in percentage allocation amounts in a 
smaller cost driver create the appearance of a significant difference, 
even though the actual difference in dollar amounts is small.
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 (61.9%) to 
physical 10Gb ULL connectivity because the third-party data centers and 
the Exchange's physical equipment contained therein is the most direct 
cost in providing physical access to the Exchange. In other words, for 
the Exchange to operate in a dedicated space with connectivity by 
market 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.
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.\114\
---------------------------------------------------------------------------

    \114\ This expense may be less than the Exchange's affiliated 
markets, specifically MIAX Pearl (the options and equities markets), 
because, unlike the Exchange, MIAX Pearl (the options and equities 
markets) maintains an additional gateway to accommodate its member's 
access and connectivity needs. This added gateway contributes to the 
difference in allocations between the Exchange and MIAX Pearl. This 
expense also differs in dollar amount among the Exchange, MIAX Pearl 
(options and equities), and MIAX because each market may maintain 
and utilize a different amount of hardware and software based on its 
market model and infrastructure needs. The Exchange allocated a 
percentage of the overall cost based on actual amounts of hardware 
and software utilized by that market, which resulted in different 
cost allocations and dollar amounts.
---------------------------------------------------------------------------

Depreciation
    All physical assets, software, and hardware used to provide 10Gb 
ULL connectivity, which also includes assets used for testing and 
monitoring of Exchange infrastructure, were valued at cost, and 
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. The Exchange also included in the

[[Page 42799]]

Depreciation cost driver certain budgeted improvements that the 
Exchange intends to capitalize and depreciate with respect to 10Gb ULL 
connectivity in the near-term. As with the other allocated costs in the 
Exchange's updated Cost Analysis, the Depreciation cost was therefore 
narrowly tailored to depreciation related to 10Gb ULL connectivity. As 
noted above, the Exchange allocated 63.8% of its allocated depreciation 
costs to providing physical 10Gb ULL 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. 
For example, the percentages the Exchange and its affiliate, MIAX, 
allocated to the depreciation of hardware and software used to provide 
10Gb ULL connectivity are nearly identical. However, the Exchange's 
dollar amount is lower than that of MIAX by approximately $32,000 per 
month due to two factors: first, MIAX has undergone a technology 
refresh since the time MIAX Emerald launched in February 2019, leading 
MIAX to have more hardware that software that is subject to 
depreciation. Second, MIAX maintains 24 matching engines while MIAX 
Emerald maintains only 12 matching engines. This also results in more 
of MIAX's hardware and software being subject to depreciation than MIAX 
Emerald's hardware and software due to the greater amount of equipment 
and software necessary to support the greater number of matching 
engines on MIAX.
Allocated Shared Expenses
    Finally, a limited portion of general shared expenses was allocated 
to overall physical connectivity costs because 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. Similarly, the cost of paying directors to 
serve on the Exchange's Board of Directors is also included in the 
Exchange's general shared expenses cost driver.\115\ The Exchange notes 
that the 51.3% allocation of general shared expenses for physical 10Gb 
ULL connectivity is higher than that allocated to general shared 
expenses for Limited Service MEI Ports based on its allocation 
methodology that weighted costs attributable to each core service based 
on an understanding of each area. While physical connectivity has 
several areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Center, as described above), Limited 
Service MEI Ports do not require as many broad or indirect resources as 
other core services.
---------------------------------------------------------------------------

    \115\ The Exchange notes that MEMX allocated a precise amount of 
10% of the overall cost for directors to providing physical 
connectivity. The Exchange does not calculate is expenses at that 
granular a level. Instead, director costs are included as part of 
the overall general allocation.
---------------------------------------------------------------------------

* * * * *
Approximate Cost per 10Gb ULL Connection per Month
    After determining the approximate allocated monthly cost related to 
10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of 
$946,799 was divided by the number of physical 10Gb ULL connections the 
Exchange maintained at the time that proposed pricing was determined 
(102), to arrive at a cost of approximately $9,282 per month, per 
physical 10Gb ULL connection. Due to the nature of this particular 
cost, this allocation methodology results in an allocation among the 
Exchange and its affiliated markets based on set quantifiable criteria, 
i.e., actual number of 10Gb ULL connections.
* * * * *
Costs Related to Offering Limited Service MEI Ports
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering Limited Service 
MEI Ports as well as the percentage of the Exchange's overall costs 
such costs represent for such area (e.g., as set forth below, the 
Exchange allocated approximately 5.9% of its overall Human Resources 
cost to offering Limited Service MEI Ports).

------------------------------------------------------------------------
                                    Allocated    Allocated
           Cost drivers            annual cost    monthly      % Of all
                                      \116\      cost \117\
------------------------------------------------------------------------
Human Resources..................     $737,784      $61,482          5.9
Connectivity (external fees,             3,713          309          3.2
 cabling, switches, etc.)........
Internet Services and External          14,102        1,175          3.2
 Market Data.....................
Data Center......................       55,686        4,641          4.6
Hardware and Software Maintenance       41,951        3,496          3.2
 and Licenses....................
Depreciation.....................      112,694        9,391          3.7
Allocated Shared Expenses........      813,136       67,761         10.3
                                  --------------------------------------
    Total........................    1,779,066      148,255          6.7
------------------------------------------------------------------------

    Below are additional details regarding each of the line-item costs 
considered by the Exchange to be related to offering Limited Service 
MEI Ports. While some costs were attempted to be allocated as equally 
as possible among the Exchange and its affiliated markets, the Exchange 
notes that some of its cost allocation percentages for certain cost 
drivers differ when compared to the same cost drivers described by the 
Exchange's affiliated markets 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 affiliated markets) to 
determine its actual costs, which may vary across the Exchange and its 
affiliated markets based on factors that are unique to each 
marketplace. The

[[Page 42800]]

Exchange provides additional explanation below (including the reason 
for the deviation) for the significant differences.
---------------------------------------------------------------------------

    \116\ See supra note 111 (describing rounding of Annual Costs).
    \117\ See supra note 112 (describing rounding of Monthly Costs 
based on Annual Costs).
---------------------------------------------------------------------------

Human Resources
    With respect to Limited Service MEI Ports, the Exchange calculated 
Human Resources cost by taking an allocation of employee time for 
employees whose functions include providing Limited Service MEI Ports 
and maintaining performance thereof (including a broader range of 
employees such as technical operations personnel, market operations 
personnel, and software engineering personnel) as well as a limited 
subset of personnel with ancillary functions related to maintaining 
such connectivity (such as sales, membership, and finance personnel). 
Just as described above for 10Gb ULL connectivity, the estimates of 
Human Resources cost were again determined by consulting with 
department leaders, determining which employees are involved in tasks 
related to providing Limited Service MEI Ports and maintaining 
performance thereof, and confirming that the proposed allocations were 
reasonable based on an understanding of the percentage of their time 
such employees devote to tasks related to providing Limited Service MEI 
Ports and maintaining performance thereof. The Exchange notes that 
senior level executives were allocated Human Resources costs to the 
extent they are involved in overseeing tasks specifically related to 
providing Limited Service MEI Ports.\118\ This includes personnel from 
the following Exchange departments that are predominately involved in 
providing Limited Service MEI Ports: Business Systems Development, 
Trading Systems Development, Systems Operations and Network Monitoring, 
Network and Data Center Operations, Listings, Trading Operations, and 
Project Management. Senior level executives were only allocated Human 
Resources costs to the extent that they are involved in managing 
personnel responsible for tasks integral to providing and maintaining 
Limited Service MEI Ports. 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.
---------------------------------------------------------------------------

    \118\ The Exchange notes that while 2.5 FTEs were allocated in 
this filing to the Exchange and a similar number of FTEs in a 
similar filing by the Exchange's affiliate, MIAX (3.0 FTEs), the 
overall cost percentage allocated for each differs due to the 
individual level of compensation for each employee assigned to work 
on projects for the exchanges.
---------------------------------------------------------------------------

Connectivity (External Fees, Cabling, Switches, etc.)
    The Connectivity cost includes external fees paid to connect to 
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
    The next cost driver consists of internet services and external 
market data. Internet services includes third-party service providers 
that provide the internet, fiber and bandwidth connections between the 
Exchange's networks, primary and secondary data centers, and office 
locations in Princeton and Miami. For purposes of Limited Service MEI 
Ports, the Exchange also includes a portion of its costs related to 
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 includes external market data costs 
towards the provision of Limited Service MEI Ports because such market 
data is necessary (in addition to physical connectivity) to offer 
certain services related to such ports, such as validating orders on 
entry against the NBBO and checking for other conditions (e.g., halted 
securities).\119\ Thus, since market data from other exchanges is 
consumed at the Exchange's Limited Service MEI Port level in order to 
validate orders, before additional processing occurs with respect to 
such orders, the Exchange believes it is reasonable to allocate a small 
amount of such costs to Limited Service MEI Ports.
---------------------------------------------------------------------------

    \119\ The Exchange notes that MEMX separately allocated 7.5% of 
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------

    The Exchange notes that the allocation for the internet Services 
and External Market Data cost driver is greater than that of its 
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 3.2% of its 
internet Services and External Market Data expense towards Limited 
Service MEI Ports, while MIAX Pearl Options allocated 1.4% to its Full 
Service MEO Ports for the same cost driver. The allocation percentages 
set forth above differ because they directly correspond with the number 
of applicable ports utilized on each exchange. For March 2023, MIAX 
Emerald Market Makers utilized 1,028 Limited Service MEI ports and MIAX 
Market Makers utilized 1,782 Limited Service MEI ports. When compared 
to Full Service Port (Bulk and Single) usage, for March 2023, MIAX 
Pearl Options Members utilized only 432 Full Service MEO Ports (Bulk 
and Single), far fewer than number of Limited Service MEI Ports 
utilized by Market Makers on MIAX and MIAX Emerald, thus resulting in a 
smaller cost allocation. There is increased cost associated with 
supporting a higher number of ports (requiring more hardware and other 
technical infrastructure and internet Service), thus the Exchange 
allocates a higher percentage of expense than MIAX Pearl Options, which 
has a lower port count.
Data Center
    Data Center costs includes an allocation of the costs the Exchange 
incurs to provide Limited Service MEI Ports in the third-party data 
centers where it maintains its equipment as well as related costs for 
market data to then enter the Exchange's system via Limited Service MEI 
Ports (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).
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. The Exchange notes that 
this allocation is greater than its affiliate, MIAX Pearl Options, as 
MIAX Emerald allocated 3.2% of its Hardware and Software Maintenance 
and License expense towards Limited Service MEI Ports, while MIAX Pearl 
Options allocated 1.4% to its Full Service MEO Ports (Bulk and Single) 
for the same category of expense. The allocation percentages set forth 
above differ because they correspond with the number of applicable 
ports utilized on each exchange. For March 2023, MIAX Market Makers 
utilized 1,782 Limited Service MEI ports and MIAX Emerald Market Makers 
utilized 1,028 Limited Service MEI Ports. When compared to Full Service 
Port (Bulk and Single) usage, for March 2023, MIAX Pearl Options 
Members utilized only 432 Full Service MEO Ports (Bulk and Single), far 
fewer than number of Limited Service MEI Ports utilized by Market 
Makers on MIAX and MIAX Emerald, thus resulting in a smaller cost 
allocation. There is increased cost associated with supporting a higher 
number of ports (requiring more hardware and other technical 
infrastructure), thus the Exchange allocates a higher percentage

[[Page 42801]]

of expense than MIAX Pearl Options, which has a lower port count.
Depreciation
    The vast majority of the software the Exchange uses to provide 
Limited Service MEI Ports has been developed in-house and the cost of 
such development, which takes place over an extended period of time and 
includes not just development work, but also quality assurance and 
testing to ensure the software works as intended, is depreciated over 
time once the software is activated in the production environment. 
Hardware used to provide Limited Service MEI Ports includes equipment 
used for testing and monitoring of order entry infrastructure and other 
physical equipment the Exchange purchased and is also depreciated over 
time. All hardware and software were valued at cost, depreciated or 
leased over periods ranging from three to five years. Thus, the 
depreciation cost primarily relates to servers necessary to operate the 
Exchange, some of which is owned by the Exchange and some of which is 
leased by the Exchange in order to allow efficient periodic technology 
refreshes. The Exchange allocated 3.7% of all depreciation costs to 
providing Limited Service MEI Ports. The Exchange allocated 
depreciation costs for depreciated software necessary to operate the 
Exchange because such software is related to the provision of Limited 
Service MEI Ports. As with the other allocated costs in the Exchange's 
updated Cost Analysis, the Depreciation cost driver was therefore 
narrowly tailored to depreciation related to Limited Service MEI Ports.
    The Exchange 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. For example, 
the Exchange notes that the percentages it and its affiliate, MIAX, 
allocated to the depreciation cost driver for Limited Service MEI Ports 
differ by only 2.6%. However, MIAX's approximate dollar amount is 
greater than that of MIAX Emerald by approximately $10,000 per month. 
This is due to two primary factors. First, MIAX has under gone a 
technology refresh since the time MIAX Emerald launched in February 
2019, leading to it having more hardware that software that is subject 
to depreciation. Second, MIAX maintains 24 matching engines while MIAX 
Emerald maintains only 12 matching engines. This also results in more 
of MIAX's hardware and software being subject to depreciation than MIAX 
Emerald's hardware and software due to the greater amount of equipment 
and software necessary to support the greater number of matching 
engines on the Exchange.
Allocated Shared Expenses
    Finally, a limited portion of general shared expenses was allocated 
to overall Limited Service MEI Ports costs as without these general 
shared costs the Exchange would not be able to operate in the manner 
that it does and provide Limited Service MEI Ports. The costs included 
in general shared expenses include general expenses of the Exchange, 
including office space and office expenses (e.g., occupancy and 
overhead expenses), utilities, recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services (including external and internal audit expenses), and 
telecommunications costs. The Exchange again notes that the cost of 
paying directors to serve on its Board of Directors is included in the 
calculation of Allocated Shared Expenses, and thus a portion of such 
overall cost amounting to less than 11% of the overall cost for 
directors was allocated to providing Limited Service MEI Ports. The 
Exchange notes that the 10.3% allocation of general shared expenses for 
Limited Service MEI Ports is lower than that allocated to general 
shared expenses for physical connectivity based on its allocation 
methodology that weighted costs attributable to each Core Service based 
on an understanding of each area. While Limited Service MEI Ports have 
several areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Center, as described above), 10Gb 
ULL connectivity requires a broader level of support from Exchange 
personnel in different areas, which in turn leads to a broader general 
level of cost to the Exchange.
    Lastly, the Exchange notes that this allocation is greater than its 
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 10.3% of its 
Allocated Shared Expense towards Limited Service MEI Ports, while MIAX 
Pearl Options allocated 3.6% to its Full Service MEO Ports (Bulk and 
Single) for the same category of expense. The allocation percentages 
set forth above differ because they correspond with the number of 
applicable ports utilized on each exchange. For March 2023, MIAX Market 
Makers utilized 1,782 Limited Service MEI ports and MIAX Emerald Market 
Makers utilized 1,028 Limited Service MEI Ports. When compared to Full 
Service Port (Bulk and Single) usage, for March 2023, MIAX Pearl 
Options Members utilized only 432 Full Service MEO Ports (Bulk and 
Single), far fewer than number of Limited Service MEI Ports utilized by 
Market Makers on MIAX Emerald, thus resulting in a smaller cost 
allocation. There is increased cost associated with supporting a higher 
number of ports (requiring more hardware and other technical 
infrastructure), thus the Exchange allocates a higher percentage of 
expense than MIAX Pearl Options which has a lower port count.\120\
---------------------------------------------------------------------------

    \120\ MIAX allocated a slightly lower amount (9.8%) of this cost 
as compared to MIAX Emerald (10.3%). This is not a significant 
difference. However, both allocations resulted in an identical cost 
amount of $0.8 million, despite MIAX having a higher number of 
Limited Service MEI Ports. MIAX Emerald was allocated a higher cost 
per Limited Service MEI Port due to the additional resources and 
expenditures associated with maintaining its recently enhanced low 
latency network.
---------------------------------------------------------------------------

* * * * *
Approximate Cost per Limited Service MEI Port per Month
    The total monthly cost of $148,255 was divided by the number of 
chargeable Limited Service MEI Ports (excluding the two free Limited 
Service MEI Ports per matching engine that each Member receives) the 
Exchange maintained at the time that proposed pricing was determined 
(706), to arrive at a cost of approximately $210 per month, per charged 
Limited Service MEI Port.
* * * * *
Cost Analysis--Additional Discussion
    In conducting its Cost Analysis, the Exchange did not allocate any 
of its expenses in full to any core services (including physical 
connectivity or Limited Service MEI Ports) and did not double-count any 
expenses. Instead, as described above, the Exchange allocated 
applicable cost drivers across its core services and used the same Cost 
Analysis to form the basis of this proposal and the filings the 
Exchange submitted proposing fees for proprietary 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

[[Page 42802]]

(42.4%) given their focus on functions necessary to provide physical 
connections. The salaries of those same personnel were allocated only 
8.0% to Limited Service MEI Ports and the remaining 49.6% was allocated 
to 1Gb connectivity, other port services, transaction services, 
membership services and market data. The Exchange did not allocate any 
other Human Resources expense for providing physical connections to any 
other employee group, outside of a smaller allocation of 19.8% for 10Gb 
ULL connectivity or 19.9% for the entire network, of the cost 
associated with certain specified personnel who work closely with and 
support network infrastructure personnel. In contrast, the Exchange 
allocated much smaller percentages of costs (5% or less) across a wider 
range of personnel groups in order to allocate Human Resources costs to 
providing Limited Service MEI Ports. This is because a much wider range 
of personnel are involved in functions necessary to offer, monitor and 
maintain Limited Service MEI Ports but the tasks necessary to do so are 
not a primary or full-time function.
    In total, the Exchange allocated 28.1% of its personnel costs to 
providing 10Gb ULL and 1Gb connectivity and 5.9% of its personnel costs 
to providing Limited Service MEI Ports, for a total allocation of 34% 
Human Resources expense to provide these specific connectivity and port 
services. In turn, the Exchange allocated the remaining 66% of its 
Human Resources expense to membership services, transaction services, 
other port services and market data. Thus, again, the Exchange's 
allocations of cost across core services were based on real costs of 
operating the Exchange and were not double-counted across the core 
services or their associated revenue streams.
    As another example, the Exchange allocated depreciation expense to 
all core services, including physical connections and Limited Service 
MEI Ports, but in different amounts. The Exchange believes it is 
reasonable to allocate the identified portion of such expense because 
such expense includes the actual cost of the computer equipment, such 
as dedicated servers, computers, laptops, monitors, information 
security appliances and storage, and network switching infrastructure 
equipment, including switches and taps that were purchased to operate 
and support the network. Without this equipment, the Exchange would not 
be able to operate the network and provide connectivity services to its 
Members and non-Members and their customers. However, the Exchange did 
not allocate all of the depreciation and amortization expense toward 
the cost of providing connectivity services, but instead allocated 
approximately 67.5% of the Exchange's overall depreciation and 
amortization expense to connectivity services (63.8% attributed to 10Gb 
ULL physical connections and 3.7% to Limited Service MEI Ports). The 
Exchange allocated the remaining depreciation and amortization expense 
(approximately 32.5%) toward the cost of providing transaction 
services, membership services, other port services and market data.
    The Exchange notes that its revenue estimates are based on 
projections across all potential revenue streams and will only be 
realized to the extent such revenue streams actually produce the 
revenue estimated. The Exchange does not yet know whether such 
expectations will be realized. For instance, in order to generate the 
revenue expected from connectivity, the Exchange will have to be 
successful in retaining existing clients that wish to maintain physical 
connectivity and/or Limited Service MEI Ports or in obtaining new 
clients that will purchase such services. Similarly, the Exchange will 
have to be successful in retaining a positive net capture on 
transaction fees in order to realize the anticipated revenue from 
transaction pricing. The Exchange notes that the Cost Analysis is based 
on the Exchange's 2023 fiscal year of operations and projections. It is 
possible, however, that actual costs may be higher or lower. 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 may 
propose to decrease fees in the event that revenue materially exceeds 
our current projections. In addition, the Exchange will periodically 
conduct a review to inform its decision making on whether a fee change 
is appropriate (e.g., to monitor for costs increasing/decreasing or 
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based 
analysis) and would propose to increase fees in the event that revenues 
fail to cover its costs and a reasonable mark-up, or decrease fees in 
the event that revenue or the mark-up materially exceeds our current 
projections. In the event that the Exchange determines to propose a fee 
change, the results of a timely review, including an updated cost 
estimate, will be included in the rule filing proposing the fee change. 
More generally, the Exchange believes that it is appropriate for an 
exchange to refresh and update information about its relevant costs and 
revenues in seeking any future changes to fees, and the Exchange 
commits to do so.
Projected Revenue
    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 and port 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.

[[Page 42803]]

    The Exchange's Cost Analysis estimates the annual cost to provide 
10Gb ULL connectivity services will equal $11,361,586. Based on current 
10Gb ULL connectivity services usage, the Exchange would generate 
annual revenue of approximately $16,524,000. The Exchange believes this 
represents a modest profit of 31% when compared to the cost of 
providing 10Gb ULL connectivity services which could decrease over 
time.\121\
---------------------------------------------------------------------------

    \121\ 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 June 14, 2023).
---------------------------------------------------------------------------

    The Exchange's Cost Analysis estimates the annual cost to provide 
Limited Service MEI Port services will equal $1,779,066. Based on 
current Limited Service MEI Port services usage, the Exchange would 
generate annual revenue of approximately $2,809,200. The Exchange 
believes this would result in an estimated profit margin of 37% after 
calculating the cost of providing Limited Service MEI Port services, 
which profit margin could decrease over time.\122\ The Exchange notes 
that the cost to provide Limited Service MEI Ports is higher than the 
cost for the Exchange's affiliate, MIAX Pearl Options, to provide Full 
Service MEO Ports due to the substantially higher number of Limited 
Service MEI Ports used by Exchange Members. For example, the Exchange's 
Members are currently allocated 1,028 Limited Service MEI Ports 
compared to only 432 Full Service MEO Ports (Bulk and Single combined) 
allocated to MIAX Pearl Options members.
---------------------------------------------------------------------------

    \122\ Id.
---------------------------------------------------------------------------

    Based on the above discussion, the Exchange believes that even if 
the Exchange earns the above revenue or incrementally more or less, the 
proposed fees are fair and reasonable because they will not result in 
pricing that deviates from that of other exchanges or a supra-
competitive profit, when comparing the total expense of the Exchange 
associated with providing 10Gb ULL connectivity and Limited Service MEI 
Port services versus the total projected revenue of the Exchange 
associated with network 10Gb ULL connectivity and Limited Service MEI 
Port services.
    The Exchange also notes that this the resultant profit margin 
differs slightly from the profit margins set forth in similar fee 
filings by its affiliated markets. This is not atypical among exchanges 
and is due to a number of factors that differ between these four 
markets, including: different market models, market structures, and 
product offerings (equities, options, price-time, pro-rata, simple, and 
complex); different pricing models; different number of market 
participants and connectivity subscribers; different maintenance and 
operations costs, as described in the cost allocation methodology 
above; different technical architecture (e.g., the number of matching 
engines per exchange, i.e., the Exchange maintains only 12 matching 
engines while MIAX maintains 24 matching engines); and different 
maturity phase of the Exchange and its affiliated markets (i.e., start-
up versus growth versus more mature). All of these factors contribute 
to a unique and differing level of profit margin per exchange.
    Further, the Exchange proposes to charge rates that are comparable 
to, or lower than, similar fees for similar products charged by 
competing exchanges. For example, for 10Gb ULL connectivity, the 
Exchange proposes a lower fee than the fee charged by Nasdaq for its 
comparable 10Gb Ultra fiber connection ($13,500 per month for the 
Exchange vs. $15,000 per month for Nasdaq).\123\ NYSE American charges 
even higher fees for its comparable 10GB LX LCN connection than the 
Exchange's proposed fees ($13,500 per month for the Exchange vs. 
$22,000 per month for NYSE American).\124\ Accordingly, the Exchange 
believes that comparable and competitive pricing are key factors in 
determining whether a proposed fee meets the requirements of the Act, 
regardless of whether that same fee across the Exchange's affiliated 
markets leads to slightly different profit margins due to factors 
outside of the Exchange's control (i.e., more subscribers to 10Gb ULL 
connectivity on the Exchange than its affiliated markets or vice 
versa).
---------------------------------------------------------------------------

    \123\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \124\ See NYSE American Options Fee Schedule, Section V.A. Port 
Fees and Section V.B. Co-Location Fees.
---------------------------------------------------------------------------

* * * * *
    The Exchange has operated at a cumulative net annual loss since it 
launched operations in 2019.\125\ This is due to a number of factors, 
one of which is choosing to forgo revenue by offering certain products, 
such as low latency connectivity, at lower rates than other options 
exchanges to attract order flow and encourage market participants to 
experience the high determinism, low latency, and resiliency of the 
Exchange's trading systems. The Exchange does not believe that it 
should now be penalized for seeking to raise its fees as it now needs 
to upgrades its technology and absorb increased costs. Therefore, the 
Exchange believes the proposed fees are reasonable because they are 
based on both relative costs to the Exchange to provide dedicated 10Gb 
ULL connectivity and Limited Service MEI Ports, the extent to which the 
product drives the Exchange's overall costs and the relative value of 
the product, as well as the Exchange's objective to make access to its 
Systems broadly available to market participants. The Exchange also 
believes the proposed fees are reasonable because they are designed to 
generate annual revenue to recoup the Exchange's costs of providing 
dedicated 10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

    \125\ The Exchange has incurred a cumulative loss of $9 million 
since its inception in 2019. See Exchange's Form 1/A, Application 
for Registration or Exemption from Registration as a National 
Securities Exchange, filed June 29, 2022, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001164.pdf.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimate is based on 
projections and will only be realized to the extent customer activity 
produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving 
competition, the Exchange does not yet know whether such projections 
will be realized. For instance, in order to generate the revenue 
expected from 10Gb ULL connectivity and Limited Service MEI Ports, the 
Exchange will have to be successful in retaining existing clients that 
wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports 
and/or obtaining new clients that will purchase such access. To the 
extent the Exchange is successful in encouraging new clients to utilize 
10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does 
not believe it should be penalized for such success. To the extent the 
Exchange has mispriced and experiences a net loss in connectivity 
clients or in transaction activity, the Exchange could experience a net 
reduction in revenue. While the Exchange is supportive of transparency 
around costs and potential margins (applied across all exchanges), as 
well as periodic review of revenues and applicable costs (as discussed 
below), 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. Instead, the Exchange believes that the information should be 
used solely to confirm that an Exchange is not

[[Page 42804]]

earning--or seeking to earn--supra-competitive profits. The Exchange 
believes the Cost Analysis and related projections in this filing 
demonstrate this fact.
    The Exchange is owned by a holding company that is the parent 
company of four Exchange markets and, therefore, the Exchange and its 
affiliated markets must allocate shared costs across all of those 
markets accordingly, pursuant to the above-described allocation 
methodology. In contrast, the Investors Exchange LLC (``IEX'') and 
MEMX, which are currently each operating only one exchange, in their 
recent non-transaction fee filings 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 that result from sharing costs across multiple platforms. The 
Exchange and its affiliated markets often share a single cost, which 
results in cost efficiencies that can cause a broader gap between the 
allocated cost amount and projected revenue, even though the fee levels 
being proposed are lower or competitive with 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 Exchange believes that 
Commission Staff should also consider whether the proposed fee level is 
comparable to, or competitive 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. Further, if Commission Staff is making 
determinations as to appropriate profit margins in their approval of 
exchange fees, the Exchange believes that the Commission should be 
clear to all market participants as to what they have determined 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, as is reflected in the proposal, the Exchange continuously 
and aggressively works to control its costs as a matter of good 
business practice. A potential profit margin should not be evaluated 
solely on its size; that assessment should also consider cost 
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 on another exchange where that 
exchange is charging comparable fees but has a lower profit margin due 
to higher costs. Doing so could have the perverse effect of not 
incentivizing cost control where higher costs alone could be used to 
justify fees increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for 
the Equitable Allocation of Fees, Dues, and Other Charges
    The Exchange believes that the proposed fees are reasonable, fair, 
equitable, and not unfairly discriminatory because they are designed to 
align fees with services provided and will apply equally to all 
subscribers.
10Gb ULL Connectivity
    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity and port 
alternatives, as the users of 10Gb ULL connections consume 
substantially more bandwidth and network resources than users of 1Gb 
ULL connection. Specifically, the Exchange notes that 10Gb ULL 
connection users account for more than 99% of message traffic over the 
network, driving other costs that are linked to capacity utilization, 
as described above, while the users of the 1Gb ULL connections account 
for less than 1% of message traffic over the network. In the Exchange's 
experience, users of the 1Gb connections do not have the same business 
needs for the high-performance network as 10Gb ULL users.
    The Exchange's high-performance network and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput with the network ability to support access to several 
distinct options markets. To achieve a consistent, premium network 
performance, the Exchange must build out and maintain a network that 
has the capacity to handle the message rate requirements of its most 
heavy network consumers. These billions of messages per day consume the 
Exchange's resources and significantly contribute to the overall 
network connectivity expense for storage and network transport 
capabilities. The Exchange must also purchase additional storage 
capacity on an ongoing basis to ensure it has sufficient capacity to 
store these messages to satisfy its record keeping requirements under 
the Exchange Act.\126\ 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.
---------------------------------------------------------------------------

    \126\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

Limited Service MEI Ports
    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity alternatives, as the 
users of the Limited Service MEI Ports consume the most bandwidth and 
resources of the network. Specifically, as noted above for 10Gb ULL 
connectivity, Market Makers who take the maximum amount of Limited 
Service MEI Ports account for greater than 99% of message traffic over 
the network, while Market Makers with fewer Limited Service MEI Ports 
account for less than 1% of message traffic over the network. In the 
Exchange's experience, Market Makers who only utilize the two free 
Limited Service MEI Ports do not have a business need for the high 
performance network solutions required by Market Makers who take the 
maximum amount of Limited Service MEI Ports.
    The Exchange's high performance network solutions and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput and the capacity to handle approximately 18 million 
quote messages per second. Based on May 2023 trading results, the 
Exchange handles over approximately 8.6 billion quotes on an average 
day, and more than 189 billion quotes over the entire month. Of that 
total, Market Makers with the maximum amount of Limited Service MEI 
Ports generated more than 111 billion quotes (and more than 5 billion 
quotes on an average day), and Market Makers who utilized only the two 
free Limited Service MEI Ports generated approximately 40 billion 
quotes (and approximately 1.8 billion quotes on an average day). Also 
for May 2023, Market Makers who utilized 7 to 9 Limited Service MEI 
ports submitted an average of 936 million quotes per day; Market Makers 
who utilized 5-6 Limited Service MEI Ports submitted an

[[Page 42805]]

average of 578 million quotes on an average day; and Market Makers who 
utilized 3-4 Limited Service MEI Ports submitted an average of 176 
million quotes on an average day.
    To achieve a consistent, premium network performance, the Exchange 
must build out and maintain a network that has the capacity to handle 
the message rate requirements of its most heavy network consumers 
during anticipated peak market conditions. The need to support 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.\127\ Thus, as the number of connections a Market Maker 
has increases, certain other costs incurred by the Exchange that are 
correlated to, though not directly affected by, connection costs (e.g., 
storage costs, surveillance costs, service expenses) also increase. The 
Exchange sought to design the proposed tiered-pricing structure to set 
the amount of the fees to relate to the number of connections a firm 
purchases. The more connections purchased by a Market Maker likely 
results in greater expenditure of Exchange resources and increased cost 
to the Exchange. With this in mind, the Exchange proposes no fee or 
lower fees for those Market Makers who receive fewer Limited Service 
MEI Ports since those Market Makers generally tend to send the least 
amount of orders and messages over those connections.
---------------------------------------------------------------------------

    \127\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    Meanwhile, the Exchange proposes incrementally higher fees for 
those that purchase additional Limited Service MEI Ports because those 
with the greatest number of Limited Service MEI Ports generate a 
disproportionate amount of messages and order traffic, usually billions 
per day across the Exchange. The firms that purchase numerous Limited 
Service MEI Ports do so for competitive reasons and based on their 
business needs, which include a desire to access the market more 
quickly using the lowest latency connections. These firms are generally 
engaged in sending liquidity removing orders to the Exchange and may 
require more connections as they compete to access resting liquidity. 
Consider the following example: a Member has just sent numerous 
messages and/or orders over one of their Limited Service MEI Ports that 
are now in queue to be processed. That same Member then seeks to enter 
an order to remove liquidity from the Exchange's Book. That Member may 
choose to send that order over another Limited Service MEI Port it 
maintains with less message traffic to help ensure that their liquidity 
taking order accesses the Exchange more quickly because that 
connection's queue is shorter.
    In addition, Members frequently add and drop connections mid-month 
to determine which connections have the least latency (and engage in 
the same practice with Limited Service MEI Ports). This results in 
increased costs to the Exchange to frequently make changes in the data 
center (or its network) and provide the additional technical and 
personnel support necessary to satisfy these requests. Given the 
difference in network utilization and technical support provided, the 
Exchange believes that it is reasonable, equitable, and not unfairly 
discriminatory that Market Makers who utilize the most Limited Service 
MEI Ports pay for the vast majority of the shared network resources 
from which all Member and non-Member users benefit, because the network 
is largely designed and maintained to specifically handle the message 
rate, capacity and performance requirements of those Market Makers.
    To achieve a consistent, premium network performance, the Exchange 
must build out and maintain a network that has the capacity to handle 
the message rate requirements of its most heavy network consumers. 
Billions of messages per day consume the Exchange's resources and 
significantly contribute to the overall network connectivity expense 
for storage and network transport capabilities. The Exchange must also 
purchase and maintain 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.\128\ Thus, as the number of connections a 
Market Maker has increases, the related demand on Exchange resources 
also increases. The Exchange sought to design the proposed tiered-
pricing structure to set the amount of the fees to relate to the number 
of connections a firm purchases. The more connections purchased by a 
Market Maker likely results in greater expenditure of Exchange 
resources and increased cost to the Exchange.
---------------------------------------------------------------------------

    \128\ 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 10Gb 
ULL connectivity and Limited Service MEI Ports at below market rates to 
market participants since the Exchange launched operations. As 
described above, the Exchange operated at a cumulative net annual loss 
since its launch in 2019 \129\ due to providing a low-cost alternative 
to attract order flow and encourage market participants to experience 
the high determinism and resiliency of the Exchange's trading Systems. 
To do so, the Exchange chose to waive the fees for some non-transaction 
related services and Exchange products or provide them at a very lower 
fee, which was not profitable to the Exchange. This resulted in the 
Exchange forgoing revenue it could have generated from assessing any 
fees or higher fees. The Exchange could have sought to charge higher 
fees at the outset, but that could have served to discourage 
participation on the Exchange. Instead, the Exchange chose to provide a 
low-cost exchange alternative to the options industry, which resulted 
in lower initial revenues. Examples of this are 10Gb ULL connectivity 
and Limited Service MEI Ports, for which the Exchange only now seeks to 
adopt fees at a level similar to or lower than those of other options 
exchanges.
---------------------------------------------------------------------------

    \129\ See supra note 125.
---------------------------------------------------------------------------

    Further, the Exchange does not believe that the proposed fee 
increase for the 10Gb ULL connection change would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants or affect the ability of such market 
participants to compete. As is the case with the current proposed flat 
fee, the proposed fee would apply uniformly to all market participants

[[Page 42806]]

regardless of the number of connections they choose to purchase. The 
proposed fee does not favor certain categories of market participants 
in a manner that would impose an undue burden on competition. The 
Exchange does not believe that the proposed rule change would place 
certain market participants at the Exchange at a relative disadvantage 
compared to other market participants or affect the ability of such 
market participants to compete. In particular, Exchange personnel has 
been informally discussing potential fees for connectivity services 
with a diverse group of market participants that are connected to the 
Exchange (including large and small firms, firms with large 
connectivity service footprints and small connectivity service 
footprints, as well as extranets and service bureaus) for several 
months leading up to that time. The Exchange does not believe the 
proposed fees for connectivity services would negatively impact the 
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and 
customers of those resellers to compete with other market participants 
or that they are placed at a disadvantage.
    The Exchange does anticipate, however, that some market 
participants may reduce or discontinue use of connectivity services 
provided directly by the Exchange in response to the proposed fees. In 
fact, as mentioned above, one MIAX Pearl Market Maker terminated their 
MIAX Pearl membership on January 1, 2023 as a direct result of the 
similar proposed fee changes by MIAX Pearl.\130\ The Exchange does not 
believe that the proposed fees for connectivity services place certain 
market participants at a relative disadvantage to other market 
participants because the proposed connectivity pricing is associated 
with relative usage of the Exchange by each market participant and does 
not impose a barrier to entry to smaller participants. The Exchange 
believes its proposed pricing is reasonable and, when coupled with the 
availability of third-party providers that also offer connectivity 
solutions, that participation on the Exchange is affordable for all 
market participants, including smaller trading firms. As described 
above, the connectivity services purchased by market participants 
typically increase based on their additional message traffic and/or the 
complexity of their operations. The market participants that utilize 
more connectivity services typically utilize the most bandwidth, and 
those are the participants that consume the most resources from the 
network. Accordingly, the proposed fees for connectivity services do 
not favor certain categories of market participants in a manner that 
would impose a burden on competition; rather, the allocation of the 
proposed connectivity fees reflects the network resources consumed by 
the various size of market participants and the costs to the Exchange 
of providing such connectivity services.
---------------------------------------------------------------------------

    \130\ 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 71. 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.
---------------------------------------------------------------------------

    Lastly, the Exchange does not believe its proposal to implement 
incrementally higher fees for those that purchase more Limited Service 
MEI Ports will place certain market participants at a relative 
disadvantage to other market participants because those with the 
greatest number of Limited Service MEI Ports tend generate a 
disproportionate amount of messages and order traffic, usually billions 
per day across the Exchange, resulting in greater demands and 
additional burdens on Exchange resources (as described above). The 
firms that purchase numerous Limited Service MEI Ports do so for 
competitive reasons and choose to utilize numerous connections based on 
their business needs, which include a desire to attempt to access the 
market quicker using the lowest latency connections. These firms are 
generally engaged in sending liquidity removing orders to the Exchange 
and seek to add more connections to competitively access resting 
liquidity. All firms purchase the amount of Limited Service MEI Ports 
they require based on their own business decisions and similarly 
situated firms are subject to the same fees.
Inter-Market Competition
    The Exchange also does not believe that the proposed rule change 
and price increase will result in any burden on inter-market 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. As this is a fee increase, arguably if set too 
high, this fee would make it easier for other exchanges to compete with 
the Exchange. Only if this were a substantial fee decrease could this 
be considered a form of predatory pricing. In contrast, the Exchange 
believes that, without this fee increase, we are potentially at a 
competitive disadvantage to certain other exchanges that have in place 
higher fees for similar services. As we have noted, the Exchange 
believes that connectivity fees can be used to foster more competitive 
transaction pricing and additional infrastructure investment and there 
are other options markets of which market participants may connect to 
trade options at higher rates than the Exchange's. 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, 
one

[[Page 42807]]

comment letter on the Second Proposal, and on comment letter on the 
Third Proposal, all from the same commenter.\131\ 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.
---------------------------------------------------------------------------

    \131\ See letter from Brian Sopinsky, General Counsel, 
Susquehanna International Group, LLP (``SIG''), to Vanessa 
Countryman, Secretary, Commission, dated February 7, 2023, and 
letters from Gerald D. O'Connell, SIG, to Vanessa Countryman, 
Secretary, Commission, dated March 21, 2023 and May 24, 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,\132\ and Rule 19b-4(f)(2) \133\ 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.
---------------------------------------------------------------------------

    \132\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \133\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-EMERALD-2023-14 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-EMERALD-2023-14. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 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-EMERALD-2023-14 and should 
be submitted on or before July 24, 2023.
---------------------------------------------------------------------------

    \134\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\134\
Vanessa A. Countryman,
Secretary.
[FR Doc. 2023-13997 Filed 6-30-23; 8:45 am]
BILLING CODE 8011-01-P

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