Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Modify Certain Connectivity and Port Fees, 72174-72196 [2023-23038]

Download as PDF 72174 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices exchanges and with alternative trading systems that have been exempted from compliance with the statutory standards applicable to exchanges. Because competitors are free to modify their own fees in response, the Exchange believes that the degree to which fee changes in this market may impose any burden on competition is extremely limited. Approval of the proposal does not impose any burden on the ability of other exchanges to compete. As noted above, time synchronization services are offered by other vendors and any exchange has the ability to offer such services if it so chooses. Nothing in the proposal burdens intra-market competition (the competition among consumers of exchange data) because the GPS antenna is available to any customer under the same fees as any other customer, and any market participant that wishes to purchase a GPS antenna can do so on a non-discriminatory basis. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. 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.17 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: (i) necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) 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 lotter on DSK11XQN23PROD with NOTICES1 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: • Send an email to rule-comments@ sec.gov. Please include file number SR– MRX–2023–19 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments [Release No. 34–98751; File No. SR– EMERALD–2023–27] • 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–MRX–2023–19. 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–MRX–2023–19 and should be submitted on or before November 9, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–23035 Filed 10–18–23; 8:45 am] BILLING CODE 8011–01–P Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Modify Certain Connectivity and Port Fees October 13, 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 October 2, 2023, MIAX Emerald, LLC (‘‘MIAX Emerald’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the MIAX Emerald Options Exchange Fee Schedule (‘‘Fee Schedule’’) to amend certain connectivity and port fees. The text of the proposed rule change is available on the Exchange’s website at https://www.miaxoptions.com/rulefilings, at MIAX Emerald’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. 1 15 17 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 17:48 Oct 18, 2023 18 17 Jkt 262001 PO 00000 CFR 200.30–3(a)(12). Frm 00134 Fmt 4703 Sfmt 4703 2 17 E:\FR\FM\19OCN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change lotter on DSK11XQN23PROD with NOTICES1 1. Purpose The Exchange proposes to amend the Fee Schedule as follows: (1) increase the fees for a 10 gigabit (‘‘Gb’’) ultra-low latency (‘‘ULL’’) fiber connection for Members 3 and non-Members; and (2) amend the monthly port fee for additional Limited Service MIAX Emerald Express Interface (‘‘MEI’’) Ports 4 available to Market Makers.5 The Exchange last increased the fees for both 10Gb ULL fiber connections and Limited Service MEI Ports beginning with a series of filings on October 1, 2020 (with the final filing made on March 24, 2021).6 Prior to that fee change, the Exchange provided Limited Service MEI Ports for $50 per port, after the first two Limited Service MEI Ports that are provided free of charge, and the Exchange incurred all the costs associated to provide those first two Limited Service MEI Ports since it commenced operations in March 2019. The Exchange then increased the fee by $50 to a modest $100 fee per Limited Service MEI Port and increased the fee for 10Gb ULL fiber connections from $6,000 to $10,000 per month. Also, in that fee change, the Exchange adopted fees for providing five different types of ports for the first time. These ports were FIX Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and Purge Ports.7 Again, the Exchange absorbed all costs associated with providing these ports since its launch in March 2019. As explained in 3 The term ‘‘Member’’ means an individual or organization approved to exercise the trading rights associated with a Trading Permit. Members are deemed ‘‘members’’ under the Exchange Act. See Exchange Rule 100. 4 The MIAX Emerald Express Interface (‘‘MEI’’) is a connection to the MIAX Emerald System that enables Market Makers to submit simple and complex electronic quotes to MIAX Emerald. See the Definitions Section of the Fee Schedule. 5 The term ‘‘Market Makers’’ refers to Lead Market Makers (‘‘LMMs’’), Primary Lead Market Makers (‘‘PLMMs’’), and Registered Market Makers (‘‘RMMs’’) collectively. See the Definitions Section of the Fee Schedule and Exchange Rule 100. For purposes of Limit Service MEI Ports, Market Makers also include firms that engage in other types of liquidity activity, such as seeking to remove resting liquidity from the Exchange’s Book. 6 See Securities Exchange Act Release Nos. 91460 (April 1, 2021), 86 FR 18349 (April 8, 2021) (SR– EMERALD–2021–11); 90184 (October 14, 2020), 85 FR 66636 (October 20, 2020) (SR–EMERALD–2020– 12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR–EMERALD–2020–17); 91032 (February 1, 2021), 86 FR 8428 (February 5, 2021) (SR–EMERALD–2021–02); and 91200 (February 24, 2021), 86 FR 12221 (March 2, 2021) (SR–EMERALD–2021–07). 7 See id. for a description of each of these ports. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 that filing, expenditures, as well as research and development (‘‘R&D’’) in numerous areas resulted in a material increase in expense to the Exchange and were the primary drivers for that proposed fee change. In that filing, the Exchange allocated a total of $9.3 million in expenses to providing 10Gb ULL fiber connectivity, additional Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and Purge Ports.8 Since the time of the 2021 increase discussed above, the Exchange experienced ongoing increases in expenses, particularly internal expenses.9 As discussed more fully below, the Exchange recently calculated increased annual aggregate costs of $11,361,586 for providing 10Gb ULL connectivity and $1,779,066 for providing Limited Service MEI Ports. Much of the cost relates to monitoring and analysis of data and performance of the network via the subscriber’s connection with nanosecond granularity, and continuous improvements in network performance with the goal of improving the subscriber’s experience. The costs associated with maintaining and enhancing a state-of-the-art network is a significant expense for the Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those increased costs by amending fees for connectivity services. Subscribers expect the Exchange to provide this level of support so they continue to receive the performance they expect. This differentiates the Exchange from its competitors. The Exchange now proposes to amend the Fee Schedule to amend the fees for 10Gb ULL connectivity and Limited Service MEI Ports in order to recoup ongoing costs and increase in expenses set forth below in the Exchange’s cost analysis. The Exchange initially filed this proposal on December 30, 2022 as SR–EMERALD–2022–38. On January 9, 2023, the Exchange withdrew SR– EMERALD–2022–38 and resubmitted this proposal as SR–EMERALD–2023– 01 (the ‘‘Initial Proposal’’).10 On, 8 Id. 9 For example, the New York Stock Exchange, Inc.’s (‘‘NYSE’’) Secure Financial Transaction Infrastructure (‘‘SFTI’’) network, which contributes to the Exchange’s connectivity cost, increased its fees by approximately 9% since 2021. Similarly, since 2021, the Exchange, and its affiliates, experienced an increase in data center costs of approximately 17% and an increase in hardware and software costs of approximately 19%. These percentages are based on the Exchange’s actual 2021 and proposed 2023 budgets. 10 See Securities Exchange Act Release No. 96628 (January 10, 2023), 88 FR 2651 (January 17, 2023) (SR–EMERALD–2023–01). PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 72175 February 23, 2023, the Exchange withdrew the Initial Proposal and replaced it with a revised proposal (SR– EMERALD–2023–05) (the ‘‘Second Proposal’’).11 On April 20, 2023, the Exchange withdrew the Second Proposal and replaced it with a revised proposal (SR–EMERALD–2023–12) (the ‘‘Third Proposal’’).12 On June 16, 2023, the Exchange withdrew the Third Proposal and replaced it with a revised proposal (SR–EMERALD–2023–14) (the ‘‘Fourth Proposal’’).13 On August 8, 2023, the Exchange withdrew the Fourth Proposal and replaced it with a revised proposal (SR–EMERALD–2023– 19) (the ‘‘Fifth Proposal’’).14 Since a U.S. government shutdown was avoided, on October 2, 2023, the Exchange withdrew the Fifth Proposal and replaced it with this further revised proposal (SR– EMERALD–2023–27) (the ‘‘Sixth Proposal’’). The Exchange previously included a cost analysis in the Initial, Second, Third, Fourth and Fifth Proposals. As described more fully below, the Exchange provides an updated cost analysis that includes, among other things, additional descriptions of how the Exchange allocated costs among it and its affiliated exchanges (MIAX PEARL, LLC (‘‘MIAX Pearl’’) (separately among MIAX Pearl Options and MIAX 11 See Securities Exchange Act Release No. 97079 (March 8, 2023), 88 FR 15764 (March 14, 2023) (SR– EMERALD–2023–05). 12 See Securities Exchange Act Release No. 97422 (May 2, 2023), 88 FR 29750 (May 8, 2023) (SR– EMERALD–2023–12). 13 The Exchange met with Commission Staff to discuss the Third Proposal during which the Commission Staff provided feedback and requested additional information, including, most recently, information about total costs related to certain third party vendors. Such vendor cost information is subject to confidentiality restrictions. The Exchange 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. 97813 (June 27, 2023), 88 FR 42785 (July 3, 2023) (SR– EMERALD–2023–14). 14 See Securities Exchange Act Release No. 98176 (August 21, 2023), 88 FR 58341 (August 25, 2023) (SR–EMERALD–2023–19). Due to the prospect of a U.S. government shutdown, the Commission suspended the Fifth Proposal on September 29, 2023. See Securities Exchange Act Release No. 98656 (September 29, 2023) (SR–EMERALD–2023– 19). E:\FR\FM\19OCN1.SGM 19OCN1 72176 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 Pearl Equities) and MIAX 15 (together with MIAX Pearl Options and MIAX Pearl Equities, the ‘‘affiliated markets’’)) to ensure no cost was allocated more than once, as well as additional detail supporting its cost allocation processes and explanations as to why a cost allocation in this proposal may differ from the same cost allocation in a similar proposal submitted by one of its affiliated markets. Although the baseline cost analysis used to justify the proposed fees was made in the Initial, Second, Third, Fourth and Fifth Proposals, the fees themselves have not changed since the Initial, Second, Third, Fourth or Fifth Proposals and the Exchange still proposes fees that are intended to cover the Exchange’s cost of providing 10Gb ULL connectivity and Limited Service MEI Ports with a reasonable mark-up over those costs. * * * * * Starting in 2017, following the United States Court of Appeals for the District of Columbia’s Susquehanna Decision 16 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.17 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.18 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’’).19 The Remand Order directed 15 The term ‘‘MIAX’’ means Miami International Securities Exchange, LLC. See Exchange Rule 100. 16 See Susquehanna International Group, LLP v. Securities & Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’). 17 Id. 18 See Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ‘‘SIFMA Decision’’). 19 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) VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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.’’ 20 The Commission denied requests by various exchanges and plan participants for reconsideration of the Remand Order.21 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.’’ 22 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.23 Despite approving hundreds of access fee filings in the years prior to the BOX Order (described further below) utilizing a ‘‘market-based’’ test, the Commission changed course and disapproved BOX’s proposal to begin charging connectivity at one-fourth the rate of competing exchanges’ pricing. Also while the above appeal was pending, on May 21, 2019, the Commission Staff issued guidance ‘‘to assist the national securities exchanges and FINRA . . . in preparing Fee Filings that meet their burden to demonstrate that proposed fees are consistent with the requirements of the Securities Exchange Act.’’ 24 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.’’ 25 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.’’ 26 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 27 and remanded for further proceedings consistent with its opinion.28 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.’’ 29 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.30 The Commission further invited ‘‘the parties to submit briefing stating whether the challenges asserted in the applications for review . . . should be dismissed, (asserted as an alternative basis of jurisdiction in some applications). 20 Id. at page 2. 21 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ‘‘Order Denying Reconsideration’’). 22 Order Denying Reconsideration, 2019 WL 2022819, at *13. 23 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). 24 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’’). 25 Id. 26 Id. 27 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. 28 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. 29 Id. at *2; see also id. (‘‘[T]he sole purpose of the challenged remand has disappeared.’’). 30 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’’). PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 E:\FR\FM\19OCN1.SGM 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices and specifically identifying any challenge that they contend should not be dismissed pursuant to the holding of Nasdaq v. SEC.’’ 31 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.32 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.’’ 33 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’’).34 The lotter on DSK11XQN23PROD with NOTICES1 31 Id. 32 Sec. Indus. & Fin. Mkts. Ass’n, Securities Exchange Act Release No. 90087 (October 5, 2020). 33 See supra note 27, at page 2. 34 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 VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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 35 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.36 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. 35 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. 36 See, e.g., Securities Exchange Act Release Nos. 74417 (March 3, 2015), 80 FR 12534 (March 9, 2015) (SR–ISE–2015–06); 83016 (April 9, 2018), 83 FR 16157 (April 13, 2018) (SR–PHLX–2018–26); 70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR–NYSEMKT–2013–71); 76373 (November 5, 2015), 80 FR 70024 (November 12, 2015) (SR–NYSEMKT–2015–90); 79729 (January 4, 2017), 82 FR 3061 (January 10, 2017) (SR– NYSEARCA–2016–172). PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 72177 discrimination and placing an undue burden on inter-market competition between legacy exchanges and nonlegacy exchanges. Commission Staff now require exchange filings, including from nonlegacy exchanges such as the Exchange, to provide detailed cost-based analysis in place of competition-based arguments to support such changes. However, even with the added detailed cost and expense disclosures, the Commission Staff continues to either suspend such filings and institute disapproval proceedings, or put the exchanges in the unenviable position of having to repeatedly withdraw and re-file with additional detail in order to continue to charge those fees.37 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 38 and $80,383,000 for 2021.39 Cboe C2 Exchange, Inc. (‘‘C2’’) reported ‘‘access and capacity fee’’ revenue of $19,016,000 for 2020 40 and $22,843,000 for 2021.41 Cboe BZX Exchange, Inc. (‘‘BZX’’) reported ‘‘access and capacity 37 The Exchange has filed, and subsequently withdrawn, various forms of this proposed fee numerous times since August 2021 with each proposal containing hundreds of cost and revenue disclosures never previously disclosed by legacy exchanges in their access and market data fee filings prior to 2019. 38 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. 39 See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001155.pdf. 40 See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000469.pdf. 41 See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001156.pdf. E:\FR\FM\19OCN1.SGM 19OCN1 72178 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 fee’’ revenue of $38,387,000 for 2020 42 and $44,800,000 for 2021.43 Cboe EDGX Exchange, Inc. (‘‘EDGX’’) reported ‘‘access and capacity fee’’ revenue of $26,126,000 for 2020 44 and $30,687,000 for 2021.45 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 2019.46 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.’’ 47 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,48 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),49 42 See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000465.pdf. 43 See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001152.pdf. 44 See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/ 21000467.pdf. 45 See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/ 22001154.pdf. 46 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. 47 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. 48 See, e.g., CNBC Debuts New Set on NYSE Floor, available at https://www.cnbc.com/id/46517876. 49 See, e.g., Cboe Fee Schedule, Page 4, Affiliate Volume Plan, available at https://cdn.cboe.com/ resources/membership/Cboe_FeeSchedule.pdf (providing that if a market maker or its affiliate receives a credit under Cboe’s Volume Incentive Program (‘‘VIP’’), the market maker will receive an access credit on their BOE Bulk Ports corresponding to the VIP tier reached and the market maker will VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 which are more immediately impactful in competition for order flow and market share, given the variable nature of this cost on member firms. The prohibition of a reasonable path forward denies the Exchange (and other nonlegacy exchanges) this flexibility, eliminates the ability to remain competitive on transaction fees, and hinders the ability to compete for order flow and market share with legacy exchanges. There is little doubt that subjecting one exchange to a materially different standard than that historically applied to legacy exchanges for nontransaction 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 . . . ’’,50 this is not the reality experienced by exchanges such as MIAX Emerald. As such, non-legacy exchanges are forced to rely on an opaque cost-based justification standard. However, because the Staff Guidance is devoid of detail on what must be contained in cost-based justification, this standard is nearly impossible to meet despite repeated good-faith efforts by the Exchange to provide substantial amount of costrelated details. For example, the Exchange has attempted to increase fees using a cost-based justification numerous times, having submitted over six filings.51 However, despite receive a transaction fee credit on their sliding scale market maker transaction fees) and NYSE American Options Fee Schedule, Section III, E, Floor Broker Incentive and Rebate Programs, available at https:// www.nyse.com/publicdocs/nyse/markets/americanoptions/NYSE_American_Options_Fee_ Schedule.pdf (providing floor brokers the opportunity to prepay certain non-transaction fees for the following calendar year by achieving certain amounts of volume executed on NYSE American). 50 See supra note 24, at note 1. 51 See Securities Exchange Act Release Nos. 94889 (May 11, 2022), 87 FR 29928 (May 17, 2022) (SR–EMERALD–2022–19); 94718 (April 14, 2022), 87 FR 23633 (April 20, 2022) (SR–EMERALD–2022– 15); 94717 (April 14, 2022), 87 FR 23648 (April 20, 2022) (SR–EMERALD–2022–13); 94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR– EMERALD–2022–05); 94257 (February 15, 2022), 87 FR 9678 (February 22, 2022) (SR–EMERALD–2022– 04); 93772 (December 14, 2021), 86 FR 71965 (December 20, 2021) (SR–EMERALD–2021–43); 93776 (December 14, 2021), 86 FR 71983 (December 20, 2021) (SR–EMERALD–2021–42); 93188 (September 29, 2021), 86 FR 55052 (October 5, 2021) (SR–EMERALD–2021–31); (SR–EMERALD– 2021–30) (withdrawn without being noticed by the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4, 2021) (SR–EMERALD–2021–29); 92662 (August 13, 2021), 86 FR 46726 (August 19, 2021) (SR–EMERALD–2021–25); 92645 (August 11, 2021), 86 FR 46048 (August 17, 2021) (SR– EMERALD–2021–23). PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 providing 100+ page filings describing in extensive detail its costs associated with providing the services described in the filings, Commission Staff continues to suspend such filings, with the rationale that the Exchange has not provided sufficient detail of its costs and without ever being precise about what additional data points are required. The Commission Staff appears to be interpreting the reasonableness standard set forth in section 6(b)(4) of the Act 52 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,53 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; 54 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 52 15 U.S.C. 78f(b)(4). the extent that the cost-based standard includes Commission Staff making determinations as to the appropriateness of certain profit margins, the Exchange believes that Staff should be clear as to what they determine is an appropriate profit margin. 54 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. 53 To E:\FR\FM\19OCN1.SGM 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices review, lack parity, and impede fair competition. Considering the absence of any such framework or clarity, the Exchange believes that the Commission does not have a reasonable basis to deny the Exchange this change in fees, where the proposed change would result in fees meaningfully lower than comparable fees at competing exchanges and where the associated nontransaction revenue is meaningfully lower than competing exchanges. In light of the above, disapproval of this would not meet the fairness standard under the Act, would be discriminatory and places a substantial burden on competition. The Exchange would be uniquely disadvantaged by not being able to increase its access fees to comparable levels (or lower levels than current market rates) to those of other options exchanges for connectivity. If the Commission Staff were to disapprove this proposal, that action, and not market forces, would substantially affect whether the Exchange can be successful in its competition with other options exchanges. Disapproval of this filing could also be viewed as an arbitrary and capricious decision should the Commission Staff continue to ignore its past treatment of non-transaction fee filings before implementation of the Revised Review Process and Staff Guidance and refuse to allow such filings to be approved despite significantly enhanced arguments and cost disclosures.55 * * * * * Members from $10,000 per month to $13,500 per month (‘‘10Gb ULL Fee’’).57 The Exchange will continue to assess monthly Member and non-Member network connectivity fees for connectivity to the primary and secondary facilities in any month the Member or non-Member is credentialed to use any of the Exchange APIs or market data feeds in the production environment. The Exchange will continue to pro-rate the fees when a Member or non-Member makes a change to the connectivity (by adding or deleting connections) with such prorated fees based on the number of trading days that the Member or nonMember has been credentialed to utilize any of the Exchange APIs or market data feeds in the production environment through such connection, divided by the total number of trading days in such month multiplied by the applicable monthly rate. Limited Service MEI Ports Background The Exchange also proposes to amend Section (5)(d) of the Fee Schedule to amend the monthly port fee for Limited Service MEI Ports available to Market Makers.58 The Exchange currently allocates two (2) Full Service MEI Ports 59 and two (2) Limited Service MEI 10Gb ULL Connectivity Fee Change lotter on DSK11XQN23PROD with NOTICES1 The Exchange proposes to amend the Fee Schedule to increase the fees for Members and non-Members to access the Exchange’s system networks 56 via a 10Gb ULL fiber connection. Specifically, the Exchange proposes to amend Sections (5)(a)–(b) of the Fee Schedule to increase the 10Gb ULL connectivity fee for Members and non55 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. 56 The Exchange’s system networks consist of the Exchange’s extranet, internal network, and external network. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 57 Market participants that purchase additional 10Gb ULL connections as a result of this change will not be subject to the Exchange’s Member Network Connectivity Testing and Certification Fee under Section (4)(c) of the Exchange’s Fee Schedule. See Section (4)(c) of the Exchange’s fee schedule available at https://www.miaxglobal.com/ markets/us-options/miax-options/fees (providing that ‘‘Network Connectivity Testing and Certification Fees will not be assessed in situations where the Exchange initiates a mandatory change to the Exchange’s system that requires testing and certification. Member Network Connectivity Testing and Certification Fees will not be assessed for testing and certification of connectivity to the Exchange’s Disaster Recovery Facility.’’). 58 The Exchange notes that in its prior filings (the Initial, Second, Third, Fourth and Fifth Proposals), the Exchange proposed to adopt a tiered-pricing structure for Limited Service MEI Ports. 59 The term ‘‘Full Service MEI Ports’’ means a port which provides Market Makers with the ability to send Market Maker simple and complex quotes, eQuotes, and quote purge messages to the MIAX Emerald System. Full Service MEI Ports are also capable of receiving administrative information. Market Makers are limited to two Full Service MEI Ports per Matching Engine. See the Definitions Section of the Fee Schedule. PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 72179 Ports 60 per matching engine 61 to which each Market Maker connects. Market Makers may also request additional Limited Service MEI Ports for each matching engine to which they connect. The Full Service MEI Ports and Limited Service MEI Ports all include access to the Exchange’s primary and secondary data centers and its disaster recovery center. Market Makers may request additional Limited Service MEI Ports. Prior to the Exchange’s proposals to adopt a tiered fee structure for Limited Service MEI Ports, Market Makers were assessed a $100 monthly fee for each Limited Service MEI Port for each matching engine above the first two Limited Service MEI Ports that are included for free (before the proposals to adopt a tiered fee structure). Limited Service MEI Port Fee Changes The Exchange now proposes to amend the monthly fee per Limited Service MEI Port and increase the number of free Limited Service MEI Ports per matching engine from two (2) to four (4). Specifically, the Exchange will now provide the first, second, third and fourth Limited Service MEI Ports for each matching engine free of charge. For additional Limited Service MEI Ports after the first four ports per matching engine that are provided for free (i.e., beginning with the fifth Limited Service MEI Port), the Exchange proposes to increase the monthly fee from $100 to $420 per Limited Service MEI Port per matching engine.62 Market Makers that elect to purchase more than the number of Limited Service Ports that are provide for free do 60 The term ‘‘Limited Service MEI Ports’’ means a port which provides Market Makers with the ability to send simple and complex eQuotes and quote purge messages only, but not Market Maker Quotes, to the MIAX Emerald System. Limited Service MEI Ports are also capable of receiving administrative information. Market Makers initially receive two Limited Service MEI Ports per Matching Engine. See the Definitions Section of the Fee Schedule. 61 The term ‘‘Matching Engine’’ means a part of the MIAX Emerald electronic system that processes options orders and trades on a symbol-by-symbol basis. Some Matching Engines will process option classes with multiple root symbols, and other Matching Engines may be dedicated to one single option root symbol (for example, options on SPY may be processed by one single Matching Engine that is dedicated only to SPY). A particular root symbol may only be assigned to a single designated Matching Engine. A particular root symbol may not be assigned to multiple Matching Engines. See the Definitions Section of the Fee Schedule. 62 As noted in the Fee Schedule, Market Makers will continue to be limited to fourteen Limited Service MEI Ports per Matching Engine. The Exchange also proposes to make a ministerial clarifying change to remove the defined term ‘‘Additional Limited Service MEI Ports’’. The Exchange proposes to make a related change to add the term ‘‘Limited Service MEI Ports’’ after the word ‘‘fourteen’’ in the Fee Schedule. E:\FR\FM\19OCN1.SGM 19OCN1 72180 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices so due to the nature of their business and their perceived need for numerous ports to access the Exchange. Meanwhile, Market Makers who utilize the free Limited Service MEI Ports do so based on their business needs. The Exchange notes that it last proposed to increase its monthly Limited Service MEI Port fees in 2020 (other than the prior proposals to adopt a tiered fee structure for Limited Service MEI Ports),63 and such increase proposed herein is designed to recover a portion of the ever increasing costs associated with directly accessing the Exchange. The Exchange also proposes to make corresponding changes to the Definitions section of the Fee Schedule and the paragraph describing the cap on the number of Limited Service MEI Ports each Market Maker may receive in Section (5)(d)(ii) of the Fee Schedule to account for the proposed change to now provide the first four (4) Limited Service MEI Ports for free per matching engine. Accordingly, the Exchange proposes to amend the last sentence of the paragraph describing the fees for Limited Service MEI Ports in Section (5)(d)(ii) of the Fee Schedule to now state that Market Makers are limited to ten additional Limited Service MEI Ports per matching engine, for a total of fourteen Limited Service MEI Ports per matching engine. Implementation The proposed fee changes are immediately effective. lotter on DSK11XQN23PROD with NOTICES1 2. Statutory Basis The Exchange believes that the proposed fees are consistent with section 6(b) of the Act 64 in general, and furthers the objectives of section 6(b)(4) of the Act 65 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 66 in that they are designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general protect investors and the public interest and are not designed to permit unfair discrimination between customers, issuers, brokers and dealers. The Exchange believes that the information provided to justify the proposed fees meets or exceeds the amount of detail required in respect of proposed fee changes under the Revised Review Process and as set forth in recent Staff Guidance. Based on both the BOX Order 67 and the Staff Guidance,68 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.’’ 69 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.’’ 70 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.’’ 71 The proposed fees are reasonable because they promote parity among exchange pricing for access, which promotes competition, including in the 67 See 63 See supra note 6. 64 15 U.S.C. 78f(b). 65 15 U.S.C. 78f(b)(4). 66 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 17:48 Oct 18, 2023 68 See supra note 23. supra note 24. 69 Id. 70 Id. 71 Id. Jkt 262001 PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 Exchanges’ ability to competitively price transaction fees, invest in infrastructure, new products and other innovations, all while allowing the Exchange to recover its costs to provide dedicated access via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed above, the Revised Review Process and Staff Guidance have created an uneven playing field between legacy and non-legacy exchanges by severely restricting non-legacy exchanges from being able to increase non-transaction 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, there is little doubt that subjecting one exchange to a materially different standard than that applied to other exchanges for nontransaction fees leaves that exchange at a disadvantage in its ability to compete with its pricing of transaction fees. The Proposed Fees Ensure Parity Among Exchange Access Fees, Which Promotes Competition The Exchange initially adopted a fee of $50 per port, after the first two Limited Service MEI Ports that are provided free of charge, and the Exchange incurred all the costs associated to provide those first two Limited Service MEI Ports since it commenced operations in March 2019. At that same time, the Exchange only charged $6,000 per month for each 10Gb ULL connection. As a new exchange entrant, the Exchange chose to offer connectivity and ports at very low fees to encourage market participants to E:\FR\FM\19OCN1.SGM 19OCN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices 72181 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.72 Later in 2020, as the Exchange’s market share increased,73 the Exchange then increased the fee by $50 to a modest $100 fee per Limited Service MEI Port and increased the fee for 10Gb ULL fiber connections from $6,000 to $10,000 per month.74 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’. . . .’’ 75 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.’’ 76 Congress directed the Commission to ‘‘rely on ‘competition, whenever possible, in meeting its regulatory responsibilities for overseeing the SROs and the national market system.’ ’’ 77 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.’’ 78 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.’’ 79 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.’’ 80 The Exchange believes the competing exchanges’ 10Gb connectivity and port fees are useful examples of alternative approaches to providing and charging for access and demonstrating how such fees are competitively set and constrained. To that end, the Exchange believes the proposed fees are competitive and reasonable because the proposed fees are similar to or less than fees charged for similar connectivity and port access provided by other options exchanges with comparable market shares. As such, the Exchange believes that denying its ability to institute fees that allow the Exchange to recoup its costs with a reasonable margin in a manner that is closer to parity with legacy exchanges, in effect, impedes its ability to compete, including in its pricing of transaction fees and ability to invest in competitive infrastructure and other offerings. The following table shows how the Exchange’s proposed fees remain similar to or less than fees charged for similar connectivity and port access provided by other options exchanges with similar market share. Each of the connectivity or port rates in place at competing options exchanges were filed with the Commission for immediate effectiveness and remain in place today. 72 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). 73 The Exchange experienced a monthly average trading volume of 3.43% for the month of October 2020. See the ‘‘Market Share’’ section of the Exchange’s website, available at https:// www.miaxglobal.com/. 74 See Securities Exchange Act Release Nos. 91460 (April 1, 2021), 86 FR 18349 (April 8, 2021) (SR–EMERALD–2021–11); 90184 (October 14, 2020), 85 FR 66636 (October 20, 2020) (SR– EMERALD–2020–12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR–EMERALD– 2020–17); 91032 (February 1, 2021), 86 FR 8428 (February 5, 2021) (SR–EMERALD–2021–02); and 91200 (February 24, 2021), 86 FR 12221 (March 2, 2021) (SR–EMERALD–2021–07). 75 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)). 76 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 77 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.’’). 78 See Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74,770 (December 9, 2008) (SR–NYSEArca–2006–21). 79 Id. 80 See Staff Guidance, supra note 24. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 E:\FR\FM\19OCN1.SGM 19OCN1 72182 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices Exchange Monthly fee (per connection or per port) Type of connection or port MIAX Emerald (as proposed) (equity options market share of 2.69% for the month of August 2023) a. 10Gb ULL connection ......................... Limited Service MEI Ports ................... NASDAQ b (equity options market share of 5.80% for the month of August 2023) c. 10Gb Ultra fiber connection ................ SQF Port ............................................. NASDAQ ISE LLC (‘‘ISE’’) d (equity options market share of 5.58% for the month of August 2023) e. NYSE American LLC (‘‘NYSE American’’) g (equity options market share of 7.34% for the month of August 2023) h. 10Gb Ultra fiber connection ................ SQF Port f ............................................ 10Gb LX LCN connection ................... Order/Quote Entry Port ....................... NASDAQ GEMX, LLC (‘‘GEMX’’) i (equity options market share of 3.03% for the month of August 2023) j. 10Gb Ultra connection ........................ SQF Port ............................................. $13,500. 1–4 ports: FREE. 5 or more ports: $420 each. $15,000 per connection. 1–5 ports: $1,500 per port. 6–20 ports: $1,000 per port. 21 or more ports: $500 per port. $15,000 per connection. $1,100 per port. $22,000 per connection. 1–40 Ports: $450 per port. 41 or more Ports: $150 per port. $15,000 per connection. $1,250 per port. 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 See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE Rules, General 8: Connectivity. e See supra note a. f Similar to the Exchange’s MEI Ports, SQF ports are primarily utilized by Market Makers. 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 lotter on DSK11XQN23PROD with NOTICES1 There is no requirement, regulatory or otherwise, that any broker-dealer connect to and access any (or all of) the available options exchanges. Market participants may choose to become a member of one or more options exchanges based on the market participant’s assessment of the business opportunity relative to the costs of the Exchange. With this, there is elasticity of demand for exchange membership. As an example, the Exchange’s affiliate, MIAX Pearl Options, experienced a decrease in membership as the result of similar fees proposed herein. One MIAX Pearl Options Market Maker terminated their MIAX Pearl Options membership effective January 1, 2023, as a direct result of the proposed connectivity and port fee changes proposed by MIAX Pearl Options. It is not a requirement for market participants to become members of all options exchanges; in fact, certain market participants conduct an options business as a member of only one options market.81 A very small number 81 BOX recently adopted an electronic market maker trading permit fee. See Securities Exchange Release No. 94894 (May 11, 2022), 87 FR 29987 (May 17, 2022) (SR–BOX–2022–17). In that proposal, BOX stated that, ‘‘. . . it is not aware of any reason why Market Makers could not simply drop their access to an exchange (or not initially access an exchange) if an exchange were to establish prices for its non-transaction fees that, in the determination of such Market Maker, did not make business or economic sense for such Market Maker to access such exchange. [BOX] again notes that no market makers are required by rule, regulation, or competitive forces to be a Market Maker on [BOX].’’ Also in 2022, MEMX established a monthly membership fee. See Securities Exchange Act Release No. 93927 (January 7, 2022), 87 FR VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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.82 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.83 The Exchange and its affiliated options markets, MIAX Pearl Options and MIAX, have a total of 46 members. Of those 46 total members, 37 are members of all three affiliated 2191 (January 13, 2022) (SR–MEMX–2021–19). In that proposal, MEMX reasoned that that there is value in becoming a member of the exchange and stated that it believed that the proposed membership fee ‘‘is not unfairly discriminatory because no broker-dealer is required to become a member of the Exchange’’ and that ‘‘neither the trade-through requirements under Regulation NMS nor broker-dealers’ best execution obligations require a broker-dealer to become a member of every exchange.’’ 82 Service Bureaus may obtain ports on behalf of Members. 83 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. PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 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 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 (which are similar to the changes proposed herein). Indeed, broker-dealers choose if and how to access a particular exchange and because it is a choice, the Exchange must set reasonable pricing, otherwise prospective members would not connect and existing members would disconnect from the Exchange. The decision to become a member of an exchange, particularly for registered market makers, is complex, and not solely based on the non-transactional costs assessed by an exchange. As noted herein, specific factors include, but are E:\FR\FM\19OCN1.SGM 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES1 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.84 If the Exchange is not at the national best bid or offer (‘‘NBBO’’),85 the Exchange will route an order to any away market that is at the NBBO to ensure that the order was executed at a superior price and prevent a trade-through.86 With respect to the submission of orders, 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,87 or request sponsored access 88 through a member of an exchange in order to submit a trade directly to an options exchange.89 A market participant may either pay the costs associated with becoming a member of an exchange or, in the alternative, a market participant may elect to pay commissions to a broker-dealer, pay fees to a service bureau to submit trades, or pay a 84 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. 85 See Exchange Rule 100. 86 Members may elect to not route their orders by utilizing the Do Not Route order type. See Exchange Rule 516(g). 87 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. 88 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. 89 This may include utilizing a floor broker and submitting the trade to one of the five options trading floors. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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).90 Indeed, the Exchange does not receive any connectivity revenue when connectivity is resold by a third-party, which often is resold to multiple customers, some of whom are agency broker-dealers that have numerous customers of their own.91 Particularly, in the event that a market participant views the Exchange’s direct connectivity and access fees as more or less attractive than competing markets, that market participant can choose to connect to the Exchange indirectly or may choose not to connect to the Exchange and connect instead to one or more of the other 15 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 90 See, e.g., Nasdaq Price List—U.S. Direct Connection and Extranet Fees, available at US Direct-Extranet Connection (nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077 (January 16, 2022), 80 FR 3683 (January 23, 2022) (SR–NASDAQ–2015–002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022) (SR– NASDAQ–2017–114). 91 The Exchange notes that resellers, such as SFTI, are not required to publicize, let alone justify or file with the Commission their fees, and as such could charge the market participant any fees it deems appropriate (including connectivity fees higher than the Exchange’s connectivity fees), even if such fees would otherwise be considered potentially unreasonable or uncompetitive fees. PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 72183 communicate with the Exchange and exercise trading rights. When a market participant elects to be a Member, and is approved for membership by the Exchange, the Member is granted trading rights to enter orders and/or quotes into Exchange through secure connections. Again, there is no legal or regulatory requirement that a market participant become a Member of the Exchange. This is again evidenced by the fact that one MIAX Pearl Options Market Maker terminated their MIAX Pearl Options membership effective January 1, 2023 as a direct result of the proposed connectivity and port fee changes on MIAX Pearl Options. If a market participant chooses to become a Member, they may then choose to purchase connectivity beyond the one connection that is necessary to quote or submit orders on the Exchange. Members may freely choose to rely on one or many connections, depending on their business model. Cost Analysis In general, the Exchange believes that exchanges, in setting fees of all types, should meet very high standards of transparency to demonstrate why each new fee or fee increase meets the Exchange Act requirements that fees be reasonable, equitably allocated, not unfairly discriminatory, and not create an undue burden on competition among members and markets. In particular, the Exchange believes that each exchange should take extra care to be able to demonstrate that these fees are based on its costs and reasonable business needs. In proposing to charge fees for connectivity and port services, the Exchange is especially diligent in assessing those fees in a transparent way against its own aggregate costs of providing the related service, and in carefully and transparently assessing the impact on Members—both generally and in relation to other Members, i.e., to assure the fee will not create a financial burden on any participant and will not have an undue impact in particular on smaller Members and competition among Members in general. The Exchange believes that this level of diligence and transparency is called for by the requirements of section 19(b)(1) under the Act,92 and Rule 19b–4 thereunder,93 with respect to the types of information exchanges should provide when filing fee changes, and section 6(b) of the Act,94 which requires, 92 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 94 15 U.S.C. 78f(b). 93 17 E:\FR\FM\19OCN1.SGM 19OCN1 72184 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices among other things, that exchange fees be reasonable and equitably allocated,95 not designed to permit unfair discrimination,96 and that they not impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act.97 This rule change proposal addresses those requirements, and the analysis and data in each of the sections that follow are designed to clearly and comprehensively show how they are met.98 The Exchange reiterates that the legacy exchanges with whom the Exchange vigorously competes for order flow and market share, were not subject to any such diligence or transparency in setting their baseline non-transaction fees, most of which were put in place before the Revised Review Process and Staff Guidance. As detailed below, the Exchange recently calculated its aggregate annual costs for providing physical 10Gb ULL connectivity to the Exchange at $11,361,586 (or approximately $946,799 per month, rounded to the nearest dollar when dividing the annual cost by 12 months) and its aggregate annual costs for providing Limited Service MEI Ports at $1,799,066 (or approximately $148,255 per month, rounded to the nearest dollar when dividing the annual cost by 12 months). In order to cover the aggregate costs of providing connectivity to its users (both Members and non-Members 99) going forward and to make a modest profit, as described below, the Exchange proposes to modify its Fee Schedule to charge a fee of $13,500 per month for each physical 10Gb ULL connection. The Exchange also proposes to modify its Fee Schedule to amend the monthly fee for additional Limited Service MEI Ports and provide two additional ports free of charge for a total of four free Limited Service MEI Ports per matching engine to which each Member connects. In 2020, the Exchange completed a study of its aggregate costs to produce market data and connectivity (the ‘‘Cost Analysis’’).100 The Cost Analysis 95 15 U.S.C. 78f(b)(4). U.S.C. 78f(b)(5). 97 15 U.S.C. 78f(b)(8). 98 See Staff Guidance, supra note 24. 99 Types of market participants that obtain connectivity services from the Exchange but are not Members include service bureaus and extranets. Service bureaus offer technology-based services to other companies for a fee, including order entry services, and thus, may access Limited Service MEI Ports on behalf of one or more Members. Extranets offer physical connectivity services to Members and non-Members. 100 The Exchange frequently updates it Cost Analysis as strategic initiatives change, costs increase or decrease, and market participant needs and trading activity changes. The Exchange’s most lotter on DSK11XQN23PROD with NOTICES1 96 15 VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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,101 storage needs, dedicated infrastructure versus shared infrastructure allocated per platform based on the resources required to support each platform, number of available connections, and employees allocated time. All of these factors result in different allocation percentages among the Exchange and its affiliated markets, i.e., the different percentages of the overall cost driver allocated to the Exchange and its affiliated markets will cause the dollar amount of the overall cost allocated among the Exchange and its affiliated markets to also differ. Because the Exchange’s parent company recent Cost Analysis was conducted ahead of this filing. 101 For example, the Exchange maintains 12 matching engines, MIAX Pearl Options maintains 12 matching engines, MIAX Pearl Equities maintains 24 matching engines, and MIAX maintains 24 matching engines. PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 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 (61.9% of total expense amount allocated to 10Gb ULL connectivity), with smaller allocations to additional Limited Service MEI Ports (4.6%), and the remainder to the provision of other connectivity, other ports, transaction execution, membership services and market data services (33.5%). This next level of the allocation methodology at the individual exchange level also took into account factors similar to those set forth under the first step of the allocation methodology process described above, to determine the appropriate allocation to connectivity or market data versus allocations for other services. This E:\FR\FM\19OCN1.SGM 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices allocation methodology was developed through an assessment of costs with senior management intimately familiar with each area of the Exchange’s operations. After adopting this allocation methodology, the Exchange then applied an allocation of each cost driver to each core service, resulting in the cost allocations described below. Each of the below cost allocations is unique to the Exchange and represents a percentage of overall cost that was allocated to the Exchange pursuant to the initial allocation described above. By allocating segmented costs to each core service, the Exchange was able to estimate by core service the potential margin it might earn based on different fee models. The Exchange notes that as a non-listing venue it has five primary sources of revenue that it can potentially use to fund its operations: transaction fees, fees for connectivity and port services, membership fees, regulatory fees, and market data fees. Accordingly, the Exchange must cover its expenses from these five primary sources of revenue. The Exchange also notes that as a general matter each of these sources of revenue is based on services that are interdependent. For instance, the Exchange’s system for executing transactions is dependent on physical hardware and connectivity; only Members and parties that they sponsor to participate directly on the Exchange may submit orders to the Exchange; many Members (but not all) consume market data from the Exchange in order to trade on the Exchange; and the Exchange consumes market data from external sources in order to comply with regulatory obligations. Accordingly, given this interdependence, the allocation of costs to each service or revenue source required judgment of the Exchange and was weighted based on estimates of the Exchange that the Exchange believes are reasonable, as set forth below. While there is no standardized and generally accepted methodology for the allocation of an exchange’s costs, the Exchange’s methodology is the result of an extensive review and analysis and will be consistently applied going forward for any other potential fee proposals. In the absence of the Commission attempting to specify a methodology for the allocation of exchanges’ interdependent costs, the Exchange will continue to be left with its best efforts to attempt to conduct such an allocation in a thoughtful and reasonable manner. Through the Exchange’s extensive updated Cost Analysis, which was again recently further refined, the Exchange analyzed every expense item in the Exchange’s general expense ledger to determine whether each such expense relates to the provision of connectivity and port services, and, if such expense did so relate, what portion (or percentage) of such expense actually supports the provision of connectivity and port services, and thus bears a relationship that is, ‘‘in nature and closeness,’’ directly related to network connectivity and port services. In turn, the Exchange allocated certain costs more to physical connectivity and others to ports, while certain costs were only allocated to such services at a very low percentage or not at all, using consistent allocation methodologies as described above. Based on this analysis, the Exchange estimates that the aggregate monthly cost to provide 10Gb ULL connectivity and Limited Service MEI Port services, including both physical 10Gb connections and Limited Service MEI Ports, is $1,095,054 (utilizing the rounded numbers when dividing the annual cost for 10Gb ULL connectivity and annual cost for Limited Service MEI Ports by 12 months, then adding both numbers together), as further detailed below. Costs Related To Offering Physical 10Gb ULL Connectivity The following chart details the individual line-item costs considered by the Exchange to be related to offering physical dedicated 10Gb ULL connectivity via an unshared network as well as the percentage of the Exchange’s overall costs that such costs represent for each cost driver (e.g., as set forth below, the Exchange allocated approximately 28.1% of its overall Human Resources cost to offering physical connectivity). Allocated annual cost k Cost drivers 72185 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 ...................................................................................... $3,520,856 71,675 373,249 752,545 666,208 1,929,118 4,047,935 $293,405 5,973 31,104 62,712 55,517 160,760 337,328 28 61.9 84.8 61.9 50.9 63.8 51.3 Total .................................................................................................................... 11,361,586 946,799 42.8 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. lotter on DSK11XQN23PROD with NOTICES1 k. The 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 the VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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. PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 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 E:\FR\FM\19OCN1.SGM 19OCN1 lotter on DSK11XQN23PROD with NOTICES1 72186 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices 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 42.4% 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’ time to 10Gb ULL connectivity (less than 20%). This other group of personnel with a smaller allocation of Human Resources costs also have a direct nexus to 10Gb ULL connectivity, whether it is a sales person selling a connection, finance personnel billing for connectivity or providing budget analysis, or information security ensuring that such connectivity is secure and adequately defended from an outside intrusion. The estimates of Human Resources cost were therefore determined by consulting with such department leaders, determining which employees VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 are involved in tasks related to providing physical connectivity, and confirming that the proposed allocations were reasonable based on an understanding of the percentage of 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 42.4% 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 PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 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 provider expense and recoups that expense, in part, by charging for 10Gb ULL connectivity. Internet Services and External Market Data The next cost driver consists of internet Services and external market data. The internet services cost driver includes third-party service providers that provide the internet, fiber and bandwidth connections between the Exchange’s networks, primary and secondary data centers, and office locations in Princeton and Miami. External market data includes fees paid to third parties, including other exchanges, to receive market data. The Exchange includes external market data fee costs towards the provision of 10Gb ULL connectivity because such market data is necessary for certain services related to connectivity, including pretrade risk checks and checks for other conditions (e.g., re-pricing of orders to avoid locked or crossed markets and E:\FR\FM\19OCN1.SGM 19OCN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices 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 various content service providers for data feeds for the entire U.S. options industry, as well as content for critical components of the network that are necessary to provide and maintain its System Networks and access to its System Networks via 10Gb ULL connectivity. Specifically, the Exchange utilizes content service providers to receive market data from OPRA, other exchanges and market data providers. The Exchange understands that these service providers provide services to most, if not all, of the other U.S. exchanges and other market participants. Market data provided these service providers is critical to the Exchanges daily operations and performance of its System Networks to which market participants connect to via 10Gb ULL connectivity. Without these services providers, the Exchange would not be able to receive market data and, therefore, would not be able to operate and support its System Networks. The Exchange does not employ a separate fee to cover its content service provider expense and recoups that expense, in part, by charging for 10Gb ULL connectivity. Lastly, the Exchange notes that the actual dollar amounts allocated as part of the second step of the 2023 budget process differ among the Exchange and its affiliated markets for the internet Services and External Market Data cost driver, even though, but for the Exchange, the allocation percentages are generally consistent across markets (e.g., MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl Equities allocated 84.8%, 73.3%, 73.3% and 72.5%, respectively, to the same cost driver). This is because: (i) a different percentage of the overall internet Services and External Market Data cost driver was allocated to the Exchange and its affiliated markets due to the factors set forth under the first step of the 2023 budget review process described above (unique technical architecture, market structure, and business requirements of each marketplace); and (ii) the Exchange itself allocated a larger portion of this cost driver to 10Gb ULL connectivity because of recent initiatives to improve the latency and determinism of its VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 systems. The Exchange notes while the percentage it allocated to the internet Services and External Market Data cost driver is greater than its affiliated markets, the overall dollar amount allocated to the Exchange under the initial step of the 2023 budget process is lower than its affiliated markets. However, the Exchange believes that this is not, in dollar amounts, a significant difference. This is because the total dollar amount of expense covered by this cost driver is relatively small compared to other cost drivers and is due to nuances in exchange architecture that require different initial allocation amount under the first step of the 2023 budget process described above. Thus, non-significant differences in percentage allocation amounts in a smaller cost driver create the appearance of a significant difference, even though the actual difference in dollar amounts is small. For instance, despite the difference in cost allocation percentages for the internet Services and External Market Data cost driver across the Exchange and MIAX, the actual dollar amount difference is approximately only $4,000 per month, a non-significant amount. Data Center Data Center costs includes an allocation of the costs the Exchange incurs to provide physical connectivity in the third-party data centers where it maintains its equipment (such as dedicated space, security services, cooling and power). The Exchange notes that it does not own the Primary Data Center or the Secondary Data Center, but instead, leases space in data centers operated by third parties. The Exchange has allocated a high percentage of the Data Center cost (61.9%) to physical 10Gb ULL connectivity because the third-party data centers and the Exchange’s physical equipment contained therein is the most direct cost in providing physical access to the Exchange. In other words, for the Exchange to operate in a dedicated space with connectivity by market participants to a physical trading platform, the data centers are a very tangible cost, and in turn, if the Exchange did not maintain such a presence then physical connectivity would be of no value to market participants. Hardware and Software Maintenance and Licenses Hardware and Software Licenses includes hardware and software licenses used to operate and monitor physical assets necessary to offer physical PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 72187 connectivity to the Exchange.102 The Exchange notes that this allocation is less than MIAX Pearl Options by a significant amount, but slightly more than MIAX, 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, MIAX Pearl Options 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 102 This expense may be less than the Exchange’s affiliated markets, specifically MIAX Pearl (the options and equities markets), because, unlike the Exchange, MIAX Pearl (the options and equities markets) maintains an additional gateway to accommodate its member’s access and connectivity needs. This added gateway contributes to the difference in allocations between the Exchange and MIAX Pearl. This expense also differs in dollar amount among the Exchange, MIAX Pearl (options and equities), and MIAX because each market may maintain and utilize a different amount of hardware and software based on its market model and infrastructure needs. The Exchange allocated a percentage of the overall cost based on actual amounts of hardware and software utilized by that market, which resulted in different cost allocations and dollar amounts. E:\FR\FM\19OCN1.SGM 19OCN1 72188 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices budgeted improvements that the Exchange intends to capitalize and depreciate with respect to 10Gb ULL connectivity in the near-term. As with the other allocated costs in the Exchange’s updated Cost Analysis, the Depreciation cost was therefore narrowly tailored to depreciation related to 10Gb ULL connectivity. As noted above, the Exchange allocated 63.8% of its allocated depreciation costs to providing physical 10Gb ULL connectivity. The Exchange also notes that this allocation differs from its affiliated markets due to a number of factors, such as the age of physical assets and software (e.g., older physical assets and software were previously depreciated and removed from the allocation), or certain system enhancements that required new physical assets and software, thus providing a higher contribution to the depreciated cost. For example, the percentages the Exchange and its affiliate, MIAX, allocated to the depreciation of hardware and software used to provide 10Gb ULL connectivity are nearly identical. However, the Exchange’s dollar amount is lower than that of MIAX by approximately $32,000 per month due to two factors: first, MIAX has undergone a technology refresh since the time MIAX Emerald launched in February 2019, leading MIAX to have more hardware that software that is subject to depreciation. Second, MIAX maintains 24 matching engines while MIAX Emerald maintains only 12 matching engines. This also results in more of MIAX’s hardware and software being subject to depreciation than MIAX Emerald’s hardware and software due to the greater amount of equipment and software necessary to support the greater number of matching engines on MIAX. lotter on DSK11XQN23PROD with NOTICES1 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 VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 shared expense cost driver.103 These general shared expenses are incurred by the Exchange’s parent company, MIH, as 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 10GBb 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. Again, a portion of all shared expenses were allocated to the Exchange (and its affiliated markets) which, in turn, allocated a portion of that overall allocation to all physical connectivity on the Exchange. The Exchange then allocated 51.3% of the portion allocated to physical connectivity to 10Gb ULL connectivity. The Exchange believes this allocation percentage is reasonable because, while the overall dollar amount may be higher than other cost drivers, the 51.3% is based on and in line with the percentage allocations of 103 The Exchange notes that MEMX allocated a precise amount of 10% of the overall cost for directors to providing physical connectivity. See Securities Exchange Act Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–2022–26). The Exchange does not calculate is expenses at that granular a level. Instead, director costs are included as part of the overall general allocation. PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 each of the Exchange’s other cost drivers. The percentage allocated to 10Gb ULL connectivity also reflects its importance to the Exchange’s strategy and necessity towards the nature of the Exchange’s overall operations, which is to provide a resilient, highly deterministic trading system that relies on faster 10Gb ULL connectivity than the Exchange’s competitors to maintiain premium performance. This allocation reflects the Exchange’s focus on providing and maintaining high performance network connectivity, of which 10Gb ULL connectivity is a main contributor. The Exchange differentiates itself by offering a ‘‘premium-product’’ network experience, as an operator of a high performance, ultra-low latency network with unparalleled system throughput, which system networks can support access to three distinct options markets and multiple competing market-makers having affirmative obligations to continuously quote over 1,100,000 distinct trading products (per exchange), and the capacity to handle approximately 18 million quote messages per second. The ‘‘premiumproduct’’ network experience enables users of 10Gb ULL connections to receive the network monitoring and reporting services for those approximately 1,100,000 distinct trading products. These value add services are part of the Exchange’s strategy for offering a high performance trading system, which utilizes 10Gb ULL connectivity. The Exchange notes that the 51.3% allocation of general shared expenses for physical 10Gb ULL connectivity is higher than that allocated to general shared expenses for Limited Service MEI Ports. 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), Limited Service MEI Ports do not require as many broad or indirect resources as other core services. * * * * * Approximate Cost per 10Gb ULL Connection per Month After determining the approximate allocated monthly cost related to 10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of $946,799 was divided by the number of physical 10Gb ULL connections the Exchange maintained at the time that proposed pricing was determined (102), to arrive at a cost of approximately $9,282 per month, per physical 10Gb ULL E:\FR\FM\19OCN1.SGM 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices connection. Due to the nature of this particular cost, this allocation methodology results in an allocation among the Exchange and its affiliated markets based on set quantifiable criteria, i.e., actual number of 10Gb ULL connections. * * * * * Costs Related To Offering Limited Service MEI Ports The following chart details the individual line-item costs considered by the Exchange to be related to offering Limited Service MEI Ports as well as the percentage of the Exchange’s overall costs such costs represent for such area (e.g., as set forth below, the Exchange allocated approximately 5.9% of its overall Human Resources cost to offering Limited Service MEI Ports). Allocated annual cost m Cost drivers 72189 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 ...................................................................................... $737,784 3,713 14,102 55,686 41,951 112,694 813,136 $61,482 309 1,175 4,641 3,496 9,391 67,761 5.9 3.2 3.2 4.6 3.2 3.7 10.3 Total .................................................................................................................... 1,779,066 148,255 6.7 m. See supra note k (describing rounding of Annual Costs). n. See supra note l (describing rounding of Monthly Costs based on Annual Costs). lotter on DSK11XQN23PROD with NOTICES1 Below are additional details regarding each of the line-item costs considered by the Exchange to be related to offering Limited Service MEI Ports. While some costs were attempted to be allocated as equally as possible among the Exchange and its affiliated markets, the Exchange notes that some of its cost allocation percentages for certain cost drivers differ when compared to the same cost drivers described by the Exchange’s affiliated markets in their similar proposed fee changes for connectivity and ports. This is because the Exchange’s cost allocation methodology utilizes the actual projected costs of the Exchange (which are specific to the Exchange, and are independent of the costs projected and utilized by the Exchange’s affiliated markets) to determine its actual costs, which may vary across the Exchange and its affiliated markets based on factors that are unique to each marketplace. The Exchange provides additional explanation below (including the reason for the deviation) for the significant differences. Human Resources With respect to Limited Service MEI Ports, the Exchange calculated Human Resources cost by taking an allocation of employee time for employees whose functions include providing Limited Service MEI Ports and maintaining performance thereof (including a broader range of employees such as technical operations personnel, market operations personnel, and software engineering personnel) as well as a limited subset of personnel with ancillary functions related to maintaining such connectivity (such as sales, membership, and finance VerDate Sep<11>2014 18:46 Oct 18, 2023 Jkt 262001 personnel). Just as described above for 10Gb ULL connectivity, the estimates of Human Resources cost were again determined by consulting with department leaders, determining which employees are involved in tasks related to providing Limited Service MEI Ports and maintaining performance thereof, and confirming that the proposed allocations were reasonable based on an understanding of the percentage of their time such employees devote to tasks related to providing Limited Service MEI Ports and maintaining performance thereof. This includes personnel from the following Exchange departments that are predominately involved in providing Limited Service MEI Ports: Business Systems Development, Trading Systems Development, Systems Operations and Network Monitoring, Network and Data Center Operations, Listings, Trading Operations, and Project Management. The Exchange notes that senior level executives were allocated Human Resources costs to the extent they are involved in overseeing tasks specifically related to providing Limited Service MEI Ports. Senior level executives were only allocated Human Resources costs to the extent that they are involved in managing personnel responsible for tasks integral to providing and maintaining Limited Service MEI Ports. The Human Resources cost was again calculated using a blended rate of compensation reflecting salary, equity and bonus compensation, benefits, payroll taxes, and 401(k) matching contributions. Connectivity (External Fees, Cabling, Switches, Etc.) The Connectivity cost includes external fees paid to connect to other PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 exchanges and cabling and switches, as described above. Internet Services and External Market Data The next cost driver consists of internet services and external market data. Internet services includes thirdparty service providers that provide the internet, fiber and bandwidth connections between the Exchange’s networks, primary and secondary data centers, and office locations in Princeton and Miami. For purposes of Limited Service MEI Ports, the Exchange also includes a portion of its costs related to external market data. External market data includes fees paid to third parties, including other exchanges, to receive and consume market data from other markets. The Exchange includes external market data costs towards the provision of Limited Service MEI Ports because such market data is necessary (in addition to physical connectivity) to offer certain services related to such ports, such as validating orders on entry against the NBBO and checking for other conditions (e.g., halted securities).104 Thus, since market data from other exchanges is consumed at the Exchange’s Limited Service MEI Port level in order to validate orders, before additional processing occurs with respect to such orders, the Exchange believes it is reasonable to allocate a small amount of such costs to Limited Service MEI Ports. 104 The Exchange notes that MEMX separately allocated 7.5% of its external market data costs to providing physical connectivity. See Securities Exchange Act Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR–MEMX– 2022–26). E:\FR\FM\19OCN1.SGM 19OCN1 72190 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices The Exchange notes that the allocation for the internet Services and External Market Data cost driver is greater than that of its affiliate, MIAX Pearl Options, as MIAX Emerald allocated 3.2% of its internet Services and External Market Data expense towards Limited Service MEI Ports, while MIAX Pearl Options allocated 1.4% to its Full Service MEO Ports for the same cost driver. The allocation percentages set forth above differ because they directly correspond with the number of applicable ports utilized on each exchange. For August 2023, MIAX Emerald Market Makers utilized 1,030 Limited Service MEI ports and MIAX Market Makers utilized 1,781 Limited Service MEI ports. When compared to Full Service Port (Bulk and Single) usage, for August 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. lotter on DSK11XQN23PROD with NOTICES1 Data Center Data Center costs includes an allocation of the costs the Exchange incurs to provide Limited Service MEI Ports in the third-party data centers where it maintains its equipment as well as related costs for market data to then enter the Exchange’s system via Limited Service MEI Ports (the Exchange does not own the Primary Data Center or the Secondary Data Center, but instead, leases space in data centers operated by third parties). Hardware and Software Maintenance and Licenses Hardware and Software Licenses includes hardware and software licenses used to monitor the health of the order entry services provided by the Exchange, as described above. The Exchange notes that this allocation is greater than its affiliate, MIAX Pearl Options, as MIAX Emerald allocated 3.2% of its Hardware and Software Maintenance and License expense towards Limited Service MEI Ports, while MIAX Pearl Options allocated 1.4% to its Full Service MEO Ports (Bulk and Single) for the same category of expense. The allocation percentages set forth above differ because they correspond with the VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 number of applicable ports utilized on each exchange. For August 2023, MIAX Market Makers utilized 1,781 Limited Service MEI ports and MIAX Emerald Market Makers utilized 1,030 Limited Service MEI Ports. When compared to Full Service Port (Bulk and Single) usage, for August 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 Limited Service MEI Ports has been developed in-house and the cost of such development, which takes place over an extended period of time and includes not just development work, but also quality assurance and testing to ensure the software works as intended, is depreciated over time once the software is activated in the production environment. Hardware used to provide Limited Service MEI Ports includes equipment used for testing and monitoring of order entry infrastructure and other physical equipment the Exchange purchased and is also depreciated over time. All hardware and software, 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 3.7% of all depreciation costs to providing Limited Service MEI Ports. The Exchange allocated depreciation costs for depreciated software necessary to operate the Exchange because such software is related to the provision of Limited Service MEI Ports. As with the other allocated costs in the Exchange’s updated Cost Analysis, the Depreciation cost driver was therefore narrowly tailored to depreciation related to Limited Service MEI Ports. The Exchange notes that this allocation differs from its affiliated markets due to a number of factors, such as the age of physical assets and PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 software (e.g., older physical assets and software were previously depreciated and removed from the allocation), or certain system enhancements that required new physical assets and software, thus providing a higher contribution to the depreciated cost. For example, the Exchange notes that the percentages it and its affiliate, MIAX, allocated to the depreciation cost driver for Limited Service MEI Ports differ by only 2.6%. However, MIAX’s approximate dollar amount is greater than that of MIAX Emerald by approximately $10,000 per month. This is due to two primary factors. First, MIAX has under gone a technology refresh since the time MIAX Emerald launched in February 2019, leading to it having more hardware that software that is subject to depreciation. Second, MIAX maintains 24 matching engines while MIAX Emerald maintains only 12 matching engines. This also results in more of MIAX’s hardware and software being subject to depreciation than MIAX Emerald’s hardware and software due to the greater amount of equipment and software necessary to support the greater number of matching engines on the Exchange. Allocated Shared Expenses Finally, a portion of general shared expenses was allocated to overall Limited Service MEI Ports costs as without these general shared costs the Exchange would not be able to operate in the manner that it does and provide Limited Service MEI Ports. The costs included in general shared expenses include general expenses of the Exchange, including office space and office expenses (e.g., occupancy and overhead expenses), utilities, recruiting and training, marketing and advertising costs, professional fees for legal, tax and accounting services (including external and internal audit expenses), and telecommunications costs. The Exchange again notes that the cost of paying directors to serve on its Board of Directors is included in the calculation of Allocated Shared Expenses, and thus a portion of such overall cost amounting to less than 11% of the overall cost for directors was allocated to providing Limited Service MEI Ports. The Exchange notes that the 10.3% allocation of general shared expenses for Limited Service MEI Ports is lower than that allocated to general shared expenses for physical connectivity based on its allocation methodology that weighted costs attributable to each Core Service based on an understanding of each area. While Limited Service MEI Ports have several areas where certain tangible costs are heavily weighted E:\FR\FM\19OCN1.SGM 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices towards providing such service (e.g., Data Center, as described above), 10Gb ULL connectivity requires a broader level of support from Exchange personnel in different areas, which in turn leads to a broader general level of cost to the Exchange. Lastly, the Exchange notes that this allocation is greater than its affiliate, MIAX Pearl Options, as MIAX Emerald allocated 10.3% of its Allocated Shared Expense towards Limited Service MEI Ports, while MIAX Pearl Options allocated 3.6% to its Full Service MEO Ports (Bulk and Single) for the same category of expense. The allocation percentages set forth above differ because they correspond with the number of applicable ports utilized on each exchange. For August 2023, MIAX Market Makers utilized 1,781 Limited Service MEI ports and MIAX Emerald Market Makers utilized 1,030 Limited Service MEI Ports. When compared to Full Service Port (Bulk and Single) usage, for August 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 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.105 * * * * * lotter on DSK11XQN23PROD with NOTICES1 Approximate Cost per Limited Service MEI Port per Month Based on August 2023 data, the total monthly cost allocated to Limited Service MEI Ports of $148,255 was divided by the total number of Limited Service MEI Ports utilized by Members in August, which was 1,030 (and includes free and charged ports), resulting in an approximate cost of $144 per port per month (when rounding to the nearest dollar). The Exchange used the total number of Limited Service MEI Ports it maintained in August for all Members and included free and charged ports. However, in prior filings, the Exchange did not include the expense of maintaining the two free Limited 105 MIAX allocated a slightly lower amount (9.8%) of this cost as compared to MIAX Emerald (10.3%). This is not a significant difference. However, both allocations resulted in an identical cost amount of $0.8 million, despite MIAX having a higher number of Limited Service MEI Ports. MIAX Emerald was allocated a higher cost per Limited Service MEI Port due to the additional resources and expenditures associated with maintaining its recently enhanced low latency network. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 Service MEI Ports per matching engine that each Member receives when the Exchange discussed the approximate cost per port per month, but did include the two free Limited Service MEI Ports in the total expense amounts. As described herein, the Exchange changed its proposed fee structure since past filings to now offer four free Limited Service MEI Ports per matching engine to which each Member connects. After the first four free Limited Service MEI Ports, the Exchange proposes to charge $420 per Limited Service MEI Port per matching engine, up to a total of fourteen (14) Limited Service MEI Ports per matching engine. For the sake of clarity, if a Member wanted to connect to all 12 of the Exchange’s matching engines and utilize the maximum number of Limited Service MEI Ports on each matching engine (i.e., 14), that Member would have a total of 168 Limited Service MEI Ports (12 matching engines multiplied by 14 Limited Service MEI Ports per matching engine). With the proposed increase to now provide four Limited Service MEI Ports for free on each matching engine, that particular Member would receive 48 free Limited Service MEI Ports (4 free Limited Service MEI Ports multiplied by 12 matching engines), and be charged for the remaining 120 Limited Service MEI Ports (168 total Limited Service MEI Ports across all matching engines minus 48 free Limited Service MEI Ports across all matching engines). As mentioned above, Members utilized a total of 1,030 Limited Service MEI Ports in the month of August 2023 (free and charged ports combined). Using August 2023 data to extrapolate out after the proposed changes herein go into effect, the total number of Limited Service MEI Ports that the Exchange would not charge for as a result of this increase in free ports is 468 (meaning the Exchange would charge for only 562 ports) and amounts to a total expense of $67,392 per month to the Exchange ($144 per port multiplied by 468 free Limited Service MEI Ports). * * * * * Cost Analysis—Additional Discussion In conducting its Cost Analysis, the Exchange did not allocate any of its expenses in full to any core services (including physical connectivity or Limited Service MEI Ports) and did not double-count any expenses. Instead, as described above, the Exchange allocated applicable cost drivers across its core services and used the same Cost Analysis to form the basis of this proposal and the filings the Exchange submitted proposing fees for proprietary PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 72191 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 (42.4%) given their focus on functions necessary to provide physical connections. The salaries of those same personnel were allocated only 8.0% to Limited Service MEI Ports and the remaining 49.6% was allocated to 1Gb connectivity, other port services, transaction services, membership services and market data. The Exchange did not allocate any other Human Resources expense for providing physical connections to any other employee group, outside of a smaller allocation of 19.8% for 10Gb ULL connectivity or 19.9% for the entire network, of the cost associated with certain specified personnel who work closely with and support network infrastructure personnel. In contrast, the Exchange allocated much smaller percentages of costs (5% or less) across a wider range of personnel groups in order to allocate Human Resources costs to providing Limited Service MEI Ports. This is because a much wider range of personnel are involved in functions necessary to offer, monitor and maintain Limited Service MEI Ports but the tasks necessary to do so are not a primary or full-time function. In total, the Exchange allocated 28.1% of its personnel costs to providing 10Gb ULL and 1Gb connectivity and 5.9% of its personnel costs to providing Limited Service MEI Ports, for a total allocation of 34% Human Resources expense to provide these specific connectivity and port services. In turn, the Exchange allocated the remaining 66% of its Human Resources expense to membership services, transaction services, other port services and market data. Thus, again, the Exchange’s allocations of cost across core services were based on real costs of operating the Exchange and were not double-counted across the core services or their associated revenue streams. As another example, the Exchange allocated depreciation expense to all core services, including physical connections and Limited Service MEI Ports, but in different amounts. The Exchange believes it is reasonable to allocate the identified portion of such expense because such expense includes the actual cost of the computer equipment, such as dedicated servers, E:\FR\FM\19OCN1.SGM 19OCN1 lotter on DSK11XQN23PROD with NOTICES1 72192 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices 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 67.5% of the Exchange’s overall depreciation and amortization expense to connectivity services (63.8% attributed to 10Gb ULL physical connections and 3.7% to Limited Service MEI Ports). The Exchange allocated the remaining depreciation and amortization expense (approximately 32.5%) toward the cost of providing transaction services, membership services, other port services and market data The Exchange notes that its revenue estimates are based on projections across all potential revenue streams and will only be realized to the extent such revenue streams actually produce the revenue estimated. The Exchange does not yet know whether such expectations will be realized. For instance, in order to generate the revenue expected from connectivity, the Exchange will have to be successful in retaining existing clients that wish to maintain physical connectivity and/or Limited Service MEI Ports or in obtaining new clients that will purchase such services. Similarly, the Exchange will have to be successful in retaining a positive net capture on transaction fees in order to realize the anticipated revenue from transaction pricing. The Exchange notes that the Cost Analysis is based on the Exchange’s 2023 fiscal year of operations and projections. It is possible, however, that actual costs may be higher or lower. To the extent the Exchange sees growth in use of connectivity services it will receive additional revenue to offset future cost increases. However, if use of connectivity services is static or decreases, the Exchange might not realize the revenue that it anticipates or needs in order to cover applicable costs. Accordingly, the Exchange is committing to conduct a one-year review after implementation of these fees. The Exchange expects that it may propose to adjust fees at that time, to increase fees in the event that revenues fail to cover costs and a reasonable mark-up of such costs. Similarly, the Exchange may propose to VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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, the Exchange believes that it is appropriate for an exchange to refresh and update information about its relevant costs and revenues in seeking any future changes to fees, and the Exchange commits to do so. Projected Revenue The proposed fees will allow the Exchange to cover certain costs incurred by the Exchange associated with providing and maintaining necessary hardware and other network infrastructure as well as network monitoring and support services; without such hardware, infrastructure, monitoring and support the Exchange would be unable to provide the connectivity and port services. Much of the cost relates to monitoring and analysis of data and performance of the network via the subscriber’s connection(s). The above cost, namely those associated with hardware, software, and human capital, enable the Exchange to measure network performance with nanosecond granularity. These same costs are also associated with time and money spent seeking to continuously improve the network performance, improving the subscriber’s experience, based on monitoring and analysis activity. The Exchange routinely works to improve the performance of the network’s hardware and software. The costs associated with maintaining and enhancing a state-of-the-art exchange network is a significant expense for the Exchange, and thus the Exchange believes that it is reasonable and appropriate to help offset those costs by amending fees for connectivity services. Subscribers, particularly those of 10Gb ULL connectivity, expect the Exchange to provide this level of support to connectivity so they continue to receive PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 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 $11,361,586. Based on current 10Gb ULL connectivity services usage, the Exchange would generate annual revenue of approximately $16,524,000. The Exchange believes this represents a modest profit of 31% when compared to the cost of providing 10Gb ULL connectivity services which could decrease over time.106 Importantly, the Exchange’s affiliated markets submitted similar filings to also amend their fees for 10Gb ULL connectivity 107 and, when considering the profit margins attributed to 10Gb ULL connectivity for the affiliated markets and the Exchange collectively, the overall profit margin based on projected revenue and costs for the Exchange and its affiliated markets for 10Gb ULL connectivity is only 9.5%. This margin is in line with the profit margin MEMX anticipated making in a recent similar proposal to adopt connectivity fees, including fees for 10Gb connectivity, that the Commission Staff did not suspend and remains in effect today.108 The Exchange’s Cost Analysis estimates the annual cost to provide Limited Service MEI Port services will equal $1,779,066. Based on August 2023 data for Limited Service MEI Port usage and counting for the proposed increase in free Limited Service MEI Ports and proposed increase in the monthly fee from $100 to $420 per port, the Exchange would generate annual 106 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 September 22, 2023). 107 See SR–PEARL–2023–51, SR–PEARL–2023– 55, and SR–MIAX–2023–39. 108 See Securities Exchange Act Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–2022–26) (proposing to adopt fees for connectivity and stating that MEMX would earn approximately 8.5% to 15% margin). MEMX’s projected profit margin being for a single exchange and the Exchange and its affiliated markets aggregated profit margin being for four separate markets is not a material difference as both profit margins reflect the profit of the overall corporate entities that operate the exchange(s). E:\FR\FM\19OCN1.SGM 19OCN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices revenue of approximately $2,832,480. The Exchange believes this would result in an estimated profit margin of 37% after calculating the cost of providing Limited Service MEI Port services, which profit margin could decrease over time.109 The Exchange notes that the cost to provide Limited Service MEI Ports is higher than the cost for the Exchange’s affiliate, MIAX Pearl Options, to provide Full Service MEO Ports due to the substantially higher number of Limited Service MEI Ports used by Exchange Members. For example, utilizing August 2023 data, MIAX Emerald Market Makers utilized 1,030 Limited Service MEI Ports compared to only 384 Full Service MEO Ports (Bulk and Single combined) allocated to MIAX Pearl Options members. Based on the above discussion, the Exchange believes that even if the Exchange earns the above revenue or incrementally more or less, the proposed fees are fair and reasonable because they will not result in pricing that deviates from that of other exchanges or a supra-competitive profit, when comparing the total expense of the Exchange associated with providing 10Gb ULL connectivity and Limited Service MEI Port services versus the total projected revenue of the Exchange associated with network 10Gb ULL connectivity and Limited Service MEI Port services. The Exchange also notes that this the resultant profit margin differs slightly from the profit margins set forth in similar fee filings by its affiliated markets. This is not atypical among exchanges and is due to a number of factors that differ between these four markets, including: different market models, market structures, and product offerings (equities, options, price-time, pro-rata, simple, and complex); different pricing models; different number of market participants and connectivity subscribers; different maintenance and operations costs, as described in the cost allocation methodology above; different technical architecture (e.g., the number of matching engines per exchange, i.e., the Exchange maintains only 12 matching engines while MIAX maintains 24 matching engines); and different maturity phase of the Exchange and its affiliated markets (i.e., start-up versus growth versus more mature). All of these factors contribute to a unique and differing level of profit margin per exchange. Further, the Exchange proposes to charge rates that are comparable to, or lower than, similar fees for similar 109 Id. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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).110 NYSE American charges even higher fees for its comparable 10GB LX LCN connection than the Exchange’s proposed fees ($13,500 per month for the Exchange vs. $22,000 per month for NYSE American).111 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 operated at a cumulative net annual loss from the time it launched operations in 2019 through fiscal year 2021.112 This was due to a number of factors, one of which was choosing to forgo revenue by offering certain products, such as low latency connectivity, at lower rates than other options exchanges to attract order flow and encourage market participants to experience the high determinism, low latency, and resiliency of the Exchange’s trading systems. The Exchange does not believe that it should now be penalized for seeking to raise its fees as it now needs to 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 Limited Service MEI Ports, the extent to which the product drives the Exchange’s overall costs and the relative value of the product, as well as the Exchange’s objective to make access to its Systems broadly available to market participants. The Exchange also believes the proposed fees are reasonable because they are designed to 110 See NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other Services and NASDAQ Rules, General 8: Connectivity, Section 1. CoLocation Services. 111 See NYSE American Options Fee Schedule, Section V.A. Port Fees and Section V.B. CoLocation Fees. 112 Beginning with fiscal year 2022, the Exchange incurred a net gain of approximately $14 million. 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/2300/23007742.pdf. PO 00000 Frm 00153 Fmt 4703 Sfmt 4703 72193 generate annual revenue to recoup the Exchange’s costs of providing dedicated 10Gb ULL connectivity and Limited Service MEI Ports. The Exchange notes that its revenue estimate is based on projections and will only be realized to the extent customer activity produces the revenue estimated. As a competitor in the hypercompetitive exchange environment, and an exchange focused on driving competition, the Exchange does not yet know whether such projections will be realized. For instance, in order to generate the revenue expected from 10Gb ULL connectivity and Limited Service MEI Ports, the Exchange will have to be successful in retaining existing clients that wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports and/or obtaining new clients that will purchase such access. To the extent the Exchange is successful in encouraging new clients to utilize 10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does not believe it should be penalized for such success. To the extent the Exchange has mispriced and experiences a net loss in connectivity clients or in transaction activity, the Exchange could experience a net reduction in revenue. While the Exchange is supportive of transparency around costs and potential margins (applied across all exchanges), as well as periodic review of revenues and applicable costs (as discussed below), the Exchange does not believe that these estimates should form the sole basis of whether or not a proposed fee is reasonable or can be adopted. Instead, the Exchange believes that the information should be used solely to confirm that an Exchange is not 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 E:\FR\FM\19OCN1.SGM 19OCN1 72194 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices Exchange and its affiliated markets often share a single cost, which results in cost efficiencies that can cause a broader gap between the allocated cost amount and projected revenue, even though the fee levels being proposed are lower or competitive with competing markets (as described above). To the extent that the application of a cost-based standard results in Commission Staff making determinations as to the appropriateness of certain profit margins, the Exchange believes that Commission Staff should also consider whether the proposed fee level is comparable to, or competitive with, the same fee charged by competing exchanges and how different cost allocation methodologies (such as across multiple markets) may result in different profit margins for comparable fee levels. Further, if Commission Staff is making determinations as to appropriate profit margins in their approval of exchange fees, the Exchange believes that the Commission should be clear to all market participants as to what they have determined is an appropriate profit margin and should apply such determinations consistently and, in the case of certain legacy exchanges, retroactively, if such standards are to avoid having a discriminatory effect. Further, as is reflected in the proposal, the Exchange continuously and aggressively works to control its costs as a matter of good business practice. A potential profit margin should not be evaluated solely on its size; that assessment should also consider cost management and whether the ultimate fee reflects the value of the services provided. For example, a profit margin on one exchange should not be deemed excessive where that exchange has been successful in controlling its costs, but not excessive on another exchange where that exchange is charging comparable fees but has a lower profit margin due to higher costs. Doing so could have the perverse effect of not incentivizing cost control where higher costs alone could be used to justify fees increases. lotter on DSK11XQN23PROD with NOTICES1 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. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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.113 Thus, as the number of messages an entity increases, certain other costs incurred by the Exchange that are correlated to, though not directly affected by, connection costs (e.g., storage costs, surveillance costs, service expenses) also increase. Given this difference in network utilization rate, the Exchange believes that it is reasonable, equitable, and not unfairly discriminatory that the 10Gb ULL users pay for the vast majority of the shared network resources from which all market participants’ benefit. Limited Service MEI Ports The proposed changes to the monthly fee for Limited Service MEI Ports is not unfairly discriminatory because it would apply to all Market Makers equally. All Market Makers would now 113 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 be eligible to receive four (4) free Limited Service MEI Ports and those that elect to purchase more would be subject to the same monthly rate regardless of the number of additional Limited Service MEI Ports they purchase. Certain market participants choose to purchase additional Limited Service MEI Ports based on their own particular trading/quoting strategies and feel they need a certain number of connections to the Exchange to execute on those strategies. Other market participants may continue to choose to only utilize the free Limited Service MEI Ports to accommodate their own trading or quoting strategies, or other business models. All market participants elect to receive or purchase the amount of Limited Service MEI Ports they require based on their own business decisions and all market participants would be subject to the same fee structure and flat fee. Every market participant may receive up to four (4) free Limited Service MEI Ports and those that choose to purchase additional Limited Service MEI Ports may elect to do so based on their own business decisions and would continue to be subject to the same flat fee. The Exchange notes that it filed to amend this fee in 2020 and that filing contained the same fee structure, i.e., a certain number of free Limited Service MEI Ports coupled with a flat fee for additional Limited Service MEI Ports.114 At that time, the Commission did not find the structure to be unfairly discriminatory by virtue of that proposal surviving the 60-day suspension period. Therefore, the proposed changes to the fees for Limited Service MEI Ports is not unfairly discriminatory because it would continue to apply to all market participants equally and provides a fee structure that includes four free Limited Service MEI Ports for one monthly rate that was previously in place and filed with the Commission. To achieve consistent, premium network performance, the Exchange must build and maintain a network that has the capacity to handle the message rate requirements of its heaviest network consumers during anticipated peak market conditions. The resultant 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. This need also requires the Exchange to purchase additional storage capacity on an ongoing basis to ensure it has sufficient capacity to store these messages as part of it surveillance 114 See E:\FR\FM\19OCN1.SGM supra note 6. 19OCN1 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices program and to satisfy its record keeping requirements under the Exchange Act.115 Thus, as the number of connections per Market Maker increases, other costs incurred by the Exchange also increase, e.g., storage costs, surveillance costs, service expenses. 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 lotter on DSK11XQN23PROD with NOTICES1 The Exchange believes the proposed fees will not result in any burden on intra-market competition that is not necessary or appropriate in furtherance of the purposes of the Act because the proposed fees will allow the Exchange to recoup some of its costs in providing 10Gb ULL connectivity and Limited Service MEI Ports at below market rates to market participants since the Exchange launched operations. As described above, the Exchange operated at a cumulative net annual loss since its launch in 2019 through 2021 116 due to providing a low-cost alternative to attract order flow and encourage market participants to experience the high determinism and resiliency of the Exchange’s trading Systems. To do so, the Exchange chose to waive the fees for some non-transaction related services and Exchange products or provide them at a very lower fee, which was not profitable to the Exchange. This resulted in the Exchange forgoing revenue it could have generated from assessing any fees or higher fees. The Exchange could have sought to charge higher fees at the outset, but that could have served to discourage participation on the Exchange. Instead, the Exchange chose to provide a low-cost exchange alternative to the options industry, which resulted in lower initial revenues. Examples of this are 10Gb ULL connectivity and Limited Service MEI Ports, for which the Exchange only now seeks to adopt fees at a level similar to or lower than those of other options exchanges. 115 17 CFR 240.17a–1 (recordkeeping rule for national securities exchanges, national securities associations, registered clearing agencies and the Municipal Securities Rulemaking Board). 116 The Exchange has incurred a cumulative loss of $9 million since its inception in 2019 through 2021. See Exchange’s Form 1/A, Application for Registration or Exemption from Registration as a National Securities Exchange, filed June 29, 2022, available at https://www.sec.gov/Archives/edgar/ vprr/2200/22001164.pdf. VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 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 MIAX Pearl Options membership on January 1, 2023 as a direct result of the similar proposed fee changes by MIAX Pearl Options.117 117 The Exchange acknowledges that IEX included in its proposal to adopt market data fees after offering market data for free an analysis of what its projected revenue would be if all of its existing customers continued to subscribe versus what its projected revenue would be if a limited number of customers subscribed due to the new fees. See Securities Exchange Act Release No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR–IEX– 2022–02). MEMX did not include a similar analysis in either of its recent non-transaction fee proposals. See, e.g., supra note 71. The Exchange does not believe a similar analysis would be useful here because it is amending existing fees, not proposing to charge a new fee where existing subscribers may PO 00000 Frm 00155 Fmt 4703 Sfmt 4703 72195 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. Lastly, the Exchange does not believe its proposed changes to the monthly rate for Limited Service MEI Ports will place certain market participants at a relative disadvantage to other market participants. All market participants would be eligible to receive four (4) free Limited Service MEI Ports and those that elect to purchase more would be subject to the same flat fee regardless of the number of additional Limited Service MEI Ports they purchase. All firms purchase the amount of Limited Service MEI Ports they require based on their own business decisions and similarly situated firms are subject to the same fees. Inter-Market Competition The Exchange also does not believe that the proposed rule change and price increase will result in any burden on inter-market competition that is not necessary or appropriate in furtherance of the purposes of the Act. As this is a fee increase, arguably if set too high, this fee would make it easier for other exchanges to compete with the Exchange. Only if this were a terminate connections because they are no longer enjoying the service at no cost. E:\FR\FM\19OCN1.SGM 19OCN1 lotter on DSK11XQN23PROD with NOTICES1 72196 Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices substantial fee decrease could this be considered a form of predatory pricing. In contrast, the Exchange believes that, without this fee increase, we are potentially at a competitive disadvantage to certain other exchanges that have in place higher fees for similar services. As we have noted, the Exchange believes that connectivity fees can be used to foster more competitive transaction pricing and additional infrastructure investment and there are other options markets of which market participants may connect to trade options at higher rates than the Exchange’s. Accordingly, the Exchange does not believe its proposed fee changes impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. * * * * * In conclusion, as discussed thoroughly above, the Exchange regrettably believes that the application of the Revised Review Process and Staff Guidance has adversely affected intermarket competition among legacy and non-legacy exchanges by impeding the ability of non-legacy exchanges to adopt or increase fees for their market data and access services (including connectivity and port products and services) that are on parity or commensurate with fee levels previously established by legacy exchanges. Since the adoption of the Revised Review Process and Staff Guidance, and even more so recently, it has become extraordinarily difficult to adopt or increase fees to generate revenue necessary to invest in systems, provide innovative trading products and solutions, and improve competitive standing to the benefit of non-legacy exchanges’ market participants. Although the Staff Guidance served an important policy goal of improving disclosures and requiring exchanges to justify that their market data and access fee proposals are fair and reasonable, it has also negatively impacted non-legacy exchanges in particular in their efforts to adopt or increase fees that would enable them to more fairly compete with legacy exchanges, despite providing enhanced disclosures and rationale under both competitive and cost basis approaches provided for by the Revised Review Process and Staff Guidance to support their proposed fee changes. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange received one comment letter on the Initial Proposal, one VerDate Sep<11>2014 17:48 Oct 18, 2023 Jkt 262001 comment letter on the Second Proposal, one comment letter on the Third Proposal, one comment letter on the Fourth Proposal and one comment letter on the Fifth Proposal, all from the same commenter.118 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. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to section 19(b)(3)(A)(ii) of the Act,119 and Rule 19b–4(f)(2) 120 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 118 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, July 24, 2023 and September 18, 2023. 119 15 U.S.C. 78s(b)(3)(A)(ii). 120 17 CFR 240.19b–4(f)(2). PO 00000 Frm 00156 Fmt 4703 Sfmt 9990 Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– EMERALD–2023–27 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–EMERALD–2023–27. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–EMERALD–2023–27 and should be submitted on or before November 9, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.121 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–23038 Filed 10–18–23; 8:45 am] BILLING CODE 8011–01–P 121 17 E:\FR\FM\19OCN1.SGM CFR 200.30–3(a)(12). 19OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 201 (Thursday, October 19, 2023)]
[Notices]
[Pages 72174-72196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23038]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98751; File No. SR-EMERALD-2023-27]

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

October 13, 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 October 2, 2023, MIAX Emerald, LLC (``MIAX Emerald'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange is filing a proposal to amend the MIAX Emerald Options
Exchange Fee Schedule (``Fee Schedule'') to amend certain connectivity
and port fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings, at MIAX Emerald'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.

[[Page 72175]]

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

1. Purpose
The Exchange proposes to amend the Fee Schedule as follows: (1)
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'')
fiber connection for Members \3\ and non-Members; and (2) amend the
monthly port fee for additional Limited Service MIAX Emerald Express
Interface (``MEI'') Ports \4\ available to Market Makers.\5\ The
Exchange last increased the fees for both 10Gb ULL fiber connections
and Limited Service MEI Ports beginning with a series of filings on
October 1, 2020 (with the final filing made on March 24, 2021).\6\
Prior to that fee change, the Exchange provided Limited Service MEI
Ports for $50 per port, after the first two Limited Service MEI Ports
that are provided free of charge, and the Exchange incurred all the
costs associated to provide those first two Limited Service MEI Ports
since it commenced operations in March 2019. The Exchange then
increased the fee by $50 to a modest $100 fee per Limited Service MEI
Port and increased the fee for 10Gb ULL fiber connections from $6,000
to $10,000 per month.
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule.
\5\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100. For purposes of Limit
Service MEI Ports, Market Makers also include firms that engage in
other types of liquidity activity, such as seeking to remove resting
liquidity from the Exchange's Book.
\6\ See Securities Exchange Act Release Nos. 91460 (April 1,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR
12221 (March 2, 2021) (SR-EMERALD-2021-07).
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Also, in that fee change, the Exchange adopted fees for providing
five different types of ports for the first time. These ports were FIX
Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and
Purge Ports.\7\ Again, the Exchange absorbed all costs associated with
providing these ports since its launch in March 2019. As explained in
that filing, expenditures, as well as research and development
(``R&D'') in numerous areas resulted in a material increase in expense
to the Exchange and were the primary drivers for that proposed fee
change. In that filing, the Exchange allocated a total of $9.3 million
in expenses to providing 10Gb ULL fiber connectivity, additional
Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop
Ports, FIX Drop Copy Ports, and Purge Ports.\8\
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\7\ See id. for a description of each of these ports.
\8\ Id.
---------------------------------------------------------------------------

Since the time of the 2021 increase discussed above, the Exchange
experienced ongoing increases in expenses, particularly internal
expenses.\9\ As discussed more fully below, the Exchange recently
calculated increased annual aggregate costs of $11,361,586 for
providing 10Gb ULL connectivity and $1,779,066 for providing Limited
Service MEI Ports.
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\9\ For example, the New York Stock Exchange, Inc.'s (``NYSE'')
Secure Financial Transaction Infrastructure (``SFTI'') network,
which contributes to the Exchange's connectivity cost, increased its
fees by approximately 9% since 2021. Similarly, since 2021, the
Exchange, and its affiliates, experienced an increase in data center
costs of approximately 17% and an increase in hardware and software
costs of approximately 19%. These percentages are based on the
Exchange's actual 2021 and proposed 2023 budgets.
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Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity services.
Subscribers expect the Exchange to provide this level of support so
they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and Limited Service MEI Ports in order
to recoup ongoing costs and increase in expenses set forth below in the
Exchange's cost analysis. The Exchange initially filed this proposal on
December 30, 2022 as SR-EMERALD-2022-38. On January 9, 2023, the
Exchange withdrew SR-EMERALD-2022-38 and resubmitted this proposal as
SR-EMERALD-2023-01 (the ``Initial Proposal'').\10\ On, February 23,
2023, the Exchange withdrew the Initial Proposal and replaced it with a
revised proposal (SR-EMERALD-2023-05) (the ``Second Proposal'').\11\ On
April 20, 2023, the Exchange withdrew the Second Proposal and replaced
it with a revised proposal (SR-EMERALD-2023-12) (the ``Third
Proposal'').\12\ On June 16, 2023, the Exchange withdrew the Third
Proposal and replaced it with a revised proposal (SR-EMERALD-2023-14)
(the ``Fourth Proposal'').\13\ On August 8, 2023, the Exchange withdrew
the Fourth Proposal and replaced it with a revised proposal (SR-
EMERALD-2023-19) (the ``Fifth Proposal'').\14\ Since a U.S. government
shutdown was avoided, on October 2, 2023, the Exchange withdrew the
Fifth Proposal and replaced it with this further revised proposal (SR-
EMERALD-2023-27) (the ``Sixth Proposal'').
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\10\ See Securities Exchange Act Release No. 96628 (January 10,
2023), 88 FR 2651 (January 17, 2023) (SR-EMERALD-2023-01).
\11\ See Securities Exchange Act Release No. 97079 (March 8,
2023), 88 FR 15764 (March 14, 2023) (SR-EMERALD-2023-05).
\12\ See Securities Exchange Act Release No. 97422 (May 2,
2023), 88 FR 29750 (May 8, 2023) (SR-EMERALD-2023-12).
\13\ The Exchange met with Commission Staff to discuss the Third
Proposal during which the Commission Staff provided feedback and
requested additional information, including, most recently,
information about total costs related to certain third party
vendors. Such vendor cost information is subject to confidentiality
restrictions. The Exchange 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. 97813 (June 27, 2023), 88 FR 42785 (July 3, 2023) (SR-EMERALD-
2023-14).
\14\ See Securities Exchange Act Release No. 98176 (August 21,
2023), 88 FR 58341 (August 25, 2023) (SR-EMERALD-2023-19). Due to
the prospect of a U.S. government shutdown, the Commission suspended
the Fifth Proposal on September 29, 2023. See Securities Exchange
Act Release No. 98656 (September 29, 2023) (SR-EMERALD-2023-19).
---------------------------------------------------------------------------

The Exchange previously included a cost analysis in the Initial,
Second, Third, Fourth and Fifth Proposals. As described more fully
below, the Exchange provides an updated cost analysis that includes,
among other things, additional descriptions of how the Exchange
allocated costs among it and its affiliated exchanges (MIAX PEARL, LLC
(``MIAX Pearl'') (separately among MIAX Pearl Options and MIAX

[[Page 72176]]

Pearl Equities) and MIAX \15\ (together with MIAX Pearl Options and
MIAX Pearl Equities, the ``affiliated markets'')) to ensure no cost was
allocated more than once, as well as additional detail supporting its
cost allocation processes and explanations as to why a cost allocation
in this proposal may differ from the same cost allocation in a similar
proposal submitted by one of its affiliated markets. Although the
baseline cost analysis used to justify the proposed fees was made in
the Initial, Second, Third, Fourth and Fifth Proposals, the fees
themselves have not changed since the Initial, Second, Third, Fourth or
Fifth Proposals and the Exchange still proposes fees that are intended
to cover the Exchange's cost of providing 10Gb ULL connectivity and
Limited Service MEI Ports with a reasonable mark-up over those costs.
---------------------------------------------------------------------------

\15\ The term ``MIAX'' means Miami International Securities
Exchange, LLC. See Exchange Rule 100.
---------------------------------------------------------------------------

* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \16\ 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.\17\ 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.\18\ 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'').\19\ 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.'' \20\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\21\ 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.'' \22\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
---------------------------------------------------------------------------

\16\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\17\ Id.
\18\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\19\ 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).
\20\ Id. at page 2.
\21\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\22\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased the level of
information needed for the Commission to believe that an exchange's
filing satisfied its obligations under the Act with respect to changing
a fee.\23\ 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.
---------------------------------------------------------------------------

\23\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to
Amend the Fee Schedule on the BOX Market LLC Options Facility to
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted
in the BOX Order that it ``historically applied a `market-based'
test in its assessment of market data fees, which [the Commission]
believe[s] present similar issues as the connectivity fees proposed
herein.'' Id. at page 16. Despite this admission, the Commission
disapproved BOX's proposal to begin charging $5,000 per month for
10Gb connections (while allowing legacy exchanges to charge rates
equal to 3-4 times that amount utilizing ``market-based'' fee
filings from years prior).
---------------------------------------------------------------------------

Also while the above appeal was pending, on May 21, 2019, the
Commission Staff issued guidance ``to assist the national securities
exchanges and FINRA . . . in preparing Fee Filings that meet their
burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \24\ 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.'' \25\ 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.'' \26\
---------------------------------------------------------------------------

\24\ 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'').
\25\ Id.
\26\ 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 \27\ and remanded for further proceedings consistent
with its opinion.\28\ 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.'' \29\
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.\30\ The Commission
further invited ``the parties to submit briefing stating whether the
challenges asserted in the applications for review . . . should be
dismissed,

[[Page 72177]]

and specifically identifying any challenge that they contend should not
be dismissed pursuant to the holding of Nasdaq v. SEC.'' \31\ 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.\32\
---------------------------------------------------------------------------

\27\ 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.
\28\ 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.
\29\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\30\ 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'').
\31\ Id.
\32\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ vs. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \33\
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.
---------------------------------------------------------------------------

\33\ See supra note 27, at page 2.
---------------------------------------------------------------------------

While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\34\ 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 \35\ 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.\36\ These fees
remain in effect today.
---------------------------------------------------------------------------

\34\ 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.
\35\ 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.
\36\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
---------------------------------------------------------------------------

The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\37\
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 \38\ and $80,383,000 for
2021.\39\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \40\ and $22,843,000 for
2021.\41\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity

[[Page 72178]]

fee'' revenue of $38,387,000 for 2020 \42\ and $44,800,000 for
2021.\43\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \44\ and $30,687,000 for
2021.\45\ 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.\46\ 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.'' \47\
---------------------------------------------------------------------------

\37\ The Exchange has filed, and subsequently withdrawn, various
forms of this proposed fee numerous times since August 2021 with
each proposal containing hundreds of cost and revenue disclosures
never previously disclosed by legacy exchanges in their access and
market data fee filings prior to 2019.
\38\ 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.
\39\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\40\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\41\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\42\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\43\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\44\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\45\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\46\ 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.
\47\ 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,\48\ 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),\49\ 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. 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.
---------------------------------------------------------------------------

\48\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
\49\ See, e.g., Cboe Fee Schedule, Page 4, Affiliate Volume
Plan, available at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf (providing that if a market maker or its
affiliate receives a credit under Cboe's Volume Incentive Program
(``VIP''), the market maker will receive an access credit on their
BOE Bulk Ports corresponding to the VIP tier reached and the market
maker will receive a transaction fee credit on their sliding scale
market maker transaction fees) and NYSE American Options Fee
Schedule, Section III, E, Floor Broker Incentive and Rebate
Programs, available at https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf (providing
floor brokers the opportunity to prepay certain non-transaction fees
for the following calendar year by achieving certain amounts of
volume executed on NYSE American).
---------------------------------------------------------------------------

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 . . . '',\50\ this is not the reality experienced by
exchanges such as MIAX Emerald. As such, non-legacy exchanges are
forced to rely on an opaque cost-based justification standard. However,
because the Staff Guidance is devoid of detail on what must be
contained in cost-based justification, this standard is nearly
impossible to meet despite repeated good-faith efforts by the Exchange
to provide substantial amount of cost-related details. For example, the
Exchange has attempted to increase fees using a cost-based
justification numerous times, having submitted over six filings.\51\
However, despite providing 100+ page filings describing in extensive
detail its costs associated with providing the services described in
the filings, Commission Staff continues to suspend such filings, with
the rationale that the Exchange has not provided sufficient detail of
its costs and without ever being precise about what additional data
points are required. The Commission Staff appears to be interpreting
the reasonableness standard set forth in section 6(b)(4) of the Act
\52\ 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.
---------------------------------------------------------------------------

\50\ See supra note 24, at note 1.
\51\ See Securities Exchange Act Release Nos. 94889 (May 11,
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15); 94717
(April 14, 2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13);
94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-
EMERALD-2022-05); 94257 (February 15, 2022), 87 FR 9678 (February
22, 2022) (SR-EMERALD-2022-04); 93772 (December 14, 2021), 86 FR
71965 (December 20, 2021) (SR-EMERALD-2021-43); 93776 (December 14,
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42); 93188
(September 29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-
2021-31); (SR-EMERALD-2021-30) (withdrawn without being noticed by
the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4,
2021) (SR-EMERALD-2021-29); 92662 (August 13, 2021), 86 FR 46726
(August 19, 2021) (SR-EMERALD-2021-25); 92645 (August 11, 2021), 86
FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
\52\ 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,\53\ 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; \54\ 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

[[Page 72179]]

review, lack parity, and impede fair competition. Considering the
absence of any such framework or clarity, the Exchange believes that
the Commission does not have a reasonable basis to deny the Exchange
this change in fees, where the proposed change would result in fees
meaningfully lower than comparable fees at competing exchanges and
where the associated non-transaction revenue is meaningfully lower than
competing exchanges.
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\53\ 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.
\54\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
---------------------------------------------------------------------------

In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and places a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other options exchanges for connectivity. If the Commission Staff
were to disapprove this proposal, that action, and not market forces,
would substantially affect whether the Exchange can be successful in
its competition with other options exchanges. Disapproval of this
filing could also be viewed as an arbitrary and capricious decision
should the Commission Staff continue to ignore its past treatment of
non-transaction fee filings before implementation of the Revised Review
Process and Staff Guidance and refuse to allow such filings to be
approved despite significantly enhanced arguments and cost
disclosures.\55\
---------------------------------------------------------------------------

\55\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever-increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
---------------------------------------------------------------------------

* * * * *
10Gb ULL Connectivity Fee Change
The Exchange proposes to amend the Fee Schedule to increase the
fees for Members and non-Members to access the Exchange's system
networks \56\ via a 10Gb ULL fiber connection. Specifically, the
Exchange proposes to amend Sections (5)(a)-(b) of the Fee Schedule to
increase the 10Gb ULL connectivity fee for Members and non-Members from
$10,000 per month to $13,500 per month (``10Gb ULL Fee'').\57\
---------------------------------------------------------------------------

\56\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\57\ Market participants that purchase additional 10Gb ULL
connections as a result of this change will not be subject to the
Exchange's Member Network Connectivity Testing and Certification Fee
under Section (4)(c) of the Exchange's Fee Schedule. See Section
(4)(c) of the Exchange's fee schedule available at https://www.miaxglobal.com/markets/us-options/miax-options/fees (providing
that ``Network Connectivity Testing and Certification Fees will not
be assessed in situations where the Exchange initiates a mandatory
change to the Exchange's system that requires testing and
certification. Member Network Connectivity Testing and Certification
Fees will not be assessed for testing and certification of
connectivity to the Exchange's Disaster Recovery Facility.'').
---------------------------------------------------------------------------

The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange will continue to pro-rate the fees when a
Member or non-Member makes a change to the connectivity (by adding or
deleting connections) with such pro-rated fees based on the number of
trading days that the Member or non-Member has been credentialed to
utilize any of the Exchange APIs or market data feeds in the production
environment through such connection, divided by the total number of
trading days in such month multiplied by the applicable monthly rate.
Limited Service MEI Ports
Background
The Exchange also proposes to amend Section (5)(d) of the Fee
Schedule to amend the monthly port fee for Limited Service MEI Ports
available to Market Makers.\58\ The Exchange currently allocates two
(2) Full Service MEI Ports \59\ and two (2) Limited Service MEI Ports
\60\ per matching engine \61\ to which each Market Maker connects.
Market Makers may also request additional Limited Service MEI Ports for
each matching engine to which they connect. The Full Service MEI Ports
and Limited Service MEI Ports all include access to the Exchange's
primary and secondary data centers and its disaster recovery center.
Market Makers may request additional Limited Service MEI Ports. Prior
to the Exchange's proposals to adopt a tiered fee structure for Limited
Service MEI Ports, Market Makers were assessed a $100 monthly fee for
each Limited Service MEI Port for each matching engine above the first
two Limited Service MEI Ports that are included for free (before the
proposals to adopt a tiered fee structure).
---------------------------------------------------------------------------

\58\ The Exchange notes that in its prior filings (the Initial,
Second, Third, Fourth and Fifth Proposals), the Exchange proposed to
adopt a tiered-pricing structure for Limited Service MEI Ports.
\59\ The term ``Full Service MEI Ports'' means a port which
provides Market Makers with the ability to send Market Maker simple
and complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\60\ The term ``Limited Service MEI Ports'' means a port which
provides Market Makers with the ability to send simple and complex
eQuotes and quote purge messages only, but not Market Maker Quotes,
to the MIAX Emerald System. Limited Service MEI Ports are also
capable of receiving administrative information. Market Makers
initially receive two Limited Service MEI Ports per Matching Engine.
See the Definitions Section of the Fee Schedule.
\61\ The term ``Matching Engine'' means a part of the MIAX
Emerald electronic system that processes options orders and trades
on a symbol-by-symbol basis. Some Matching Engines will process
option classes with multiple root symbols, and other Matching
Engines may be dedicated to one single option root symbol (for
example, options on SPY may be processed by one single Matching
Engine that is dedicated only to SPY). A particular root symbol may
only be assigned to a single designated Matching Engine. A
particular root symbol may not be assigned to multiple Matching
Engines. See the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------

Limited Service MEI Port Fee Changes
The Exchange now proposes to amend the monthly fee per Limited
Service MEI Port and increase the number of free Limited Service MEI
Ports per matching engine from two (2) to four (4). Specifically, the
Exchange will now provide the first, second, third and fourth Limited
Service MEI Ports for each matching engine free of charge. For
additional Limited Service MEI Ports after the first four ports per
matching engine that are provided for free (i.e., beginning with the
fifth Limited Service MEI Port), the Exchange proposes to increase the
monthly fee from $100 to $420 per Limited Service MEI Port per matching
engine.\62\
---------------------------------------------------------------------------

\62\ As noted in the Fee Schedule, Market Makers will continue
to be limited to fourteen Limited Service MEI Ports per Matching
Engine. The Exchange also proposes to make a ministerial clarifying
change to remove the defined term ``Additional Limited Service MEI
Ports''. The Exchange proposes to make a related change to add the
term ``Limited Service MEI Ports'' after the word ``fourteen'' in
the Fee Schedule.
---------------------------------------------------------------------------

Market Makers that elect to purchase more than the number of
Limited Service Ports that are provide for free do

[[Page 72180]]

so due to the nature of their business and their perceived need for
numerous ports to access the Exchange. Meanwhile, Market Makers who
utilize the free Limited Service MEI Ports do so based on their
business needs.
The Exchange notes that it last proposed to increase its monthly
Limited Service MEI Port fees in 2020 (other than the prior proposals
to adopt a tiered fee structure for Limited Service MEI Ports),\63\ and
such increase proposed herein is designed to recover a portion of the
ever increasing costs associated with directly accessing the Exchange.
---------------------------------------------------------------------------

\63\ See supra note 6.
---------------------------------------------------------------------------

The Exchange also proposes to make corresponding changes to the
Definitions section of the Fee Schedule and the paragraph describing
the cap on the number of Limited Service MEI Ports each Market Maker
may receive in Section (5)(d)(ii) of the Fee Schedule to account for
the proposed change to now provide the first four (4) Limited Service
MEI Ports for free per matching engine. Accordingly, the Exchange
proposes to amend the last sentence of the paragraph describing the
fees for Limited Service MEI Ports in Section (5)(d)(ii) of the Fee
Schedule to now state that Market Makers are limited to ten additional
Limited Service MEI Ports per matching engine, for a total of fourteen
Limited Service MEI Ports per matching engine.
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 \64\ in general, and furthers the objectives of
section 6(b)(4) of the Act \65\ 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 \66\ 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.
---------------------------------------------------------------------------

\64\ 15 U.S.C. 78f(b).
\65\ 15 U.S.C. 78f(b)(4).
\66\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes under the Revised Review Process and as set
forth in recent Staff Guidance. Based on both the BOX Order \67\ and
the Staff Guidance,\68\ 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.
---------------------------------------------------------------------------

\67\ See supra note 23.
\68\ See supra note 24.
---------------------------------------------------------------------------

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.''
\69\ 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.'' \70\ 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.'' \71\
---------------------------------------------------------------------------

\69\ Id.
\70\ Id.
\71\ Id.
---------------------------------------------------------------------------

The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed
above, the Revised Review Process and Staff Guidance have created an
uneven playing field between legacy and non-legacy exchanges by
severely restricting non-legacy exchanges from being able to increase
non-transaction 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, there is little doubt that subjecting one exchange
to a materially different standard than that applied to other exchanges
for non-transaction fees leaves that exchange at a disadvantage in its
ability to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which
Promotes Competition
The Exchange initially adopted a fee of $50 per port, after the
first two Limited Service MEI Ports that are provided free of charge,
and the Exchange incurred all the costs associated to provide those
first two Limited Service MEI Ports since it commenced operations in
March 2019. At that same time, the Exchange only charged $6,000 per
month for each 10Gb ULL connection. As a new exchange entrant, the
Exchange chose to offer connectivity and ports at very low fees to
encourage market participants to

[[Page 72181]]

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.\72\
---------------------------------------------------------------------------

\72\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX . . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
---------------------------------------------------------------------------

Later in 2020, as the Exchange's market share increased,\73\ the
Exchange then increased the fee by $50 to a modest $100 fee per Limited
Service MEI Port and increased the fee for 10Gb ULL fiber connections
from $6,000 to $10,000 per month.\74\ 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.
---------------------------------------------------------------------------

\73\ The Exchange experienced a monthly average trading volume
of 3.43% for the month of October 2020. See the ``Market Share''
section of the Exchange's website, available at https://www.miaxglobal.com/.
\74\ See Securities Exchange Act Release Nos. 91460 (April 1,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR
12221 (March 2, 2021) (SR-EMERALD-2021-07).
---------------------------------------------------------------------------

The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
competitive forces, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. The fact that the
market for order flow is competitive has long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .'' \75\
---------------------------------------------------------------------------

\75\ 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.'' \76\
---------------------------------------------------------------------------

\76\ 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.' '' \77\ 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.'' \78\ 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.'' \79\ 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.'' \80\
---------------------------------------------------------------------------

\77\ 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.'').
\78\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
\79\ Id.
\80\ See Staff Guidance, supra note 24.
---------------------------------------------------------------------------

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

[[Page 72182]]

----------------------------------------------------------------------------------------------------------------
Monthly fee (per connection or
Exchange Type of connection or port per port)
----------------------------------------------------------------------------------------------------------------
MIAX Emerald (as proposed) (equity options 10Gb ULL connection............. $13,500.
market share of 2.69% for the month of Limited Service MEI Ports....... 1-4 ports: FREE.
August 2023) \a\. 5 or more ports: $420 each.
NASDAQ \b\ (equity options market share of 10Gb Ultra fiber connection..... $15,000 per connection.
5.80% for the month of August 2023) \c\. SQF Port........................ 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'') \d\ (equity options 10Gb Ultra fiber connection..... $15,000 per connection.
market share of 5.58% for the month of SQF Port \f\.................... $1,100 per port.
August 2023) \e\.
NYSE American LLC (``NYSE American'') \g\ 10Gb LX LCN connection.......... $22,000 per connection.
(equity options market share of 7.34% for Order/Quote Entry Port.......... 1-40 Ports: $450 per port.
the month of August 2023) \h\. 41 or more Ports: $150 per port.
NASDAQ GEMX, LLC (``GEMX'') \i\ (equity 10Gb Ultra connection........... $15,000 per connection.
options market share of 3.03% for the month SQF Port........................ $1,250 per port.
of August 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\ See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE Rules, General 8: Connectivity.
\e\ See supra note a.
\f\ Similar to the Exchange's MEI Ports, SQF ports are primarily utilized by Market Makers.
\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.

There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options
exchanges. Market participants may choose to become a member of one or
more options exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, the Exchange's affiliate, MIAX Pearl Options, experienced a
decrease in membership as the result of similar fees proposed herein.
One MIAX Pearl Options Market Maker terminated their MIAX Pearl Options
membership effective January 1, 2023, as a direct result of the
proposed connectivity and port fee changes proposed by MIAX Pearl
Options.
It is not a requirement for market participants to become members
of all options exchanges; in fact, certain market participants conduct
an options business as a member of only one options market.\81\ 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.\82\
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\81\ BOX recently adopted an electronic market maker trading
permit fee. See Securities Exchange Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17). In that
proposal, BOX stated that, ``. . . it is not aware of any reason why
Market Makers could not simply drop their access to an exchange (or
not initially access an exchange) if an exchange were to establish
prices for its non-transaction fees that, in the determination of
such Market Maker, did not make business or economic sense for such
Market Maker to access such exchange. [BOX] again notes that no
market makers are required by rule, regulation, or competitive
forces to be a Market Maker on [BOX].'' Also in 2022, MEMX
established a monthly membership fee. See Securities Exchange Act
Release No. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022)
(SR-MEMX-2021-19). In that proposal, MEMX reasoned that that there
is value in becoming a member of the exchange and stated that it
believed that the proposed membership fee ``is not unfairly
discriminatory because no broker-dealer is required to become a
member of the Exchange'' and that ``neither the trade-through
requirements under Regulation NMS nor broker-dealers' best execution
obligations require a broker-dealer to become a member of every
exchange.''
\82\ Service Bureaus may obtain ports on behalf of 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.\83\ The Exchange and its affiliated
options markets, MIAX Pearl Options and MIAX, 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 elect to do so
based on their own business decisions and need to directly access each
exchange's liquidity pool.
---------------------------------------------------------------------------

\83\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (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 (which are
similar to the changes proposed herein). Indeed, broker-dealers choose
if and how to access a particular exchange and because it is a choice,
the Exchange must set reasonable pricing, otherwise prospective members
would not connect and existing members would disconnect from the
Exchange. The decision to become a member of an exchange, particularly
for registered market makers, is complex, and not solely based on the
non-transactional costs assessed by an exchange. As noted herein,
specific factors include, but are

[[Page 72183]]

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.\84\ If the Exchange is
not at the national best bid or offer (``NBBO''),\85\ the Exchange will
route an order to any away market that is at the NBBO to ensure that
the order was executed at a superior price and prevent a trade-
through.\86\
---------------------------------------------------------------------------

\84\ 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.
\85\ See Exchange Rule 100.
\86\ 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,\87\ or request sponsored
access \88\ through a member of an exchange in order to submit a trade
directly to an options exchange.\89\ A market participant may either
pay the costs associated with becoming a member of an exchange or, in
the alternative, a market participant may elect to pay commissions to a
broker-dealer, pay fees to a service bureau to submit trades, or pay a
member to sponsor the market participant in order to submit trades
directly to an exchange.
---------------------------------------------------------------------------

\87\ Service Bureaus provide access to market participants to
submit and execute orders on an exchange. On the Exchange, a Service
Bureau may be 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.
\88\ 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.
\89\ 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).\90\
Indeed, the Exchange does not receive any connectivity revenue when
connectivity is resold by a third-party, which often is resold to
multiple customers, some of whom are agency broker-dealers that have
numerous customers of their own.\91\ Particularly, in the event that a
market participant views the Exchange's direct connectivity and access
fees as more or less attractive than competing markets, that market
participant can choose to connect to the Exchange indirectly or may
choose not to connect to the Exchange and connect instead to one or
more of the other 15 options markets. Accordingly, the Exchange
believes that the proposed fees are fair and reasonable and constrained
by competitive forces.
---------------------------------------------------------------------------

\90\ See, e.g., Nasdaq Price List--U.S. Direct Connection and
Extranet Fees, available at US Direct-Extranet Connection
(nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022)
(SR-NASDAQ-2017-114).
\91\ The Exchange notes that resellers, such as SFTI, are not
required to publicize, let alone justify or file with the Commission
their fees, and as such could charge the market participant any fees
it deems appropriate (including connectivity fees higher than the
Exchange's connectivity fees), even if such fees would otherwise be
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------

The Exchange is obligated to regulate its 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.
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,\92\ and Rule 19b-4
thereunder,\93\ with respect to the types of information exchanges
should provide when filing fee changes, and section 6(b) of the
Act,\94\ which requires,

[[Page 72184]]

among other things, that exchange fees be reasonable and equitably
allocated,\95\ not designed to permit unfair discrimination,\96\ and
that they not impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\97\ This rule
change proposal addresses those requirements, and the analysis and data
in each of the sections that follow are designed to clearly and
comprehensively show how they are met.\98\ The Exchange reiterates that
the legacy exchanges with whom the Exchange vigorously competes for
order flow and market share, were not subject to any such diligence or
transparency in setting their baseline non-transaction fees, most of
which were put in place before the Revised Review Process and Staff
Guidance.
---------------------------------------------------------------------------

\92\ 15 U.S.C. 78s(b)(1).
\93\ 17 CFR 240.19b-4.
\94\ 15 U.S.C. 78f(b).
\95\ 15 U.S.C. 78f(b)(4).
\96\ 15 U.S.C. 78f(b)(5).
\97\ 15 U.S.C. 78f(b)(8).
\98\ See Staff Guidance, supra note 24.
---------------------------------------------------------------------------

As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $11,361,586 (or approximately $946,799 per month, rounded
to the nearest dollar when dividing the annual cost by 12 months) and
its aggregate annual costs for providing Limited Service MEI Ports at
$1,799,066 (or approximately $148,255 per month, rounded to the nearest
dollar when dividing the annual cost by 12 months). In order to cover
the aggregate costs of providing connectivity to its users (both
Members and non-Members \99\) going forward and to make a modest
profit, as described below, the Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per month for each physical 10Gb
ULL connection. The Exchange also proposes to modify its Fee Schedule
to amend the monthly fee for additional Limited Service MEI Ports and
provide two additional ports free of charge for a total of four free
Limited Service MEI Ports per matching engine to which each Member
connects.
---------------------------------------------------------------------------

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

In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\100\ The
Cost Analysis required a detailed analysis of the Exchange's aggregate
baseline costs, including a determination and allocation of costs for
core services provided by the Exchange--transaction execution, market
data, membership services, physical connectivity, and port access
(which provide order entry, cancellation and modification
functionality, risk functionality, the ability to receive drop copies,
and other functionality). The Exchange separately divided its costs
between those costs necessary to deliver each of these core services,
including infrastructure, software, human resources (i.e., personnel),
and certain general and administrative expenses (``cost drivers'').
---------------------------------------------------------------------------

\100\ The Exchange frequently updates it Cost Analysis as
strategic initiatives change, costs increase or decrease, and market
participant needs and trading activity changes. The Exchange's most
recent Cost Analysis was conducted ahead of this filing.
---------------------------------------------------------------------------

As an initial step, the Exchange determined the total cost for the
Exchange and the affiliated markets 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,\101\ storage needs, dedicated
infrastructure versus shared infrastructure allocated per platform
based on the resources required to support each platform, number of
available connections, and employees allocated time.
---------------------------------------------------------------------------

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

All of these factors result in different allocation percentages
among the Exchange and its affiliated markets, i.e., the different
percentages of the overall cost driver allocated to the Exchange and
its affiliated markets will cause the dollar amount of the overall cost
allocated among the Exchange and its affiliated markets to also differ.
Because the Exchange's parent company currently owns and operates four
separate and distinct marketplaces, the Exchange must determine the
costs associated with each actual market--as opposed to the Exchange's
parent company simply concluding that all costs drivers are the same at
each individual marketplace and dividing total cost by four (4) (evenly
for each marketplace). Rather, the Exchange's parent company determines
an accurate cost for each marketplace, which results in different
allocations and amounts across exchanges for the same cost drivers, due
to the unique factors of each marketplace as described above. This
allocation methodology also ensures that no cost would be allocated
twice or double-counted between the Exchange and its affiliated
markets. The Finance Team then consolidates the budget and sends it to
senior management, including the Chief Financial Officer and Chief
Executive Officer, for review and approval. Next, the budget is
presented to the Board of Directors and the Finance and Audit
Committees for each exchange for their approval. The above steps
encompass the first step of the cost allocation process.
The next step involves determining what portion of the cost
allocated to the Exchange pursuant to the above methodology is to be
allocated to each core service, e.g., connectivity and ports, market
data, and transaction services. The Exchange and its affiliated markets
adopted an allocation methodology with thoughtful and consistently
applied principles to guide how much of a particular cost amount
allocated to the Exchange should be allocated within the Exchange to
each core service. This is the final step in the cost allocation
process and is applied to each of the cost drivers set forth below. For
instance, fixed costs that are not driven by client activity (e.g.,
message rates), such as data center costs, were allocated more heavily
to the provision of physical connectivity (61.9% of total expense
amount allocated to 10Gb ULL connectivity), with smaller allocations to
additional Limited Service MEI Ports (4.6%), and the remainder to the
provision of other connectivity, other ports, transaction execution,
membership services and market data services (33.5%). This next level
of the allocation methodology at the individual exchange level also
took into account factors similar to those set forth under the first
step of the allocation methodology process described above, to
determine the appropriate allocation to connectivity or market data
versus allocations for other services. This

[[Page 72185]]

allocation methodology was developed through an assessment of costs
with senior management intimately familiar with each area of the
Exchange's operations. After adopting this allocation methodology, the
Exchange then applied an allocation of each cost driver to each core
service, resulting in the cost allocations described below. Each of the
below cost allocations is unique to the Exchange and represents a
percentage of overall cost that was allocated to the Exchange pursuant
to the initial allocation described above.
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity and
port services, membership fees, regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue. The Exchange also notes that as a general
matter each of these sources of revenue is based on services that are
interdependent. For instance, the Exchange's system for executing
transactions is dependent on physical hardware and connectivity; only
Members and parties that they sponsor to participate directly on the
Exchange may submit orders to the Exchange; many Members (but not all)
consume market data from the Exchange in order to trade on the
Exchange; and the Exchange consumes market data from external sources
in order to comply with regulatory obligations. Accordingly, given this
interdependence, the allocation of costs to each service or revenue
source required judgment of the Exchange and was weighted based on
estimates of the Exchange that the Exchange believes are reasonable, as
set forth below. While there is no standardized and generally accepted
methodology for the allocation of an exchange's costs, the Exchange's
methodology is the result of an extensive review and analysis and will
be consistently applied going forward for any other potential fee
proposals. In the absence of the Commission attempting to specify a
methodology for the allocation of exchanges' interdependent costs, the
Exchange will continue to be left with its best efforts to attempt to
conduct such an allocation in a thoughtful and reasonable manner.
Through the Exchange's extensive updated Cost Analysis, which was
again recently further refined, the Exchange analyzed every expense
item in the Exchange's general expense ledger to determine whether each
such expense relates to the provision of connectivity and port
services, and, if such expense did so relate, what portion (or
percentage) of such expense actually supports the provision of
connectivity and port services, and thus bears a relationship that is,
``in nature and closeness,'' directly related to network connectivity
and port services. In turn, the Exchange allocated certain costs more
to physical connectivity and others to ports, while certain costs were
only allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the aggregate monthly cost
to provide 10Gb ULL connectivity and Limited Service MEI Port services,
including both physical 10Gb connections and Limited Service MEI Ports,
is $1,095,054 (utilizing the rounded numbers when dividing the annual
cost for 10Gb ULL connectivity and annual cost for Limited Service MEI
Ports by 12 months, then adding both numbers together), as further
detailed below.
Costs Related To Offering Physical 10Gb ULL Connectivity
The following chart details the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
10Gb ULL connectivity via an unshared network as well as the percentage
of the Exchange's overall costs that such costs represent for each cost
driver (e.g., as set forth below, the Exchange allocated approximately
28.1% of its overall Human Resources cost to offering physical
connectivity).

----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \k\ cost \l\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources........................................ $3,520,856 $293,405 28
Connectivity (external fees, cabling, switches, etc.).. 71,675 5,973 61.9
Internet Services and External Market Data............. 373,249 31,104 84.8
Data Center............................................ 752,545 62,712 61.9
Hardware and Software Maintenance and Licenses......... 666,208 55,517 50.9
Depreciation........................................... 1,929,118 160,760 63.8
Allocated Shared Expenses.............................. 4,047,935 337,328 51.3
--------------------------------------------------------
Total.............................................. 11,361,586 946,799 42.8
----------------------------------------------------------------------------------------------------------------
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 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
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

[[Page 72186]]

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 42.4% 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' time to 10Gb ULL connectivity (less than
20%). This other group of personnel with a smaller allocation of Human
Resources costs also have a direct nexus to 10Gb ULL connectivity,
whether it is a sales person selling a connection, finance personnel
billing for connectivity or providing budget analysis, or information
security ensuring that such connectivity is secure and adequately
defended from an outside intrusion.
The estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing physical connectivity, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of 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 42.4% 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 provider expense and recoups that
expense, in part, by charging for 10Gb ULL connectivity.
Internet Services and External Market Data
The next cost driver consists of internet Services and external
market data. The internet services cost driver includes third-party
service providers that provide the internet, fiber and bandwidth
connections between the Exchange's networks, primary and secondary data
centers, and office locations in Princeton and Miami.
External market data includes fees paid to third parties, including
other exchanges, to receive market data. The Exchange includes external
market data fee costs towards the provision of 10Gb ULL connectivity
because such market data is necessary for certain services related to
connectivity, including pre-trade risk checks and checks for other
conditions (e.g., re-pricing of orders to avoid locked or crossed
markets and

[[Page 72187]]

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 various content service providers for data
feeds for the entire U.S. options industry, as well as content for
critical components of the network that are necessary to provide and
maintain its System Networks and access to its System Networks via 10Gb
ULL connectivity. Specifically, the Exchange utilizes content service
providers to receive market data from OPRA, other exchanges and market
data providers. The Exchange understands that these service providers
provide services to most, if not all, of the other U.S. exchanges and
other market participants. Market data provided these service providers
is critical to the Exchanges daily operations and performance of its
System Networks to which market participants connect to via 10Gb ULL
connectivity. Without these services providers, the Exchange would not
be able to receive market data and, therefore, would not be able to
operate and support its System Networks. The Exchange does not employ a
separate fee to cover its content service provider expense and recoups
that expense, in part, by charging for 10Gb ULL connectivity.
Lastly, the Exchange notes that the actual dollar amounts allocated
as part of the second step of the 2023 budget process differ among the
Exchange and its affiliated markets for the internet Services and
External Market Data cost driver, even though, but for the Exchange,
the allocation percentages are generally consistent across markets
(e.g., MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl Equities
allocated 84.8%, 73.3%, 73.3% and 72.5%, respectively, to the same cost
driver). This is because: (i) a different percentage of the overall
internet Services and External Market Data cost driver was allocated to
the Exchange and its affiliated markets due to the factors set forth
under the first step of the 2023 budget review process described above
(unique technical architecture, market structure, and business
requirements of each marketplace); and (ii) the Exchange itself
allocated a larger portion of this cost driver to 10Gb ULL connectivity
because of recent initiatives to improve the latency and determinism of
its systems. The Exchange notes while the percentage it allocated to
the internet Services and External Market Data cost driver is greater
than its affiliated markets, the overall dollar amount allocated to the
Exchange under the initial step of the 2023 budget process is lower
than its affiliated markets. However, the Exchange believes that this
is not, in dollar amounts, a significant difference. This is because
the total dollar amount of expense covered by this cost driver is
relatively small compared to other cost drivers and is due to nuances
in exchange architecture that require different initial allocation
amount under the first step of the 2023 budget process described above.
Thus, non-significant differences in percentage allocation amounts in a
smaller cost driver create the appearance of a significant difference,
even though the actual difference in dollar amounts is small. For
instance, despite the difference in cost allocation percentages for the
internet Services and External Market Data cost driver across the
Exchange and MIAX, the actual dollar amount difference is approximately
only $4,000 per month, a non-significant amount.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (61.9%) to
physical 10Gb ULL connectivity because the third-party data centers and
the Exchange's physical equipment contained therein is the most direct
cost in providing physical access to the Exchange. In other words, for
the Exchange to operate in a dedicated space with connectivity by
market participants to a physical trading platform, the data centers
are a very tangible cost, and in turn, if the Exchange did not maintain
such a presence then physical connectivity would be of no value to
market participants.
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.\102\ The Exchange notes that
this allocation is less than MIAX Pearl Options by a significant
amount, but slightly more than MIAX, 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, MIAX Pearl Options 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.
---------------------------------------------------------------------------

\102\ This expense may be less than the Exchange's affiliated
markets, specifically MIAX Pearl (the options and equities markets),
because, unlike the Exchange, MIAX Pearl (the options and equities
markets) maintains an additional gateway to accommodate its member's
access and connectivity needs. This added gateway contributes to the
difference in allocations between the Exchange and MIAX Pearl. This
expense also differs in dollar amount among the Exchange, MIAX Pearl
(options and equities), and MIAX because each market may maintain
and utilize a different amount of hardware and software based on its
market model and infrastructure needs. The Exchange allocated a
percentage of the overall cost based on actual amounts of hardware
and software utilized by that market, which resulted in different
cost allocations and dollar amounts.
---------------------------------------------------------------------------

Depreciation
All physical assets, software, and hardware used to provide 10Gb
ULL connectivity, which also includes assets used for testing and
monitoring of Exchange infrastructure, were valued at cost, and
depreciated or leased over periods ranging from three to five years.
Thus, the depreciation cost primarily relates to servers necessary to
operate the Exchange, some of which are owned by the Exchange and some
of which are leased by the Exchange in order to allow efficient
periodic technology refreshes. The Exchange also included in the
Depreciation cost driver certain

[[Page 72188]]

budgeted improvements that the Exchange intends to capitalize and
depreciate with respect to 10Gb ULL connectivity in the near-term. As
with the other allocated costs in the Exchange's updated Cost Analysis,
the Depreciation cost was therefore narrowly tailored to depreciation
related to 10Gb ULL connectivity. As noted above, the Exchange
allocated 63.8% of its allocated depreciation costs to providing
physical 10Gb ULL connectivity.
The Exchange also notes that this allocation differs from its
affiliated markets due to a number of factors, such as the age of
physical assets and software (e.g., older physical assets and software
were previously depreciated and removed from the allocation), or
certain system enhancements that required new physical assets and
software, thus providing a higher contribution to the depreciated cost.
For example, the percentages the Exchange and its affiliate, MIAX,
allocated to the depreciation of hardware and software used to provide
10Gb ULL connectivity are nearly identical. However, the Exchange's
dollar amount is lower than that of MIAX by approximately $32,000 per
month due to two factors: first, MIAX has undergone a technology
refresh since the time MIAX Emerald launched in February 2019, leading
MIAX to have more hardware that software that is subject to
depreciation. Second, MIAX maintains 24 matching engines while MIAX
Emerald maintains only 12 matching engines. This also results in more
of MIAX's hardware and software being subject to depreciation than MIAX
Emerald's hardware and software due to the greater amount of equipment
and software necessary to support the greater number of matching
engines on MIAX.
Allocated Shared Expenses
Finally, 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.\103\
These general shared expenses are incurred by the Exchange's parent
company, MIH, as a direct result of operating the Exchange and its
affiliated markets.
---------------------------------------------------------------------------

\103\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors to providing physical
connectivity. See Securities Exchange Act Release No. 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26). 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 10GBb 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.
Again, a portion of all shared expenses were allocated to the
Exchange (and its affiliated markets) which, in turn, allocated a
portion of that overall allocation to all physical connectivity on the
Exchange. The Exchange then allocated 51.3% of the portion allocated to
physical connectivity to 10Gb ULL connectivity. The Exchange believes
this allocation percentage is reasonable because, while the overall
dollar amount may be higher than other cost drivers, the 51.3% is based
on and in line with the percentage allocations of each of the
Exchange's other cost drivers. The percentage allocated to 10Gb ULL
connectivity also reflects its importance to the Exchange's strategy
and necessity towards the nature of the Exchange's overall operations,
which is to provide a resilient, highly deterministic trading system
that relies on faster 10Gb ULL connectivity than the Exchange's
competitors to maintiain premium performance. This allocation reflects
the Exchange's focus on providing and maintaining high performance
network connectivity, of which 10Gb ULL connectivity is a main
contributor. The Exchange differentiates itself by offering a
``premium-product'' network experience, as an operator of a high
performance, ultra-low latency network with unparalleled system
throughput, which system networks can support access to three distinct
options markets and multiple competing market-makers having affirmative
obligations to continuously quote over 1,100,000 distinct trading
products (per exchange), and the capacity to handle approximately 18
million quote messages per second. The ``premium-product'' network
experience enables users of 10Gb ULL connections to receive the network
monitoring and reporting services for those approximately 1,100,000
distinct trading products. These value add services are part of the
Exchange's strategy for offering a high performance trading system,
which utilizes 10Gb ULL connectivity.
The Exchange notes that the 51.3% allocation of general shared
expenses for physical 10Gb ULL connectivity is higher than that
allocated to general shared expenses for Limited Service MEI Ports.
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), Limited
Service MEI Ports do not require as many broad or indirect resources as
other core services.
* * * * *
Approximate Cost per 10Gb ULL Connection per Month
After determining the approximate allocated monthly cost related to
10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of
$946,799 was divided by the number of physical 10Gb ULL connections the
Exchange maintained at the time that proposed pricing was determined
(102), to arrive at a cost of approximately $9,282 per month, per
physical 10Gb ULL

[[Page 72189]]

connection. Due to the nature of this particular cost, this allocation
methodology results in an allocation among the Exchange and its
affiliated markets based on set quantifiable criteria, i.e., actual
number of 10Gb ULL connections.
* * * * *
Costs Related To Offering Limited Service MEI Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Limited Service
MEI Ports as well as the percentage of the Exchange's overall costs
such costs represent for such area (e.g., as set forth below, the
Exchange allocated approximately 5.9% of its overall Human Resources
cost to offering Limited Service MEI Ports).

----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \m\ cost \n\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources........................................ $737,784 $61,482 5.9
Connectivity (external fees, cabling, switches, etc.).. 3,713 309 3.2
Internet Services and External Market Data............. 14,102 1,175 3.2
Data Center............................................ 55,686 4,641 4.6
Hardware and Software Maintenance and Licenses......... 41,951 3,496 3.2
Depreciation........................................... 112,694 9,391 3.7
Allocated Shared Expenses.............................. 813,136 67,761 10.3
--------------------------------------------------------
Total.............................................. 1,779,066 148,255 6.7
----------------------------------------------------------------------------------------------------------------
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 Limited Service
MEI Ports. While some costs were attempted to be allocated as equally
as possible among the Exchange and its affiliated markets, the Exchange
notes that some of its cost allocation percentages for certain cost
drivers differ when compared to the same cost drivers described by the
Exchange's affiliated markets in their similar proposed fee changes for
connectivity and ports. This is because the Exchange's cost allocation
methodology utilizes the actual projected costs of the Exchange (which
are specific to the Exchange, and are independent of the costs
projected and utilized by the Exchange's affiliated markets) to
determine its actual costs, which may vary across the Exchange and its
affiliated markets based on factors that are unique to each
marketplace. The Exchange provides additional explanation below
(including the reason for the deviation) for the significant
differences.
Human Resources
With respect to Limited Service MEI Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Limited Service MEI Ports
and maintaining performance thereof (including a broader range of
employees such as technical operations personnel, market operations
personnel, and software engineering personnel) as well as a limited
subset of personnel with ancillary functions related to maintaining
such connectivity (such as sales, membership, and finance personnel).
Just as described above for 10Gb ULL connectivity, the estimates of
Human Resources cost were again determined by consulting with
department leaders, determining which employees are involved in tasks
related to providing Limited Service MEI Ports and maintaining
performance thereof, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing Limited Service MEI
Ports and maintaining performance thereof. This includes personnel from
the following Exchange departments that are predominately involved in
providing Limited Service MEI Ports: Business Systems Development,
Trading Systems Development, Systems Operations and Network Monitoring,
Network and Data Center Operations, Listings, Trading Operations, and
Project Management. The Exchange notes that senior level executives
were allocated Human Resources costs to the extent they are involved in
overseeing tasks specifically related to providing Limited Service MEI
Ports. Senior level executives were only allocated Human Resources
costs to the extent that they are involved in managing personnel
responsible for tasks integral to providing and maintaining Limited
Service MEI Ports. The Human Resources cost was again calculated using
a blended rate of compensation reflecting salary, equity and bonus
compensation, benefits, payroll taxes, and 401(k) matching
contributions.
Connectivity (External Fees, Cabling, Switches, Etc.)
The Connectivity cost includes external fees paid to connect to
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. For purposes of Limited Service MEI
Ports, the Exchange also includes a portion of its costs related to
external market data. External market data includes fees paid to third
parties, including other exchanges, to receive and consume market data
from other markets. The Exchange includes external market data costs
towards the provision of Limited Service MEI Ports because such market
data is necessary (in addition to physical connectivity) to offer
certain services related to such ports, such as validating orders on
entry against the NBBO and checking for other conditions (e.g., halted
securities).\104\ Thus, since market data from other exchanges is
consumed at the Exchange's Limited Service MEI Port level in order to
validate orders, before additional processing occurs with respect to
such orders, the Exchange believes it is reasonable to allocate a small
amount of such costs to Limited Service MEI Ports.
---------------------------------------------------------------------------

\104\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
See Securities Exchange Act Release No. 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26).

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

[[Page 72190]]

The Exchange notes that the allocation for the internet Services
and External Market Data cost driver is greater than that of its
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 3.2% of its
internet Services and External Market Data expense towards Limited
Service MEI Ports, while MIAX Pearl Options allocated 1.4% to its Full
Service MEO Ports for the same cost driver. The allocation percentages
set forth above differ because they directly correspond with the number
of applicable ports utilized on each exchange. For August 2023, MIAX
Emerald Market Makers utilized 1,030 Limited Service MEI ports and MIAX
Market Makers utilized 1,781 Limited Service MEI ports. When compared
to Full Service Port (Bulk and Single) usage, for August 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 Limited Service MEI Ports in the third-party data
centers where it maintains its equipment as well as related costs for
market data to then enter the Exchange's system via Limited Service MEI
Ports (the Exchange does not own the Primary Data Center or the
Secondary Data Center, but instead, leases space in data centers
operated by third parties).
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
The Exchange notes that this allocation is greater than its
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 3.2% of its
Hardware and Software Maintenance and License expense towards Limited
Service MEI Ports, while MIAX Pearl Options allocated 1.4% to its Full
Service MEO Ports (Bulk and Single) for the same category of expense.
The allocation percentages set forth above differ because they
correspond with the number of applicable ports utilized on each
exchange. For August 2023, MIAX Market Makers utilized 1,781 Limited
Service MEI ports and MIAX Emerald Market Makers utilized 1,030 Limited
Service MEI Ports. When compared to Full Service Port (Bulk and Single)
usage, for August 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
Limited Service MEI Ports has been developed in-house and the cost of
such development, which takes place over an extended period of time and
includes not just development work, but also quality assurance and
testing to ensure the software works as intended, is depreciated over
time once the software is activated in the production environment.
Hardware used to provide Limited Service MEI Ports includes equipment
used for testing and monitoring of order entry infrastructure and other
physical equipment the Exchange purchased and is also depreciated over
time.
All hardware and software, 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 3.7% of
all depreciation costs to providing Limited Service MEI Ports. The
Exchange allocated depreciation costs for depreciated software
necessary to operate the Exchange because such software is related to
the provision of Limited Service MEI Ports. As with the other allocated
costs in the Exchange's updated Cost Analysis, the Depreciation cost
driver was therefore narrowly tailored to depreciation related to
Limited Service MEI Ports.
The Exchange notes that this allocation differs from its affiliated
markets due to a number of factors, such as the age of physical assets
and software (e.g., older physical assets and software were previously
depreciated and removed from the allocation), or certain system
enhancements that required new physical assets and software, thus
providing a higher contribution to the depreciated cost. For example,
the Exchange notes that the percentages it and its affiliate, MIAX,
allocated to the depreciation cost driver for Limited Service MEI Ports
differ by only 2.6%. However, MIAX's approximate dollar amount is
greater than that of MIAX Emerald by approximately $10,000 per month.
This is due to two primary factors. First, MIAX has under gone a
technology refresh since the time MIAX Emerald launched in February
2019, leading to it having more hardware that software that is subject
to depreciation. Second, MIAX maintains 24 matching engines while MIAX
Emerald maintains only 12 matching engines. This also results in more
of MIAX's hardware and software being subject to depreciation than MIAX
Emerald's hardware and software due to the greater amount of equipment
and software necessary to support the greater number of matching
engines on the Exchange.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall Limited Service MEI Ports costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide Limited Service MEI Ports. The costs included in
general shared expenses include general expenses of the Exchange,
including office space and office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 11% of the overall cost for
directors was allocated to providing Limited Service MEI Ports. The
Exchange notes that the 10.3% allocation of general shared expenses for
Limited Service MEI Ports is lower than that allocated to general
shared expenses for physical connectivity based on its allocation
methodology that weighted costs attributable to each Core Service based
on an understanding of each area. While Limited Service MEI Ports have
several areas where certain tangible costs are heavily weighted

[[Page 72191]]

towards providing such service (e.g., Data Center, as described above),
10Gb ULL connectivity requires a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange.
Lastly, the Exchange notes that this allocation is greater than its
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 10.3% of its
Allocated Shared Expense towards Limited Service MEI Ports, while MIAX
Pearl Options allocated 3.6% to its Full Service MEO Ports (Bulk and
Single) for the same category of expense. The allocation percentages
set forth above differ because they correspond with the number of
applicable ports utilized on each exchange. For August 2023, MIAX
Market Makers utilized 1,781 Limited Service MEI ports and MIAX Emerald
Market Makers utilized 1,030 Limited Service MEI Ports. When compared
to Full Service Port (Bulk and Single) usage, for August 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 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.\105\
---------------------------------------------------------------------------

\105\ MIAX allocated a slightly lower amount (9.8%) of this cost
as compared to MIAX Emerald (10.3%). This is not a significant
difference. However, both allocations resulted in an identical cost
amount of $0.8 million, despite MIAX having a higher number of
Limited Service MEI Ports. MIAX Emerald was allocated a higher cost
per Limited Service MEI Port due to the additional resources and
expenditures associated with maintaining its recently enhanced low
latency network.
---------------------------------------------------------------------------

* * * * *
Approximate Cost per Limited Service MEI Port per Month
Based on August 2023 data, the total monthly cost allocated to
Limited Service MEI Ports of $148,255 was divided by the total number
of Limited Service MEI Ports utilized by Members in August, which was
1,030 (and includes free and charged ports), resulting in an
approximate cost of $144 per port per month (when rounding to the
nearest dollar). The Exchange used the total number of Limited Service
MEI Ports it maintained in August for all Members and included free and
charged ports. However, in prior filings, the Exchange did not include
the expense of maintaining the two free Limited Service MEI Ports per
matching engine that each Member receives when the Exchange discussed
the approximate cost per port per month, but did include the two free
Limited Service MEI Ports in the total expense amounts. As described
herein, the Exchange changed its proposed fee structure since past
filings to now offer four free Limited Service MEI Ports per matching
engine to which each Member connects. After the first four free Limited
Service MEI Ports, the Exchange proposes to charge $420 per Limited
Service MEI Port per matching engine, up to a total of fourteen (14)
Limited Service MEI Ports per matching engine.
For the sake of clarity, if a Member wanted to connect to all 12 of
the Exchange's matching engines and utilize the maximum number of
Limited Service MEI Ports on each matching engine (i.e., 14), that
Member would have a total of 168 Limited Service MEI Ports (12 matching
engines multiplied by 14 Limited Service MEI Ports per matching
engine). With the proposed increase to now provide four Limited Service
MEI Ports for free on each matching engine, that particular Member
would receive 48 free Limited Service MEI Ports (4 free Limited Service
MEI Ports multiplied by 12 matching engines), and be charged for the
remaining 120 Limited Service MEI Ports (168 total Limited Service MEI
Ports across all matching engines minus 48 free Limited Service MEI
Ports across all matching engines).
As mentioned above, Members utilized a total of 1,030 Limited
Service MEI Ports in the month of August 2023 (free and charged ports
combined). Using August 2023 data to extrapolate out after the proposed
changes herein go into effect, the total number of Limited Service MEI
Ports that the Exchange would not charge for as a result of this
increase in free ports is 468 (meaning the Exchange would charge for
only 562 ports) and amounts to a total expense of $67,392 per month to
the Exchange ($144 per port multiplied by 468 free Limited Service MEI
Ports).
* * * * *
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or Limited Service MEI Ports) and did not double-count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections based upon the above described
methodology, the Exchange has a team of employees dedicated to network
infrastructure and with respect to such employees the Exchange
allocated network infrastructure personnel with a high percentage of
the cost of such personnel (42.4%) given their focus on functions
necessary to provide physical connections. The salaries of those same
personnel were allocated only 8.0% to Limited Service MEI Ports and the
remaining 49.6% was allocated to 1Gb connectivity, other port services,
transaction services, membership services and market data. The Exchange
did not allocate any other Human Resources expense for providing
physical connections to any other employee group, outside of a smaller
allocation of 19.8% for 10Gb ULL connectivity or 19.9% for the entire
network, of the cost associated with certain specified personnel who
work closely with and support network infrastructure personnel. In
contrast, the Exchange allocated much smaller percentages of costs (5%
or less) across a wider range of personnel groups in order to allocate
Human Resources costs to providing Limited Service MEI Ports. This is
because a much wider range of personnel are involved in functions
necessary to offer, monitor and maintain Limited Service MEI Ports but
the tasks necessary to do so are not a primary or full-time function.
In total, the Exchange allocated 28.1% of its personnel costs to
providing 10Gb ULL and 1Gb connectivity and 5.9% of its personnel costs
to providing Limited Service MEI Ports, for a total allocation of 34%
Human Resources expense to provide these specific connectivity and port
services. In turn, the Exchange allocated the remaining 66% of its
Human Resources expense to membership services, transaction services,
other port services and market data. Thus, again, the Exchange's
allocations of cost across core services were based on real costs of
operating the Exchange and were not double-counted across the core
services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and Limited Service
MEI Ports, but in different amounts. The Exchange believes it is
reasonable to allocate the identified portion of such expense because
such expense includes the actual cost of the computer equipment, such
as dedicated servers,

[[Page 72192]]

computers, laptops, monitors, information security appliances and
storage, and network switching infrastructure equipment, including
switches and taps that were purchased to operate and support the
network. Without this equipment, the Exchange would not be able to
operate the network and provide connectivity services to its Members
and non-Members and their customers. However, the Exchange did not
allocate all of the depreciation and amortization expense toward the
cost of providing connectivity services, but instead allocated
approximately 67.5% of the Exchange's overall depreciation and
amortization expense to connectivity services (63.8% attributed to 10Gb
ULL physical connections and 3.7% to Limited Service MEI Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 32.5%) toward the cost of providing transaction
services, membership services, other port services and market data
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or Limited Service MEI Ports or in obtaining new
clients that will purchase such services. Similarly, the Exchange will
have to be successful in retaining a positive net capture on
transaction fees in order to realize the anticipated revenue from
transaction pricing.
The Exchange notes that the Cost Analysis is based on the
Exchange's 2023 fiscal year of operations and projections. It is
possible, however, that actual costs may be higher or lower. To the
extent the Exchange sees growth in use of connectivity services it will
receive additional revenue to offset future cost increases.
However, if use of connectivity services is static or decreases,
the Exchange might not realize the revenue that it anticipates or needs
in order to cover applicable costs. Accordingly, the Exchange is
committing to conduct a one-year review after implementation of these
fees. The Exchange expects that it may propose to adjust fees at that
time, to increase fees in the event that revenues fail to cover costs
and a reasonable mark-up of such costs. Similarly, the Exchange may
propose to decrease fees in the event that revenue materially exceeds
our current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, the Exchange believes that it is appropriate for an
exchange to refresh and update information about its relevant costs and
revenues in seeking any future changes to fees, and the Exchange
commits to do so.
Projected Revenue
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity and port services. Much of the cost relates to monitoring
and analysis of data and performance of the network via the
subscriber's connection(s). The above cost, namely those associated
with hardware, software, and human capital, enable the Exchange to
measure network performance with nanosecond granularity. These same
costs are also associated with time and money spent seeking to
continuously improve the network performance, improving the
subscriber's experience, based on monitoring and analysis activity. The
Exchange routinely works to improve the performance of the network's
hardware and software. The costs associated with maintaining and
enhancing a state-of-the-art exchange network is a significant expense
for the Exchange, and thus the Exchange believes that it is reasonable
and appropriate to help offset those costs by amending fees for
connectivity services. Subscribers, particularly those of 10Gb ULL
connectivity, expect the Exchange to provide this level of support to
connectivity so they continue to receive the performance they expect.
This differentiates the Exchange from its competitors. As detailed
above, the Exchange has five primary sources of revenue that it can
potentially use to fund its operations: transaction fees, fees for
connectivity services, membership and regulatory fees, and market data
fees. Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue.
The Exchange's Cost Analysis estimates the annual cost to provide
10Gb ULL connectivity services will equal $11,361,586. Based on current
10Gb ULL connectivity services usage, the Exchange would generate
annual revenue of approximately $16,524,000. The Exchange believes this
represents a modest profit of 31% when compared to the cost of
providing 10Gb ULL connectivity services which could decrease over
time.\106\ Importantly, the Exchange's affiliated markets submitted
similar filings to also amend their fees for 10Gb ULL connectivity
\107\ and, when considering the profit margins attributed to 10Gb ULL
connectivity for the affiliated markets and the Exchange collectively,
the overall profit margin based on projected revenue and costs for the
Exchange and its affiliated markets for 10Gb ULL connectivity is only
9.5%. This margin is in line with the profit margin MEMX anticipated
making in a recent similar proposal to adopt connectivity fees,
including fees for 10Gb connectivity, that the Commission Staff did not
suspend and remains in effect today.\108\
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\106\ 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 September 22, 2023).
\107\ See SR-PEARL-2023-51, SR-PEARL-2023-55, and SR-MIAX-2023-
39.
\108\ See Securities Exchange Act Release No. 95936 (September
27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26)
(proposing to adopt fees for connectivity and stating that MEMX
would earn approximately 8.5% to 15% margin). MEMX's projected
profit margin being for a single exchange and the Exchange and its
affiliated markets aggregated profit margin being for four separate
markets is not a material difference as both profit margins reflect
the profit of the overall corporate entities that operate the
exchange(s).
---------------------------------------------------------------------------

The Exchange's Cost Analysis estimates the annual cost to provide
Limited Service MEI Port services will equal $1,779,066. Based on
August 2023 data for Limited Service MEI Port usage and counting for
the proposed increase in free Limited Service MEI Ports and proposed
increase in the monthly fee from $100 to $420 per port, the Exchange
would generate annual

[[Page 72193]]

revenue of approximately $2,832,480. The Exchange believes this would
result in an estimated profit margin of 37% after calculating the cost
of providing Limited Service MEI Port services, which profit margin
could decrease over time.\109\ The Exchange notes that the cost to
provide Limited Service MEI Ports is higher than the cost for the
Exchange's affiliate, MIAX Pearl Options, to provide Full Service MEO
Ports due to the substantially higher number of Limited Service MEI
Ports used by Exchange Members. For example, utilizing August 2023
data, MIAX Emerald Market Makers utilized 1,030 Limited Service MEI
Ports compared to only 384 Full Service MEO Ports (Bulk and Single
combined) allocated to MIAX Pearl Options members.
---------------------------------------------------------------------------

\109\ Id.
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Based on the above discussion, the Exchange believes that even if
the Exchange earns the above revenue or incrementally more or less, the
proposed fees are fair and reasonable because they will not result in
pricing that deviates from that of other exchanges or a supra-
competitive profit, when comparing the total expense of the Exchange
associated with providing 10Gb ULL connectivity and Limited Service MEI
Port services versus the total projected revenue of the Exchange
associated with network 10Gb ULL connectivity and Limited Service MEI
Port services.
The Exchange also notes that this the resultant profit margin
differs slightly from the profit margins set forth in similar fee
filings by its affiliated markets. This is not atypical among exchanges
and is due to a number of factors that differ between these four
markets, including: different market models, market structures, and
product offerings (equities, options, price-time, pro-rata, simple, and
complex); different pricing models; different number of market
participants and connectivity subscribers; different maintenance and
operations costs, as described in the cost allocation methodology
above; different technical architecture (e.g., the number of matching
engines per exchange, i.e., the Exchange maintains only 12 matching
engines while MIAX maintains 24 matching engines); and different
maturity phase of the Exchange and its affiliated markets (i.e., start-
up versus growth versus more mature). All of these factors contribute
to a unique and differing level of profit margin per exchange.
Further, the Exchange proposes to charge rates that are comparable
to, or lower than, similar fees for similar products charged by
competing exchanges. For example, for 10Gb ULL connectivity, the
Exchange proposes a lower fee than the fee charged by Nasdaq for its
comparable 10Gb Ultra fiber connection ($13,500 per month for the
Exchange vs. $15,000 per month for Nasdaq).\110\ NYSE American charges
even higher fees for its comparable 10GB LX LCN connection than the
Exchange's proposed fees ($13,500 per month for the Exchange vs.
$22,000 per month for NYSE American).\111\ 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).
---------------------------------------------------------------------------

\110\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\111\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
---------------------------------------------------------------------------

* * * * *
The Exchange operated at a cumulative net annual loss from the time
it launched operations in 2019 through fiscal year 2021.\112\ This was
due to a number of factors, one of which was choosing to forgo revenue
by offering certain products, such as low latency connectivity, at
lower rates than other options exchanges to attract order flow and
encourage market participants to experience the high determinism, low
latency, and resiliency of the Exchange's trading systems. The Exchange
does not believe that it should now be penalized for seeking to raise
its fees as it now needs to 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 Limited Service
MEI Ports, the extent to which the product drives the Exchange's
overall costs and the relative value of the product, as well as the
Exchange's objective to make access to its Systems broadly available to
market participants. The Exchange also believes the proposed fees are
reasonable because they are designed to generate annual revenue to
recoup the Exchange's costs of providing dedicated 10Gb ULL
connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

\112\ Beginning with fiscal year 2022, the Exchange incurred a
net gain of approximately $14 million. 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/2300/23007742.pdf.
---------------------------------------------------------------------------

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

[[Page 72194]]

Exchange and its affiliated markets often share a single cost, which
results in cost efficiencies that can cause a broader gap between the
allocated cost amount and projected revenue, even though the fee levels
being proposed are lower or competitive with competing markets (as
described above). To the extent that the application of a cost-based
standard results in Commission Staff making determinations as to the
appropriateness of certain profit margins, the Exchange believes that
Commission Staff should also consider whether the proposed fee level is
comparable to, or competitive with, the same fee charged by competing
exchanges and how different cost allocation methodologies (such as
across multiple markets) may result in different profit margins for
comparable fee levels. Further, if Commission Staff is making
determinations as to appropriate profit margins in their approval of
exchange fees, the Exchange believes that the Commission should be
clear to all market participants as to what they have determined is an
appropriate profit margin and should apply such determinations
consistently and, in the case of certain legacy exchanges,
retroactively, if such standards are to avoid having a discriminatory
effect.
Further, as is reflected in the proposal, the Exchange continuously
and aggressively works to control its costs as a matter of good
business practice. A potential profit margin should not be evaluated
solely on its size; that assessment should also consider cost
management and whether the ultimate fee reflects the value of the
services provided. For example, a profit margin on one exchange should
not be deemed excessive where that exchange has been successful in
controlling its costs, but not excessive on another exchange where that
exchange is charging comparable fees but has a lower profit margin due
to higher costs. Doing so could have the perverse effect of not
incentivizing cost control where higher costs alone could be used to
justify fees increases.
The Proposed Pricing is not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have the same business
needs for the high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct options markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages to satisfy its record keeping requirements under
the Exchange Act.\113\ 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.
---------------------------------------------------------------------------

\113\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

Limited Service MEI Ports
The proposed changes to the monthly fee for Limited Service MEI
Ports is not unfairly discriminatory because it would apply to all
Market Makers equally. All Market Makers would now be eligible to
receive four (4) free Limited Service MEI Ports and those that elect to
purchase more would be subject to the same monthly rate regardless of
the number of additional Limited Service MEI Ports they purchase.
Certain market participants choose to purchase additional Limited
Service MEI Ports based on their own particular trading/quoting
strategies and feel they need a certain number of connections to the
Exchange to execute on those strategies. Other market participants may
continue to choose to only utilize the free Limited Service MEI Ports
to accommodate their own trading or quoting strategies, or other
business models. All market participants elect to receive or purchase
the amount of Limited Service MEI Ports they require based on their own
business decisions and all market participants would be subject to the
same fee structure and flat fee. Every market participant may receive
up to four (4) free Limited Service MEI Ports and those that choose to
purchase additional Limited Service MEI Ports may elect to do so based
on their own business decisions and would continue to be subject to the
same flat fee. The Exchange notes that it filed to amend this fee in
2020 and that filing contained the same fee structure, i.e., a certain
number of free Limited Service MEI Ports coupled with a flat fee for
additional Limited Service MEI Ports.\114\ At that time, the Commission
did not find the structure to be unfairly discriminatory by virtue of
that proposal surviving the 60-day suspension period. Therefore, the
proposed changes to the fees for Limited Service MEI Ports is not
unfairly discriminatory because it would continue to apply to all
market participants equally and provides a fee structure that includes
four free Limited Service MEI Ports for one monthly rate that was
previously in place and filed with the Commission.
---------------------------------------------------------------------------

\114\ See supra note 6.
---------------------------------------------------------------------------

To achieve consistent, premium network performance, the Exchange
must build and maintain a network that has the capacity to handle the
message rate requirements of its heaviest network consumers during
anticipated peak market conditions. The resultant 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. This need also requires
the Exchange to purchase additional storage capacity on an ongoing
basis to ensure it has sufficient capacity to store these messages as
part of it surveillance

[[Page 72195]]

program and to satisfy its record keeping requirements under the
Exchange Act.\115\ Thus, as the number of connections per Market Maker
increases, other costs incurred by the Exchange also increase, e.g.,
storage costs, surveillance costs, service expenses.
---------------------------------------------------------------------------

\115\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

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

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Limited Service MEI Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange operated at a cumulative net annual loss
since its launch in 2019 through 2021 \116\ due to providing a low-cost
alternative to attract order flow and encourage market participants to
experience the high determinism and resiliency of the Exchange's
trading Systems. To do so, the Exchange chose to waive the fees for
some non-transaction related services and Exchange products or provide
them at a very lower fee, which was not profitable to the Exchange.
This resulted in the Exchange forgoing revenue it could have generated
from assessing any fees or higher fees. The Exchange could have sought
to charge higher fees at the outset, but that could have served to
discourage participation on the Exchange. Instead, the Exchange chose
to provide a low-cost exchange alternative to the options industry,
which resulted in lower initial revenues. Examples of this are 10Gb ULL
connectivity and Limited Service MEI Ports, for which the Exchange only
now seeks to adopt fees at a level similar to or lower than those of
other options exchanges.
---------------------------------------------------------------------------

\116\ The Exchange has incurred a cumulative loss of $9 million
since its inception in 2019 through 2021. See Exchange's Form 1/A,
Application for Registration or Exemption from Registration as a
National Securities Exchange, filed June 29, 2022, available at
https://www.sec.gov/Archives/edgar/vprr/2200/22001164.pdf.
---------------------------------------------------------------------------

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 MIAX Pearl Options membership on January 1, 2023 as a
direct result of the similar proposed fee changes by MIAX Pearl
Options.\117\ The Exchange does not believe that the proposed fees for
connectivity services place certain market participants at a relative
disadvantage to other market participants because the proposed
connectivity pricing is associated with relative usage of the Exchange
by each market participant and does not impose a barrier to entry to
smaller participants. The Exchange believes its proposed pricing is
reasonable and, when coupled with the availability of third-party
providers that also offer connectivity solutions, that participation on
the Exchange is affordable for all market participants, including
smaller trading firms. As described above, the connectivity services
purchased by market participants typically increase based on their
additional message traffic and/or the complexity of their operations.
The market participants that utilize more connectivity services
typically utilize the most bandwidth, and those are the participants
that consume the most resources from the network. Accordingly, the
proposed fees for connectivity services do not favor certain categories
of market participants in a manner that would impose a burden on
competition; rather, the allocation of the proposed connectivity fees
reflects the network resources consumed by the various size of market
participants and the costs to the Exchange of providing such
connectivity services.
---------------------------------------------------------------------------

\117\ The Exchange acknowledges that IEX included in its
proposal to adopt market data fees after offering market data for
free an analysis of what its projected revenue would be if all of
its existing customers continued to subscribe versus what its
projected revenue would be if a limited number of customers
subscribed due to the new fees. See Securities Exchange Act Release
No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-
2022-02). MEMX did not include a similar analysis in either of its
recent non-transaction fee proposals. See, e.g., supra note 71. The
Exchange does not believe a similar analysis would be useful here
because it is amending existing fees, not proposing to charge a new
fee where existing subscribers may terminate connections because
they are no longer enjoying the service at no cost.
---------------------------------------------------------------------------

Lastly, the Exchange does not believe its proposed changes to the
monthly rate for Limited Service MEI Ports will place certain market
participants at a relative disadvantage to other market participants.
All market participants would be eligible to receive four (4) free
Limited Service MEI Ports and those that elect to purchase more would
be subject to the same flat fee regardless of the number of additional
Limited Service MEI Ports they purchase. All firms purchase the amount
of Limited Service MEI Ports they require based on their own business
decisions and similarly situated firms are subject to the same fees.
Inter-Market Competition
The Exchange also does not believe that the proposed rule change
and price increase will result in any burden on inter-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. As this is a fee increase, arguably if set too
high, this fee would make it easier for other exchanges to compete with
the Exchange. Only if this were a

[[Page 72196]]

substantial fee decrease could this be considered a form of predatory
pricing. In contrast, the Exchange believes that, without this fee
increase, we are potentially at a competitive disadvantage to certain
other exchanges that have in place higher fees for similar services. As
we have noted, the Exchange believes that connectivity fees can be used
to foster more competitive transaction pricing and additional
infrastructure investment and there are other options markets of which
market participants may connect to trade options at higher rates than
the Exchange's. Accordingly, the Exchange does not believe its proposed
fee changes impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.

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

The Exchange received one comment letter on the Initial Proposal,
one comment letter on the Second Proposal, one comment letter on the
Third Proposal, one comment letter on the Fourth Proposal and one
comment letter on the Fifth Proposal, all from the same commenter.\118\
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.
---------------------------------------------------------------------------

\118\ 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, July 24,
2023 and September 18, 2023.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

The foregoing rule change has become effective pursuant to section
19(b)(3)(A)(ii) of the Act,\119\ and Rule 19b-4(f)(2) \120\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

\119\ 15 U.S.C. 78s(b)(3)(A)(ii).
\120\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

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

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-EMERALD-2023-27 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-EMERALD-2023-27. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-EMERALD-2023-27 and should
be submitted on or before November 9, 2023.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\121\
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\121\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-23038 Filed 10-18-23; 8:45 am]
BILLING CODE 8011-01-P

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