Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Options Exchange Fee Schedule To Modify Certain Connectivity and Port Fees, 58404-58430 [2023-18302]

Download as PDF 58404 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.149 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–18299 Filed 8–24–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [Release No. 34–98180; File No. SR– PEARL–2023–35] 1. Purpose Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Options Exchange Fee Schedule To Modify Certain Connectivity and Port Fees August 21, 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 August 8, 2023, MIAX PEARL, LLC (‘‘MIAX Pearl’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the MIAX Pearl Options Exchange Fee Schedule (the ‘‘Fee Schedule’’) to amend certain connectivity and port fees.3 The text of the proposed rule change is available on the Exchange’s website at https://www.miaxoptions.com/rulefilings, at MIAX Pearl’s principal office, and at the Commission’s Public Reference Room. ddrumheller on DSK120RN23PROD with NOTICES1 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. 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 149 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 All references to the ‘‘Exchange’’ in this filing mean MIAX Pearl Options. Any references to the equities trading facility of MIAX PEARL, LLC, will specifically be referred to as ‘‘MIAX Pearl Equities.’’ 1 15 VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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 4 and non-Members; (2) amend the calculation of fees for MIAX Express Network Full Service (‘‘MEO’’) 5 Ports (Bulk and Single); and (3) amend the fees for Full Service MEO Ports (Bulk and Single). The Exchange and its affiliate, Miami International Securities Exchange, LLC (‘‘MIAX’’) operated 10Gb ULL connectivity on a single shared network that provided access to both exchanges via a single 10Gb ULL connection. The Exchange last increased fees for 10Gb ULL connections from $9,300 to $10,000 per month on January 1, 2021.6 At the same time, MIAX also increased its 10Gb ULL connectivity fee from $9,300 to $10,000 per month.7 The Exchange and MIAX shared a combined cost analysis in those filings due to the single shared 10Gb ULL connectivity network for both exchanges. In those filings, the Exchange and MIAX allocated a combined total of $17.9 million in expenses to providing 10Gb ULL connectivity.8 Beginning in late January 2023, the Exchange also recently determined a substantial operational need to no longer operate 10Gb ULL connectivity on a single shared network with MIAX. The Exchange bifurcated 10Gb ULL connectivity due to ever-increasing capacity constraints and to enable it to continue to satisfy the anticipated access needs for Members and other 4 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. 5 The term ‘‘MEO Interface’’ or ‘‘MEO’’ means a binary order interface for certain order types as set forth in Rule 516 into the MIAX Pearl System. See the Definitions Section of the Fee Schedule and Exchange Rule 100. 6 See Securities Exchange Act Release No. 90981 (January 25, 2021), 86 FR 7582 (January 29, 2021) (SR–PEARL–2021–01). 7 See Securities Exchange Act Release No. 90980 (January 25, 2021), 86 FR 7602 (January 29, 2021) (SR–MIAX–2021–02). 8 See id. PO 00000 Frm 00171 Fmt 4703 Sfmt 4703 market participants.9 Since the time of the 2021 increase discussed above, 10 the Exchange experienced ongoing increases in expenses, particularly internal expenses.11 As discussed more fully below, the Exchange recently calculated increased annual aggregate costs of $11,567,509 for providing 10Gb ULL connectivity on a single unshared network (an overall increase over its prior cost to provide 10Gb ULL connectivity on a shared network with MIAX) and $1,644,132 for providing Full Service MEO Ports.12 Much of the cost relates to monitoring and analysis of data and performance of the network via the subscriber’s connection with nanosecond granularity, and continuous improvements in network performance with the goal of improving the subscriber’s experience. The costs associated with maintaining and enhancing a state-of-the-art network is a significant expense for the Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those increased costs by amending fees for connectivity services. Subscribers expect the Exchange to provide this level of support so they continue to receive the performance they expect. This differentiates the Exchange from its competitors. The Exchange now proposes to amend the Fee Schedule to amend the fees for 10Gb ULL connectivity and Full Service 9 See MIAX Options and MIAX Pearl Options— Announce planned network changes related to shared 10G ULL extranet, issued August 12, 2022, available at https://www.miaxglobal.com/alert/ 2022/08/12/miax-options-and-miax-pearl-optionsannounce-planned-network-changes-0. The Exchange will continue to provide access to both the Exchange and MIAX over a single shared 1Gb connection. See Securities Exchange Act Release Nos. 96553 (December 20, 2022), 87 FR 79379 (December 27, 2022) (SR–PEARL–2022–60); 96545 (December 20, 2022) 87 FR 79393 (December 27, 2022) (SR–MIAX–2022–48). 10 The Exchange notes it last filed to amend the fees for Full Service MEO Ports in 2018 (excluding filings made in July 2021 through early 2022), prior to which the Exchange provided Full Service MEO Ports free of charge since the it launched operations in 2017 and absorbed all costs since that time. See Securities Exchange Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) (SR– PEARL–2018–07). 11 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. 12 For the avoidance of doubt, all references to costs in this filing, including the cost categories discussed below, refer to costs incurred by MIAX Pearl Options only and not MIAX Pearl Equities, the equities trading facility. E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 MEO Ports (Bulk and Single) in order to recoup cost related to bifurcating 10Gb connectivity to the Exchange and MIAX as well as the ongoing costs and increase in expenses set forth below in the Exchange’s cost analysis.13 The Exchange proposes to implement the changes to the Fee Schedule pursuant to this proposal immediately. The Exchange initially filed the proposal on December 30, 2022 (SR–PEARL–2022– 62) (the ‘‘Initial Proposal’’).14 On February 23, 2023, the Exchange withdrew the Initial Proposal and replaced it with a revised proposal (SR– PEARL–2023–08) (the ‘‘Second Proposal’’).15 On April 20, 2023, the Exchange withdrew the Second Proposal and replaced it with a revised proposal (SR–PEARL–2023–19) (the ‘‘Third Proposal’’).16 On June 16, 2023, the Exchange withdrew the Third Proposal and replaced it with a revised proposal (SR–PEARL–2023–27) (the ‘‘Fourth Proposal’’).17 On August 8, 2023, the Exchange withdrew the Fourth Proposal and replaced it with this further revised proposal (SR– PEARL–2023–35). The Exchange previously included a cost analysis in the Initial, Second, Third, and Fourth 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 (separately 13 The Exchange notes that MIAX will make a similar filing to increase its 10Gb ULL connectivity fees. 14 See Securities Exchange Act Release No. 96632 (January 10, 2023), 88 FR 2707 (January 17, 2023) (SR–PEARL–2022–62). 15 See Securities Exchange Act Release No. 97082 (March 8, 2023), 88 FR 15825 (March 14, 2023) (SR– PEARL–2023–05). 16 See Securities Exchange Act Release No. 97420 (May 2, 2023), 88 FR 29701 (May 8, 2023) (SR– PEARL–2023–19). 17 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 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. See Securities Exchange Act Release No. 97815 (June 27, 2023), 88 FR 42759 (July 3, 2023) (SR–PEARL– 2023–27). VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 among MIAX Pearl Options and MIAX Pearl Equities, MIAX and MIAX Emerald 18 (together with MIAX 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 markets. Although the baseline cost analysis used to justify the proposed fees was made in the Initial, Second, Third, and Fourth Proposals, the fees themselves have not changed since the Initial, Second, Third, or Fourth Proposals and the Exchange still proposes fees that are intended to cover the Exchange’s cost of providing 10Gb ULL connectivity and Full Service MEO Ports with a reasonable mark-up over those costs. * * * * * Starting in 2017, following the United States Court of Appeals for the District of Columbia’s Susquehanna Decision 19 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.20 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.21 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’’).22 The Remand Order directed 18 The term ‘‘MIAX Emerald’’ means MIAX Emerald, LLC. See Exchange Rule 100. 19 See Susquehanna International Group, LLP v. Securities & Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’). 20 Id. 21 See Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ‘‘SIFMA Decision’’). 22 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 PO 00000 Frm 00172 Fmt 4703 Sfmt 4703 58405 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.’’ 23 The Commission denied requests by various exchanges and plan participants for reconsideration of the Remand Order.24 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.’’ 25 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.26 Despite approving hundreds of access fee filings in the years prior to the BOX Order (described further below) utilizing a ‘‘market-based’’ test, the Commission changed course and disapproved BOX’s proposal to begin charging connectivity at one-fourth the rate of competing exchanges’ pricing. Also while the above appeal was pending, on May 21, 2019, the Commission Staff issued guidance ‘‘to assist the national securities exchanges and FINRA . . . in preparing Fee Filings that meet their burden to demonstrate that proposed fees are consistent with the requirements of the Securities Rule 608(d) of Regulation NMS, 17 CFR 242.608(d) (asserted as an alternative basis of jurisdiction in some applications). 23 Id. at page 2. 24 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ‘‘Order Denying Reconsideration’’). 25 Order Denying Reconsideration, 2019 WL 2022819, at * 13. 26 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). E:\FR\FM\25AUN1.SGM 25AUN1 58406 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 Exchange Act.’’ 27 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.’’ 28 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.’’ 29 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 30 and remanded for further proceedings consistent with its opinion.31 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.’’ 32 Accordingly, on August 7, 2020, the Commission vacated the Remand Order and ordered the parties to file briefs addressing whether the holding in NASDAQ v. SEC that Exchange Act section 19(d) does not permit challenges to generally applicable fee rules requiring dismissal of the challenges the Commission previously remanded.33 The Commission further invited ‘‘the parties to submit briefing stating whether the challenges asserted in the applications for review . . . should be dismissed, 27 See Staff Guidance on SRO Rule Filings Relating to Fees (May 21, 2019), available at https:/ /www.sec.gov/tm/staff-guidance-sro-rule-filingsfees (the ‘‘Staff Guidance’’). 28 Id. 29 Id. 30 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. 31 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. 32 Id. at *2; see also id. (‘‘[T]he sole purpose of the challenged remand has disappeared.’’). 33 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’’). VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 and specifically identifying any challenge that they contend should not be dismissed pursuant to the holding of Nasdaq v. SEC.’’ 34 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.35 As a result of the Commission’s loss of the NASDAQ vs. SEC case noted above, the Commission never followed through with its intention to subject the over 400 fee filings to ‘‘develop a record,’’ and to ‘‘explain their conclusions, based on that record, in a written decision that is sufficient to enable us to perform our review.’’ 36 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’’).37 The 34 Id. 35 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 90087 (October 5, 2020). 36 See supra note 31, at page 2. 37 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 PO 00000 Frm 00173 Fmt 4703 Sfmt 4703 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 38 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.39 These fees remain in effect today. The net result is that the non-legacy exchanges are effectively now blocked by the Commission Staff from adopting or increasing fees to amounts comparable to the legacy exchanges (which were not subject to the Revised Review Process and Staff Guidance), despite providing enhanced disclosures and rationale to support their proposed fee changes that far exceed any such support provided by legacy exchanges. Simply put, legacy exchanges were able to increase their non-transaction fees during an extended period in which the Commission applied a ‘‘market-based’’ test that only relied upon the assumed presence of significant competitive forces, while exchanges today are subject to a cost-based test requiring extensive cost and revenue disclosures, a process that is complex, inconsistently applied, and rarely results in a successful outcome, i.e., nonsuspension. The Revised Review Process and Staff Guidance changed decades-long Commission Staff standards for review, resulting in unfair 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. 38 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. 39 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). E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 discrimination and placing an undue burden on inter-market competition between legacy exchanges and nonlegacy exchanges. Commission Staff now require exchange filings, including from nonlegacy exchanges such as MIAX Pearl, to provide detailed cost-based analysis in place of competition-based arguments to support such changes. However, even with the added detailed cost and expense disclosures, the Commission Staff continues to either suspend such filings and institute disapproval proceedings, or put the exchanges in the unenviable position of having to repeatedly withdraw and re-file with additional detail in order to continue to charge those fees.40 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 41 and $80,383,000 for 2021.42 Cboe C2 Exchange, Inc. (‘‘C2’’) reported ‘‘access and capacity fee’’ revenue of $19,016,000 for 2020 43 and $22,843,000 for 2021.44 Cboe BZX Exchange, Inc. (‘‘BZX’’) reported ‘‘access and capacity 40 The Exchange has filed, and subsequently withdrew, various forms of this proposed fee change numerous times since August 2021 with each proposal containing hundreds of cost and revenue disclosures never previously disclosed by legacy exchanges in their access and market data fee filings prior to 2019. 41 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. 42 See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001155.pdf. 43 See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000469.pdf. 44 See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001156.pdf. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 fee’’ revenue of $38,387,000 for 2020 45 and $44,800,000 for 2021.46 Cboe EDGX Exchange, Inc. (‘‘EDGX’’) reported ‘‘access and capacity fee’’ revenue of $26,126,000 for 2020 47 and $30,687,000 for 2021.48 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 2019.49 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.’’ 50 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,51 new products and other innovations. Second, higher nontransaction fees provide the legacy exchanges with greater flexibility to lower their transaction fees (or use the revenue from the higher non-transaction fees to subsidize transaction fee rates), which are more immediately impactful in competition for order flow and market share, given the variable nature of this cost on member firms. The prohibition of a reasonable path forward denies the Exchange (and other nonlegacy exchanges) this flexibility, 45 See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000465.pdf. 46 See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001152.pdf. 47 See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000467.pdf. 48 See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001154.pdf. 49 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. 50 See PHLX 2021 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. 51 See, e.g., CNBC Debuts New Set on NYSE Floor, available at https://www.cnbc.com/id/46517876. PO 00000 Frm 00174 Fmt 4703 Sfmt 4703 58407 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 . . .’’,52 this is not the reality experienced by exchanges such as MIAX Pearl. As such, non-legacy exchanges are forced to rely on an opaque cost-based justification standard. However, because the Staff Guidance is devoid of detail on what must be contained in cost-based justification, this standard is nearly impossible to meet despite repeated good-faith efforts by the Exchange to provide substantial amount of costrelated details. For example, the Exchange has attempted to increase fees using a cost-based justification numerous times, having submitted over six filings.53 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 52 See supra note 27, at note 1. Securities Exchange Act Release Nos. 92798 (August 27, 2021), 86 FR 49360 (September 2, 2021) (SR–PEARL–2021–33); 92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR–PEARL– 2021–36); 93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR–PEARL–2021–45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 2021) (SR–PEARL–2021–53); 93774 (December 14, 2021), 86 FR 71952 (December 20, 2021) (SR– PEARL–2021–57); 93894 (January 4, 2022), 87 FR 1203 (January 10, 2022) (SR–PEARL–2021–58); 94258 (February 15, 2022), 87 FR 9659 (February 22, 2022) (SR–PEARL–2022–03); 94286 (February 18, 2022), 87 FR 10860 (February 25, 2022) (SR– PEARL–2022–04); 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022) (SR–PEARL–2022–11); 94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR–PEARL–2022–12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 2022) (SR–PEARL–2022–18). 53 See E:\FR\FM\25AUN1.SGM 25AUN1 58408 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices the Act 54 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,55 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; 56 or (c) accept that certain competition-based arguments are applicable given the linkage between non-transaction fees and transaction fees, especially where non-transaction fees among exchanges are based upon disparate standards of review, lack parity, and impede fair competition. Considering the absence of any such framework or clarity, the Exchange believes that the Commission does not have a reasonable basis to deny the Exchange this change in fees, where the proposed change would result in fees meaningfully lower than comparable fees at competing exchanges and where the associated non- ddrumheller on DSK120RN23PROD with NOTICES1 54 15 U.S.C. 78f(b)(4). 55 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. 56 In light of the arguments above regarding disparate standards of review for historical legacy non-transaction fees and current non-transaction fees for non-legacy exchanges, a fee parity alternative would be one possible way to avoid the current unfair and discriminatory effect of the Staff Guidance and Revised Review Process. See, e.g., CSA Staff Consultation Paper 21–401, Real-Time Market Data Fees, available at https:// www.bcsc.bc.ca/-/media/PWS/Resources/ Securities_Law/Policies/Policy2/21401_Market_ Data_Fee_CSA_Staff_Consulation_Paper.pdf. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 transaction revenue is meaningfully lower than competing exchanges. In light of the above, disapproval of this would not meet the fairness standard under the Act, would be discriminatory and place a substantial burden on competition. The Exchange would be uniquely disadvantaged by not being able to increase its access fees to comparable levels (or lower levels than current market rates) to those of other options exchanges for connectivity. If the Commission Staff were to disapprove this proposal, that action, and not market forces, would substantially affect whether the Exchange can be successful in its competition with other options exchanges. Disapproval of this filing could also be viewed as an arbitrary and capricious decision should the Commission Staff continue to ignore its past treatment of non-transaction fee filings before implementation of the Revised Review Process and Staff Guidance and refuse to allow such filings to be approved despite significantly enhanced arguments and cost disclosures.57 * * * * * 10Gb ULL Connectivity Fee Change MIAX Pearl Options filed a proposal to no longer operate 10Gb connectivity to MIAX Pearl Options on a single shared network with its affiliate, MIAX. This change is an operational necessity due to ever-increasing capacity constraints and to accommodate anticipated access needs for Members and other market participants.58 This proposal: (i) sets forth the applicable fees for the bifurcated 10Gb ULL network; (ii) removes provisions in the Fee Schedule that provide for a shared 10Gb ULL network; and (iii) specifies that market participants may continue to connect to both MIAX Pearl Options and MIAX via the 1Gb network. MIAX Pearl Options bifurcated the MIAX Pearl Options and MIAX 10Gb ULL networks in the first quarter of 2023, which change became effective on January 23, 2023. The Exchange issued 57 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. 58 See supra note 9. PO 00000 Frm 00175 Fmt 4703 Sfmt 4703 an alert on August 12, 2022 publicly announcing the planned network change and implementation plan and dates to provide market participants adequate time to prepare.59 Upon bifurcation of the 10Gb ULL network, subscribers need to purchase separate connections to MIAX Pearl Options and MIAX at the applicable rate. The Exchange’s proposed amended rate for 10Gb ULL connectivity is described below. Prior to the bifurcation of the 10Gb ULL networks, subscribers to 10Gb ULL connectivity were able to connect to both MIAX Pearl Options and MIAX at the applicable rate set forth below. The Exchange, therefore, proposes to amend the Fee Schedule to increase the fees for Members and non-Members to access the Exchange’s system networks 60 via a 10Gb ULL fiber connection and to specify that this fee is for a dedicated connection to MIAX Pearl Options and no longer provides access to MIAX. Specifically, MIAX Pearl Options 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’’).61 The Exchange also proposes to amend the Fee Schedule to reflect the bifurcation of the 10Gb ULL network and specify that only the 1Gb network provides access to both MIAX Pearl Options and MIAX. The Exchange proposes to make the following changes to reflect the bifurcated 10Gb ULL network for the Exchange and MIAX. First, in the Definitions section of the Fee Schedule, the Exchange proposes to amend the last sentence in the definition of ‘‘MENI’’ to specify that the MENI can be configured to provide network connectivity to the trading platforms, market data systems, test systems, and disaster recovery facilities of the Exchange’s affiliate, MIAX, via a single, shared 1Gb 59 Id. 60 The Exchange’s system networks consist of the Exchange’s extranet, internal network, and external network. 61 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/pearl-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.’’). E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices connection. Next, the Exchange proposes to amend the explanatory paragraphs below the network connectivity fee tables in Sections 5)a)b) of the Fee Schedule to specify that, with the bifurcated 10Gb ULL network, Members (and non-Members) utilizing the MENI to connect to the trading platforms, market data systems, test systems, and disaster recovery facilities of the Exchange and MIAX via a single, can only do so via a shared 1Gb connection. The Exchange will continue to assess monthly Member and non-Member network connectivity fees for connectivity to the primary and secondary facilities in any month the Member or non-Member is credentialed to use any of the Exchange APIs or market data feeds in the production environment. The Exchange will continue to pro-rate the fees when a Member or non-Member makes a change to the connectivity (by adding or deleting connections) with such prorated fees based on the number of trading days that the Member or nonMember has been credentialed to utilize any of the Exchange APIs or market data feeds in the production environment through such connection, divided by the total number of trading days in such month multiplied by the applicable monthly rate. Full Service MEO Ports—Bulk and Single ddrumheller on DSK120RN23PROD with NOTICES1 Background The Exchange also proposes to amend Section 5)d) of the Fee Schedule to amend the calculation and amount of fees for Full Service MEO Ports. The Exchange currently offers different types of MEO Ports depending on the services required by the Member, including a Full Service MEO Port-Bulk,62 a Full Service MEO Port-Single,63 and a Limited Service MEO Port.64 For one monthly price, a Member may be allocated two (2) Full-Service MEO Ports of either type per matching engine 65 and may request Limited 62. ‘‘Full Service MEO Port—Bulk’’ means an MEO port that supports all MEO input message types and binary bulk order entry. See the Definitions Section of the Fee Schedule. 63 ‘‘Full Service MEO Port—Single’’ means an MEO port that supports all MEO input message types and binary order entry on a single order-byorder basis, but not bulk orders. See the Definitions Section of the Fee Schedule. 64 ‘‘Limited Service MEO Port’’ means an MEO port that supports all MEO input message types, but does not support bulk order entry and only supports limited order types, as specified by the Exchange via Regulatory Circular. See the Definitions Section of the Fee Schedule. 65 A ‘‘Matching Engine’’ is a part of the Exchange’s electronic system that processes options VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 Service MEO Ports for which MIAX Pearl will assess Members Limited Service MEO Port fees based on a sliding scale for the number of Limited Service MEO Ports utilized each month. The two (2) Full-Service MEO Ports that may be allocated per matching engine to a Member may consist of: (a) two (2) Full Service MEO Ports—Bulk; (b) two (2) Full Service MEO Ports—Single; or (c) one (1) Full Service MEO Port—Bulk and one (1) Full Service MEO Port— Single. Currently, the Exchange assesses Members Full Service MEO Port Fees, either for a Full Service MEO Port— Bulk and/or for a Full Service MEO Port—Single, based upon the monthly total volume executed by a Member and its Affiliates 66 on the Exchange, across all origin types, not including Excluded Contracts,67 as compared to the Total Consolidated Volume (‘‘TCV’’),68 in all MIAX Pearl-listed options. The Exchange adopted a tier-based fee structure based upon the volume-based tiers detailed in the definition of ‘‘NonTransaction Fees Volume-Based Tiers’’ described in the Definitions section of the Fee Schedule. The Exchange assesses these and other monthly Port fees to Members in each month the market participant is credentialed to use a Port in the production environment. Full Service MEO Port (Bulk) Fee Changes Current Full Service MEO Port (Bulk) Fees. The Exchange currently assesses all Members (Market Makers 69 and Electronic Exchange Members 70 orders and trades on a symbol-by-symbol basis. See the Definitions Section of the Fee Schedule. 66 ‘‘Affiliate’’ means (i) an affiliate of a Member of at least 75% common ownership between the firms as reflected on each firm’s Form BD, Schedule A, or (ii) the Appointed Market Maker of an Appointed EEM (or, conversely, the Appointed EEM of an Appointed Market Maker). See the Definitions Section of the Fee Schedule. 67 ‘‘Excluded Contracts’’ means any contracts routed to an away market for execution. See the Definitions Section of the Fee Schedule. 68 ‘‘TCV’’ means total consolidated volume calculated as the total national volume in those classes listed on MIAX Pearl for the month for which the fees apply, excluding consolidated volume executed during the period of time in which the Exchange experiences an Exchange System Disruption (solely in the option classes of the affected Matching Engine). See the Definitions Section of the Fee Schedule. 69 The term ‘‘Market Maker’’ means a Member registered with the Exchange for the purpose of making markets in options contracts traded on the Exchange and that is vested with the rights and responsibilities specified in Chapter VI of Exchange Rules. See the Definitions Section of the Fee Schedule and Exchange Rule 100. 70 The term ‘‘Electronic Exchange Member’’ or ‘‘EEM’’ means the holder of a Trading Permit who is a Member representing as agent Public Customer Orders or Non-Customer Orders on the Exchange and those non-Market Maker Members conducting PO 00000 Frm 00176 Fmt 4703 Sfmt 4703 58409 (‘‘EEMs’’)) monthly Full Service MEO Port—Bulk fees as follows: (i) if its volume falls within the parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000; (ii) if its volume falls within the parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers, or volume above 0.30% up to 0.60%, $4,500; and (iii) if its volume falls within the parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000. Proposed Full Service MEO Port (Bulk) Fees. The Exchange proposes to amend the calculation and amount of Full Service MEO Port (Bulk) fees for EEMs and Market Makers. In particular, for EEMs, the Exchange proposes to move away from the above-described volume tier-based fee structure and instead charge all EEMs that utilize Full Service MEO Ports (Bulk) a flat monthly fee of $7,500. For this flat monthly fee, EEMs will continue to be entitled to two (2) Full Service MEO Ports (Bulk) for each Matching Engine for the single monthly fee of $7,500. The Exchange now proposes to amend the calculation and amount of Full Service MEO Port (Bulk) fees for Market Makers by moving away from the above-described volume tier-based fee structure to harmonize the Full Service MEO Port (Bulk) fee structure for Market Makers with that of the Exchange’s affiliates, MIAX and MIAX Emerald.71 The Exchange proposes that the amount of the monthly Full Service MEO Port (Bulk) fees for Market Makers would be based on the lesser of either the per class traded or percentage of total national average daily volume (‘‘ADV’’) measurement based on classes traded by volume. The amount of monthly Market Maker Full Service MEO Port (Bulk) fee would be based upon the number of classes in which the Market Maker was registered to quote on any given day within the calendar month, or upon the class volume percentages. This change in how Full Service MEO Port (Bulk) fees are calculated is identical to how the Exchange assesses Market Makers Trading Permit fees, which is in line with how numerous exchanges charge similar membership fees. Specifically, the Exchange proposes to adopt the following Full Service MEO Port (Bulk) fees for Market Makers: (i) $5,000 for Market Maker registrations in proprietary trading. Electronic Exchange Members are deemed ‘‘members’’ under the Exchange Act. See the Definitions Section of the Fee Schedule and Exchange Rule 100. 71 See MIAX Fee Schedule, Section 5)d)ii) and MIAX Emerald Fee Schedule, Section 5)d)ii). E:\FR\FM\25AUN1.SGM 25AUN1 ddrumheller on DSK120RN23PROD with NOTICES1 58410 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices up to 10 option classes or up to 20% of option classes by national ADV; (ii) $7,500 for Market Maker registrations in up to 40 option classes or up to 35% of option classes by ADV; (iii) $10,000 for Market Maker registrations in up to 100 option classes or up to 50% of option classes by ADV; and (iv) $12,000 for Market Maker registrations in over 100 option classes or over 50% of option classes by ADV up to all option classes listed on MIAX Pearl. For example, if Market Maker 1 elects to quote the top 40 option classes which consist of 58% of the total national average daily volume in the prior calendar quarter, the Exchange would assess $7,500 to Market Maker 1 for the month which is the lesser of ‘up to 40 classes’ and ‘over 50% of classes by volume up to all classes listed on MIAX Pearl’. If Market Maker 2 elects to quote the bottom 1000 option classes which consist of 10% of the total national average daily volume in the prior quarter, the Exchange would assess $5,000 to Market Maker 2 for the month which is the lesser of ‘over 100 classes’ and ‘up to 20% of classes by volume. The Exchange notes that the proposed tiers (ranging from $5,000 to $12,000) are lower than the tiers that the Exchange’s affiliates charge for their comparable ports (ranging from $5,000 to $20,500) for similar per class tier thresholds.72 With the proposed changes, a Market Maker would be determined to be registered in a class if that Market Maker has been registered in one or more series in that class.73 The Exchange will assess MIAX Pearl Options Market Makers the monthly Market Maker Full Service MEO Port (Bulk) fee based on the greatest number of classes listed on MIAX Pearl Options that the MIAX Pearl Options Market Maker registered to quote in on any given day within a calendar month. Therefore, with the proposed changes to the calculation of Market Maker Full Service MEO Port (Bulk) fees, the Exchange’s Market Makers would be encouraged to quote in more series in each class they are registered in because each additional series in that class would not count against their total classes for purposes of the Full Service MEO Port (Bulk) fee tiers. The class volume percentage is based on the total national ADV in classes listed on MIAX Pearl Options in the prior calendar quarter. Newly listed option classes are excluded from the calculation of the monthly Market Maker Full Service MEO Port (Bulk) fee 72 See id. 73 Pursuant to Exchange Rule 602(a), a Member that has qualified as a Market Maker may register to make markets in individual series of options. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 until the calendar quarter following their listing, at which time the newly listed option classes will be included in both the per class count and the percentage of total national ADV. The Exchange also proposes to adopt an alternative lower Full Service MEO Port (Bulk) fee for Market Makers who fall within the 2nd, 3rd and 4th levels of the proposed Market Maker Full Service MEO Port (Bulk) fee table: (i) Market Maker registrations in up to 40 option classes or up to 35% of option classes by volume; (ii) Market Maker registrations in up to 100 option classes or up to 50% of option classes by volume; and (iii) Market Maker registrations in over 100 option classes or over 50% of option classes by volume up to all option classes listed on MIAX Pearl Options. In particular, the Exchange proposes to adopt footnote ‘‘**’’ following the Market Maker Full Service MEO Port (Bulk) fee table for these Monthly Full Service MEO Port (Bulk) tier levels. New proposed footnote ‘‘**’’ will provide that if the Market Maker’s total monthly executed volume during the relevant month is less than 0.040% of the total monthly TCV for MIAX Pearl-listed option classes for that month, then the fee will be $6,000 instead of the fee otherwise applicable to such level. The purpose of the alternative lower fee designated in proposed footnote ‘‘**’’ is to provide a lower fixed fee to those Market Makers who are willing to quote the entire Exchange market (or substantial amount of the Exchange market), as objectively measured by either number of classes assigned or national ADV, but who do not otherwise execute a significant amount of volume on the Exchange. The Exchange believes that, by offering lower fixed fees to Market Makers that execute less volume, the Exchange will retain and attract smaller-scale Market Makers, which are an integral component of the option marketplace, but have been decreasing in number in recent years, due to industry consolidation. Since these smaller-scale Market Makers utilize less Exchange capacity due to lower overall volume executed, the Exchange believes it is reasonable and equitable to offer such Market Makers a lower fixed fee. The Exchange notes that the Exchange’s affiliates, MIAX and MIAX Emerald, also provide lower MIAX Express Interface (‘‘MEI’’) Port fees (the comparable ports on those exchanges) for Market Makers who quote the entire MIAX and MIAX Emerald markets (or substantial amount of those markets), as objectively measured by either number of classes assigned or national ADV, but who do not otherwise execute a PO 00000 Frm 00177 Fmt 4703 Sfmt 4703 significant amount of volume on MIAX or MIAX Emerald.74 The proposed changes to the Full Service MEO Port (Bulk) fees for Market Makers who fall within the 2nd, 3rd and 4th levels of the fee table are based upon a business determination of current Market Maker assignments and trading volume. Unlike other options exchanges that provide similar port functionality and charge fees on a per port basis,75 the Exchange offers Full Service MEO Ports as a package and provides Members with the option to receive up to two Full Service MEO Ports (described above) per matching engine to which that Member connects. The Exchange currently has twelve (12) matching engines, which means Market Makers may receive up to twenty-four (24) Full Service MEO Ports for a single monthly fee, that can vary based on the lesser of either the per class traded or percentage of total national ADV measurement based on classes traded by volume, as described above. For illustrative purposes, the Exchange currently assesses a fee of $5,000 per month for Market Makers that reach the highest Full Service MEO Port (Bulk) tier, regardless of the number of Full Service MEO Ports allocated to the Market Maker. For example, assuming a Market 74 See MIAX Fee Schedule, Section 5)d)ii), note ‘‘*’’ and MIAX Emerald Fee Schedule, Section 5)d)ii), note ‘‘■’’. 75 See NYSE American Options Fee Schedule, Section V.A., Port Fees (each port charged on a per matching engine basis, with NYSE American having 17 match engines). See NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How many matching engines are used by each exchange?) (September 2020) (providing a link to an Excel file detailing the number of matching engines per options exchange); NYSE Arca Options Fee Schedule, Port Fees (each port charged on a per matching engine basis, NYSE Arca having 19 match engines); and NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How many matching engines are used by each exchange?) (September 2020) (providing a link to an Excel file detailing the number of matching engines per options exchange). See NASDAQ Fee Schedule, NASDAQ Options 7 Pricing Schedule, Section 3, Nasdaq Options Market—Ports and Other Services (each port charged on a per matching engine basis, with Nasdaq having multiple matching engines). See NASDAQ Specialized Quote Interface (SQF) Specification, Version 6.5b (updated February 13, 2020), Section 2, Architecture, available at https:// www.nasdaq.com/docs/2020/02/18/SpecializedQuote-Interface-SQI-6.5b.pdf (the ‘‘NASDAQ SQF Interface Specification’’). The NASDAQ SQF Interface Specification also provides that NASDAQ’s affiliates, NASDAQ Phlx and NASDAQ BX, Inc. (‘‘BX’’), have trading infrastructures that may consist of multiple matching engines with each matching engine trading only a range of option classes. Further, the NASDAQ SQF Interface Specification provides that the SQF infrastructure is such that the firms connect to one or more servers residing directly on the matching engine infrastructure. Since there may be multiple matching engines, firms will need to connect to each engine’s infrastructure in order to establish the ability to quote the symbols handled by that engine. E:\FR\FM\25AUN1.SGM 25AUN1 58411 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices Maker connects to all twelve (12) matching engines during a month, with two Full Service MEO Ports (Bulk) per matching engine, this results in an effective fee of $208.33 per Full Service MEO Port ($5,000 divided by 24) for the month, as compared to other exchanges that charge over $1,000 per port and require multiple ports to connect to all of their matching engines.76 This fee had been unchanged since the Exchange adopted Full Service MEO Port fees in 2018.77 The Exchange proposes to increase Full Service MEO Port fees, with the highest monthly fee of $12,000 for the Full Service MEO Ports (Bulk). Market Makers will continue to receive two (2) Full Service MEO Ports to each matching engine to which they connect for the single flat monthly fee. Assuming a Market Maker connects to all twelve (12) matching engines during the month, with two Full Service MEO Ports per matching engine, this would result in an effective fee of $500 per Full Service MEO Port ($12,000 divided by 24). FULL SERVICE MEO PORTS (BULK) Number of match engines Total number of ports for market maker to connect to all match engines 12 24 $5,000 $208.33 12 24 12,000 500 Pricing Based on Market Maker Being Charged the Highest Tier (Current) .. Pricing Based on Market Maker Being Charged the Highest Tier (as proposed) .......................................................................................................... ddrumheller on DSK120RN23PROD with NOTICES1 Full Service MEO Port (Single) Fee Changes Current Full Service MEO Port (Single) Fees. The Exchange currently assesses all Members (Market Makers and EEMs) monthly Full Service MEO Port (Single) fees as follows: (i) if its volume falls within the parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000; (ii) if its volume falls within the parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers, or volume above 0.30% up to 0.60%, $3,375; and (iii) if its volume falls within the parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750. Proposed Full Service MEO Port (Single) Fees. The Exchange proposes to amend the calculation and amount of Full Service MEO Port (Single) fees for EEMs and Market Makers. In particular, the Exchange proposes to move away from the above-described volume tierbased fee structure and instead charge all Members that utilize Full Service MEO Ports (Single) a flat monthly fee of $4,000. For this flat monthly fee, all Members will continue to be entitled to two (2) Full Service MEO Ports (Single) for each Matching Engine for the single monthly fee of $4,000. The Exchange offers various types of ports with differing prices because each port accomplishes different tasks, are suited to different types of Members, and consume varying capacity amounts 76 Id. See also infra notes 101 to 108 and accompanying text. 77 See Securities Exchange Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) (SR–PEARL–2018–07). VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 of the network. For instance, MEO ports allow for a higher throughput and can handle much higher quote/order rates than FIX ports. Members that are Market Makers or high frequency trading firms utilize these ports (typically coupled with 10Gb ULL connectivity) because they transact in significantly higher amounts of messages being sent to and from the Exchange, versus FIX port users, who are traditionally customers sending only orders to the Exchange (typically coupled with 1Gb connectivity). The different types of ports cater to the different types of Exchange Memberships and different capabilities of the various Exchange Members. Certain Members need ports and connections that can handle using far more of the network’s capacity for message throughput, risk protections, and the amount of information that the System has to assess. Those Members account for the vast majority of network capacity utilization and volume executed on the Exchange, as discussed throughout. For example, three (3) Members account for 64% of all 10Gb ULL connections and Full Service MEO Ports purchased. The Exchange proposes to increase its monthly Full Service MEO Port fees since it has not done so since the fees were adopted in 2018,78 which are designed to recover a portion of the costs associated with directly accessing the Exchange. As described above, the Exchange’s affiliates, MIAX and MIAX Emerald, also charge fees for their high throughput, low latency ports in a id. MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee Schedule, Section 5)d)ii). 80 15 U.S.C. 78f(b). 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 80 in general, and furthers the objectives of section 6(b)(4) of the Act 81 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 82 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 81 15 79 See 82 15 Frm 00178 Fmt 4703 Sfmt 4703 Effective per port fee similar fashion as the Exchange proposes to charge for its MEO Ports— generally, the more active user the Member (i.e., the greater number/greater national ADV of classes assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port fee.79 This concept is, therefore, not new or novel. 78 See PO 00000 Total fee (monthly) E:\FR\FM\25AUN1.SGM U.S.C. 78f(b)(4). U.S.C. 78f(b)(5). 25AUN1 ddrumheller on DSK120RN23PROD with NOTICES1 58412 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices Review Process and as set forth in recent Staff Guidance. Based on both the BOX Order 83 and the Staff Guidance,84 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.’’ 85 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.’’ 86 In the Staff Guidance, the Commission Staff further states that, ‘‘[i]f an SRO seeks to support its claims that a proposed fee is fair and reasonable because it will permit recovery of the SRO’s costs, . . . , specific information, including quantitative information, should be provided to support that argument.’’ 87 The proposed fees are reasonable because they promote parity among exchange pricing for access, which promotes competition, including in the Exchanges’ ability to competitively price transaction fees, invest in infrastructure, new products and other innovations, all while allowing the Exchange to recover its costs to provide dedicated access via 10Gb ULL connectivity (driven by the bifurcation 83 See 84 See supra note 26. supra note 27. 85 Id. 86 Id. 87 Id. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 of the 10Gb ULL network) and Full Service MEO Ports. As discussed above, the Revised Review Process and Staff Guidance have created an uneven playing field between legacy and nonlegacy exchanges by severely restricting non-legacy exchanges from being able to increase non-transaction related fees to provide them with additional necessary revenue to better compete with legacy exchanges, which largely set fees prior to the Revised Review Process. The much higher non-transaction fees charged by the legacy exchanges provides them with two significant competitive advantages: (i) additional non-transaction revenue that may be used to fund areas other than the nontransaction service related to the fee, such as investments in infrastructure, advertising, new products and other innovations; and (ii) greater flexibility to lower their transaction fees by using the revenue from the higher non-transaction fees to subsidize transaction fee rates. The latter is more immediately impactful in competition for order flow and market share, given the variable nature of this cost on Member firms. The absence of a reasonable path forward to increase non-transaction fees to comparable (or lower rates) limits the Exchange’s flexibility to, among other things, make additional investments in infrastructure and advertising, diminishes the ability to remain competitive on transaction fees, and hinders the ability to compete for order flow and market share. Again, while one could debate whether the pricing of non-transaction fees are subject to the same market forces as transaction fees, there is little doubt that subjecting one exchange to a materially different standard than that applied to other exchanges for non-transaction fees leaves that exchange at a disadvantage in its ability to compete with its pricing of transaction fees. The Proposed Fees Ensure Parity Among Exchange Access Fees, Which Promotes Competition The Exchange commenced operations in February 2017 88 and adopted its initial fee schedule, with 10Gb ULL connectivity fees set at $8,500 (the Exchange originally had a non-ULL 10Gb connectivity option, which it has since removed) and a fee waiver for all Full Service MEO Port fees.89 As a new 88 See MIAX PEARL Successfully Launches Trading Operations, dated February 6, 2017, available at https://www.miaxglobal.com/sites/ default/files/alert-files/MIAX_Press_Release_ 02062017.pdf. 89 See Securities Exchange Act Release No. 80061 (February 17, 2017), 82 FR 11676 (February 24, 2017) (SR–PEARL–2017–10). PO 00000 Frm 00179 Fmt 4703 Sfmt 4703 exchange entrant, the Exchange chose to offer Full Service MEO Ports free of charge to encourage market participants to trade on the Exchange and experience, among things, the quality of the Exchange’s technology and trading functionality. This practice is not uncommon. New exchanges often do not charge fees or charge lower fees for certain services such as memberships/ trading permits to attract order flow to an exchange, and later amend their fees to reflect the true value of those services, absorbing all costs to provide those services in the meantime. Allowing new exchange entrants time to build and sustain market share through various pricing incentives before increasing non-transaction fees encourages market entry and fee parity, which promotes competition among exchanges. It also enables new exchanges to mature their markets and allow market participants to trade on the new exchanges without fees serving as a potential barrier to attracting memberships and order flow.90 Later in 2018, as the Exchange’s market share increased,91 the Exchange adopted nominal fees for Full Service MEO Ports.92 The Exchange last increased the fees for its 10Gb ULL fiber connections from $9,300 to $10,000 per 90 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). 91 The Exchange experienced a monthly average trading volume of 3.94% for the month of March 2018. See the ‘‘Market Share’’ section of the Exchange’s website, available at www.miaxglobal.com. 92 See Securities Exchange Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) (SR–PEARL–2018–07). E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices month on January 1, 2021.93 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’. . . .’’ 94 The Commission and the courts have repeatedly expressed their preference for competition over regulatory intervention to determine prices, products, and services in the securities markets. In Regulation NMS, while adopting a series of steps to improve the current market model, the Commission highlighted the importance of market forces in determining prices and SRO revenues, and also recognized that current regulation of the market system ‘‘has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.’’ 95 Congress directed the Commission to ‘‘rely on ‘competition, whenever possible, in meeting its regulatory responsibilities for overseeing the SROs and the national market system.’ ’’ 96 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.’’ 97 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.’’ 98 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.’’ 99 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 and port rates in place at competing options exchanges were filed with the Commission for immediate effectiveness and remain in place today. Exchange Type of connection or port Monthly fee (per connection or per port) MIAX Pearl Options (as proposed) (equity options market share of 7.05% for the month of May 2023) a. 10Gb ULL connection ...................................... Full Service MEO Port (Bulk) for Market Makers. $13,500. Lesser of either the per class basis or percentage of total national ADV by the Market Maker, as follows: $5,000—up to 10 classes or up to 20% of classes by volume. $7,500 **—up to 40 classes or up to 35% of classes by volume. $10,000 **—up to 100 classes or up to 50% of classes by volume. $12,000 **—over 100 classes or over 50% of all classes by volume up to all classes (or $500 per port per matching engine). ** A lower rate of $6,000 will apply to these tiers if the Market Maker’s total monthly executed volume is less than 0.040% of total monthly TCV for MIAX Pearl options. $7,500 (or $312.50 per port per matching engine). $4,000 (or $166.66 per port per matching engine). Full Service MEO Port (Bulk) for EEMs .......... ddrumheller on DSK120RN23PROD with NOTICES1 58413 Full Service MEO Port (Single) for Market Makers and EEMs. 93 See Securities Exchange Act Release No. 90981 (January 25, 2021), 86 FR 7582 (January 29, 2021) (SR–PEARL–2021–01). 94 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)). VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 95 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 96 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 PO 00000 Frm 00180 Fmt 4703 Sfmt 4703 as unnecessary regulatory restrictions are removed.’’). 97 See Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74,770 (December 9, 2008) (SR–NYSEArca–2006–21). 98 Id. 99 See Staff Guidance, supra note 27. E:\FR\FM\25AUN1.SGM 25AUN1 58414 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices Exchange Monthly fee (per connection or per port) Type of connection or port NASDAQ b (equity options market share of 6.59% for the month of May 2023) c. 10Gb Ultra fiber connection ............................. SQF Port d ........................................................ NASDAQ ISE LLC (‘‘ISE’’) e (equity options market share of 6.18% for the month of May 2023) f. NYSE American LLC (‘‘NYSE American’’) g (equity options market share of 7.34% for the month of May 2023) h. NASDAQ GEMX, LLC (‘‘GEMX’’) i (equity options market share of 2.00% for the month of May 2023) j. 10Gb Ultra fiber connection ............................. SQF Port .......................................................... 10Gb LX LCN connection ................................ Order/Quote Entry Port .................................... 10Gb Ultra connection ..................................... SQF Port .......................................................... $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. a See the ‘‘Market Share’’ section of the Exchange’s website, available at https://www.miaxglobal.com/. NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other Services and NASDAQ Rules, General 8: Connectivity, Section 1. CoLocation Services. c See supra note a. d Similar to the MIAX Pearl Options’ MEO Ports, SQF ports are primarily utilized by Market Makers. e See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE Rules, General 8: Connectivity. f See supra note a. g See NYSE American Options Fee Schedule, Section V.A. Port Fees and Section V.B. Co-Location Fees. h See supra note a. i See GEMX Pricing Schedule, Options 7, Section 6, Connectivity Fees and GEMX Rules, General 8: Connectivity. j See supra note a. b See ddrumheller on DSK120RN23PROD with NOTICES1 The Exchange acknowledges that, without additional contextual information, the above table may lead someone to believe that the Exchange’s proposed fees for Full Service MEO Ports is higher than other exchanges when in fact, that is not true. The Exchange provides each Member or non-Member access to two (2) ports on all twelve (12) matching engines for a single fee and a vast majority choose to connect to all twelve (12) matching engines and utilize both ports for a total of 24 ports. Other exchanges charge on a per port basis and require firms to connect to multiple matching engines, thereby multiplying the cost to access their full market.100 On the Exchange, this is not the case. The Exchange provides each Member or non-Member access, but does not require they connect to, all twelve (12) matching engines. 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 100 See Specialized Quote Interface Specification, Nasdaq PHLX, Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2, Architecture (revised August 16, 2019), available at https:// www.nasdaqtrader.com/content/technicalsupport/ specifications/TradingProducts/SQF6.5a-2019Aug.pdf. The Exchange notes that it is unclear whether the NASDAQ exchanges include connectivity to each matching engine for the single fee or charge per connection, per matching engine. See also NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How many matching engines are used by each exchange?) (September 2020). The Exchange notes that NYSE provides a link to an Excel file detailing the number of matching engines per options exchange, with Arca and Amex having 19 and 17 matching engines, respectively. VerDate Sep<11>2014 19:41 Aug 24, 2023 Jkt 259001 member of one or more options exchanges based on the market participant’s assessment of the business opportunity relative to the costs of the Exchange. With this, there is elasticity of demand for exchange membership. As an example, one 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.101 A very small number of market participants choose to become 101 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.’’ PO 00000 Frm 00181 Fmt 4703 Sfmt 4703 a member of all sixteen options exchanges. Most firms that actively trade on options markets are not currently Members of the Exchange and do not purchase connectivity or port services at the Exchange. Connectivity and ports are only available to Members or service bureaus, and only a Member may utilize a port.102 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.103 The Exchange and its affiliated options markets, MIAX and MIAX Emerald, have a total of 46 members. Of those 46 total members, 37 are members of all three affiliated options markets, two are members of only two affiliated options markets, and seven are members of only one affiliated options market. 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 102 Service Bureaus may obtain ports on behalf of Members. 103 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. E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 elect to do so based on their own business decisions and need to directly access each exchange’s liquidity pool. Not only is there not an actual regulatory requirement to connect to every options exchange, the Exchange believes there is also no ‘‘de facto’’ or practical requirement as well, as further evidenced by the broker-dealer membership analysis of the options exchanges discussed above. As noted above, this is evidenced by the fact that one MIAX Pearl 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. Indeed, brokerdealers 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.104 If the Exchange is not at the national best bid or offer (‘‘NBBO’’),105 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.106 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 104 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. 105 See Exchange Rule 100. 106 Members may elect to not route their orders by utilizing the Do Not Route order type. See Exchange Rule 516(g). VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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,107 or request sponsored access 108 through a member of an exchange in order to submit a trade directly to an options exchange.109 A market participant may either pay the costs associated with becoming a member of an exchange or, in the alternative, a market participant may elect to pay commissions to a broker-dealer, pay fees to a service bureau to submit trades, or pay a member to sponsor the market participant in order to submit trades directly to an exchange. Non-Member third-parties, such as service bureaus and extranets, resell the Exchange’s connectivity. This indirect connectivity is another viable alternative for market participants to trade on the Exchange without connecting directly to the Exchange (and thus not pay the Exchange’s connectivity fees), which alternative is already being used by non-Members and further constrains the price that the Exchange is able to charge for connectivity and other access fees to its market. The Exchange notes that it could, but chooses not to, preclude market participants from reselling its connectivity. Unlike other exchanges, the Exchange also does not currently assess fees on third-party resellers on a per customer basis (i.e., fees based on the number of firms that connect to the Exchange indirectly via the thirdparty).110 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 107 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. 108 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. 109 This may include utilizing a floor broker and submitting the trade to one of the five options trading floors. 110 See, e.g., Nasdaq Price List—U.S. Direct Connection and Extranet Fees, available at, US Direct-Extranet Connection (nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077 (January 16, 2022), 80 FR 3683 (January 23, 2022) (SR–NASDAQ–2015–002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022) (SR– NASDAQ–2017–114). PO 00000 Frm 00182 Fmt 4703 Sfmt 4703 58415 broker-dealers that have numerous customers of their own.111 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 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. Bifurcation of 10Gb ULL Connectivity and Related Fees The Exchange began to operate on a single shared network with MIAX when MIAX Pearl Options commenced operations as a national securities exchange on February 7, 2017.112 The 111 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. 112 See Securities Exchange Act Release No. 80061 (February 17, 2017), 82 FR 11676 (February E:\FR\FM\25AUN1.SGM Continued 25AUN1 58416 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 Exchange and MIAX operated on a single shared network to provide Members with a single convenient set of access points for both exchanges. Both the Exchange and MIAX offer two methods of connectivity, 1Gb and 10Gb ULL connections. The 1Gb connection services are supported by a discrete set of switches providing 1Gb access ports to Members. The 10Gb ULL connection services are supported by a second and mutually exclusive set of switches providing 10Gb ULL access ports to Members. Previously, both the 1Gb and 10Gb ULL shared extranet ports allowed Members to use one connection to access both exchanges, namely their trading platforms, market data systems, test systems, and disaster recovery facilities. The Exchange stresses that bifurcating the 10Gb ULL connectivity between the Exchange and MIAX was not designed with the objective to generate an overall increase in access fee revenue. Rather, the proposed change was necessitated by 10Gb ULL connectivity experiencing a significant decrease in port availability mostly driven by connectivity demands of latency sensitive Members that seek to maintain multiple 10Gb ULL connections on every switch in the network. Operating two separate national securities exchanges on a single shared network provided certain benefits, such as streamlined connectivity to multiple exchanges, and simplified exchange infrastructure. However, doing so was no longer sustainable due to ever-increasing capacity constraints and current system limitations. The network is not an unlimited resource. As described more fully in the proposal to bifurcate the 10Gb ULL network,113 the connectivity needs of Members and market participants has increased every year since the launch of MIAX Pearl Options and the operations of the Exchange and MIAX on a single shared 10Gb ULL network is no longer feasible. This required constant System expansion to meet Member demand for additional ports and 10Gb ULL connections has resulted in limited available System headroom, which eventually became 24, 2017) (establishing MIAX Pearl Options Fee Schedule and establishing that the MENI can also be configured to provide network connectivity to the trading platforms, market data systems, test systems, and disaster recovery facility of the MIAX Pearl Options’ affiliate, MIAX, via a single, shared connection). 113 See Securities Exchange Act Release Nos. 96553 (December 20, 2022), 87 FR 79379 (December 27, 2022) (SR–PEARL–2022–60); 96545 (December 20, 2022) 87 FR 79393 (December 27, 2022) (SR– MIAX–2022–48). VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 operationally problematic for both the Exchange and its customers. As stated above, the shared network is not an unlimited resource and its expansion was constrained by MIAX’s and MIAX Pearl Options’ ability to provide fair and equitable access to all market participants of both markets. Due to the ever-increasing connectivity demands, the Exchange found it necessary to bifurcate 10Gb ULL connectivity to the Exchange’s and MIAX’s Systems and networks to be able to continue to meet ongoing and future 10Gb ULL connectivity and access demands.114 Unlike the switches that provide 1Gb connectivity, the availability for additional 10Gb ULL connections on each switch had significantly decreased. This was mostly driven by the connectivity demands of latency sensitive Members (e.g., Market Makers and liquidity removers) that sought to maintain connectivity across multiple 10Gb ULL switches. Based on the Exchange’s experience, such Members did not typically use a shared 10Gb ULL connection to reach both the Exchange and MIAX due to related latency concerns. Instead, those Members maintain dedicated separate 10Gb ULL connections for the Exchange and separate dedicated 10Gb ULL connections for MIAX. This resulted in a much higher 10Gb ULL usage per switch by those Members on the shared 10Gb ULL network than would otherwise be needed if the Exchange and MIAX had their own dedicated 10Gb ULL networks. Separation of the Exchange and MIAX 10Gb ULL networks naturally lends itself to reduced 10Gb ULL port consumption on each switch and, therefore, increased 10Gb ULL port availability for current Members and new Members. Prior to bifurcating the 10Gb ULL network, the Exchange and MIAX continued to add switches to meet ongoing demand for 10Gb ULL connectivity. That was no longer sustainable because simply adding additional switches to expand the current shared 10Gb ULL network would not adequately alleviate the issue of limited available port connectivity. While it would have resulted in a gain in overall port availability, the existing switches on the shared 10Gb ULL network in use would have continued to suffer from lack of port headroom given many latency sensitive Members’ needs for a presence on each switch to reach 114 Currently, the Exchange maintains sufficient headroom to meet ongoing and future requests for 1Gb connectivity. Therefore, the Exchange did not propose to alter 1Gb connectivity and continues to provide 1Gb connectivity over a shared network. PO 00000 Frm 00183 Fmt 4703 Sfmt 4703 both the Exchange and MIAX. This was because those latency sensitive Members sought to have a presence on each switch to maximize the probability of experiencing the best network performance. Those Members routinely decide to rebalance orders and/or messages over their various connections to ensure each connection is operating with maximum efficiency. Simply adding switches to the extranet would not have resolved the port availability needs on the shared 10Gb ULL network since many of the latency sensitive Members were unwilling to relocate their connections to a new switch due to the potential detrimental performance impact. As such, the impact of adding new switches and rebalancing ports would not have been effective or responsive to customer needs. The Exchange has found that ongoing and continued rebalancing once additional switches are added has had, and would have continued to have had, a diminishing return on increasing available 10Gb ULL connectivity. Based on its experience and expertise, the Exchange found the most practical way to increase connectivity availability on its switches was to bifurcate the existing 10Gb ULL networks for the Exchange and MIAX by migrating the exchanges’ connections from the shared network onto their own set of switches. Such changes accordingly necessitated a review of the Exchange’s previous 10Gb ULL connectivity fees and related costs. The proposed fees necessary to allow the Exchange to cover ongoing costs related to providing and maintaining such connectivity, described more fully below. The ever increasing connectivity demands that necessitated this change further support that the proposed fees are reasonable because this demand reflects that Members and non-Members believe they are getting value from the 10Gb ULL connections they purchase. The Exchange announced on August 12, 2022 the planned network change and January 23, 2023 implementation date to provide market participants adequate time to prepare.115 Since August 12, 2022, the Exchange has worked with current 10Gb ULL subscribers to address their connectivity needs ahead of the January 23, 2023 date. Based on those interactions and subscriber feedback, the Exchange experienced a minimal net increase of six (6) overall 10Gb ULL connectivity subscriptions across MIAX Pearl Options and MIAX. This immaterial increase in overall connections reflects a minimal fee impact for all types of subscribers and reflects that subscribers 115 See E:\FR\FM\25AUN1.SGM supra note 9. 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices elected to reallocate existing 10Gb ULL connectivity directly to the Exchange or MIAX, or chose to decrease or cease connectivity as a result of the change. Should the Commission Staff disapprove such fees, it would effectively dictate how an exchange manages its technology and would hamper the Exchange’s ability to continue to invest in and fund access services in a manner that allows it to meet existing and anticipated access demands of market participants. Disapproval could also have the adverse effect of discouraging an exchange from optimizing its operations and deploying innovative technology to the benefit of market participants if it believes the Commission would later prevent that exchange from covering its costs and monetizing its operational enhancements, thus adversely impacting competition. Also, as noted above, the economic consequences of not being able to better establish fee parity with other exchanges for nontransaction fees hampers the Exchange’s ability to compete on transaction fees. ddrumheller on DSK120RN23PROD with NOTICES1 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,116 and Rule 19b–4 thereunder,117 with respect to the types of information exchanges should provide when filing fee changes, and 116 15 117 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 section 6(b) of the Act,118 which requires, among other things, that exchange fees be reasonable and equitably allocated,119 not designed to permit unfair discrimination,120 and that they not impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act.121 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.122 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 $11,567,509 (or approximately $963,959 per month, rounded to the nearest dollar when dividing the annual cost by 12 months) and its aggregate annual costs for providing Full Service MEO Ports at $1,644,132 (or approximately $137,012 per month, rounded to the nearest dollar when dividing the annual cost by 12 months). In order to cover the aggregate costs of providing connectivity to its users (both Members and nonMembers 123) going forward and to make a modest profit, as described below, the Exchange proposes to modify its Fee Schedule to charge a fee of $13,500 per month for each physical 10Gb ULL connection and to remove language providing for a shared 10Gb ULL network between the Exchange and MIAX. The Exchange also proposes to modify its Fee Schedule to charge tiered rates for Full Service MEO Ports (Bulk) depending on the number of classes assigned or the percentage of national ADV, which is in line with how the Exchange’s affiliates, MIAX and MIAX Emerald, assess fees for their comparable MEI Ports. In 2019, the Exchange completed a study of its aggregate costs to produce 118 15 U.S.C. 78f(b). U.S.C. 78f(b)(4). 120 15 U.S.C. 78f(b)(5). 121 15 U.S.C. 78f(b)(8). 122 See Staff Guidance, supra note 27. 123 Types of market participants that obtain connectivity services from the Exchange but are not Members include service bureaus and extranets. Service bureaus offer technology-based services to other companies for a fee, including order entry services, and thus, may access application sessions on behalf of one or more Members. Extranets offer physical connectivity services to Members and nonMembers. 119 15 PO 00000 Frm 00184 Fmt 4703 Sfmt 4703 58417 market data and connectivity (the ‘‘Cost Analysis’’).124 The Cost Analysis required a detailed analysis of the Exchange’s aggregate baseline costs, including a determination and allocation of costs for core services provided by the Exchange—transaction execution, market data, membership services, physical connectivity, and port access (which provide order entry, cancellation and modification functionality, risk functionality, the ability to receive drop copies, and other functionality). The Exchange separately divided its costs between those costs necessary to deliver each of these core services, including infrastructure, software, human resources (i.e., personnel), and certain general and administrative expenses (‘‘cost drivers’’). As an initial step, the Exchange determined the total cost for the Exchange and the affiliated markets 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,125 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 124 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. 125 For example, MIAX Pearl Options maintains 12 matching engines, MIAX Pearl Equities maintains 24 matching engines, MIAX maintains 24 matching engines and MIAX Emerald maintains 12 matching engines. E:\FR\FM\25AUN1.SGM 25AUN1 ddrumheller on DSK120RN23PROD with NOTICES1 58418 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices 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 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 (60.6% of total expense amount allocated to 10Gb ULL connectivity), with smaller allocations to Full Service MEO Ports (3.4%), and the remainder to the provision of other connectivity, other ports, transaction execution, membership services and market data services (36%). 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 VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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. PO 00000 Frm 00185 Fmt 4703 Sfmt 4703 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 Full Service MEO Port services, is $1,106,971 (utilizing the rounded numbers when dividing the annual cost for 10Gb ULL connectivity and annual cost for Full Service MEO Ports by 12 months, then adding both numbers together), as further detailed below. Lastly, the Exchange notes that, based on: (i) the total expense amounts contained in this filing (which are 2023 projected expenses), and (ii) the total expense amounts contained in the related MIAX Pearl Equities filing (also 2023 projected expenses), MIAX PEARL, LLC’s total costs have increased at a greater rate over the last three years than the total costs of MIAX PEARL, LLC’s affiliated exchanges, MIAX and MIAX Emerald. This is also reflected in the total costs reported in MIAX PEARL, LLC’s Form 1 filings over the last three years, when comparing MIAX PEARL, LLC to MIAX PEARL, LLC’s affiliated exchanges, MIAX and MIAX Emerald. This is primarily because that MIAX PEARL, LLC operates two markets, one for options and one for equities, while MIAX and MIAX Emerald each operate only one market. This is also due to higher current expense for MIAX PEARL, LLC for 2022 and 2023, due to a hardware refresh (i.e., replacing old hardware with new equipment) for MIAX Pearl Options, as well as higher costs associated with MIAX Pearl Equities due to greater development efforts to grow that newer marketplace.126 The Exchange confirms 126 See, e.g., Securities Exchange Act Release Nos. 94301 (February 23, 2022), 87 FR 11739 (March 2, 2022) (SR–PEARL–2022–06) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2617(b) To Adopt Two New Routing Options, and To Make Related Changes and E:\FR\FM\25AUN1.SGM 25AUN1 58419 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices that there is no double counting of expenses between the options and equities platform of MIAX Pearl; the greater expense amounts of the MIAX PEARL, LLC (relative to its affiliated exchanges, MIAX and MIAX Emerald) is solely attributed to the unique factors of MIAX Pearl discussed above. 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 26.9% of its overall Human Resources cost to offering physical connectivity). Allocated annual cost k Cost drivers Allocated monthly cost l % 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 ........................................................................................................ $3,675,098 70,163 322,388 739,983 959,157 1,885,969 3,914,751 $306,258 5,847 26,866 61,665 79,930 157,164 326,229 26.3 60.6 73.3 60.6 58.6 58.2 49.2 Total ...................................................................................................................................... 11,567,509 963,959 40.5 k The Annual Cost includes figures rounded to the nearest dollar. l 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. 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. 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). As described more fully above, the Exchange’s parent company allocates costs to the Exchange and its affiliated markets and then a portion of the Human Resources costs allocated to the Exchange is then allocated to connectivity. From that portion allocated to the Exchange that applied to connectivity, the Exchange then allocated a weighted average of 42.9% of each employee’s time from the above group. 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). 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 17%). 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 Clarifications to Rules 2614(a)(2)(B) and 2617(b)(2)); 94851 (May 4, 2022), 87 FR 28077 (May 10, 2022) (SR–PEARL–2022–15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Exchange Rule 532, Order Price Protection Mechanisms and Risk Controls); 95298 (July 15, 2022), 87 FR 43579 (July 21, 2022) (SR– PEARL–2022–29) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC To Amend the Route to Primary Auction Routing Option Under Exchange Rule 2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR 55866 (September 12, 2022) (SR–PEARL–2022–34) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 2614, Orders and Order Instructions, To Adopt the Primary Peg Order Type); 96205 (November 1, 2022), 87 FR 67080 (November 7, 2022) (SR– PEARL–2022–43) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders and Order Instructions and Rule 2618, Risk Settings and Trading Risk Metrics To Enhance Existing Risk Controls); 96905 (February 13, 2023), 88 FR 10391 (February 17, 2023) (SR– PEARL–2023–03) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 2618 To Add Optional Risk Control Settings); 97236 (March 31, 2023), 88 FR 20597 (April 6, 2023) (SR–PEARL–2023–15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rules 2617 and 2626 Regarding Retail Orders Routed Pursuant to the Route to Primary Auction Routing Option). 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 drivers for the Exchange’s affiliated markets in their similar proposed fee changes for connectivity and ports. This is because MIAX Pearl Options’ cost allocation methodology utilizes the actual projected costs of MIAX Pearl Options (which are specific to MIAX Pearl Options, and are independent of the costs projected and utilized by MIAX Pearl Options’ 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. MIAX Pearl Options provides additional explanation below (including the reason for the deviation) for the significant differences. ddrumheller on DSK120RN23PROD with NOTICES1 Human Resources VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 PO 00000 Frm 00186 Fmt 4703 Sfmt 4703 E:\FR\FM\25AUN1.SGM 25AUN1 58420 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 were reasonable based on an understanding of the percentage of time such employees devote to those tasks. 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. Again, the Exchange allocated 42.9% of each of their employee’s time assigned to the Exchange for 10Gb ULL connectivity, as stated above. Employees from these departments perform numerous functions to support 10Gb ULL connectivity, such as the installation, relocation, configuration, and maintenance of 10Gb ULL connections and the hardware they access. This hardware includes servers, routers, switches, firewalls, and monitoring devices. These employees also perform software upgrades, vulnerability assessments, remediation and patch installs, equipment configuration and hardening, as well as performance and capacity management. These employees also engage in research and development analysis for equipment and software supporting 10Gb ULL connectivity and design, and support the development and on-going maintenance of internally-developed applications as well as data capture and analysis, and Member and internal Exchange reports related to network and system performance. The above list of employee functions is not exhaustive of all the functions performed by Exchange employees to support 10Gb ULL connectivity, but illustrates the breath of functions those employees perform in support of the above cost and time allocations. Lastly, the Exchange notes that senior level executives’ time was only allocated to the 10Gb ULL connectivity related 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 VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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 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 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. 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. 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 PO 00000 Frm 00187 Fmt 4703 Sfmt 4703 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 an amount of such costs to 10Gb ULL connectivity. The Exchange relies on 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 MIAX Emerald, 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 MIAX Emerald 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) MIAX Emerald 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 MIAX Emerald allocated to the Internet Services and External Market Data cost driver is greater than the Exchange and its other affiliated E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices 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 (60.6%) to physical 10Gb ULL connectivity because the third-party data centers and the Exchange’s physical equipment contained therein is the most direct cost in providing physical access to the Exchange. In other words, for the Exchange to operate in a dedicated space with connectivity 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. ddrumheller on DSK120RN23PROD with NOTICES1 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.127 The 127 This expense may be greater than the Exchange’s affiliated markets, specifically MIAX and MIAX Emerald, because, unlike the MIAX and MIAX Emerald, MIAX Pearl (the options and equities markets) maintains an additional gateway to accommodate its Members’ and Equity Members’ access and connectivity needs. This added gateway contributes to the difference in allocations between MIAX Pearl, MIAX and MIAX Emerald. This expense also differs in dollar amount among the MIAX Pearl (options and equities markets), MIAX, and MIAX Emerald because each market may VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 Exchange notes that this allocation is greater than MIAX and MIAX Emerald options exchanges by a significant amount as MIAX Pearl Options allocated 58.6% of its Hardware and Software Maintenance and License expense towards 10Gb ULL connectivity, while MIAX and MIAX Emerald allocated 49.8% and 50.9%, respectively, to the same category of expense. This is because MIAX Pearl Options is in the process of replacing and upgrading various hardware and software used to operate its options trading platform in order to maintain premium network performance. At the time of this filing, the Exchange is undergoing a major hardware refresh, replacing older hardware with new hardware. This hardware includes servers, network switches, cables, optics, protocol data units, and cabinets, to maintain a state-of-the-art technology platform. Because of the timing of the hardware refresh with the timing of this filing, the Exchange has materially higher expense than its affiliates. Also, MIAX Pearl Equities allocated a higher percentage of the same category of expense (58%) towards its Hardware and Software Maintenance and License expense for 10Gb ULL connectivity, which MIAX Pearl Equities explains in its own proposal to amend its 10Gb ULL connectivity fees. 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 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 58.2% of 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. PO 00000 Frm 00188 Fmt 4703 Sfmt 4703 58421 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 less than that of MIAX by approximately $35,000 per month due to two factors: first, MIAX has undergone a technology refresh since the time MIAX Pearl Options launched in 2017, leading to it having more hardware that software that is subject to depreciation. Second, MIAX maintains 24 matching engines while MIAX Pearl Options maintains only 12 matching engines. This also results in more of MIAX’s hardware and software being subject to depreciation than MIAX Pearl Options’ 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, as with other exchange products and services, a portion of general shared expenses was allocated to overall physical connectivity costs. These general shared costs are integral to exchange operations, including its ability to provide physical connectivity. Costs included in general shared expenses include 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. Similarly, the cost of paying directors to serve on the Exchange’s Board of Directors is also included in the Exchange’s general shared expense cost driver.128 These general shared expenses are incurred by the Exchange’s parent company, MIH, as 128 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. E:\FR\FM\25AUN1.SGM 25AUN1 58422 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices a direct result of operating the Exchange and its affiliated markets. The Exchange employed a process to determine a reasonable percentage to allocate general shared expenses to 10Gb ULL connectivity pursuant to its multi-layered allocation process. First, general expenses were allocated among the Exchange and affiliated markets as described above. Then, the general shared expense assigned to the Exchange was allocated across core services of the Exchange, including connectivity. Then, these costs were further allocated to sub-categories within the final categories, i.e., 10Gb ULL connectivity as a sub-category of connectivity. In determining the percentage of general shared expenses allocated to connectivity that ultimately apply to 10Gb ULL connectivity, the Exchange looked at the percentage allocations of each of the cost drivers and determined a reasonable allocation percentage. The Exchange also held meetings with senior management, department heads, and the Finance Team to determine the proper amount of the shared general expense to allocate to 10Gb ULL connectivity. The Exchange, therefore, believes it is reasonable to assign an allocation, in the range of allocations for other cost drivers, while continuing to ensure that this expense is only allocated once. Again, the general shared expenses are incurred by the Exchange’s parent company as a result of operating the Exchange and its affiliated markets and it is therefore reasonable to allocate a percentage of those expenses to the Exchange and ultimately to specific product offerings such as 10Gb ULL connectivity. The Exchange notes that the 49.2% allocation of general shared expenses for physical 10Gb ULL connectivity is higher than that allocated to general shared expenses for Full Service MEO Ports. This is based on its allocation methodology that weighted costs attributable to each core service. While physical connectivity has several areas where certain tangible costs are heavily weighted towards providing such service (e.g., Data Center, as described above), Full Service MEO Ports do not require as many broad or indirect resources as other core services. * * * * * Approximate Cost per 10Gb Connection per Month After determining the approximate allocated monthly cost related to 10Gb Costs Related To Offering Full Service MEO Ports The following chart details the individual line-item costs considered by the Exchange to be related to offering Full Service MEO Ports as well as the percentage of the Exchange’s overall costs such costs represent for such area (e.g., as set forth below, the Exchange allocated approximately 8.3% of its overall Human Resources cost to offering Full Service MEO Ports). Allocated annual cost m Cost drivers Allocated monthly cost n % 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 ........................................................................................................ $1,159,831 1,589 6,033 41,881 22,438 127,986 284,374 $96,653 132 503 3,490 1,870 10,666 23,698 8.3 1.4 1.4 3.4 1.4 3.9 3.6 Total ...................................................................................................................................... 1,644,132 137,012 5.8 m See n See ddrumheller on DSK120RN23PROD with NOTICES1 connectivity, the total monthly cost for 10Gb ULL connectivity of $963,959 was divided by the number of physical 10Gb ULL connections the Exchange maintained at the time that proposed pricing was determined (108), to arrive at a cost of approximately $8,925 per month, per physical 10Gb ULL connection. 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. * * * * * supra note k (describing rounding of Annual Costs). supra note l (describing rounding of Monthly Costs based on Annual Costs). Below are additional details regarding each of the line-item costs considered by the Exchange to be related to offering Full Service MEO 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 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 VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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 With respect to Full Service MEO Ports, the Exchange calculated Human Resources cost by taking an allocation of employee time for employees whose functions include providing Full Service MEO Ports and maintaining performance thereof (including a broader range of employees such as technical operations personnel, market operations personnel, and software engineering personnel) as well as a limited subset of personnel with ancillary functions related to PO 00000 Frm 00189 Fmt 4703 Sfmt 4703 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 Full Service MEO 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 Full Service MEO Ports and maintaining performance thereof. This includes personnel from the following Exchange departments that are predominately involved in providing Full Service MEO Ports: Business Systems Development, Trading E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices Systems Development, Systems Operations and Network Monitoring, Network and Data Center Operations, Listings, Trading Operations, and Project Management. The Exchange notes that senior level executives were allocated Human Resources costs to the extent they are involved in overseeing tasks specifically related to providing Full Service MEO Ports. 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 Full Service MEO 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. 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. ddrumheller on DSK120RN23PROD with NOTICES1 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 Full Service MEO 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 Full Service MEO 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).129 Thus, since market data from other exchanges is consumed at the Exchange’s Full Service MEO 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 Full Service MEO Ports. 129 The Exchange notes that MEMX separately allocated 7.5% of its external market data costs to providing physical connectivity. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 The Exchange notes that the allocation for the Internet Services and External Market Data cost driver is lower than that of its affiliate, MIAX, as MIAX allocated 7.2% 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 May 2023, MIAX Market Makers utilized 1,770 Limited Service MEI ports and MIAX Emerald Market Makers utilized 1,017 Limited Service MEI Ports. When compared to Full Service Port (Bulk and Single) usage, for May 2023, MIAX Pearl Options Members utilized only 384 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 Full Service MEO 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 Full Service MEO 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 less than its affiliate, MIAX, as MIAX allocated 7.2% 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 May 2023, MIAX PO 00000 Frm 00190 Fmt 4703 Sfmt 4703 58423 Market Makers utilized 1,770 Limited Service MEI ports and MIAX Emerald Market Makers utilized 1,017 Limited Service MEI Ports. When compared to Full Service Port (Bulk and Single) usage, for May 2023, MIAX Pearl Options Members utilized only 384 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 of expense than MIAX Pearl Options, which has a lower port count. Depreciation The vast majority of the software the Exchange uses to provide Full Service MEO 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 Full Service MEO 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, which also includes assets used for testing and monitoring of order entry infrastructure, were valued at cost, depreciated or leased over periods ranging from three to five years. Thus, the depreciation cost primarily relates to servers necessary to operate the Exchange, some of which is owned by the Exchange and some of which is leased by the Exchange in order to allow efficient periodic technology refreshes. The Exchange allocated 3.9% of all depreciation costs to providing Full Service MEO Ports. The Exchange allocated depreciation costs for depreciated software necessary to operate the Exchange to Full Service MEO Ports because such software is related to the provision of Full Service MEO 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 Full Service MEO 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 E:\FR\FM\25AUN1.SGM 25AUN1 58424 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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 percentage it allocated to the depreciation cost driver for Full Service MEO Ports and the percentage its affiliate, MIAX, allocated to the depreciation cost driver for MIAX’s Limited Service MEI Ports, differ by only 2.4%. However, MIAX’s approximate dollar amount is greater than that of MIAX Pearl Options by approximately $9,000 per month. This is due to two primary factors. First, MIAX has under gone a technology refresh since the time MIAX Pearl Options launched in 2017, leading to it having more hardware that software that is subject to depreciation. Second, MIAX maintains 24 matching engines while MIAX Pearl Options maintains only 12 matching engines. This also results in more of MIAX’s hardware and software being subject to depreciation than MIAX Pearl Options’ 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 portion of general shared expenses was allocated to overall Full Service MEO Ports costs as without these general shared costs the Exchange would not be able to operate in the manner that it does and provide application sessions. The costs included in general shared expenses include general expenses of the Exchange, including office space and office expenses (e.g., occupancy and overhead expenses), utilities, recruiting and training, marketing and advertising costs, professional fees for legal, tax and accounting services (including external and internal audit expenses), and telecommunications costs. The Exchange again notes that the cost of paying directors to serve on its Board of Directors is included in the calculation of Allocated Shared Expenses, and thus a portion of such overall cost amounting to less than 4.0% of the overall cost for directors was allocated to providing Full Service MEO Ports. The Exchange notes that the 3.6% allocation of general shared expenses for Full Service MEO Ports is lower than that allocated to general shared expenses for physical connectivity based on its allocation methodology that weighted costs attributable to each Core Service based on an understanding of each area. While Full Service MEO Ports have several VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 areas where certain tangible costs are heavily weighted towards providing such service (e.g., Data Centers, as described above), 10Gb ULL connectivity requires a broader level of support from Exchange personnel in different areas, which in turn leads to a broader general level of cost to the Exchange. Lastly, the Exchange notes that this allocation is less than its affiliate, MIAX, as MIAX allocated 9.8% 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 May 2023, MIAX Market Makers utilized 1,770 Limited Service MEI Ports and MIAX Emerald Market Makers utilized 1,017 Limited Service MEI ports. When compared to Full Service Port (Bulk and Single) usage, for May 2023, MIAX Pearl Options Members utilized only 384 Full Service MEO Ports (Bulk and Single), far fewer than number of Limited Service MEI Ports utilized by Market Makers on MIAX, 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. * * * * * Approximate Cost per Full Service MEO Port per Month Based on May 2023 data, the total monthly cost allocated to Full Service MEO Ports of $137,012 was divided by the number of chargeable Full Service MEO Ports the Exchange maintained at the time that proposed pricing was determined (25 total; 25 Full Service MEO Port, Bulk, and 0 Full Service MEO Port, Single), to arrive at a cost of approximately $5,480 per month, per charged Full Service MEO Port. * * * * * Cost Analysis—Additional Discussion In conducting its Cost Analysis, the Exchange did not allocate any of its expenses in full to any core services (including physical connectivity or Full Service MEO Ports) and did not doublecount any expenses. Instead, as described above, the Exchange allocated applicable cost drivers across its core services and used the same Cost Analysis to form the basis of this PO 00000 Frm 00191 Fmt 4703 Sfmt 4703 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 (42.9%) given their focus on functions necessary to provide physical connections. The salaries of those same personnel were allocated only 12.3% to Full Service MEO Ports and the remaining 44.8% was allocated to 1Gb connectivity, other port services, transaction services, membership services and market data. The Exchange did not allocate any other Human Resources expense for providing physical connections to any other employee group, outside of a smaller allocation of 16.9% for 10Gb ULL connectivity or 17.3% for the entire network, of the cost associated with certain specified personnel who work closely with and support network infrastructure personnel. In contrast, the Exchange allocated much smaller percentages of costs (6.0% or less) across a wider range of personnel groups in order to allocate Human Resources costs to providing Full Service MEO Ports. This is because a much wider range of personnel are involved in functions necessary to offer, monitor and maintain Full Service MEO Ports but the tasks necessary to do so are not a primary or full-time function. In total, the Exchange allocated 26.9% of its personnel costs to providing 10Gb ULL and 1Gb ULL connectivity and 8.3% of its personnel costs to providing Full Service MEO Ports, for a total allocation of 35.2% Human Resources expense to provide these specific connectivity and port services. In turn, the Exchange allocated the remaining 64.8% of its Human Resources expense to membership services, transaction services, other port services and market data. Thus, again, the Exchange’s allocations of cost across core services were based on real costs of operating the Exchange and were not double-counted across the core services or their associated revenue streams. As another example, the Exchange allocated depreciation expense to all core services, including physical connections and Full Service MEO Ports, but in different amounts. The Exchange believes it is reasonable to allocate the identified portion of such expense because such expense includes E:\FR\FM\25AUN1.SGM 25AUN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices 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, the Exchange did not allocate all of the depreciation and amortization expense toward the cost of providing connectivity services, but instead allocated approximately 62.1% of the Exchange’s overall depreciation and amortization expense to connectivity services (58.2% attributed to 10Gb ULL physical connections and 3.9% to Full Service MEO Ports). The Exchange allocated the remaining depreciation and amortization expense (approximately 37.9%) toward the cost of providing transaction services, membership services, other port services and market data. The Exchange notes that its revenue estimates are based on projections across all potential revenue streams and will only be realized to the extent such revenue streams actually produce the revenue estimated. The Exchange does not yet know whether such expectations will be realized. For instance, in order to generate the revenue expected from connectivity, the Exchange will have to be successful in retaining existing clients that wish to maintain physical connectivity and/or Full Service MEO Ports or in obtaining new clients that will purchase such services. Similarly, the Exchange will have to be successful in retaining a positive net capture on transaction fees in order to realize the anticipated revenue from transaction pricing. The Exchange notes that the Cost Analysis is based on the Exchange’s 2023 fiscal year of operations and projections. 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 VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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 would propose to increase fees in the event that revenues fail to cover its costs and a reasonable mark-up, or decrease fees in the event that revenue or the mark-up materially exceeds our current projections. In the event that the Exchange determines to propose a fee change, the results of a timely review, including an updated cost estimate, will be included in the rule filing proposing the fee change. More generally, we believe that it is appropriate for an exchange to refresh and update information about its relevant costs and revenues in seeking any future changes to fees, and the Exchange commits to do so. Projected Revenue 130 The proposed fees will allow the Exchange to cover certain costs incurred by the Exchange associated with providing and maintaining necessary hardware and other network infrastructure as well as network monitoring and support services; without such hardware, infrastructure, monitoring and support the Exchange would be unable to provide the connectivity 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 130 For purposes of calculating revenue for 10Gb ULL connectivity, the Exchange used revenues for February 2023, the first full month for which it provided dedicated 10Gb ULL connectivity to MIAX Pearl Options and ceased operating a shared 10Gb ULL network with MIAX. PO 00000 Frm 00192 Fmt 4703 Sfmt 4703 58425 Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those costs by amending fees for connectivity services. Subscribers, particularly those of 10Gb ULL connectivity, expect the Exchange to provide this level of support to connectivity so they continue to receive the performance they expect. This differentiates the Exchange from its competitors. As detailed above, the Exchange has five primary sources of revenue that it can potentially use to fund its operations: transaction fees, fees for connectivity services, membership and regulatory fees, and market data fees. Accordingly, the Exchange must cover its expenses from these five primary sources of revenue. The Exchange’s Cost Analysis estimates the annual cost to provide 10Gb ULL connectivity services will equal $11,567,509. Based on current 10Gb ULL connectivity services usage, the Exchange would generate annual revenue of approximately $17,496,000. The Exchange believes this represents a modest profit of 34% when compared to the cost of providing 10Gb ULL connectivity services, which could decrease over time.131 The Exchange’s Cost Analysis estimates the annual cost to provide Full Service MEO Port services will equal $1,644,132. Based on current Full Service MEO Port services usage, the Exchange would generate annual revenue of approximately $1,644,000. The Exchange believes this would result in a small negative margin after calculating the cost of providing Full Service MEO Port services, which could decrease further over time.132 Based on the above discussion, 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 excessive 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 Full Service MEO Port services versus the total projected revenue of the Exchange associated with network 10Gb ULL connectivity and Full Service MEO Port services. The Exchange also notes that this the resultant profit margin differs slightly 131 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 August 4, 2023). 132 Id. E:\FR\FM\25AUN1.SGM 25AUN1 58426 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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 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).133 NYSE American charges even higher fees for its comparable 10GB LX LCN connection than the Exchange’s proposed fees ($13,500 for the Exchange vs. $22,000 per month for NYSE American).134 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 2017.135 This is 133 See NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other Services and NASDAQ Rules, General 8: Connectivity, Section 1. CoLocation Services. 134 See NYSE American Options Fee Schedule, Section V.A. Port Fees and Section V.B. CoLocation Fees. 135 The Exchange has incurred a cumulative loss of $83 million since its inception in 2017 through full year 2022. See Exchange’s Form 1/A, Application for Registration or Exemption from Registration as a National Securities Exchange, filed June 26, 2023, available at https://www.sec.gov/ Archives/edgar/vprr/2300/23007743.pdf. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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 it should now be penalized for seeking to raise its fees as it now needs to upgrade 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 Full Service MEO Ports, the extent to which the product drives the Exchange’s overall costs and the relative value of the product, as well as the Exchange’s objective to make access to its Systems broadly available to market participants. The Exchange also believes the proposed fees are reasonable because they are designed to generate annual revenue to recoup the Exchange’s costs of providing dedicated 10Gb ULL connectivity and Full Service MEO Ports. The Exchange notes that its revenue estimate is based on projections and will only be realized to the extent customer activity 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 Full Service MEO Ports, the Exchange will have to be successful in retaining existing clients that wish to utilize 10Gb ULL connectivity and Full Service MEO Ports and/or obtaining new clients that will purchase such access. To the extent the Exchange is successful in encouraging new clients to utilize 10Gb ULL connectivity and Full Service MEO Ports, the Exchange does not believe it should be penalized for such success. 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 PO 00000 Frm 00193 Fmt 4703 Sfmt 4703 information should be used solely to confirm that an Exchange is not 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 E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices 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. ddrumheller on DSK120RN23PROD with NOTICES1 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 VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 Act.136 Thus, as the number of messages an entity increases, certain other costs incurred by the Exchange that are correlated to, though not directly affected by, connection costs (e.g., storage costs, surveillance costs, service expenses) also increase. Given this difference in network utilization rate, the Exchange believes that it is reasonable, equitable, and not unfairly discriminatory that the 10Gb ULL users pay for the vast majority of the shared network resources from which all market participants’ benefit. Full Service MEO Ports The tiered pricing structure for Full Service MEO Ports has been in effect since 2018.137 The Exchange now proposes a pricing structure that is used by the Exchange’s affiliates, MIAX and MIAX Emerald, except with lower pricing for each tier for Full Service MEO Ports (Bulk) and a flat fee for Full Service MEO Ports (Single). Members that are frequently in the highest tier for Full Service MEO Ports consume the most bandwidth and resources of the network. Specifically, as noted above for 10Gb ULL connectivity, Market Makers who reach the highest tier for Full Service MEO Ports (Bulk) account for greater than 84% of ADV on the Exchange, while Market Makers that are typically in the lowest Tier for Full Service MEO Ports, account for less than 14% of ADV on the Exchange. The remaining 1% is accounted for by Market Makers who are frequently in the middle Tier for Full Service MEO Ports (Bulk). To achieve a consistent, premium network performance, the Exchange must build out and maintain a network that has the capacity to handle the message rate requirements of its most heavy network consumers 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 136 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). 137 See Securities Exchange Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) (SR–PEARL–2018–07). PO 00000 Frm 00194 Fmt 4703 Sfmt 4703 58427 Exchange Act.138 Thus, as the number of connections a Market Maker has increases, the related pull on Exchange resources also increases. The Exchange sought to design the proposed tieredpricing structure to set the amount of the fees to relate to the number of connections a firm purchases. The more connections purchased by a Market Maker likely results in greater expenditure of Exchange resources and increased cost to the Exchange. The Exchange further believes that the proposed fees are reasonable, equitably allocated and not unfairly discriminatory because, for the flat fee, the Exchange provides each Member two (2) Full Service MEO Ports for each matching engine to which that Member is connected. Unlike other options exchanges that provide similar port functionality and charge fees on a per port basis,139 the Exchange offers Full Service MEO Ports as a package and provides Members with the option to receive up to two Full Service MEO Ports per matching engine to which it connects. The Exchange currently has twelve (12) matching engines, which means Members may receive up to twenty-four (24) Full Service MEO Ports for a single monthly fee, that can vary based on certain volume percentages. The Exchange currently assesses Members a fee of $5,000 per month in the highest Full Service MEO Port— Bulk Tier, regardless of the number of Full Service MEO Ports allocated to the Member. Assuming a Member connects to all twelve (12) matching engines during a month, with two Full Service MEO Ports per matching engine, this results in a cost of $208.33 per Full Service MEO Port—Bulk ($5,000 divided by 24) for the month. This fee has been unchanged since the Exchange adopted Full Service MEO Port fees in 2018.140 Members will continue to receive two (2) Full Service MEO Ports to each matching engine to which they are connected for the single flat monthly fee. Assuming a Member connects to all twelve (12) matching engines during the month, and achieves the highest Tier for that month, with two Full Service MEO Ports (Bulk) per matching engine, this would result in a cost of $500 per Full Service MEO Port ($12,000 divided by 24). 138 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). 139 See supra notes 101 to 109 and accompanying text. 140 See Securities Exchange Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) (SR–PEARL–2018–07). E:\FR\FM\25AUN1.SGM 25AUN1 58428 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices 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. ddrumheller on DSK120RN23PROD with NOTICES1 Intra-Market Competition The Exchange believes the proposed fees will not result in any burden on intra-market competition that is not necessary or appropriate in furtherance of the purposes of the Act because the proposed fees will allow the Exchange to recoup some of its costs in providing 10Gb ULL connectivity and Full Service MEO Ports at below market rates to market participants since the Exchange launched operations. As described above, the Exchange has operated at a cumulative net annual loss since it launched operations in 2017 141 due to providing a low-cost alternative to attract order flow and encourage market participants to experience the high determinism and resiliency of the Exchange’s trading Systems. To do so, the Exchange chose to waive the fees for some non-transaction related services and Exchange products or provide them at a very lower fee, which was not profitable to the Exchange. This resulted in the Exchange forgoing revenue it could have generated from assessing any fees or higher fees. The Exchange could have sought to charge higher fees at the outset, but that could have served to discourage participation on the Exchange. Instead, the Exchange chose to provide a low-cost exchange alternative to the options industry, which resulted in lower initial revenues. Examples of this are 10Gb ULL connectivity and Full Service MEO Ports, for which the Exchange only now seeks to adopt fees at a level similar to or lower than those of other options exchanges. Further, the Exchange does not believe that the proposed fee increase for the 10Gb ULL connection change would place certain market participants at the Exchange at a relative disadvantage compared to other market participants or affect the ability of such market participants to compete. As is the case with the current proposed flat fee, the proposed fee would apply uniformly to all market participants regardless of the number of connections they choose to purchase. The proposed fee does not favor certain categories of market participants in a manner that would impose an undue burden on competition. 141 See supra note 135. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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 Options Market Maker terminated their membership on January 1, 2023 as a direct result of the proposed fee changes.142 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 142 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 90. 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. PO 00000 Frm 00195 Fmt 4703 Sfmt 4703 connectivity services purchased by market participants typically increase based on their additional message traffic and/or the complexity of their operations. The market participants that utilize more connectivity services typically utilize the most bandwidth, and those are the participants that consume the most resources from the network. Accordingly, the proposed fees for connectivity services do not favor certain categories of market participants in a manner that would impose a burden on competition; rather, the allocation of the proposed connectivity fees reflects the network resources consumed by the various size of market participants and the costs to the Exchange of providing such connectivity services. Inter-Market Competition The Exchange also does not believe that the proposed rule change 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. The Exchange also believes that the proposed fees for 10Gb connectivity are appropriate and warranted and would not impose any burden on competition. This is a technology driven change designed to meet customer needs. The proposed fees would assist the Exchange in recovering costs related to providing dedicated 10Gb connectivity to the Exchange while enabling it to continue to meet current and anticipated demands for connectivity by its Members and other market participants. Separating its 10Gb network from MIAX enables the Exchange to better compete with other E:\FR\FM\25AUN1.SGM 25AUN1 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 exchanges by ensuring it can continue to provide adequate connectivity to existing and new Members, which may increase in ability to compete for order flow and deepen its liquidity pool, improving the overall quality of its market. The proposed rates for 10Gb ULL connectivity are structured to enable the Exchange to bifurcate its 10Gb ULL network shared with MIAX so that it can continue to meet current and anticipated connectivity demands of all market participants. Similarly, and also in connection with a technology change, Cboe Exchange, Inc. (‘‘Cboe’’) amended its access and connectivity fees, including port fees.143 Specifically, Cboe adopted certain logical ports to allow for the delivery and/or receipt of trading messages—i.e., orders, accepts, cancels, transactions, etc. Cboe established tiered pricing for BOE and FIX logical ports, tiered pricing for BOE Bulk ports, and flat prices for DROP, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server Ports. Cboe argued in its fee proposal that the proposed pricing more closely aligned its access fees to those of its affiliated exchanges as the affiliated exchanges offer substantially similar connectivity and functionality and are on the same platform that Cboe migrated to.144 Cboe justified its proposal by stating that, ‘‘. . . the Exchange believes substitutable products and services are in fact available to market participants, including, among other things, other options exchanges a market participant may connect to in lieu of the Exchange, indirect connectivity to the Exchange via a third-party reseller of connectivity and/or trading of any options product, including proprietary products, in the Over-the-Counter (OTC) markets.’’ 145 The Exchange concurs with the following statement by Cboe, The rule structure for options exchanges are also fundamentally different from those of equities exchanges. In particular, options market participants are not forced to connect to (and purchase market data from) all options exchanges. For example, there are many order types that are available in the equities markets that are not utilized in the options markets, which relate to mid-point pricing and pegged pricing which require connection to the SIPs and each of the equities exchanges in order to properly execute those orders in compliance with best execution obligations. Additionally, in the options markets, the linkage routing and trade through protection are handled by the 143 See Securities Exchange Act Release No. 90333 (November 4, 2020), 85 FR 71666 (November 10, 2020) (SR–CBOE–2020–105). The Exchange notes that Cboe submitted this filing after the Staff Guidance and contained no cost based justification. 144 Id. at 71676. 145 Id. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 exchanges, not by the individual members. Thus not connecting to an options exchange or disconnecting from an options exchange does not potentially subject a broker-dealer to violate order protection requirements. Gone are the days when the retail brokerage firms (such as Fidelity, Schwab, and eTrade) were members of the options exchanges—they are not members of the Exchange or its affiliates, they do not purchase connectivity to the Exchange, and they do not purchase market data from the Exchange. Accordingly, not only is there not an actual regulatory requirement to connect to every options exchange, the Exchange believes there is also no ‘‘de facto’’ or practical requirement as well, as further evidenced by the recent significant reduction in the number of broker-dealers that are members of all options exchanges.146 The Cboe proposal also referenced the National Market System Plan Governing the Consolidated Audit Trail (‘‘CAT NMS Plan’’),147 wherein the Commission discussed the existence of competition in the marketplace generally, and particularly for exchanges with unique business models. The Commission acknowledged that, even if an exchange were to exit the marketplace due to its proposed feerelated change, it would not significantly impact competition in the market for exchange trading services because these markets are served by multiple competitors.148 Further, the Commission explicitly stated that ‘‘[c]onsequently, demand for these services in the event of the exit of a competitor is likely to be swiftly met by existing competitors.’’ 149 Finally, the Commission recognized that while some exchanges may have a unique business model that is not currently offered by competitors, a competitor could create similar business models if demand were adequate, and if a competitor did not do so, the Commission believes it would be likely that new entrants would do so if the exchange with that unique business model was otherwise profitable.150 Cboe also filed to establish a monthly fee for Certification Logical Ports of $250 per Certification Logical Port.151 146 Id. at 71676. Securities Exchange Act Release No. 86901 (September 9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7–13–19). 148 Id. 149 Id. 150 Id. 151 See Securities Exchange Act Release No. 94512 (March 24, 2002), 87 FR 18425 (March 30, 2022) (SR–Cboe–2022–011). Cboe offers BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server Ports. For each type of the aforementioned logical ports that are used in the production environment, the Exchange also offers corresponding ports which provide Trading Permit Holders and non-TPHs access to the Exchange’s certification environment to test proprietary 147 See PO 00000 Frm 00196 Fmt 4703 Sfmt 4703 58429 Cboe reasoned that purchasing additional Certification Logical Ports, beyond the one Certification Logical Port per logical port type offered in the production environment free of charge, is voluntary and not required in order to participate in the production environment, including live production trading on the Exchange.152 In its statutory basis, Cboe justified the new port fee by stating that it believed the Certification Logical Port fee were reasonable because while such ports were no longer completely free, TPHs and non-TPHs would continue to be entitled to receive free of charge one Certification Logical Port for each type of logical port that is currently offered in the production environment.153 Cboe noted that other exchanges assess similar fees and cited to NASDAQ LLC and MIAX.154 Cboe also noted that the decision to purchase additional ports is optional and no market participant is required or under any regulatory obligation to purchase excess Certification Logical Ports in order to access the Exchange’s certification environment.155 Finally, similar proposals to adopt a Certification Logical Port monthly fee were filed by Cboe BYX Exchange, Inc.,156 BZX,157 and Cboe EDGA Exchange, Inc.158 The Cboe fee proposals described herein were filed subsequent to the D.C. Circuit decision in Susquehanna Int’l Grp., LLC v. SEC, 866 F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject to the same (and current) standard for SEC review and approval as this proposal. In summary, the Exchange requests the Commission apply the same standard of review to this proposal which was applied to the various Cboe and Cboe affiliated markets’ filings with respect to nontransaction fees. If the Commission were to apply a different standard of review to this proposal than it applied to other exchange fee filings it would create a burden on competition such that it would impair the Exchange’s ability to make necessary technology driven systems and applications (i.e., ‘‘Certification Logical Ports’’). 152 See Securities Exchange Act Release No. 94512 (March 24, 2002), 87 FR 18425 (March 30, 2022) (SR–Cboe–2022–011). 153 Id. at 18426. 154 Id. 155 Id. 156 See Securities Exchange Act Release No. 94507 (March 24, 2002), 87 FR 18439 (March 30, 2022) (SR–CboeBYX–2022–004). 157 See Securities Exchange Act Release No. 94511 (March 24, 2002), 87 FR 18411 (March 30, 2022) (SR–CboeBZX–2022–021). 158 See Securities Exchange Act Release No. 94517 (March 25, 2002), 87 FR 18848 (March 31, 2022) (SR–CboeEDGA–2022–004). E:\FR\FM\25AUN1.SGM 25AUN1 58430 Federal Register / Vol. 88, No. 164 / Friday, August 25, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 changes, such as bifurcating its 10Gb ULL network, because it would be unable to monetize or recoup costs related to that change and compete with larger, non-legacy exchanges. * * * * * In conclusion, as discussed thoroughly above, the Exchange regrettably believes that the application of the Revised Review Process and Staff Guidance has adversely affected intermarket competition among legacy and non-legacy exchanges by impeding the ability of non-legacy exchanges to adopt or increase fees for their market data and access services (including connectivity and port products and services) that are on parity or commensurate with fee levels previously established by legacy exchanges. Since the adoption of the Revised Review Process and Staff Guidance, and even more so recently, it has become extraordinarily difficult to adopt or increase fees to generate revenue necessary to invest in systems, provide innovative trading products and solutions, and improve competitive standing to the benefit of non-legacy exchanges’ market participants. Although the Staff Guidance served an important policy goal of improving disclosures and requiring exchanges to justify that their market data and access fee proposals are fair and reasonable, it has also negatively impacted non-legacy exchanges in particular in their efforts to adopt or increase fees that would enable them to more fairly compete with legacy exchanges, despite providing enhanced disclosures and rationale under both competitive and cost basis approaches provided for by the Revised Review Process and Staff Guidance to support their proposed fee changes. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange received one comment letter on the Initial Proposal, one comment letter on the Second Proposal, one comment letter on the Third Proposal, and one comment letter on the Fourth Proposal, all from the same commenter.159 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 159 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, May 24, 2023 and July 24, 2023. VerDate Sep<11>2014 18:23 Aug 24, 2023 Jkt 259001 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 filings. 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,160 and Rule 19b–4(f)(2) 161 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–2023–35 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–SR–PEARL–2023–35. This file number should be included on the subject line if email is used. To help the Commission process and review your 160 15 161 17 PO 00000 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). Frm 00197 Fmt 4703 Sfmt 4703 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–2023–35 and should be submitted on or before September 15, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.162 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–18302 Filed 8–24–23; 8:45 am] BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration # 18086 and # 18087; NEW JERSEY Disaster Number NJ–00075] Administrative Disaster Declaration of a Rural Area for the State of New Jersey U.S. Small Business Administration. ACTION: Notice. AGENCY: This is a notice of an Administrative disaster declaration of a rural area for the State of New Jersey dated 08/18/2023. Incident: Severe Storm and Flooding. Incident Period: 07/14/2023 through 07/15/2023. DATES: Issued on 08/18/2023. Physical Loan Application Deadline Date: 10/17/2023. SUMMARY: 162 17 E:\FR\FM\25AUN1.SGM CFR 200.30–3(a)(12). 25AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 164 (Friday, August 25, 2023)]
[Notices]
[Pages 58404-58430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18302]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98180; File No. SR-PEARL-2023-35]


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

August 21, 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 August 8, 2023, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

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

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

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

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule as follows: (1) 
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') 
fiber connection for Members \4\ and non-Members; (2) amend the 
calculation of fees for MIAX Express Network Full Service (``MEO'') \5\ 
Ports (Bulk and Single); and (3) amend the fees for Full Service MEO 
Ports (Bulk and Single). The Exchange and its affiliate, Miami 
International Securities Exchange, LLC (``MIAX'') operated 10Gb ULL 
connectivity on a single shared network that provided access to both 
exchanges via a single 10Gb ULL connection. The Exchange last increased 
fees for 10Gb ULL connections from $9,300 to $10,000 per month on 
January 1, 2021.\6\ At the same time, MIAX also increased its 10Gb ULL 
connectivity fee from $9,300 to $10,000 per month.\7\ The Exchange and 
MIAX shared a combined cost analysis in those filings due to the single 
shared 10Gb ULL connectivity network for both exchanges. In those 
filings, the Exchange and MIAX allocated a combined total of $17.9 
million in expenses to providing 10Gb ULL connectivity.\8\
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    \4\ 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.
    \5\ The term ``MEO Interface'' or ``MEO'' means a binary order 
interface for certain order types as set forth in Rule 516 into the 
MIAX Pearl System. See the Definitions Section of the Fee Schedule 
and Exchange Rule 100.
    \6\ See Securities Exchange Act Release No. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
    \7\ See Securities Exchange Act Release No. 90980 (January 25, 
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
    \8\ See id.
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    Beginning in late January 2023, the Exchange also recently 
determined a substantial operational need to no longer operate 10Gb ULL 
connectivity on a single shared network with MIAX. The Exchange 
bifurcated 10Gb ULL connectivity due to ever-increasing capacity 
constraints and to enable it to continue to satisfy the anticipated 
access needs for Members and other market participants.\9\ Since the 
time of the 2021 increase discussed above, \10\ the Exchange 
experienced ongoing increases in expenses, particularly internal 
expenses.\11\ As discussed more fully below, the Exchange recently 
calculated increased annual aggregate costs of $11,567,509 for 
providing 10Gb ULL connectivity on a single unshared network (an 
overall increase over its prior cost to provide 10Gb ULL connectivity 
on a shared network with MIAX) and $1,644,132 for providing Full 
Service MEO Ports.\12\
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    \9\ See MIAX Options and MIAX Pearl Options--Announce planned 
network changes related to shared 10G ULL extranet, issued August 
12, 2022, available at https://www.miaxglobal.com/alert/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-0. The Exchange will continue to provide access to both the 
Exchange and MIAX over a single shared 1Gb connection. See 
Securities Exchange Act Release Nos. 96553 (December 20, 2022), 87 
FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 (December 20, 
2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-48).
    \10\ The Exchange notes it last filed to amend the fees for Full 
Service MEO Ports in 2018 (excluding filings made in July 2021 
through early 2022), prior to which the Exchange provided Full 
Service MEO Ports free of charge since the it launched operations in 
2017 and absorbed all costs since that time. See Securities Exchange 
Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) 
(SR-PEARL-2018-07).
    \11\ 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.
    \12\ For the avoidance of doubt, all references to costs in this 
filing, including the cost categories discussed below, refer to 
costs incurred by MIAX Pearl Options only and not MIAX Pearl 
Equities, the equities trading facility.
---------------------------------------------------------------------------

    Much of the cost relates to monitoring and analysis of data and 
performance of the network via the subscriber's connection with 
nanosecond granularity, and continuous improvements in network 
performance with the goal of improving the subscriber's experience. The 
costs associated with maintaining and enhancing a state-of-the-art 
network is a significant expense for the Exchange, and thus the 
Exchange believes that it is reasonable and appropriate to help offset 
those increased costs by amending fees for connectivity services. 
Subscribers expect the Exchange to provide this level of support so 
they continue to receive the performance they expect. This 
differentiates the Exchange from its competitors.
    The Exchange now proposes to amend the Fee Schedule to amend the 
fees for 10Gb ULL connectivity and Full Service

[[Page 58405]]

MEO Ports (Bulk and Single) in order to recoup cost related to 
bifurcating 10Gb connectivity to the Exchange and MIAX as well as the 
ongoing costs and increase in expenses set forth below in the 
Exchange's cost analysis.\13\ The Exchange proposes to implement the 
changes to the Fee Schedule pursuant to this proposal immediately. The 
Exchange initially filed the proposal on December 30, 2022 (SR-PEARL-
2022-62) (the ``Initial Proposal'').\14\ On February 23, 2023, the 
Exchange withdrew the Initial Proposal and replaced it with a revised 
proposal (SR-PEARL-2023-08) (the ``Second Proposal'').\15\ On April 20, 
2023, the Exchange withdrew the Second Proposal and replaced it with a 
revised proposal (SR-PEARL-2023-19) (the ``Third Proposal'').\16\ On 
June 16, 2023, the Exchange withdrew the Third Proposal and replaced it 
with a revised proposal (SR-PEARL-2023-27) (the ``Fourth 
Proposal'').\17\ On August 8, 2023, the Exchange withdrew the Fourth 
Proposal and replaced it with this further revised proposal (SR-PEARL-
2023-35).
---------------------------------------------------------------------------

    \13\ The Exchange notes that MIAX will make a similar filing to 
increase its 10Gb ULL connectivity fees.
    \14\ See Securities Exchange Act Release No. 96632 (January 10, 
2023), 88 FR 2707 (January 17, 2023) (SR-PEARL-2022-62).
    \15\ See Securities Exchange Act Release No. 97082 (March 8, 
2023), 88 FR 15825 (March 14, 2023) (SR-PEARL-2023-05).
    \16\ See Securities Exchange Act Release No. 97420 (May 2, 
2023), 88 FR 29701 (May 8, 2023) (SR-PEARL-2023-19).
    \17\ 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 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. See Securities Exchange Act Release 
No. 97815 (June 27, 2023), 88 FR 42759 (July 3, 2023) (SR-PEARL-
2023-27).
---------------------------------------------------------------------------

    The Exchange previously included a cost analysis in the Initial, 
Second, Third, and Fourth 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 (separately among MIAX Pearl 
Options and MIAX Pearl Equities, MIAX and MIAX Emerald \18\ (together 
with MIAX 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 
markets. Although the baseline cost analysis used to justify the 
proposed fees was made in the Initial, Second, Third, and Fourth 
Proposals, the fees themselves have not changed since the Initial, 
Second, Third, or Fourth Proposals and the Exchange still proposes fees 
that are intended to cover the Exchange's cost of providing 10Gb ULL 
connectivity and Full Service MEO Ports with a reasonable mark-up over 
those costs.
---------------------------------------------------------------------------

    \18\ The term ``MIAX Emerald'' means MIAX Emerald, LLC. See 
Exchange Rule 100.
---------------------------------------------------------------------------

* * * * *
    Starting in 2017, following the United States Court of Appeals for 
the District of Columbia's Susquehanna Decision \19\ 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.\20\ 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.\21\ 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'').\22\ 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.'' \23\ The Commission 
denied requests by various exchanges and plan participants for 
reconsideration of the Remand Order.\24\ 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.'' \25\ Both the 
Remand Order and the Order Denying Reconsideration were appealed to the 
D.C. Circuit.
---------------------------------------------------------------------------

    \19\ See Susquehanna International Group, LLP v. Securities & 
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the 
``Susquehanna Decision'').
    \20\ Id.
    \21\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA 
Decision'').
    \22\ 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).
    \23\ Id. at page 2.
    \24\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order 
Denying Reconsideration'').
    \25\ 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.\26\ 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.
---------------------------------------------------------------------------

    \26\ 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

[[Page 58406]]

Exchange Act.'' \27\ 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.'' \28\ 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.'' \29\
---------------------------------------------------------------------------

    \27\ 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'').
    \28\ Id.
    \29\ 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 \30\ and remanded for further proceedings consistent 
with its opinion.\31\ 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.'' \32\ 
Accordingly, on August 7, 2020, the Commission vacated the Remand Order 
and ordered the parties to file briefs addressing whether the holding 
in NASDAQ v. SEC that Exchange Act section 19(d) does not permit 
challenges to generally applicable fee rules requiring dismissal of the 
challenges the Commission previously remanded.\33\ 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.'' 
\34\ 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.\35\
---------------------------------------------------------------------------

    \30\ 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.
    \31\ 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.
    \32\ Id. at *2; see also id. (``[T]he sole purpose of the 
challenged remand has disappeared.'').
    \33\ 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'').
    \34\ Id.
    \35\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 90087 (October 5, 2020).
---------------------------------------------------------------------------

    As a result of the Commission's loss of the NASDAQ vs. SEC case 
noted above, the Commission never followed through with its intention 
to subject the over 400 fee filings to ``develop a record,'' and to 
``explain their conclusions, based on that record, in a written 
decision that is sufficient to enable us to perform our review.'' \36\ 
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.
---------------------------------------------------------------------------

    \36\ See supra note 31, 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'').\37\ 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 \38\ 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.\39\ These fees 
remain in effect today.
---------------------------------------------------------------------------

    \37\ 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.
    \38\ 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.
    \39\ 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

[[Page 58407]]

discrimination and placing an undue burden on inter-market competition 
between legacy exchanges and non-legacy exchanges.
    Commission Staff now require exchange filings, including from non-
legacy exchanges such as MIAX Pearl, to provide detailed cost-based 
analysis in place of competition-based arguments to support such 
changes. However, even with the added detailed cost and expense 
disclosures, the Commission Staff continues to either suspend such 
filings and institute disapproval proceedings, or put the exchanges in 
the unenviable position of having to repeatedly withdraw and re-file 
with additional detail in order to continue to charge those fees.\40\ 
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 \41\ and $80,383,000 for 
2021.\42\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and 
capacity fee'' revenue of $19,016,000 for 2020 \43\ and $22,843,000 for 
2021.\44\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and 
capacity fee'' revenue of $38,387,000 for 2020 \45\ and $44,800,000 for 
2021.\46\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and 
capacity fee'' revenue of $26,126,000 for 2020 \47\ and $30,687,000 for 
2021.\48\ 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.\49\ 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.'' \50\
---------------------------------------------------------------------------

    \40\ The Exchange has filed, and subsequently withdrew, various 
forms of this proposed fee change numerous times since August 2021 
with each proposal containing hundreds of cost and revenue 
disclosures never previously disclosed by legacy exchanges in their 
access and market data fee filings prior to 2019.
    \41\ 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.
    \42\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
    \43\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
    \44\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
    \45\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \46\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
    \47\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
    \48\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
    \49\ 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.
    \50\ See PHLX 2021 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,\51\ 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.
---------------------------------------------------------------------------

    \51\ 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 . . .'',\52\ this is not the reality experienced by 
exchanges such as MIAX Pearl. As such, non-legacy exchanges are forced 
to rely on an opaque cost-based justification standard. However, 
because the Staff Guidance is devoid of detail on what must be 
contained in cost-based justification, this standard is nearly 
impossible to meet despite repeated good-faith efforts by the Exchange 
to provide substantial amount of cost-related details. For example, the 
Exchange has attempted to increase fees using a cost-based 
justification numerous times, having submitted over six filings.\53\ 
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

[[Page 58408]]

the Act \54\ 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.
---------------------------------------------------------------------------

    \52\ See supra note 27, at note 1.
    \53\ See Securities Exchange Act Release Nos. 92798 (August 27, 
2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-33); 92644 
(August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36); 
93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR-PEARL-
2021-45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 2021) 
(SR-PEARL-2021-53); 93774 (December 14, 2021), 86 FR 71952 (December 
20, 2021) (SR-PEARL-2021-57); 93894 (January 4, 2022), 87 FR 1203 
(January 10, 2022) (SR-PEARL-2021-58); 94258 (February 15, 2022), 87 
FR 9659 (February 22, 2022) (SR-PEARL-2022-03); 94286 (February 18, 
2022), 87 FR 10860 (February 25, 2022) (SR-PEARL-2022-04); 94721 
(April 14, 2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11); 
94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-
12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 2022) (SR-PEARL-
2022-18).
    \54\ 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,\55\ 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; \56\ or (c) accept that 
certain competition-based arguments are applicable given the linkage 
between non-transaction fees and transaction fees, especially where 
non-transaction fees among exchanges are based upon disparate standards 
of review, lack parity, and impede fair competition. Considering the 
absence of any such framework or clarity, the Exchange believes that 
the Commission does not have a reasonable basis to deny the Exchange 
this change in fees, where the proposed change would result in fees 
meaningfully lower than comparable fees at competing exchanges and 
where the associated non-transaction revenue is meaningfully lower than 
competing exchanges.
---------------------------------------------------------------------------

    \55\ 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.
    \56\ In light of the arguments above regarding disparate 
standards of review for historical legacy non-transaction fees and 
current non-transaction fees for non-legacy exchanges, a fee parity 
alternative would be one possible way to avoid the current unfair 
and discriminatory effect of the Staff Guidance and Revised Review 
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time 
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
---------------------------------------------------------------------------

    In light of the above, disapproval of this would not meet the 
fairness standard under the Act, would be discriminatory and place a 
substantial burden on competition. The Exchange would be uniquely 
disadvantaged by not being able to increase its access fees to 
comparable levels (or lower levels than current market rates) to those 
of other options exchanges for connectivity. If the Commission Staff 
were to disapprove this proposal, that action, and not market forces, 
would substantially affect whether the Exchange can be successful in 
its competition with other options exchanges. Disapproval of this 
filing could also be viewed as an arbitrary and capricious decision 
should the Commission Staff continue to ignore its past treatment of 
non-transaction fee filings before implementation of the Revised Review 
Process and Staff Guidance and refuse to allow such filings to be 
approved despite significantly enhanced arguments and cost 
disclosures.\57\
---------------------------------------------------------------------------

    \57\ 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
    MIAX Pearl Options filed a proposal to no longer operate 10Gb 
connectivity to MIAX Pearl Options on a single shared network with its 
affiliate, MIAX. This change is an operational necessity due to ever-
increasing capacity constraints and to accommodate anticipated access 
needs for Members and other market participants.\58\ This proposal: (i) 
sets forth the applicable fees for the bifurcated 10Gb ULL network; 
(ii) removes provisions in the Fee Schedule that provide for a shared 
10Gb ULL network; and (iii) specifies that market participants may 
continue to connect to both MIAX Pearl Options and MIAX via the 1Gb 
network.
---------------------------------------------------------------------------

    \58\ See supra note 9.
---------------------------------------------------------------------------

    MIAX Pearl Options bifurcated the MIAX Pearl Options and MIAX 10Gb 
ULL networks in the first quarter of 2023, which change became 
effective on January 23, 2023. The Exchange issued an alert on August 
12, 2022 publicly announcing the planned network change and 
implementation plan and dates to provide market participants adequate 
time to prepare.\59\ Upon bifurcation of the 10Gb ULL network, 
subscribers need to purchase separate connections to MIAX Pearl Options 
and MIAX at the applicable rate. The Exchange's proposed amended rate 
for 10Gb ULL connectivity is described below. Prior to the bifurcation 
of the 10Gb ULL networks, subscribers to 10Gb ULL connectivity were 
able to connect to both MIAX Pearl Options and MIAX at the applicable 
rate set forth below.
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    The Exchange, therefore, proposes to amend the Fee Schedule to 
increase the fees for Members and non-Members to access the Exchange's 
system networks \60\ via a 10Gb ULL fiber connection and to specify 
that this fee is for a dedicated connection to MIAX Pearl Options and 
no longer provides access to MIAX. Specifically, MIAX Pearl Options 
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'').\61\ The Exchange also 
proposes to amend the Fee Schedule to reflect the bifurcation of the 
10Gb ULL network and specify that only the 1Gb network provides access 
to both MIAX Pearl Options and MIAX.
---------------------------------------------------------------------------

    \60\ The Exchange's system networks consist of the Exchange's 
extranet, internal network, and external network.
    \61\ 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/pearl-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 proposes to make the following changes to reflect the 
bifurcated 10Gb ULL network for the Exchange and MIAX. First, in the 
Definitions section of the Fee Schedule, the Exchange proposes to amend 
the last sentence in the definition of ``MENI'' to specify that the 
MENI can be configured to provide network connectivity to the trading 
platforms, market data systems, test systems, and disaster recovery 
facilities of the Exchange's affiliate, MIAX, via a single, shared 1Gb

[[Page 58409]]

connection. Next, the Exchange proposes to amend the explanatory 
paragraphs below the network connectivity fee tables in Sections 5)a)-
b) of the Fee Schedule to specify that, with the bifurcated 10Gb ULL 
network, Members (and non-Members) utilizing the MENI to connect to the 
trading platforms, market data systems, test systems, and disaster 
recovery facilities of the Exchange and MIAX via a single, can only do 
so via a shared 1Gb connection.
    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the Exchange APIs or market data feeds in the production 
environment. The Exchange will continue to pro-rate the fees when a 
Member or non-Member makes a change to the connectivity (by adding or 
deleting connections) with such pro-rated fees based on the number of 
trading days that the Member or non-Member has been credentialed to 
utilize any of the Exchange APIs or market data feeds in the production 
environment through such connection, divided by the total number of 
trading days in such month multiplied by the applicable monthly rate.
Full Service MEO Ports--Bulk and Single
Background
    The Exchange also proposes to amend Section 5)d) of the Fee 
Schedule to amend the calculation and amount of fees for Full Service 
MEO Ports. The Exchange currently offers different types of MEO Ports 
depending on the services required by the Member, including a Full 
Service MEO Port-Bulk,\62\ a Full Service MEO Port-Single,\63\ and a 
Limited Service MEO Port.\64\ For one monthly price, a Member may be 
allocated two (2) Full-Service MEO Ports of either type per matching 
engine \65\ and may request Limited Service MEO Ports for which MIAX 
Pearl will assess Members Limited Service MEO Port fees based on a 
sliding scale for the number of Limited Service MEO Ports utilized each 
month. The two (2) Full-Service MEO Ports that may be allocated per 
matching engine to a Member may consist of: (a) two (2) Full Service 
MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--Single; or (c) one 
(1) Full Service MEO Port--Bulk and one (1) Full Service MEO Port--
Single.
---------------------------------------------------------------------------

    \62.\ ``Full Service MEO Port--Bulk'' means an MEO port that 
supports all MEO input message types and binary bulk order entry. 
See the Definitions Section of the Fee Schedule.
    \63\ ``Full Service MEO Port--Single'' means an MEO port that 
supports all MEO input message types and binary order entry on a 
single order-by-order basis, but not bulk orders. See the 
Definitions Section of the Fee Schedule.
    \64\ ``Limited Service MEO Port'' means an MEO port that 
supports all MEO input message types, but does not support bulk 
order entry and only supports limited order types, as specified by 
the Exchange via Regulatory Circular. See the Definitions Section of 
the Fee Schedule.
    \65\ A ``Matching Engine'' is a part of the Exchange's 
electronic system that processes options orders and trades on a 
symbol-by-symbol basis. See the Definitions Section of the Fee 
Schedule.
---------------------------------------------------------------------------

    Currently, the Exchange assesses Members Full Service MEO Port 
Fees, either for a Full Service MEO Port--Bulk and/or for a Full 
Service MEO Port--Single, based upon the monthly total volume executed 
by a Member and its Affiliates \66\ on the Exchange, across all origin 
types, not including Excluded Contracts,\67\ as compared to the Total 
Consolidated Volume (``TCV''),\68\ in all MIAX Pearl-listed options. 
The Exchange adopted a tier-based fee structure based upon the volume-
based tiers detailed in the definition of ``Non-Transaction Fees 
Volume-Based Tiers'' described in the Definitions section of the Fee 
Schedule. The Exchange assesses these and other monthly Port fees to 
Members in each month the market participant is credentialed to use a 
Port in the production environment.
---------------------------------------------------------------------------

    \66\ ``Affiliate'' means (i) an affiliate of a Member of at 
least 75% common ownership between the firms as reflected on each 
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an 
Appointed EEM (or, conversely, the Appointed EEM of an Appointed 
Market Maker). See the Definitions Section of the Fee Schedule.
    \67\ ``Excluded Contracts'' means any contracts routed to an 
away market for execution. See the Definitions Section of the Fee 
Schedule.
    \68\ ``TCV'' means total consolidated volume calculated as the 
total national volume in those classes listed on MIAX Pearl for the 
month for which the fees apply, excluding consolidated volume 
executed during the period of time in which the Exchange experiences 
an Exchange System Disruption (solely in the option classes of the 
affected Matching Engine). See the Definitions Section of the Fee 
Schedule.
---------------------------------------------------------------------------

Full Service MEO Port (Bulk) Fee Changes
    Current Full Service MEO Port (Bulk) Fees. The Exchange currently 
assesses all Members (Market Makers \69\ and Electronic Exchange 
Members \70\ (``EEMs'')) monthly Full Service MEO Port--Bulk fees as 
follows:
---------------------------------------------------------------------------

    \69\ The term ``Market Maker'' means a Member registered with 
the Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in Chapter VI of Exchange Rules. See the 
Definitions Section of the Fee Schedule and Exchange Rule 100.
    \70\ The term ``Electronic Exchange Member'' or ``EEM'' means 
the holder of a Trading Permit who is a Member representing as agent 
Public Customer Orders or Non-Customer Orders on the Exchange and 
those non-Market Maker Members conducting proprietary trading. 
Electronic Exchange Members are deemed ``members'' under the 
Exchange Act. See the Definitions Section of the Fee Schedule and 
Exchange Rule 100.
---------------------------------------------------------------------------

    (i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $4,500; and
    (iii) if its volume falls within the parameters of Tier 3 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
    Proposed Full Service MEO Port (Bulk) Fees. The Exchange proposes 
to amend the calculation and amount of Full Service MEO Port (Bulk) 
fees for EEMs and Market Makers. In particular, for EEMs, the Exchange 
proposes to move away from the above-described volume tier-based fee 
structure and instead charge all EEMs that utilize Full Service MEO 
Ports (Bulk) a flat monthly fee of $7,500. For this flat monthly fee, 
EEMs will continue to be entitled to two (2) Full Service MEO Ports 
(Bulk) for each Matching Engine for the single monthly fee of $7,500. 
The Exchange now proposes to amend the calculation and amount of Full 
Service MEO Port (Bulk) fees for Market Makers by moving away from the 
above-described volume tier-based fee structure to harmonize the Full 
Service MEO Port (Bulk) fee structure for Market Makers with that of 
the Exchange's affiliates, MIAX and MIAX Emerald.\71\ The Exchange 
proposes that the amount of the monthly Full Service MEO Port (Bulk) 
fees for Market Makers would be based on the lesser of either the per 
class traded or percentage of total national average daily volume 
(``ADV'') measurement based on classes traded by volume. The amount of 
monthly Market Maker Full Service MEO Port (Bulk) fee would be based 
upon the number of classes in which the Market Maker was registered to 
quote on any given day within the calendar month, or upon the class 
volume percentages. This change in how Full Service MEO Port (Bulk) 
fees are calculated is identical to how the Exchange assesses Market 
Makers Trading Permit fees, which is in line with how numerous 
exchanges charge similar membership fees.
---------------------------------------------------------------------------

    \71\ See MIAX Fee Schedule, Section 5)d)ii) and MIAX Emerald Fee 
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------

    Specifically, the Exchange proposes to adopt the following Full 
Service MEO Port (Bulk) fees for Market Makers: (i) $5,000 for Market 
Maker registrations in

[[Page 58410]]

up to 10 option classes or up to 20% of option classes by national ADV; 
(ii) $7,500 for Market Maker registrations in up to 40 option classes 
or up to 35% of option classes by ADV; (iii) $10,000 for Market Maker 
registrations in up to 100 option classes or up to 50% of option 
classes by ADV; and (iv) $12,000 for Market Maker registrations in over 
100 option classes or over 50% of option classes by ADV up to all 
option classes listed on MIAX Pearl. For example, if Market Maker 1 
elects to quote the top 40 option classes which consist of 58% of the 
total national average daily volume in the prior calendar quarter, the 
Exchange would assess $7,500 to Market Maker 1 for the month which is 
the lesser of `up to 40 classes' and `over 50% of classes by volume up 
to all classes listed on MIAX Pearl'. If Market Maker 2 elects to quote 
the bottom 1000 option classes which consist of 10% of the total 
national average daily volume in the prior quarter, the Exchange would 
assess $5,000 to Market Maker 2 for the month which is the lesser of 
`over 100 classes' and `up to 20% of classes by volume. The Exchange 
notes that the proposed tiers (ranging from $5,000 to $12,000) are 
lower than the tiers that the Exchange's affiliates charge for their 
comparable ports (ranging from $5,000 to $20,500) for similar per class 
tier thresholds.\72\
---------------------------------------------------------------------------

    \72\ See id.
---------------------------------------------------------------------------

    With the proposed changes, a Market Maker would be determined to be 
registered in a class if that Market Maker has been registered in one 
or more series in that class.\73\ The Exchange will assess MIAX Pearl 
Options Market Makers the monthly Market Maker Full Service MEO Port 
(Bulk) fee based on the greatest number of classes listed on MIAX Pearl 
Options that the MIAX Pearl Options Market Maker registered to quote in 
on any given day within a calendar month. Therefore, with the proposed 
changes to the calculation of Market Maker Full Service MEO Port (Bulk) 
fees, the Exchange's Market Makers would be encouraged to quote in more 
series in each class they are registered in because each additional 
series in that class would not count against their total classes for 
purposes of the Full Service MEO Port (Bulk) fee tiers. The class 
volume percentage is based on the total national ADV in classes listed 
on MIAX Pearl Options in the prior calendar quarter. Newly listed 
option classes are excluded from the calculation of the monthly Market 
Maker Full Service MEO Port (Bulk) fee until the calendar quarter 
following their listing, at which time the newly listed option classes 
will be included in both the per class count and the percentage of 
total national ADV.
---------------------------------------------------------------------------

    \73\ Pursuant to Exchange Rule 602(a), a Member that has 
qualified as a Market Maker may register to make markets in 
individual series of options.
---------------------------------------------------------------------------

    The Exchange also proposes to adopt an alternative lower Full 
Service MEO Port (Bulk) fee for Market Makers who fall within the 2nd, 
3rd and 4th levels of the proposed Market Maker Full Service MEO Port 
(Bulk) fee table: (i) Market Maker registrations in up to 40 option 
classes or up to 35% of option classes by volume; (ii) Market Maker 
registrations in up to 100 option classes or up to 50% of option 
classes by volume; and (iii) Market Maker registrations in over 100 
option classes or over 50% of option classes by volume up to all option 
classes listed on MIAX Pearl Options. In particular, the Exchange 
proposes to adopt footnote ``**'' following the Market Maker Full 
Service MEO Port (Bulk) fee table for these Monthly Full Service MEO 
Port (Bulk) tier levels. New proposed footnote ``**'' will provide that 
if the Market Maker's total monthly executed volume during the relevant 
month is less than 0.040% of the total monthly TCV for MIAX Pearl-
listed option classes for that month, then the fee will be $6,000 
instead of the fee otherwise applicable to such level.
    The purpose of the alternative lower fee designated in proposed 
footnote ``**'' is to provide a lower fixed fee to those Market Makers 
who are willing to quote the entire Exchange market (or substantial 
amount of the Exchange market), as objectively measured by either 
number of classes assigned or national ADV, but who do not otherwise 
execute a significant amount of volume on the Exchange. The Exchange 
believes that, by offering lower fixed fees to Market Makers that 
execute less volume, the Exchange will retain and attract smaller-scale 
Market Makers, which are an integral component of the option 
marketplace, but have been decreasing in number in recent years, due to 
industry consolidation. Since these smaller-scale Market Makers utilize 
less Exchange capacity due to lower overall volume executed, the 
Exchange believes it is reasonable and equitable to offer such Market 
Makers a lower fixed fee. The Exchange notes that the Exchange's 
affiliates, MIAX and MIAX Emerald, also provide lower MIAX Express 
Interface (``MEI'') Port fees (the comparable ports on those exchanges) 
for Market Makers who quote the entire MIAX and MIAX Emerald markets 
(or substantial amount of those markets), as objectively measured by 
either number of classes assigned or national ADV, but who do not 
otherwise execute a significant amount of volume on MIAX or MIAX 
Emerald.\74\ The proposed changes to the Full Service MEO Port (Bulk) 
fees for Market Makers who fall within the 2nd, 3rd and 4th levels of 
the fee table are based upon a business determination of current Market 
Maker assignments and trading volume.
---------------------------------------------------------------------------

    \74\ See MIAX Fee Schedule, Section 5)d)ii), note ``*'' and MIAX 
Emerald Fee Schedule, Section 5)d)ii), note ``[squf]''.
---------------------------------------------------------------------------

    Unlike other options exchanges that provide similar port 
functionality and charge fees on a per port basis,\75\ the Exchange 
offers Full Service MEO Ports as a package and provides Members with 
the option to receive up to two Full Service MEO Ports (described 
above) per matching engine to which that Member connects. The Exchange 
currently has twelve (12) matching engines, which means Market Makers 
may receive up to twenty-four (24) Full Service MEO Ports for a single 
monthly fee, that can vary based on the lesser of either the per class 
traded or percentage of total national ADV measurement based on classes 
traded by volume, as described above. For illustrative purposes, the 
Exchange currently assesses a fee of $5,000 per month for Market Makers 
that reach the highest Full Service MEO Port (Bulk) tier, regardless of 
the number of Full Service MEO Ports allocated to the Market Maker. For 
example, assuming a Market

[[Page 58411]]

Maker connects to all twelve (12) matching engines during a month, with 
two Full Service MEO Ports (Bulk) per matching engine, this results in 
an effective fee of $208.33 per Full Service MEO Port ($5,000 divided 
by 24) for the month, as compared to other exchanges that charge over 
$1,000 per port and require multiple ports to connect to all of their 
matching engines.\76\ This fee had been unchanged since the Exchange 
adopted Full Service MEO Port fees in 2018.\77\ The Exchange proposes 
to increase Full Service MEO Port fees, with the highest monthly fee of 
$12,000 for the Full Service MEO Ports (Bulk). Market Makers will 
continue to receive two (2) Full Service MEO Ports to each matching 
engine to which they connect for the single flat monthly fee. Assuming 
a Market Maker connects to all twelve (12) matching engines during the 
month, with two Full Service MEO Ports per matching engine, this would 
result in an effective fee of $500 per Full Service MEO Port ($12,000 
divided by 24).
---------------------------------------------------------------------------

    \75\ See NYSE American Options Fee Schedule, Section V.A., Port 
Fees (each port charged on a per matching engine basis, with NYSE 
American having 17 match engines). See NYSE Technology FAQ and Best 
Practices: Options, Section 5.1 (How many matching engines are used 
by each exchange?) (September 2020) (providing a link to an Excel 
file detailing the number of matching engines per options exchange); 
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a 
per matching engine basis, NYSE Arca having 19 match engines); and 
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How 
many matching engines are used by each exchange?) (September 2020) 
(providing a link to an Excel file detailing the number of matching 
engines per options exchange). See NASDAQ Fee Schedule, NASDAQ 
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports 
and Other Services (each port charged on a per matching engine 
basis, with Nasdaq having multiple matching engines). See NASDAQ 
Specialized Quote Interface (SQF) Specification, Version 6.5b 
(updated February 13, 2020), Section 2, Architecture, available at 
https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface Specification''). The 
NASDAQ SQF Interface Specification also provides that NASDAQ's 
affiliates, NASDAQ Phlx and NASDAQ BX, Inc. (``BX''), have trading 
infrastructures that may consist of multiple matching engines with 
each matching engine trading only a range of option classes. 
Further, the NASDAQ SQF Interface Specification provides that the 
SQF infrastructure is such that the firms connect to one or more 
servers residing directly on the matching engine infrastructure. 
Since there may be multiple matching engines, firms will need to 
connect to each engine's infrastructure in order to establish the 
ability to quote the symbols handled by that engine.
    \76\ Id. See also infra notes 101 to 108 and accompanying text.
    \77\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).

                                          Full Service MEO Ports (Bulk)
----------------------------------------------------------------------------------------------------------------
                                                                   Total number
                                                                   of ports for
                                                     Number of     market maker      Total fee     Effective per
                                                   match engines  to connect  to     (monthly)       port fee
                                                                     all match
                                                                      engines
----------------------------------------------------------------------------------------------------------------
Pricing Based on Market Maker Being Charged the               12              24          $5,000         $208.33
 Highest Tier (Current).........................
Pricing Based on Market Maker Being Charged the               12              24          12,000             500
 Highest Tier (as proposed).....................
----------------------------------------------------------------------------------------------------------------

Full Service MEO Port (Single) Fee Changes
    Current Full Service MEO Port (Single) Fees. The Exchange currently 
assesses all Members (Market Makers and EEMs) monthly Full Service MEO 
Port (Single) fees as follows:
    (i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $3,375; and
    (iii) if its volume falls within the parameters of Tier 3 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
    Proposed Full Service MEO Port (Single) Fees. The Exchange proposes 
to amend the calculation and amount of Full Service MEO Port (Single) 
fees for EEMs and Market Makers. In particular, the Exchange proposes 
to move away from the above-described volume tier-based fee structure 
and instead charge all Members that utilize Full Service MEO Ports 
(Single) a flat monthly fee of $4,000. For this flat monthly fee, all 
Members will continue to be entitled to two (2) Full Service MEO Ports 
(Single) for each Matching Engine for the single monthly fee of $4,000.
    The Exchange offers various types of ports with differing prices 
because each port accomplishes different tasks, are suited to different 
types of Members, and consume varying capacity amounts of the network. 
For instance, MEO ports allow for a higher throughput and can handle 
much higher quote/order rates than FIX ports. Members that are Market 
Makers or high frequency trading firms utilize these ports (typically 
coupled with 10Gb ULL connectivity) because they transact in 
significantly higher amounts of messages being sent to and from the 
Exchange, versus FIX port users, who are traditionally customers 
sending only orders to the Exchange (typically coupled with 1Gb 
connectivity). The different types of ports cater to the different 
types of Exchange Memberships and different capabilities of the various 
Exchange Members. Certain Members need ports and connections that can 
handle using far more of the network's capacity for message throughput, 
risk protections, and the amount of information that the System has to 
assess. Those Members account for the vast majority of network capacity 
utilization and volume executed on the Exchange, as discussed 
throughout. For example, three (3) Members account for 64% of all 10Gb 
ULL connections and Full Service MEO Ports purchased.
    The Exchange proposes to increase its monthly Full Service MEO Port 
fees since it has not done so since the fees were adopted in 2018,\78\ 
which are designed to recover a portion of the costs associated with 
directly accessing the Exchange. As described above, the Exchange's 
affiliates, MIAX and MIAX Emerald, also charge fees for their high 
throughput, low latency ports in a similar fashion as the Exchange 
proposes to charge for its MEO Ports--generally, the more active user 
the Member (i.e., the greater number/greater national ADV of classes 
assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port 
fee.\79\ This concept is, therefore, not new or novel.
---------------------------------------------------------------------------

    \78\ See id.
    \79\ See MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee 
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------

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 \80\ in general, and furthers the objectives of 
section 6(b)(4) of the Act \81\ 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 \82\ 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.
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78f(b).
    \81\ 15 U.S.C. 78f(b)(4).
    \82\ 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

[[Page 58412]]

Review Process and as set forth in recent Staff Guidance. Based on both 
the BOX Order \83\ and the Staff Guidance,\84\ 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.
---------------------------------------------------------------------------

    \83\ See supra note 26.
    \84\ See supra note 27.
---------------------------------------------------------------------------

    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.'' 
\85\ 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.'' \86\ In the Staff Guidance, the Commission Staff further states 
that, ``[i]f an SRO seeks to support its claims that a proposed fee is 
fair and reasonable because it will permit recovery of the SRO's costs, 
. . . , specific information, including quantitative information, 
should be provided to support that argument.'' \87\
---------------------------------------------------------------------------

    \85\ Id.
    \86\ Id.
    \87\ Id.
---------------------------------------------------------------------------

    The proposed fees are reasonable because they promote parity among 
exchange pricing for access, which promotes competition, including in 
the Exchanges' ability to competitively price transaction fees, invest 
in infrastructure, new products and other innovations, all while 
allowing the Exchange to recover its costs to provide dedicated access 
via 10Gb ULL connectivity (driven by the bifurcation of the 10Gb ULL 
network) and Full Service MEO Ports. As discussed above, the Revised 
Review Process and Staff Guidance have created an uneven playing field 
between legacy and non-legacy exchanges by severely restricting non-
legacy exchanges from being able to increase non-transaction related 
fees to provide them with additional necessary revenue to better 
compete with legacy exchanges, which largely set fees prior to the 
Revised Review Process. The much higher non-transaction fees charged by 
the legacy exchanges provides them with two significant competitive 
advantages: (i) additional non-transaction revenue that may be used to 
fund areas other than the non-transaction service related to the fee, 
such as investments in infrastructure, advertising, new products and 
other innovations; and (ii) greater flexibility to lower their 
transaction fees by using the revenue from the higher non-transaction 
fees to subsidize transaction fee rates. The latter is more immediately 
impactful in competition for order flow and market share, given the 
variable nature of this cost on Member firms. The absence of a 
reasonable path forward to increase non-transaction fees to comparable 
(or lower rates) limits the Exchange's flexibility to, among other 
things, make additional investments in infrastructure and advertising, 
diminishes the ability to remain competitive on transaction fees, and 
hinders the ability to compete for order flow and market share. Again, 
while one could debate whether the pricing of non-transaction fees are 
subject to the same market forces as transaction fees, there is little 
doubt that subjecting one exchange to a materially different standard 
than that applied to other exchanges for non-transaction fees leaves 
that exchange at a disadvantage in its ability to compete with its 
pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which 
Promotes Competition
    The Exchange commenced operations in February 2017 \88\ and adopted 
its initial fee schedule, with 10Gb ULL connectivity fees set at $8,500 
(the Exchange originally had a non-ULL 10Gb connectivity option, which 
it has since removed) and a fee waiver for all Full Service MEO Port 
fees.\89\ As a new exchange entrant, the Exchange chose to offer Full 
Service MEO Ports free of charge to encourage market participants to 
trade on the Exchange and experience, among things, the quality of the 
Exchange's technology and trading functionality. This practice is not 
uncommon. New exchanges often do not charge fees or charge lower fees 
for certain services such as memberships/trading permits to attract 
order flow to an exchange, and later amend their fees to reflect the 
true value of those services, absorbing all costs to provide those 
services in the meantime. Allowing new exchange entrants time to build 
and sustain market share through various pricing incentives before 
increasing non-transaction fees encourages market entry and fee parity, 
which promotes competition among exchanges. It also enables new 
exchanges to mature their markets and allow market participants to 
trade on the new exchanges without fees serving as a potential barrier 
to attracting memberships and order flow.\90\
---------------------------------------------------------------------------

    \88\ See MIAX PEARL Successfully Launches Trading Operations, 
dated February 6, 2017, available at https://www.miaxglobal.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf.
    \89\ See Securities Exchange Act Release No. 80061 (February 17, 
2017), 82 FR 11676 (February 24, 2017) (SR-PEARL-2017-10).
    \90\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he 
Exchange established this lower (when compared to other options 
exchanges in the industry) Participant Fee in order to encourage 
market participants to become Participants of BOX . . .''). See also 
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR 
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the 
initial fee schedule and stating that ``[u]nder the initial proposed 
Fee Schedule, the Exchange proposes to make clear that it does not 
charge any fees for membership, market data products, physical 
connectivity or application sessions.''). MEMX's market share has 
increased and recently proposed to adopt numerous non-transaction 
fees, including fees for membership, market data, and connectivity. 
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87 
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt 
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7, 
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845 
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for 
connectivity). See also, e.g., Securities Exchange Act Release No. 
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange 
after initially setting such fees at zero).
---------------------------------------------------------------------------

    Later in 2018, as the Exchange's market share increased,\91\ the 
Exchange adopted nominal fees for Full Service MEO Ports.\92\ The 
Exchange last increased the fees for its 10Gb ULL fiber connections 
from $9,300 to $10,000 per

[[Page 58413]]

month on January 1, 2021.\93\ 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.
---------------------------------------------------------------------------

    \91\ The Exchange experienced a monthly average trading volume 
of 3.94% for the month of March 2018. See the ``Market Share'' 
section of the Exchange's website, available at www.miaxglobal.com.
    \92\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
    \93\ See Securities Exchange Act Release No. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
---------------------------------------------------------------------------

    The proposed changes to the Fee Schedule are reasonable in several 
respects. As a threshold matter, the Exchange is subject to significant 
competitive forces, which constrains its pricing determinations for 
transaction fees as well as non-transaction fees. The fact that the 
market for order flow is competitive has long been recognized by the 
courts. In NetCoalition v. Securities and Exchange Commission, the D.C. 
Circuit stated, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution;' [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \94\
---------------------------------------------------------------------------

    \94\ See NetCoalition, 615 F.3d at 539 (D.C. Cir. 2010) (quoting 
Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 
74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention to determine 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues, and also recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \95\
---------------------------------------------------------------------------

    \95\ 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.' '' \96\ 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.'' \97\ 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.'' \98\ 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.'' \99\
---------------------------------------------------------------------------

    \96\ 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.'').
    \97\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \98\ Id.
    \99\ See Staff Guidance, supra note 27.
---------------------------------------------------------------------------

    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 and 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     connection or per
                                     or port                port)
------------------------------------------------------------------------
MIAX Pearl Options (as        10Gb ULL connection.  $13,500.
 proposed) (equity options    Full Service MEO      Lesser of either the
 market share of 7.05% for     Port (Bulk) for       per class basis or
 the month of May 2023) \a\.   Market Makers.        percentage of total
                                                     national ADV by the
                                                     Market Maker, as
                                                     follows:
                                                    $5,000--up to 10
                                                     classes or up to
                                                     20% of classes by
                                                     volume.
                                                    $7,500 **--up to 40
                                                     classes or up to
                                                     35% of classes by
                                                     volume.
                                                    $10,000 **--up to
                                                     100 classes or up
                                                     to 50% of classes
                                                     by volume.
                                                    $12,000 **--over 100
                                                     classes or over 50%
                                                     of all classes by
                                                     volume up to all
                                                     classes (or $500
                                                     per port per
                                                     matching engine).
                                                    ** A lower rate of
                                                     $6,000 will apply
                                                     to these tiers if
                                                     the Market Maker's
                                                     total monthly
                                                     executed volume is
                                                     less than 0.040% of
                                                     total monthly TCV
                                                     for MIAX Pearl
                                                     options.
                              Full Service MEO      $7,500 (or $312.50
                               Port (Bulk) for       per port per
                               EEMs.                 matching engine).
                              Full Service MEO      $4,000 (or $166.66
                               Port (Single) for     per port per
                               Market Makers and     matching engine).
                               EEMs.

[[Page 58414]]

 
NASDAQ \b\ (equity options    10Gb Ultra fiber      $15,000 per
 market share of 6.59% for     connection.           connection.
 the month of May 2023) \c\.  SQF Port \d\........  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'') \e\  10Gb Ultra fiber      $15,000 per
 (equity options market        connection.           connection.
 share of 6.18% for the       SQF Port............  $1,100 per port.
 month of May 2023) \f\.
NYSE American LLC (``NYSE     10Gb LX LCN           $22,000 per
 American'') \g\ (equity       connection.           connection.
 options market share of      Order/Quote Entry     1-40 ports: $450 per
 7.34% for the month of May    Port.                 port.
 2023) \h\.                                         41 or more ports:
                                                     $150 per port.
NASDAQ GEMX, LLC (``GEMX'')   10Gb Ultra            $15,000 per
 \i\ (equity options market    connection.           connection.
 share of 2.00% for the       SQF Port............  $1,250 per port.
 month of May 2023) \j\.
------------------------------------------------------------------------
\a\ See the ``Market Share'' section of the Exchange's website,
  available at https://www.miaxglobal.com/.
\b\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other
  Services and NASDAQ Rules, General 8: Connectivity, Section 1. Co-
  Location Services.
\c\ See supra note a.
\d\ Similar to the MIAX Pearl Options' MEO Ports, SQF ports are
  primarily utilized by Market Makers.
\e\ See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees
  and ISE Rules, General 8: Connectivity.
\f\ See supra note a.
\g\ See NYSE American Options Fee Schedule, Section V.A. Port Fees and
  Section V.B. Co-Location Fees.
\h\ See supra note a.
\i\ See GEMX Pricing Schedule, Options 7, Section 6, Connectivity Fees
  and GEMX Rules, General 8: Connectivity.
\j\ See supra note a.

    The Exchange acknowledges that, without additional contextual 
information, the above table may lead someone to believe that the 
Exchange's proposed fees for Full Service MEO Ports is higher than 
other exchanges when in fact, that is not true. The Exchange provides 
each Member or non-Member access to two (2) ports on all twelve (12) 
matching engines for a single fee and a vast majority choose to connect 
to all twelve (12) matching engines and utilize both ports for a total 
of 24 ports. Other exchanges charge on a per port basis and require 
firms to connect to multiple matching engines, thereby multiplying the 
cost to access their full market.\100\ On the Exchange, this is not the 
case. The Exchange provides each Member or non-Member access, but does 
not require they connect to, all twelve (12) matching engines.
---------------------------------------------------------------------------

    \100\ See Specialized Quote Interface Specification, Nasdaq 
PHLX, Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, 
Section 2, Architecture (revised August 16, 2019), available at 
https://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is 
unclear whether the NASDAQ exchanges include connectivity to each 
matching engine for the single fee or charge per connection, per 
matching engine. See also NYSE Technology FAQ and Best Practices: 
Options, Section 5.1 (How many matching engines are used by each 
exchange?) (September 2020). The Exchange notes that NYSE provides a 
link to an Excel file detailing the number of matching engines per 
options exchange, with Arca and Amex having 19 and 17 matching 
engines, respectively.
---------------------------------------------------------------------------

    There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options 
exchanges. Market participants may choose to become a member of one or 
more options exchanges based on the market participant's assessment of 
the business opportunity relative to the costs of the Exchange. With 
this, there is elasticity of demand for exchange membership. As an 
example, one 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.\101\ A very 
small number of market participants choose to become a member of all 
sixteen options exchanges. Most firms that actively trade on options 
markets are not currently Members of the Exchange and do not purchase 
connectivity or port services at the Exchange. Connectivity and ports 
are only available to Members or service bureaus, and only a Member may 
utilize a port.\102\
---------------------------------------------------------------------------

    \101\ 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.''
    \102\ 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.\103\ The Exchange and its affiliated 
options markets, MIAX and MIAX Emerald, have a total of 46 members. Of 
those 46 total members, 37 are members of all three affiliated options 
markets, two are members of only two affiliated options markets, and 
seven are members of only one affiliated options market. 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

[[Page 58415]]

elect to do so based on their own business decisions and need to 
directly access each exchange's liquidity pool.
---------------------------------------------------------------------------

    \103\ 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 
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. 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.\104\ If the Exchange is 
not at the national best bid or offer (``NBBO''),\105\ 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.\106\
---------------------------------------------------------------------------

    \104\ 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.
    \105\ See Exchange Rule 100.
    \106\ 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,\107\ or request 
sponsored access \108\ through a member of an exchange in order to 
submit a trade directly to an options exchange.\109\ 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.
---------------------------------------------------------------------------

    \107\ 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.
    \108\ 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.
    \109\ 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).\110\ 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.\111\ 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.
---------------------------------------------------------------------------

    \110\ See, e.g., Nasdaq Price List--U.S. Direct Connection and 
Extranet Fees, available at, US Direct-Extranet Connection 
(nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077 
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022) 
(SR-NASDAQ-2017-114).
    \111\ The Exchange notes that resellers, such as SFTI, are not 
required to publicize, let alone justify or file with the Commission 
their fees, and as such could charge the market participant any fees 
it deems appropriate (including connectivity fees higher than the 
Exchange's connectivity fees), even if such fees would otherwise be 
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------

    The Exchange is obligated to regulate its Members and secure access 
to its environment. In order to properly regulate its Members and 
secure the trading environment, the Exchange takes measures to ensure 
access is monitored and maintained with various controls. Connectivity 
and ports are methods utilized by the Exchange to grant Members secure 
access to communicate with the Exchange and exercise trading rights. 
When a market participant elects to be a Member, and is approved for 
membership by the Exchange, the Member is granted trading rights to 
enter orders and/or quotes into Exchange through secure connections.
    Again, there is no legal or regulatory requirement that a market 
participant become a Member of the Exchange. 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.
Bifurcation of 10Gb ULL Connectivity and Related Fees
    The Exchange began to operate on a single shared network with MIAX 
when MIAX Pearl Options commenced operations as a national securities 
exchange on February 7, 2017.\112\ The

[[Page 58416]]

Exchange and MIAX operated on a single shared network to provide 
Members with a single convenient set of access points for both 
exchanges. Both the Exchange and MIAX offer two methods of 
connectivity, 1Gb and 10Gb ULL connections. The 1Gb connection services 
are supported by a discrete set of switches providing 1Gb access ports 
to Members. The 10Gb ULL connection services are supported by a second 
and mutually exclusive set of switches providing 10Gb ULL access ports 
to Members. Previously, both the 1Gb and 10Gb ULL shared extranet ports 
allowed Members to use one connection to access both exchanges, namely 
their trading platforms, market data systems, test systems, and 
disaster recovery facilities.
---------------------------------------------------------------------------

    \112\ See Securities Exchange Act Release No. 80061 (February 
17, 2017), 82 FR 11676 (February 24, 2017) (establishing MIAX Pearl 
Options Fee Schedule and establishing that the MENI can also be 
configured to provide network connectivity to the trading platforms, 
market data systems, test systems, and disaster recovery facility of 
the MIAX Pearl Options' affiliate, MIAX, via a single, shared 
connection).
---------------------------------------------------------------------------

    The Exchange stresses that bifurcating the 10Gb ULL connectivity 
between the Exchange and MIAX was not designed with the objective to 
generate an overall increase in access fee revenue. Rather, the 
proposed change was necessitated by 10Gb ULL connectivity experiencing 
a significant decrease in port availability mostly driven by 
connectivity demands of latency sensitive Members that seek to maintain 
multiple 10Gb ULL connections on every switch in the network. Operating 
two separate national securities exchanges on a single shared network 
provided certain benefits, such as streamlined connectivity to multiple 
exchanges, and simplified exchange infrastructure. However, doing so 
was no longer sustainable due to ever-increasing capacity constraints 
and current system limitations. The network is not an unlimited 
resource. As described more fully in the proposal to bifurcate the 10Gb 
ULL network,\113\ the connectivity needs of Members and market 
participants has increased every year since the launch of MIAX Pearl 
Options and the operations of the Exchange and MIAX on a single shared 
10Gb ULL network is no longer feasible. This required constant System 
expansion to meet Member demand for additional ports and 10Gb ULL 
connections has resulted in limited available System headroom, which 
eventually became operationally problematic for both the Exchange and 
its customers.
---------------------------------------------------------------------------

    \113\ See Securities Exchange Act Release Nos. 96553 (December 
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
---------------------------------------------------------------------------

    As stated above, the shared network is not an unlimited resource 
and its expansion was constrained by MIAX's and MIAX Pearl Options' 
ability to provide fair and equitable access to all market participants 
of both markets. Due to the ever-increasing connectivity demands, the 
Exchange found it necessary to bifurcate 10Gb ULL connectivity to the 
Exchange's and MIAX's Systems and networks to be able to continue to 
meet ongoing and future 10Gb ULL connectivity and access demands.\114\
---------------------------------------------------------------------------

    \114\ Currently, the Exchange maintains sufficient headroom to 
meet ongoing and future requests for 1Gb connectivity. Therefore, 
the Exchange did not propose to alter 1Gb connectivity and continues 
to provide 1Gb connectivity over a shared network.
---------------------------------------------------------------------------

    Unlike the switches that provide 1Gb connectivity, the availability 
for additional 10Gb ULL connections on each switch had significantly 
decreased. This was mostly driven by the connectivity demands of 
latency sensitive Members (e.g., Market Makers and liquidity removers) 
that sought to maintain connectivity across multiple 10Gb ULL switches. 
Based on the Exchange's experience, such Members did not typically use 
a shared 10Gb ULL connection to reach both the Exchange and MIAX due to 
related latency concerns. Instead, those Members maintain dedicated 
separate 10Gb ULL connections for the Exchange and separate dedicated 
10Gb ULL connections for MIAX. This resulted in a much higher 10Gb ULL 
usage per switch by those Members on the shared 10Gb ULL network than 
would otherwise be needed if the Exchange and MIAX had their own 
dedicated 10Gb ULL networks. Separation of the Exchange and MIAX 10Gb 
ULL networks naturally lends itself to reduced 10Gb ULL port 
consumption on each switch and, therefore, increased 10Gb ULL port 
availability for current Members and new Members.
    Prior to bifurcating the 10Gb ULL network, the Exchange and MIAX 
continued to add switches to meet ongoing demand for 10Gb ULL 
connectivity. That was no longer sustainable because simply adding 
additional switches to expand the current shared 10Gb ULL network would 
not adequately alleviate the issue of limited available port 
connectivity. While it would have resulted in a gain in overall port 
availability, the existing switches on the shared 10Gb ULL network in 
use would have continued to suffer from lack of port headroom given 
many latency sensitive Members' needs for a presence on each switch to 
reach both the Exchange and MIAX. This was because those latency 
sensitive Members sought to have a presence on each switch to maximize 
the probability of experiencing the best network performance. Those 
Members routinely decide to rebalance orders and/or messages over their 
various connections to ensure each connection is operating with maximum 
efficiency. Simply adding switches to the extranet would not have 
resolved the port availability needs on the shared 10Gb ULL network 
since many of the latency sensitive Members were unwilling to relocate 
their connections to a new switch due to the potential detrimental 
performance impact. As such, the impact of adding new switches and 
rebalancing ports would not have been effective or responsive to 
customer needs. The Exchange has found that ongoing and continued 
rebalancing once additional switches are added has had, and would have 
continued to have had, a diminishing return on increasing available 
10Gb ULL connectivity.
    Based on its experience and expertise, the Exchange found the most 
practical way to increase connectivity availability on its switches was 
to bifurcate the existing 10Gb ULL networks for the Exchange and MIAX 
by migrating the exchanges' connections from the shared network onto 
their own set of switches. Such changes accordingly necessitated a 
review of the Exchange's previous 10Gb ULL connectivity fees and 
related costs. The proposed fees necessary to allow the Exchange to 
cover ongoing costs related to providing and maintaining such 
connectivity, described more fully below. The ever increasing 
connectivity demands that necessitated this change further support that 
the proposed fees are reasonable because this demand reflects that 
Members and non-Members believe they are getting value from the 10Gb 
ULL connections they purchase.
    The Exchange announced on August 12, 2022 the planned network 
change and January 23, 2023 implementation date to provide market 
participants adequate time to prepare.\115\ Since August 12, 2022, the 
Exchange has worked with current 10Gb ULL subscribers to address their 
connectivity needs ahead of the January 23, 2023 date. Based on those 
interactions and subscriber feedback, the Exchange experienced a 
minimal net increase of six (6) overall 10Gb ULL connectivity 
subscriptions across MIAX Pearl Options and MIAX. This immaterial 
increase in overall connections reflects a minimal fee impact for all 
types of subscribers and reflects that subscribers

[[Page 58417]]

elected to reallocate existing 10Gb ULL connectivity directly to the 
Exchange or MIAX, or chose to decrease or cease connectivity as a 
result of the change.
---------------------------------------------------------------------------

    \115\ See supra note 9.
---------------------------------------------------------------------------

    Should the Commission Staff disapprove such fees, it would 
effectively dictate how an exchange manages its technology and would 
hamper the Exchange's ability to continue to invest in and fund access 
services in a manner that allows it to meet existing and anticipated 
access demands of market participants. Disapproval could also have the 
adverse effect of discouraging an exchange from optimizing its 
operations and deploying innovative technology to the benefit of market 
participants if it believes the Commission would later prevent that 
exchange from covering its costs and monetizing its operational 
enhancements, thus adversely impacting competition. Also, as noted 
above, the economic consequences of not being able to better establish 
fee parity with other exchanges for non-transaction fees hampers the 
Exchange's ability to compete on transaction fees.
Cost Analysis
    In general, the Exchange believes that exchanges, in setting fees 
of all types, should meet very high standards of transparency to 
demonstrate why each new fee or fee increase meets the Exchange Act 
requirements that fees be reasonable, equitably allocated, not unfairly 
discriminatory, and not create an undue burden on competition among 
members and markets. In particular, the Exchange believes that each 
exchange should take extra care to be able to demonstrate that these 
fees are based on its costs and reasonable business needs.
    In proposing to charge fees for connectivity 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,\116\ and Rule 19b-4 
thereunder,\117\ with respect to the types of information exchanges 
should provide when filing fee changes, and section 6(b) of the 
Act,\118\ which requires, among other things, that exchange fees be 
reasonable and equitably allocated,\119\ not designed to permit unfair 
discrimination,\120\ and that they not impose a burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Act.\121\ 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.\122\ 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.
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78s(b)(1).
    \117\ 17 CFR 240.19b-4.
    \118\ 15 U.S.C. 78f(b).
    \119\ 15 U.S.C. 78f(b)(4).
    \120\ 15 U.S.C. 78f(b)(5).
    \121\ 15 U.S.C. 78f(b)(8).
    \122\ See Staff Guidance, supra note 27.
---------------------------------------------------------------------------

    As detailed below, the Exchange recently calculated its aggregate 
annual costs for providing physical 10Gb ULL connectivity to the 
Exchange at $11,567,509 (or approximately $963,959 per month, rounded 
to the nearest dollar when dividing the annual cost by 12 months) and 
its aggregate annual costs for providing Full Service MEO Ports at 
$1,644,132 (or approximately $137,012 per month, rounded to the nearest 
dollar when dividing the annual cost by 12 months). In order to cover 
the aggregate costs of providing connectivity to its users (both 
Members and non-Members \123\) going forward and to make a modest 
profit, as described below, the Exchange proposes to modify its Fee 
Schedule to charge a fee of $13,500 per month for each physical 10Gb 
ULL connection and to remove language providing for a shared 10Gb ULL 
network between the Exchange and MIAX. The Exchange also proposes to 
modify its Fee Schedule to charge tiered rates for Full Service MEO 
Ports (Bulk) depending on the number of classes assigned or the 
percentage of national ADV, which is in line with how the Exchange's 
affiliates, MIAX and MIAX Emerald, assess fees for their comparable MEI 
Ports.
---------------------------------------------------------------------------

    \123\ Types of market participants that obtain connectivity 
services from the Exchange but are not Members include service 
bureaus and extranets. Service bureaus offer technology-based 
services to other companies for a fee, including order entry 
services, and thus, may access application sessions on behalf of one 
or more Members. Extranets offer physical connectivity services to 
Members and non-Members.
---------------------------------------------------------------------------

    In 2019, the Exchange completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis'').\124\ 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'').
---------------------------------------------------------------------------

    \124\ 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,\125\ 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

[[Page 58418]]

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

    \125\ For example, MIAX Pearl Options maintains 12 matching 
engines, MIAX Pearl Equities maintains 24 matching engines, MIAX 
maintains 24 matching engines and MIAX Emerald maintains 12 matching 
engines.
---------------------------------------------------------------------------

    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 (60.6% of total expense 
amount allocated to 10Gb ULL connectivity), with smaller allocations to 
Full Service MEO Ports (3.4%), and the remainder to the provision of 
other connectivity, other ports, transaction execution, membership 
services and market data services (36%). 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 Full Service MEO Port services, is 
$1,106,971 (utilizing the rounded numbers when dividing the annual cost 
for 10Gb ULL connectivity and annual cost for Full Service MEO Ports by 
12 months, then adding both numbers together), as further detailed 
below.
    Lastly, the Exchange notes that, based on: (i) the total expense 
amounts contained in this filing (which are 2023 projected expenses), 
and (ii) the total expense amounts contained in the related MIAX Pearl 
Equities filing (also 2023 projected expenses), MIAX PEARL, LLC's total 
costs have increased at a greater rate over the last three years than 
the total costs of MIAX PEARL, LLC's affiliated exchanges, MIAX and 
MIAX Emerald. This is also reflected in the total costs reported in 
MIAX PEARL, LLC's Form 1 filings over the last three years, when 
comparing MIAX PEARL, LLC to MIAX PEARL, LLC's affiliated exchanges, 
MIAX and MIAX Emerald. This is primarily because that MIAX PEARL, LLC 
operates two markets, one for options and one for equities, while MIAX 
and MIAX Emerald each operate only one market. This is also due to 
higher current expense for MIAX PEARL, LLC for 2022 and 2023, due to a 
hardware refresh (i.e., replacing old hardware with new equipment) for 
MIAX Pearl Options, as well as higher costs associated with MIAX Pearl 
Equities due to greater development efforts to grow that newer 
marketplace.\126\ The Exchange confirms

[[Page 58419]]

that there is no double counting of expenses between the options and 
equities platform of MIAX Pearl; the greater expense amounts of the 
MIAX PEARL, LLC (relative to its affiliated exchanges, MIAX and MIAX 
Emerald) is solely attributed to the unique factors of MIAX Pearl 
discussed above.
---------------------------------------------------------------------------

    \126\ See, e.g., Securities Exchange Act Release Nos. 94301 
(February 23, 2022), 87 FR 11739 (March 2, 2022) (SR-PEARL-2022-06) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend Rule 2617(b) To Adopt Two New Routing Options, and 
To Make Related Changes and Clarifications to Rules 2614(a)(2)(B) 
and 2617(b)(2)); 94851 (May 4, 2022), 87 FR 28077 (May 10, 2022) 
(SR-PEARL-2022-15) (Notice of Filing and Immediate Effectiveness of 
a Proposed Rule Change To Adopt Exchange Rule 532, Order Price 
Protection Mechanisms and Risk Controls); 95298 (July 15, 2022), 87 
FR 43579 (July 21, 2022) (SR-PEARL-2022-29) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC 
To Amend the Route to Primary Auction Routing Option Under Exchange 
Rule 2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR 55866 
(September 12, 2022) (SR-PEARL-2022-34) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend Exchange 
Rule 2614, Orders and Order Instructions, To Adopt the Primary Peg 
Order Type); 96205 (November 1, 2022), 87 FR 67080 (November 7, 
2022) (SR-PEARL-2022-43) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders 
and Order Instructions and Rule 2618, Risk Settings and Trading Risk 
Metrics To Enhance Existing Risk Controls); 96905 (February 13, 
2023), 88 FR 10391 (February 17, 2023) (SR-PEARL-2023-03) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Exchange Rule 2618 To Add Optional Risk Control Settings); 
97236 (March 31, 2023), 88 FR 20597 (April 6, 2023) (SR-PEARL-2023-
15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend Exchange Rules 2617 and 2626 Regarding Retail Orders 
Routed Pursuant to the Route to Primary Auction Routing Option).
---------------------------------------------------------------------------

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 
26.9% of its overall Human Resources cost to offering physical 
connectivity).

----------------------------------------------------------------------------------------------------------------
                                                                     Allocated       Allocated
                          Cost drivers                              annual cost    monthly cost      % of all
                                                                        \k\             \l\
----------------------------------------------------------------------------------------------------------------
Human Resources.................................................      $3,675,098        $306,258            26.3
Connectivity (external fees, cabling, switches, etc.)...........          70,163           5,847            60.6
Internet Services and External Market Data......................         322,388          26,866            73.3
Data Center.....................................................         739,983          61,665            60.6
Hardware and Software Maintenance and Licenses..................         959,157          79,930            58.6
Depreciation....................................................       1,885,969         157,164            58.2
Allocated Shared Expenses.......................................       3,914,751         326,229            49.2
                                                                 -----------------------------------------------
    Total.......................................................      11,567,509         963,959            40.5
----------------------------------------------------------------------------------------------------------------
\k\ The Annual Cost includes figures rounded to the nearest dollar.
\l\ 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.

    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 drivers for the 
Exchange's affiliated markets in their similar proposed fee changes for 
connectivity and ports. This is because MIAX Pearl Options' cost 
allocation methodology utilizes the actual projected costs of MIAX 
Pearl Options (which are specific to MIAX Pearl Options, and are 
independent of the costs projected and utilized by MIAX Pearl Options' 
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. MIAX Pearl Options provides additional 
explanation below (including the reason for the deviation) for the 
significant differences.
Human Resources
    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.
    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). As described more fully above, the Exchange's parent 
company allocates costs to the Exchange and its affiliated markets and 
then a portion of the Human Resources costs allocated to the Exchange 
is then allocated to connectivity. From that portion allocated to the 
Exchange that applied to connectivity, the Exchange then allocated a 
weighted average of 42.9% of each employee's time from the above group. 
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). 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 17%).
    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

[[Page 58420]]

were reasonable based on an understanding of the percentage of time 
such employees devote to those tasks. 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. Again, the Exchange allocated 42.9% of each of their 
employee's time assigned to the Exchange for 10Gb ULL connectivity, as 
stated above. Employees from these departments perform numerous 
functions to support 10Gb ULL connectivity, such as the installation, 
re-location, configuration, and maintenance of 10Gb ULL connections and 
the hardware they access. This hardware includes servers, routers, 
switches, firewalls, and monitoring devices. These employees also 
perform software upgrades, vulnerability assessments, remediation and 
patch installs, equipment configuration and hardening, as well as 
performance and capacity management. These employees also engage in 
research and development analysis for equipment and software supporting 
10Gb ULL connectivity and design, and support the development and on-
going maintenance of internally-developed applications as well as data 
capture and analysis, and Member and internal Exchange reports related 
to network and system performance. The above list of employee functions 
is not exhaustive of all the functions performed by Exchange employees 
to support 10Gb ULL connectivity, but illustrates the breath of 
functions those employees perform in support of the above cost and time 
allocations.
    Lastly, the Exchange notes that senior level executives' time was 
only allocated to the 10Gb ULL connectivity related 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 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 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. 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.
    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 an amount 
of such costs to 10Gb ULL connectivity.
    The Exchange relies on 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 MIAX Emerald, 
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 
MIAX Emerald 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) MIAX Emerald 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 MIAX Emerald 
allocated to the Internet Services and External Market Data cost driver 
is greater than the Exchange and its other affiliated

[[Page 58421]]

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 (60.6%) to 
physical 10Gb ULL connectivity because the third-party data centers and 
the Exchange's physical equipment contained therein is the most direct 
cost in providing physical access to the Exchange. In other words, for 
the Exchange to operate in a dedicated space with connectivity 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.\127\ The Exchange notes that 
this allocation is greater than MIAX and MIAX Emerald options exchanges 
by a significant amount as MIAX Pearl Options allocated 58.6% of its 
Hardware and Software Maintenance and License expense towards 10Gb ULL 
connectivity, while MIAX and MIAX Emerald allocated 49.8% and 50.9%, 
respectively, to the same category of expense. This is because MIAX 
Pearl Options is in the process of replacing and upgrading various 
hardware and software used to operate its options trading platform in 
order to maintain premium network performance. At the time of this 
filing, the Exchange is undergoing a major hardware refresh, replacing 
older hardware with new hardware. This hardware includes servers, 
network switches, cables, optics, protocol data units, and cabinets, to 
maintain a state-of-the-art technology platform. Because of the timing 
of the hardware refresh with the timing of this filing, the Exchange 
has materially higher expense than its affiliates. Also, MIAX Pearl 
Equities allocated a higher percentage of the same category of expense 
(58%) towards its Hardware and Software Maintenance and License expense 
for 10Gb ULL connectivity, which MIAX Pearl Equities explains in its 
own proposal to amend its 10Gb ULL connectivity fees.
---------------------------------------------------------------------------

    \127\ This expense may be greater than the Exchange's affiliated 
markets, specifically MIAX and MIAX Emerald, because, unlike the 
MIAX and MIAX Emerald, MIAX Pearl (the options and equities markets) 
maintains an additional gateway to accommodate its Members' and 
Equity Members' access and connectivity needs. This added gateway 
contributes to the difference in allocations between MIAX Pearl, 
MIAX and MIAX Emerald. This expense also differs in dollar amount 
among the MIAX Pearl (options and equities markets), MIAX, and MIAX 
Emerald 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 
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 58.2% 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 less than that of MIAX by approximately $35,000 per 
month due to two factors: first, MIAX has undergone a technology 
refresh since the time MIAX Pearl Options launched in 2017, leading to 
it having more hardware that software that is subject to depreciation. 
Second, MIAX maintains 24 matching engines while MIAX Pearl Options 
maintains only 12 matching engines. This also results in more of MIAX's 
hardware and software being subject to depreciation than MIAX Pearl 
Options' 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, as with other exchange products and services, a portion of 
general shared expenses was allocated to overall physical connectivity 
costs. These general shared costs are integral to exchange operations, 
including its ability to provide physical connectivity. Costs included 
in general shared expenses include 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. Similarly, the cost of paying 
directors to serve on the Exchange's Board of Directors is also 
included in the Exchange's general shared expense cost driver.\128\ 
These general shared expenses are incurred by the Exchange's parent 
company, MIH, as

[[Page 58422]]

a direct result of operating the Exchange and its affiliated markets.
---------------------------------------------------------------------------

    \128\ 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.
---------------------------------------------------------------------------

    The Exchange employed a process to determine a reasonable 
percentage to allocate general shared expenses to 10Gb ULL connectivity 
pursuant to its multi-layered allocation process. First, general 
expenses were allocated among the Exchange and affiliated markets as 
described above. Then, the general shared expense assigned to the 
Exchange was allocated across core services of the Exchange, including 
connectivity. Then, these costs were further allocated to sub-
categories within the final categories, i.e., 10Gb ULL connectivity as 
a sub-category of connectivity. In determining the percentage of 
general shared expenses allocated to connectivity that ultimately apply 
to 10Gb ULL connectivity, the Exchange looked at the percentage 
allocations of each of the cost drivers and determined a reasonable 
allocation percentage. The Exchange also held meetings with senior 
management, department heads, and the Finance Team to determine the 
proper amount of the shared general expense to allocate to 10Gb ULL 
connectivity. The Exchange, therefore, believes it is reasonable to 
assign an allocation, in the range of allocations for other cost 
drivers, while continuing to ensure that this expense is only allocated 
once. Again, the general shared expenses are incurred by the Exchange's 
parent company as a result of operating the Exchange and its affiliated 
markets and it is therefore reasonable to allocate a percentage of 
those expenses to the Exchange and ultimately to specific product 
offerings such as 10Gb ULL connectivity.
    The Exchange notes that the 49.2% allocation of general shared 
expenses for physical 10Gb ULL connectivity is higher than that 
allocated to general shared expenses for Full Service MEO Ports. This 
is based on its allocation methodology that weighted costs attributable 
to each core service. While physical connectivity has several areas 
where certain tangible costs are heavily weighted towards providing 
such service (e.g., Data Center, as described above), Full Service MEO 
Ports do not require as many broad or indirect resources as other core 
services.
* * * * *
Approximate Cost per 10Gb Connection per Month
    After determining the approximate allocated monthly cost related to 
10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of 
$963,959 was divided by the number of physical 10Gb ULL connections the 
Exchange maintained at the time that proposed pricing was determined 
(108), to arrive at a cost of approximately $8,925 per month, per 
physical 10Gb ULL connection. 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 Full Service MEO Ports
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering Full Service MEO 
Ports as well as the percentage of the Exchange's overall costs such 
costs represent for such area (e.g., as set forth below, the Exchange 
allocated approximately 8.3% of its overall Human Resources cost to 
offering Full Service MEO Ports).

----------------------------------------------------------------------------------------------------------------
                                                                     Allocated       Allocated
                          Cost drivers                              annual cost    monthly cost      % of all
                                                                        \m\             \n\
----------------------------------------------------------------------------------------------------------------
Human Resources.................................................      $1,159,831         $96,653             8.3
Connectivity (external fees, cabling, switches, etc.)...........           1,589             132             1.4
Internet Services and External Market Data......................           6,033             503             1.4
Data Center.....................................................          41,881           3,490             3.4
Hardware and Software Maintenance and Licenses..................          22,438           1,870             1.4
Depreciation....................................................         127,986          10,666             3.9
Allocated Shared Expenses.......................................         284,374          23,698             3.6
                                                                 -----------------------------------------------
    Total.......................................................       1,644,132         137,012             5.8
----------------------------------------------------------------------------------------------------------------
\m\ See supra note k (describing rounding of Annual Costs).
\n\ See supra note l (describing rounding of Monthly Costs based on Annual Costs).

    Below are additional details regarding each of the line-item costs 
considered by the Exchange to be related to offering Full Service MEO 
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 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
    With respect to Full Service MEO Ports, the Exchange calculated 
Human Resources cost by taking an allocation of employee time for 
employees whose functions include providing Full Service MEO Ports and 
maintaining performance thereof (including a broader range of employees 
such as technical operations personnel, market operations personnel, 
and software engineering personnel) as well as a limited subset of 
personnel with ancillary functions related to maintaining such 
connectivity (such as sales, membership, and finance personnel). 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 Full Service MEO 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 Full Service MEO Ports and maintaining 
performance thereof. This includes personnel from the following 
Exchange departments that are predominately involved in providing Full 
Service MEO Ports: Business Systems Development, Trading

[[Page 58423]]

Systems Development, Systems Operations and Network Monitoring, Network 
and Data Center Operations, Listings, Trading Operations, and Project 
Management. The Exchange notes that senior level executives were 
allocated Human Resources costs to the extent they are involved in 
overseeing tasks specifically related to providing Full Service MEO 
Ports. 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 Full Service MEO 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.
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 Full Service MEO 
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 Full Service MEO 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).\129\ Thus, since market data from other exchanges is 
consumed at the Exchange's Full Service MEO 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 Full Service MEO Ports.
---------------------------------------------------------------------------

    \129\ 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 lower than that of its 
affiliate, MIAX, as MIAX allocated 7.2% 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 May 2023, MIAX Market Makers utilized 
1,770 Limited Service MEI ports and MIAX Emerald Market Makers utilized 
1,017 Limited Service MEI Ports. When compared to Full Service Port 
(Bulk and Single) usage, for May 2023, MIAX Pearl Options Members 
utilized only 384 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 Full Service MEO 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 Full Service MEO 
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 less than its affiliate, 
MIAX, as MIAX allocated 7.2% 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 May 2023, MIAX Market Makers 
utilized 1,770 Limited Service MEI ports and MIAX Emerald Market Makers 
utilized 1,017 Limited Service MEI Ports. When compared to Full Service 
Port (Bulk and Single) usage, for May 2023, MIAX Pearl Options Members 
utilized only 384 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 of expense than MIAX 
Pearl Options, which has a lower port count.
Depreciation
    The vast majority of the software the Exchange uses to provide Full 
Service MEO 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 Full Service MEO 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, which also includes assets used for 
testing and monitoring of order entry infrastructure, were valued at 
cost, depreciated or leased over periods ranging from three to five 
years. Thus, the depreciation cost primarily relates to servers 
necessary to operate the Exchange, some of which is owned by the 
Exchange and some of which is leased by the Exchange in order to allow 
efficient periodic technology refreshes. The Exchange allocated 3.9% of 
all depreciation costs to providing Full Service MEO Ports. The 
Exchange allocated depreciation costs for depreciated software 
necessary to operate the Exchange to Full Service MEO Ports because 
such software is related to the provision of Full Service MEO 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 Full Service MEO 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

[[Page 58424]]

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 percentage it allocated to 
the depreciation cost driver for Full Service MEO Ports and the 
percentage its affiliate, MIAX, allocated to the depreciation cost 
driver for MIAX's Limited Service MEI Ports, differ by only 2.4%. 
However, MIAX's approximate dollar amount is greater than that of MIAX 
Pearl Options by approximately $9,000 per month. This is due to two 
primary factors. First, MIAX has under gone a technology refresh since 
the time MIAX Pearl Options launched in 2017, leading to it having more 
hardware that software that is subject to depreciation. Second, MIAX 
maintains 24 matching engines while MIAX Pearl Options maintains only 
12 matching engines. This also results in more of MIAX's hardware and 
software being subject to depreciation than MIAX Pearl Options' 
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 portion of general shared expenses was allocated to 
overall Full Service MEO Ports costs as without these general shared 
costs the Exchange would not be able to operate in the manner that it 
does and provide application sessions. The costs included in general 
shared expenses include general expenses of the Exchange, including 
office space and office expenses (e.g., occupancy and overhead 
expenses), utilities, recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services (including external and internal audit expenses), and 
telecommunications costs. The Exchange again notes that the cost of 
paying directors to serve on its Board of Directors is included in the 
calculation of Allocated Shared Expenses, and thus a portion of such 
overall cost amounting to less than 4.0% of the overall cost for 
directors was allocated to providing Full Service MEO Ports. The 
Exchange notes that the 3.6% allocation of general shared expenses for 
Full Service MEO Ports is lower than that allocated to general shared 
expenses for physical connectivity based on its allocation methodology 
that weighted costs attributable to each Core Service based on an 
understanding of each area. While Full Service MEO Ports have several 
areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Centers, as described above), 10Gb 
ULL connectivity requires a broader level of support from Exchange 
personnel in different areas, which in turn leads to a broader general 
level of cost to the Exchange.
    Lastly, the Exchange notes that this allocation is less than its 
affiliate, MIAX, as MIAX allocated 9.8% 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 May 2023, MIAX Market Makers utilized 1,770 Limited 
Service MEI Ports and MIAX Emerald Market Makers utilized 1,017 Limited 
Service MEI ports. When compared to Full Service Port (Bulk and Single) 
usage, for May 2023, MIAX Pearl Options Members utilized only 384 Full 
Service MEO Ports (Bulk and Single), far fewer than number of Limited 
Service MEI Ports utilized by Market Makers on MIAX, 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.
* * * * *
Approximate Cost per Full Service MEO Port per Month
    Based on May 2023 data, the total monthly cost allocated to Full 
Service MEO Ports of $137,012 was divided by the number of chargeable 
Full Service MEO Ports the Exchange maintained at the time that 
proposed pricing was determined (25 total; 25 Full Service MEO Port, 
Bulk, and 0 Full Service MEO Port, Single), to arrive at a cost of 
approximately $5,480 per month, per charged Full Service MEO Port.
* * * * *
Cost Analysis--Additional Discussion
    In conducting its Cost Analysis, the Exchange did not allocate any 
of its expenses in full to any core services (including physical 
connectivity or Full Service MEO Ports) and did not double- count any 
expenses. Instead, as described above, the Exchange allocated 
applicable cost drivers across its core services and used the same Cost 
Analysis to form the basis of this proposal and the filings the 
Exchange submitted proposing fees for proprietary data feeds offered by 
the Exchange. For instance, in calculating the Human Resources expenses 
to be allocated to physical connections based upon the above described 
methodology, the Exchange has a team of employees dedicated to network 
infrastructure and with respect to such employees the Exchange 
allocated network infrastructure personnel with a high percentage of 
the cost of such personnel (42.9%) given their focus on functions 
necessary to provide physical connections. The salaries of those same 
personnel were allocated only 12.3% to Full Service MEO Ports and the 
remaining 44.8% was allocated to 1Gb connectivity, other port services, 
transaction services, membership services and market data. The Exchange 
did not allocate any other Human Resources expense for providing 
physical connections to any other employee group, outside of a smaller 
allocation of 16.9% for 10Gb ULL connectivity or 17.3% for the entire 
network, of the cost associated with certain specified personnel who 
work closely with and support network infrastructure personnel. In 
contrast, the Exchange allocated much smaller percentages of costs 
(6.0% or less) across a wider range of personnel groups in order to 
allocate Human Resources costs to providing Full Service MEO Ports. 
This is because a much wider range of personnel are involved in 
functions necessary to offer, monitor and maintain Full Service MEO 
Ports but the tasks necessary to do so are not a primary or full-time 
function.
    In total, the Exchange allocated 26.9% of its personnel costs to 
providing 10Gb ULL and 1Gb ULL connectivity and 8.3% of its personnel 
costs to providing Full Service MEO Ports, for a total allocation of 
35.2% Human Resources expense to provide these specific connectivity 
and port services. In turn, the Exchange allocated the remaining 64.8% 
of its Human Resources expense to membership services, transaction 
services, other port services and market data. Thus, again, the 
Exchange's allocations of cost across core services were based on real 
costs of operating the Exchange and were not double-counted across the 
core services or their associated revenue streams.
    As another example, the Exchange allocated depreciation expense to 
all core services, including physical connections and Full Service MEO 
Ports, but in different amounts. The Exchange believes it is reasonable 
to allocate the identified portion of such expense because such expense 
includes

[[Page 58425]]

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 62.1% of the Exchange's overall depreciation and 
amortization expense to connectivity services (58.2% attributed to 10Gb 
ULL physical connections and 3.9% to Full Service MEO Ports). The 
Exchange allocated the remaining depreciation and amortization expense 
(approximately 37.9%) toward the cost of providing transaction 
services, membership services, other port services and market data.
    The Exchange notes that its revenue estimates are based on 
projections across all potential revenue streams and will only be 
realized to the extent such revenue streams actually produce the 
revenue estimated. The Exchange does not yet know whether such 
expectations will be realized. For instance, in order to generate the 
revenue expected from connectivity, the Exchange will have to be 
successful in retaining existing clients that wish to maintain physical 
connectivity and/or Full Service MEO Ports or in obtaining new clients 
that will purchase such services. Similarly, the Exchange will have to 
be successful in retaining a positive net capture on transaction fees 
in order to realize the anticipated revenue from transaction pricing.
    The Exchange notes that the Cost Analysis is based on the 
Exchange's 2023 fiscal year of operations and projections. 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, we believe that it is appropriate for an exchange to 
refresh and update information about its relevant costs and revenues in 
seeking any future changes to fees, and the Exchange commits to do so.
Projected Revenue \130\
---------------------------------------------------------------------------

    \130\ For purposes of calculating revenue for 10Gb ULL 
connectivity, the Exchange used revenues for February 2023, the 
first full month for which it provided dedicated 10Gb ULL 
connectivity to MIAX Pearl Options and ceased operating a shared 
10Gb ULL network with MIAX.
---------------------------------------------------------------------------

    The proposed fees will allow the Exchange to cover certain costs 
incurred by the Exchange associated with providing and maintaining 
necessary hardware and other network infrastructure as well as network 
monitoring and support services; without such hardware, infrastructure, 
monitoring and support the Exchange would be unable to provide the 
connectivity 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.
    The Exchange's Cost Analysis estimates the annual cost to provide 
10Gb ULL connectivity services will equal $11,567,509. Based on current 
10Gb ULL connectivity services usage, the Exchange would generate 
annual revenue of approximately $17,496,000. The Exchange believes this 
represents a modest profit of 34% when compared to the cost of 
providing 10Gb ULL connectivity services, which could decrease over 
time.\131\ The Exchange's Cost Analysis estimates the annual cost to 
provide Full Service MEO Port services will equal $1,644,132. Based on 
current Full Service MEO Port services usage, the Exchange would 
generate annual revenue of approximately $1,644,000. The Exchange 
believes this would result in a small negative margin after calculating 
the cost of providing Full Service MEO Port services, which could 
decrease further over time.\132\
---------------------------------------------------------------------------

    \131\ 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 August 4, 2023).
    \132\ Id.
---------------------------------------------------------------------------

    Based on the above discussion, 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 excessive 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 Full Service MEO Port services 
versus the total projected revenue of the Exchange associated with 
network 10Gb ULL connectivity and Full Service MEO Port services.
    The Exchange also notes that this the resultant profit margin 
differs slightly

[[Page 58426]]

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 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).\133\ NYSE American charges 
even higher fees for its comparable 10GB LX LCN connection than the 
Exchange's proposed fees ($13,500 for the Exchange vs. $22,000 per 
month for NYSE American).\134\ 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).
---------------------------------------------------------------------------

    \133\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \134\ 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 2017.\135\ 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 it should now 
be penalized for seeking to raise its fees as it now needs to upgrade 
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 Full Service MEO Ports, the extent to which the 
product drives the Exchange's overall costs and the relative value of 
the product, as well as the Exchange's objective to make access to its 
Systems broadly available to market participants. The Exchange also 
believes the proposed fees are reasonable because they are designed to 
generate annual revenue to recoup the Exchange's costs of providing 
dedicated 10Gb ULL connectivity and Full Service MEO Ports.
---------------------------------------------------------------------------

    \135\ The Exchange has incurred a cumulative loss of $83 million 
since its inception in 2017 through full year 2022. See Exchange's 
Form 1/A, Application for Registration or Exemption from 
Registration as a National Securities Exchange, filed June 26, 2023, 
available at https://www.sec.gov/Archives/edgar/vprr/2300/23007743.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 Full Service MEO Ports, the 
Exchange will have to be successful in retaining existing clients that 
wish to utilize 10Gb ULL connectivity and Full Service MEO Ports and/or 
obtaining new clients that will purchase such access. To the extent the 
Exchange is successful in encouraging new clients to utilize 10Gb ULL 
connectivity and Full Service MEO Ports, the Exchange does not believe 
it should be penalized for such success. 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 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

[[Page 58427]]

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.\136\ 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.
---------------------------------------------------------------------------

    \136\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

Full Service MEO Ports
    The tiered pricing structure for Full Service MEO Ports has been in 
effect since 2018.\137\ The Exchange now proposes a pricing structure 
that is used by the Exchange's affiliates, MIAX and MIAX Emerald, 
except with lower pricing for each tier for Full Service MEO Ports 
(Bulk) and a flat fee for Full Service MEO Ports (Single). Members that 
are frequently in the highest tier for Full Service MEO Ports consume 
the most bandwidth and resources of the network. Specifically, as noted 
above for 10Gb ULL connectivity, Market Makers who reach the highest 
tier for Full Service MEO Ports (Bulk) account for greater than 84% of 
ADV on the Exchange, while Market Makers that are typically in the 
lowest Tier for Full Service MEO Ports, account for less than 14% of 
ADV on the Exchange. The remaining 1% is accounted for by Market Makers 
who are frequently in the middle Tier for Full Service MEO Ports 
(Bulk).
---------------------------------------------------------------------------

    \137\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------

    To achieve a consistent, premium network performance, the Exchange 
must build out and maintain a network that has the capacity to handle 
the message rate requirements of its most heavy network consumers 
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.\138\ Thus, as the number of connections a Market Maker 
has increases, the related pull on Exchange resources also increases. 
The Exchange sought to design the proposed tiered-pricing structure to 
set the amount of the fees to relate to the number of connections a 
firm purchases. The more connections purchased by a Market Maker likely 
results in greater expenditure of Exchange resources and increased cost 
to the Exchange.
---------------------------------------------------------------------------

    \138\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    The Exchange further believes that the proposed fees are 
reasonable, equitably allocated and not unfairly discriminatory 
because, for the flat fee, the Exchange provides each Member two (2) 
Full Service MEO Ports for each matching engine to which that Member is 
connected. Unlike other options exchanges that provide similar port 
functionality and charge fees on a per port basis,\139\ the Exchange 
offers Full Service MEO Ports as a package and provides Members with 
the option to receive up to two Full Service MEO Ports per matching 
engine to which it connects. The Exchange currently has twelve (12) 
matching engines, which means Members may receive up to twenty-four 
(24) Full Service MEO Ports for a single monthly fee, that can vary 
based on certain volume percentages. The Exchange currently assesses 
Members a fee of $5,000 per month in the highest Full Service MEO 
Port--Bulk Tier, regardless of the number of Full Service MEO Ports 
allocated to the Member. Assuming a Member connects to all twelve (12) 
matching engines during a month, with two Full Service MEO Ports per 
matching engine, this results in a cost of $208.33 per Full Service MEO 
Port--Bulk ($5,000 divided by 24) for the month. This fee has been 
unchanged since the Exchange adopted Full Service MEO Port fees in 
2018.\140\ Members will continue to receive two (2) Full Service MEO 
Ports to each matching engine to which they are connected for the 
single flat monthly fee. Assuming a Member connects to all twelve (12) 
matching engines during the month, and achieves the highest Tier for 
that month, with two Full Service MEO Ports (Bulk) per matching engine, 
this would result in a cost of $500 per Full Service MEO Port ($12,000 
divided by 24).
---------------------------------------------------------------------------

    \139\ See supra notes 101 to 109 and accompanying text.
    \140\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).

---------------------------------------------------------------------------

[[Page 58428]]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes the proposed fees will not result in any 
burden on intra-market competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the proposed fees 
will allow the Exchange to recoup some of its costs in providing 10Gb 
ULL connectivity and Full Service MEO Ports at below market rates to 
market participants since the Exchange launched operations. As 
described above, the Exchange has operated at a cumulative net annual 
loss since it launched operations in 2017 \141\ due to providing a low-
cost alternative to attract order flow and encourage market 
participants to experience the high determinism and resiliency of the 
Exchange's trading Systems. To do so, the Exchange chose to waive the 
fees for some non-transaction related services and Exchange products or 
provide them at a very lower fee, which was not profitable to the 
Exchange. This resulted in the Exchange forgoing revenue it could have 
generated from assessing any fees or higher fees. The Exchange could 
have sought to charge higher fees at the outset, but that could have 
served to discourage participation on the Exchange. Instead, the 
Exchange chose to provide a low-cost exchange alternative to the 
options industry, which resulted in lower initial revenues. Examples of 
this are 10Gb ULL connectivity and Full Service MEO Ports, for which 
the Exchange only now seeks to adopt fees at a level similar to or 
lower than those of other options exchanges.
---------------------------------------------------------------------------

    \141\ See supra note 135.
---------------------------------------------------------------------------

    Further, the Exchange does not believe that the proposed fee 
increase for the 10Gb ULL connection change would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants or affect the ability of such market 
participants to compete. As is the case with the current proposed flat 
fee, the proposed fee would apply uniformly to all market participants 
regardless of the number of connections they choose to purchase. The 
proposed fee does not favor certain categories of market participants 
in a manner that would impose an undue burden on competition.
    The Exchange does not believe that the proposed rule change would 
place certain market participants at the Exchange at a relative 
disadvantage compared to other market participants or affect the 
ability of such market participants to compete. In particular, Exchange 
personnel has been informally discussing potential fees for 
connectivity services with a diverse group of market participants that 
are connected to the Exchange (including large and small firms, firms 
with large connectivity service footprints and small connectivity 
service footprints, as well as extranets and service bureaus) for 
several months leading up to that time. The Exchange does not believe 
the proposed fees for connectivity services would negatively impact the 
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and 
customers of those resellers to compete with other market participants 
or that they are placed at a disadvantage.
    The Exchange does anticipate, however, that some market 
participants may reduce or discontinue use of connectivity services 
provided directly by the Exchange in response to the proposed fees. In 
fact, as mentioned above, one MIAX Pearl Options Market Maker 
terminated their membership on January 1, 2023 as a direct result of 
the proposed fee changes.\142\ 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.
---------------------------------------------------------------------------

    \142\ 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 90. 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.
---------------------------------------------------------------------------

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.
    The Exchange also believes that the proposed fees for 10Gb 
connectivity are appropriate and warranted and would not impose any 
burden on competition. This is a technology driven change designed to 
meet customer needs. The proposed fees would assist the Exchange in 
recovering costs related to providing dedicated 10Gb connectivity to 
the Exchange while enabling it to continue to meet current and 
anticipated demands for connectivity by its Members and other market 
participants. Separating its 10Gb network from MIAX enables the 
Exchange to better compete with other

[[Page 58429]]

exchanges by ensuring it can continue to provide adequate connectivity 
to existing and new Members, which may increase in ability to compete 
for order flow and deepen its liquidity pool, improving the overall 
quality of its market. The proposed rates for 10Gb ULL connectivity are 
structured to enable the Exchange to bifurcate its 10Gb ULL network 
shared with MIAX so that it can continue to meet current and 
anticipated connectivity demands of all market participants.
    Similarly, and also in connection with a technology change, Cboe 
Exchange, Inc. (``Cboe'') amended its access and connectivity fees, 
including port fees.\143\ Specifically, Cboe adopted certain logical 
ports to allow for the delivery and/or receipt of trading messages--
i.e., orders, accepts, cancels, transactions, etc. Cboe established 
tiered pricing for BOE and FIX logical ports, tiered pricing for BOE 
Bulk ports, and flat prices for DROP, Purge Ports, GRP Ports and 
Multicast PITCH/Top Spin Server Ports. Cboe argued in its fee proposal 
that the proposed pricing more closely aligned its access fees to those 
of its affiliated exchanges as the affiliated exchanges offer 
substantially similar connectivity and functionality and are on the 
same platform that Cboe migrated to.\144\ Cboe justified its proposal 
by stating that, ``. . . the Exchange believes substitutable products 
and services are in fact available to market participants, including, 
among other things, other options exchanges a market participant may 
connect to in lieu of the Exchange, indirect connectivity to the 
Exchange via a third-party reseller of connectivity and/or trading of 
any options product, including proprietary products, in the Over-the-
Counter (OTC) markets.'' \145\ The Exchange concurs with the following 
statement by Cboe,
---------------------------------------------------------------------------

    \143\ See Securities Exchange Act Release No. 90333 (November 4, 
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105). The 
Exchange notes that Cboe submitted this filing after the Staff 
Guidance and contained no cost based justification.
    \144\ Id. at 71676.
    \145\ Id.

    The rule structure for options exchanges are also fundamentally 
different from those of equities exchanges. In particular, options 
market participants are not forced to connect to (and purchase 
market data from) all options exchanges. For example, there are many 
order types that are available in the equities markets that are not 
utilized in the options markets, which relate to mid-point pricing 
and pegged pricing which require connection to the SIPs and each of 
the equities exchanges in order to properly execute those orders in 
compliance with best execution obligations. Additionally, in the 
options markets, the linkage routing and trade through protection 
are handled by the exchanges, not by the individual members. Thus 
not connecting to an options exchange or disconnecting from an 
options exchange does not potentially subject a broker-dealer to 
violate order protection requirements. Gone are the days when the 
retail brokerage firms (such as Fidelity, Schwab, and eTrade) were 
members of the options exchanges--they are not members of the 
Exchange or its affiliates, they do not purchase connectivity to the 
Exchange, and they do not purchase market data from the Exchange. 
Accordingly, not only is there not an actual regulatory requirement 
to connect to every options exchange, the Exchange believes there is 
also no ``de facto'' or practical requirement as well, as further 
evidenced by the recent significant reduction in the number of 
broker-dealers that are members of all options exchanges.\146\
---------------------------------------------------------------------------

    \146\ Id. at 71676.

    The Cboe proposal also referenced the National Market System Plan 
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\147\ wherein 
the Commission discussed the existence of competition in the 
marketplace generally, and particularly for exchanges with unique 
business models. The Commission acknowledged that, even if an exchange 
were to exit the marketplace due to its proposed fee-related change, it 
would not significantly impact competition in the market for exchange 
trading services because these markets are served by multiple 
competitors.\148\ Further, the Commission explicitly stated that 
``[c]onsequently, demand for these services in the event of the exit of 
a competitor is likely to be swiftly met by existing competitors.'' 
\149\ Finally, the Commission recognized that while some exchanges may 
have a unique business model that is not currently offered by 
competitors, a competitor could create similar business models if 
demand were adequate, and if a competitor did not do so, the Commission 
believes it would be likely that new entrants would do so if the 
exchange with that unique business model was otherwise profitable.\150\
---------------------------------------------------------------------------

    \147\ See Securities Exchange Act Release No. 86901 (September 
9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
    \148\ Id.
    \149\ Id.
    \150\ Id.
---------------------------------------------------------------------------

    Cboe also filed to establish a monthly fee for Certification 
Logical Ports of $250 per Certification Logical Port.\151\ Cboe 
reasoned that purchasing additional Certification Logical Ports, beyond 
the one Certification Logical Port per logical port type offered in the 
production environment free of charge, is voluntary and not required in 
order to participate in the production environment, including live 
production trading on the Exchange.\152\
---------------------------------------------------------------------------

    \151\ See Securities Exchange Act Release No. 94512 (March 24, 
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011). Cboe offers 
BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical 
Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server 
Ports. For each type of the aforementioned logical ports that are 
used in the production environment, the Exchange also offers 
corresponding ports which provide Trading Permit Holders and non-
TPHs access to the Exchange's certification environment to test 
proprietary systems and applications (i.e., ``Certification Logical 
Ports'').
    \152\ See Securities Exchange Act Release No. 94512 (March 24, 
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011).
---------------------------------------------------------------------------

    In its statutory basis, Cboe justified the new port fee by stating 
that it believed the Certification Logical Port fee were reasonable 
because while such ports were no longer completely free, TPHs and non-
TPHs would continue to be entitled to receive free of charge one 
Certification Logical Port for each type of logical port that is 
currently offered in the production environment.\153\ Cboe noted that 
other exchanges assess similar fees and cited to NASDAQ LLC and 
MIAX.\154\ Cboe also noted that the decision to purchase additional 
ports is optional and no market participant is required or under any 
regulatory obligation to purchase excess Certification Logical Ports in 
order to access the Exchange's certification environment.\155\ Finally, 
similar proposals to adopt a Certification Logical Port monthly fee 
were filed by Cboe BYX Exchange, Inc.,\156\ BZX,\157\ and Cboe EDGA 
Exchange, Inc.\158\
---------------------------------------------------------------------------

    \153\ Id. at 18426.
    \154\ Id.
    \155\ Id.
    \156\ See Securities Exchange Act Release No. 94507 (March 24, 
2002), 87 FR 18439 (March 30, 2022) (SR-CboeBYX-2022-004).
    \157\ See Securities Exchange Act Release No. 94511 (March 24, 
2002), 87 FR 18411 (March 30, 2022) (SR-CboeBZX-2022-021).
    \158\ See Securities Exchange Act Release No. 94517 (March 25, 
2002), 87 FR 18848 (March 31, 2022) (SR-CboeEDGA-2022-004).
---------------------------------------------------------------------------

    The Cboe fee proposals described herein were filed subsequent to 
the D.C. Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866 
F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject 
to the same (and current) standard for SEC review and approval as this 
proposal. In summary, the Exchange requests the Commission apply the 
same standard of review to this proposal which was applied to the 
various Cboe and Cboe affiliated markets' filings with respect to non-
transaction fees. If the Commission were to apply a different standard 
of review to this proposal than it applied to other exchange fee 
filings it would create a burden on competition such that it would 
impair the Exchange's ability to make necessary technology driven

[[Page 58430]]

changes, such as bifurcating its 10Gb ULL network, because it would be 
unable to monetize or recoup costs related to that change and compete 
with larger, non-legacy exchanges.
* * * * *
    In conclusion, as discussed thoroughly above, the Exchange 
regrettably believes that the application of the Revised Review Process 
and Staff Guidance has adversely affected inter-market competition 
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and 
access services (including connectivity and port products and services) 
that are on parity or commensurate with fee levels previously 
established by legacy exchanges. Since the adoption of the Revised 
Review Process and Staff Guidance, and even more so recently, it has 
become extraordinarily difficult to adopt or increase fees to generate 
revenue necessary to invest in systems, provide innovative trading 
products and solutions, and improve competitive standing to the benefit 
of non-legacy exchanges' market participants. Although the Staff 
Guidance served an important policy goal of improving disclosures and 
requiring exchanges to justify that their market data and access fee 
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase 
fees that would enable them to more fairly compete with legacy 
exchanges, despite providing enhanced disclosures and rationale under 
both competitive and cost basis approaches provided for by the Revised 
Review Process and Staff Guidance to support their proposed fee 
changes.

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

    The Exchange received one comment letter on the Initial Proposal, 
one comment letter on the Second Proposal, one comment letter on the 
Third Proposal, and one comment letter on the Fourth Proposal, all from 
the same commenter.\159\ 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 filings. Among other things, the 
commenter is requesting additional data and information that is both 
opaque and a moving target and would constitute a level of disclosure 
materially over and above that provided by any competitor exchanges.
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    \159\ 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, May 24, 2023 and July 
24, 2023.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A)(ii) of the Act,\160\ and Rule 19b-4(f)(2) \161\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act. If the Commission takes such 
action, the Commission shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.
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    \160\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \161\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-PEARL-2023-35 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-SR-PEARL-2023-35. 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-2023-35 and should be 
submitted on or before September 15, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\162\
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    \162\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18302 Filed 8-24-23; 8:45 am]
BILLING CODE 8011-01-P

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