Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX Pearl Options Exchange Fee Schedule To Modify Certain Connectivity and Port Fees, 72142-72169 [2023-23044]
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Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices
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–MIAX–2023–39 and should be
submitted on or before November 9,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.150
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–23040 Filed 10–18–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98753; File No. SR–
PEARL–2023–55]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX Pearl
Options Exchange Fee Schedule To
Modify Certain Connectivity and Port
Fees
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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 PEARL, LLC (‘‘MIAX
Pearl’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
150 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Pearl Options
Exchange Fee Schedule (the ‘‘Fee
Schedule’’) to amend certain
connectivity and port fees.3
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings, at MIAX Pearl’s principal office,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
Fee Schedule as follows: (1) increase the
fees for a 10 gigabit (‘‘Gb’’) ultra-low
latency (‘‘ULL’’) fiber connection for
Members 4 and non-Members; (2) amend
the calculation of fees for MIAX Express
Network Full Service (‘‘MEO’’) 5 Ports
(Bulk and Single); and (3) amend the
fees for Full Service MEO Ports (Bulk
and Single). The Exchange and its
affiliate, Miami International Securities
3 All references to the ‘‘Exchange’’ in this filing
mean MIAX Pearl Options. Any references to the
equities trading facility of MIAX PEARL, LLC, will
specifically be referred to as ‘‘MIAX Pearl Equities.’’
4 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
5 The term ‘‘MEO Interface’’ or ‘‘MEO’’ means a
binary order interface for certain order types as set
forth in Rule 516 into the MIAX Pearl System. See
the Definitions Section of the Fee Schedule and
Exchange Rule 100.
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Exchange, LLC (‘‘MIAX’’) operated 10Gb
ULL connectivity on a single shared
network that provided access to both
exchanges via a single 10Gb ULL
connection. The Exchange last increased
fees for 10Gb ULL connections from
$9,300 to $10,000 per month on January
1, 2021.6 At the same time, MIAX also
increased its 10Gb ULL connectivity fee
from $9,300 to $10,000 per month.7 The
Exchange and MIAX shared a combined
cost analysis in those filings due to the
single shared 10Gb ULL connectivity
network for both exchanges. In those
filings, the Exchange and MIAX
allocated a combined total of $17.9
million in expenses to providing 10Gb
ULL connectivity.8
Beginning in late January 2023, the
Exchange also recently determined a
substantial operational need to no
longer operate 10Gb ULL connectivity
on a single shared network with MIAX.
The Exchange bifurcated 10Gb ULL
connectivity due to ever-increasing
capacity constraints and to enable it to
continue to satisfy the anticipated
access needs for Members and other
market participants.9 Since the time of
the 2021 increase discussed above,10 the
Exchange experienced ongoing
increases in expenses, particularly
internal expenses.11 As discussed more
fully below, the Exchange recently
calculated increased annual aggregate
6 See Securities Exchange Act Release No. 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021)
(SR–PEARL–2021–01).
7 See Securities Exchange Act Release No. 90980
(January 25, 2021), 86 FR 7602 (January 29, 2021)
(SR–MIAX–2021–02).
8 See id.
9 See MIAX Options and MIAX Pearl Options—
Announce planned network changes related to
shared 10G ULL extranet, issued August 12, 2022,
available at https://www.miaxglobal.com/alert/
2022/08/12/miax-options-and-miax-pearl-optionsannounce-planned-network-changes-0. The
Exchange will continue to provide access to both
the Exchange and MIAX over a single shared 1Gb
connection. See Securities Exchange Act Release
Nos. 96553 (December 20, 2022), 87 FR 79379
(December 27, 2022) (SR–PEARL–2022–60); 96545
(December 20, 2022) 87 FR 79393 (December 27,
2022) (SR–MIAX–2022–48).
10 The Exchange notes it last filed to amend the
fees for Full Service MEO Ports in 2018 (excluding
filings made in July 2021 through early 2022), prior
to which the Exchange provided Full Service MEO
Ports free of charge since the it launched operations
in 2017 and absorbed all costs since that time. See
Securities Exchange Act Release No. 82867 (March
13, 2018), 83 FR 12044 (March 19, 2018) (SR–
PEARL–2018–07).
11 For example, the New York Stock Exchange,
Inc.’s (‘‘NYSE’’) Secure Financial Transaction
Infrastructure (‘‘SFTI’’) network, which contributes
to the Exchange’s connectivity cost, increased its
fees by approximately 9% since 2021. Similarly,
since 2021, the Exchange, and its affiliates,
experienced an increase in data center costs of
approximately 17% and an increase in hardware
and software costs of approximately 19%. These
percentages are based on the Exchange’s actual
2021 and proposed 2023 budgets.
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costs of $11,567,509 for providing 10Gb
ULL connectivity on a single unshared
network (an overall increase over its
prior cost to provide 10Gb ULL
connectivity on a shared network with
MIAX) and $1,644,132 for providing
Full Service MEO Ports.12
Much of the cost relates to monitoring
and analysis of data and performance of
the network via the subscriber’s
connection with nanosecond
granularity, and continuous
improvements in network performance
with the goal of improving the
subscriber’s experience. The costs
associated with maintaining and
enhancing a state-of-the-art network is a
significant expense for the Exchange,
and thus the Exchange believes that it
is reasonable and appropriate to help
offset those increased costs by amending
fees for connectivity services.
Subscribers expect the Exchange to
provide this level of support so they
continue to receive the performance
they expect. This differentiates the
Exchange from its competitors.
The Exchange now proposes to amend
the Fee Schedule to amend the fees for
10Gb ULL connectivity and Full Service
MEO Ports (Bulk and Single) in order to
recoup cost related to bifurcating 10Gb
connectivity to the Exchange and MIAX
as well as the ongoing costs and
increase in expenses set forth below in
the Exchange’s cost analysis.13 The
Exchange proposes to implement the
changes to the Fee Schedule pursuant to
this proposal immediately. The
Exchange initially filed the proposal on
December 30, 2022 (SR–PEARL–2022–
62) (the ‘‘Initial Proposal’’).14 On
February 23, 2023, the Exchange
withdrew the Initial Proposal and
replaced it with a revised proposal (SR–
PEARL–2023–08) (the ‘‘Second
Proposal’’).15 On April 20, 2023, the
Exchange withdrew the Second
Proposal and replaced it with a revised
proposal (SR–PEARL–2023–19) (the
‘‘Third Proposal’’).16 On June 16, 2023,
the Exchange withdrew the Third
Proposal and replaced it with a revised
proposal (SR–PEARL–2023–27) (the
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12 For
the avoidance of doubt, all references to
costs in this filing, including the cost categories
discussed below, refer to costs incurred by MIAX
Pearl Options only and not MIAX Pearl Equities,
the equities trading facility.
13 The Exchange notes that MIAX will make a
similar filing to increase its 10Gb ULL connectivity
fees.
14 See Securities Exchange Act Release No. 96632
(January 10, 2023), 88 FR 2707 (January 17, 2023)
(SR–PEARL–2022–62).
15 See Securities Exchange Act Release No. 97082
(March 8, 2023), 88 FR 15825 (March 14, 2023) (SR–
PEARL–2023–05).
16 See Securities Exchange Act Release No. 97420
(May 2, 2023), 88 FR 29701 (May 8, 2023) (SR–
PEARL–2023–19).
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‘‘Fourth Proposal’’).17 On August 8,
2023, the Exchange withdrew the
Fourth Proposal and replaced it with a
revised proposal (SR–PEARL–2023–35)
(the ‘‘Fifth Proposal’’).18 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–
PEARL–2023–55) (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 (separately
among MIAX Pearl Options and MIAX
Pearl Equities, MIAX and MIAX
Emerald 19 (together with MIAX and
MIAX Pearl Equities, the ‘‘affiliated
markets’’)) to ensure no cost was
allocated more than once, as well as
additional detail supporting its cost
allocation processes and explanations as
to why a cost allocation in this proposal
may differ from the same cost allocation
in a similar proposal submitted by one
of its affiliated markets. Although the
baseline cost analysis used to justify the
proposed fees was made in the Initial,
Second, Third, 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
17 The Exchange met with Commission Staff to
discuss the Third Proposal during which the
Commission Staff provided feedback and requested
additional information, including, most recently,
information about total costs related to certain third
party vendors. Such vendor cost information is
subject to confidentiality restrictions. The Exchange
provided this information to Commission Staff
under separate cover with a request for
confidentiality. While the Exchange will continue
to be responsive to Commission Staff’s information
requests, the Exchange believes that the
Commission should, at this point, issue
substantially more detailed guidance for exchanges
to follow in the process of pursuing a cost-based
approach to fee filings, and that, for the purposes
of fair competition, detailed disclosures by
exchanges, such as those that the Exchange is
providing now, should be consistent across all
exchanges, including for those that have resisted a
cost-based approach to fee filings, in the interests
of fair and even disclosure and fair competition. See
Securities Exchange Act Release No. 97815 (June
27, 2023), 88 FR 42759 (July 3, 2023) (SR–PEARL–
2023–27).
18 See Securities Exchange Act Release No. 98180
(August 21, 2023), 88 FR 58404 (August 25, 2023)
(SR–PEARL–2023–35). 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. 98658
(September 29, 2023) (SR–PEARL–2023–35).
19 The term ‘‘MIAX Emerald’’ means MIAX
Emerald, LLC. See Exchange Rule 100.
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72143
providing 10Gb ULL connectivity and
Full Service MEO Ports with a
reasonable mark-up over those costs.
*
*
*
*
*
Starting in 2017, following the United
States Court of Appeals for the District
of Columbia’s Susquehanna Decision 20
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.21 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.22 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’’).23 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.’’ 24 The Commission denied
requests by various exchanges and plan
participants for reconsideration of the
Remand Order.25 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
20 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
21 Id.
22 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84432, 2018 WL 5023228
(October 16, 2018) (the ‘‘SIFMA Decision’’).
23 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).
24 Id. at page 2.
25 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 85802, 2019 WL 2022819
(May 7, 2019) (the ‘‘Order Denying
Reconsideration’’).
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court’s mandate.’’ 26 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.27 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.’’ 28 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.’’ 29 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.’’ 30
Following the BOX Order and Staff
Guidance, on August 6, 2020, the D.C.
26 Order Denying Reconsideration, 2019 WL
2022819, at *13.
27 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).
28 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’’).
29 Id.
30 Id.
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Circuit vacated the Commission’s
SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC 31 and remanded for
further proceedings consistent with its
opinion.32 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.’’ 33 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.34 The
Commission further invited ‘‘the parties
to submit briefing stating whether the
challenges asserted in the applications
for review . . . should be dismissed,
and specifically identifying any
challenge that they contend should not
be dismissed pursuant to the holding of
Nasdaq v. SEC.’’ 35 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.36
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.’’ 37 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’’).38 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 39
37 See
31 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.
32 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.
33 Id. at *2; see also id. (‘‘[T]he sole purpose of
the challenged remand has disappeared.’’).
34 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’’).
35 Id.
36 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 90087 (October 5, 2020).
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supra note 31, at page 2.
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.
39 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
38 Commission
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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.40 These fees remain
in effect today.
The net result is that the non-legacy
exchanges are effectively now blocked
by the Commission Staff from adopting
or increasing fees to amounts
comparable to the legacy exchanges
(which were not subject to the Revised
Review Process and Staff Guidance),
despite providing enhanced disclosures
and rationale to support their proposed
fee changes that far exceed any such
support provided by legacy exchanges.
Simply put, legacy exchanges were able
to increase their non-transaction fees
during an extended period in which the
Commission applied a ‘‘market-based’’
test that only relied upon the assumed
presence of significant competitive
forces, while exchanges today are
subject to a cost-based test requiring
extensive cost and revenue disclosures,
a process that is complex, inconsistently
applied, and rarely results in a
successful outcome, i.e., nonsuspension. The Revised Review
Process and Staff Guidance changed
decades-long Commission Staff
standards for review, resulting in unfair
discrimination and placing an undue
burden on inter-market competition
between legacy exchanges and nonlegacy exchanges.
Commission Staff now require
exchange filings, including from nonlegacy exchanges such as MIAX Pearl, to
provide detailed cost-based analysis in
place of competition-based arguments to
support such changes. However, even
with the added detailed cost and
expense disclosures, the Commission
Staff continues to either suspend such
filings and institute disapproval
proceedings, or put the exchanges in the
unenviable position of having to
repeatedly withdraw and re-file with
additional detail in order to continue to
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.
40 See, e.g., Securities Exchange Act Release Nos.
74417 (March 3, 2015), 80 FR 12534 (March 9,
2015) (SR–ISE–2015–06); 83016 (April 9, 2018), 83
FR 16157 (April 13, 2018) (SR–PHLX–2018–26);
70285 (August 29, 2013), 78 FR 54697 (September
5, 2013) (SR–NYSEMKT–2013–71); 76373
(November 5, 2015), 80 FR 70024 (November 12,
2015) (SR–NYSEMKT–2015–90); 79729 (January 4,
2017), 82 FR 3061 (January 10, 2017) (SR–
NYSEARCA–2016–172).
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charge those fees.41 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 42
and $80,383,000 for 2021.43 Cboe C2
Exchange, Inc. (‘‘C2’’) reported ‘‘access
and capacity fee’’ revenue of
$19,016,000 for 2020 44 and $22,843,000
for 2021.45 Cboe BZX Exchange, Inc.
(‘‘BZX’’) reported ‘‘access and capacity
fee’’ revenue of $38,387,000 for 2020 46
and $44,800,000 for 2021.47 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
‘‘access and capacity fee’’ revenue of
$26,126,000 for 2020 48 and $30,687,000
for 2021.49 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,
41 The Exchange has filed, and subsequently
withdrew, various forms of this proposed fee
change numerous times since August 2021 with
each proposal containing hundreds of cost and
revenue disclosures never previously disclosed by
legacy exchanges in their access and market data fee
filings prior to 2019.
42 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.
43 See Cboe 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001155.pdf.
44 See C2 2021 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000469.pdf.
45 See C2 2022 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2200/
22001156.pdf.
46 See BZX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000465.pdf.
47 See BZX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001152.pdf.
48 See EDGX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000467.pdf.
49 See EDGX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001154.pdf.
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LLC (‘‘NASDAQ Phlx’’) reported ‘‘Trade
Management Services’’ revenue of
$20,817,000 for 2019.50 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.’’ 51
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,52 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),53
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
50 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.
51 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.
52 See, e.g., CNBC Debuts New Set on NYSE Floor,
available at https://www.cnbc.com/id/46517876.
53 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/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).
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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
. . .’’,54 this is not the reality
experienced by exchanges such as
MIAX Pearl. As such, non-legacy
exchanges are forced to rely on an
opaque cost-based justification
standard. However, because the Staff
Guidance is devoid of detail on what
must be contained in cost-based
justification, this standard is nearly
impossible to meet despite repeated
good-faith efforts by the Exchange to
provide substantial amount of costrelated details. For example, the
Exchange has attempted to increase fees
using a cost-based justification
numerous times, having submitted over
six filings.55 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 56 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
54 See
supra note 28, at note 1.
Securities Exchange Act Release Nos.
92798 (August 27, 2021), 86 FR 49360 (September
2, 2021) (SR–PEARL–2021–33); 92644 (August 11,
2021), 86 FR 46055 (August 17, 2021) (SR–PEARL–
2021–36); 93162 (September 28, 2021), 86 FR 54739
(October 4, 2021) (SR–PEARL–2021–45); 93556
(November 10, 2021), 86 FR 64235 (November 17,
2021) (SR–PEARL–2021–53); 93774 (December 14,
2021), 86 FR 71952 (December 20, 2021) (SR–
PEARL–2021–57); 93894 (January 4, 2022), 87 FR
1203 (January 10, 2022) (SR–PEARL–2021–58);
94258 (February 15, 2022), 87 FR 9659 (February
22, 2022) (SR–PEARL–2022–03); 94286 (February
18, 2022), 87 FR 10860 (February 25, 2022) (SR–
PEARL–2022–04); 94721 (April 14, 2022), 87 FR
23573 (April 20, 2022) (SR–PEARL–2022–11);
94722 (April 14, 2022), 87 FR 23660 (April 20,
2022) (SR–PEARL–2022–12); 94888 (May 11, 2022),
87 FR 29892 (May 17, 2022) (SR–PEARL–2022–18).
56 15 U.S.C. 78f(b)(4).
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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,57 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; 58 or (c)
accept that certain competition-based
arguments are applicable given the
linkage between non-transaction fees
and transaction fees, especially where
non-transaction fees among exchanges
are based upon disparate standards of
review, lack parity, and impede fair
competition. Considering the absence of
any such framework or clarity, the
Exchange believes that the Commission
does not have a reasonable basis to deny
the Exchange this change in fees, where
the proposed change would result in
fees meaningfully lower than
comparable fees at competing exchanges
and where the associated nontransaction revenue is meaningfully
lower than competing exchanges.
In light of the above, disapproval of
this would not meet the fairness
standard under the Act, would be
discriminatory and place a substantial
burden on competition. The Exchange
would be uniquely disadvantaged by
not being able to increase its access fees
to comparable levels (or lower levels
than current market rates) to those of
other 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.59
*
*
*
*
*
57 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.
58 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.
59 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.
60 See supra note 9.
61 Id.
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10Gb ULL Connectivity Fee Change
MIAX Pearl Options filed a proposal
to no longer operate 10Gb connectivity
to MIAX Pearl Options on a single
shared network with its affiliate, MIAX.
This change is an operational necessity
due to ever-increasing capacity
constraints and to accommodate
anticipated access needs for Members
and other market participants.60 This
proposal: (i) sets forth the applicable
fees for the bifurcated 10Gb ULL
network; (ii) removes provisions in the
Fee Schedule that provide for a shared
10Gb ULL network; and (iii) specifies
that market participants may continue
to connect to both MIAX Pearl Options
and MIAX via the 1Gb network.
MIAX Pearl Options bifurcated the
MIAX Pearl Options and MIAX 10Gb
ULL networks in the first quarter of
2023, which change became effective on
January 23, 2023. The Exchange issued
an alert on August 12, 2022 publicly
announcing the planned network
change and implementation plan and
dates to provide market participants
adequate time to prepare.61 Upon
bifurcation of the 10Gb ULL network,
subscribers need to purchase separate
connections to MIAX Pearl Options and
MIAX at the applicable rate. The
Exchange’s proposed amended rate for
10Gb ULL connectivity is described
below. Prior to the bifurcation of the
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10Gb ULL networks, subscribers to
10Gb ULL connectivity were able to
connect to both MIAX Pearl Options
and MIAX at the applicable rate set
forth below.
The Exchange, therefore, proposes to
amend the Fee Schedule to increase the
fees for Members and non-Members to
access the Exchange’s system
networks 62 via a 10Gb ULL fiber
connection and to specify that this fee
is for a dedicated connection to MIAX
Pearl Options and no longer provides
access to MIAX. Specifically, MIAX
Pearl Options proposes to amend
Sections 5)a)-b) of the Fee Schedule to
increase the 10Gb ULL connectivity fee
for Members and non-Members from
$10,000 per month to $13,500 per
month (‘‘10Gb ULL Fee’’).63 The
Exchange also proposes to amend the
Fee Schedule to reflect the bifurcation
of the 10Gb ULL network and specify
that only the 1Gb network provides
access to both MIAX Pearl Options and
MIAX.
The Exchange proposes to make the
following changes to reflect the
bifurcated 10Gb ULL network for the
Exchange and MIAX. First, in the
Definitions section of the Fee Schedule,
the Exchange proposes to amend the last
sentence in the definition of ‘‘MENI’’ to
specify that the MENI can be configured
to provide network connectivity to the
trading platforms, market data systems,
test systems, and disaster recovery
facilities of the Exchange’s affiliate,
MIAX, via a single, shared 1Gb
connection. Next, the Exchange
proposes to amend the explanatory
paragraphs below the network
connectivity fee tables in Sections
(5)(a)–(b) of the Fee Schedule to specify
that, with the bifurcated 10Gb ULL
network, Members (and non-Members)
utilizing the MENI to connect to the
trading platforms, market data systems,
test systems, and disaster recovery
facilities of the Exchange and MIAX via
a single, can only do so via a shared 1Gb
connection.
62 The Exchange’s system networks consist of the
Exchange’s extranet, internal network, and external
network.
63 Market participants that purchase additional
10Gb ULL connections as a result of this change
will not be subject to the Exchange’s Member
Network Connectivity Testing and Certification Fee
under Section 4)c) of the Exchange’s Fee Schedule.
See Section 4)c) of the Exchange’s fee schedule
available at https://www.miaxglobal.com/markets/
us-options/pearl-options/fees (providing that
‘‘Network Connectivity Testing and Certification
Fees will not be assessed in situations where the
Exchange initiates a mandatory change to the
Exchange’s system that requires testing and
certification. Member Network Connectivity Testing
and Certification Fees will not be assessed for
testing and certification of connectivity to the
Exchange’s Disaster Recovery Facility.’’).
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The Exchange will continue to assess
monthly Member and non-Member
network connectivity fees for
connectivity to the primary and
secondary facilities in any month the
Member or non-Member is credentialed
to use any of the Exchange APIs or
market data feeds in the production
environment. The Exchange will
continue to pro-rate the fees when a
Member or non-Member makes a change
to the connectivity (by adding or
deleting connections) with such prorated fees based on the number of
trading days that the Member or nonMember has been credentialed to utilize
any of the Exchange APIs or market data
feeds in the production environment
through such connection, divided by the
total number of trading days in such
month multiplied by the applicable
monthly rate.
Full Service MEO Ports—Bulk and
Single
Background
The Exchange also proposes to amend
Section 5)d) of the Fee Schedule to
amend the calculation and amount of
fees for Full Service MEO Ports. The
Exchange currently offers different types
of MEO Ports depending on the services
required by the Member, including a
Full Service MEO Port-Bulk,64 a Full
Service MEO Port-Single,65 and a
Limited Service MEO Port.66 For one
monthly price, a Member may be
allocated two (2) Full-Service MEO
Ports of either type per matching
engine 67 and may request Limited
Service MEO Ports for which MIAX
Pearl will assess Members Limited
Service MEO Port fees based on a
sliding scale for the number of Limited
Service MEO Ports utilized each month.
The two (2) Full-Service MEO Ports that
may be allocated per matching engine to
a Member may consist of: (a) two (2)
Full Service MEO Ports—Bulk; (b) two
(2) Full Service MEO Ports—Single; or
(c) one (1) Full Service MEO Port—Bulk
64. ‘‘Full Service MEO Port—Bulk’’ means an
MEO port that supports all MEO input message
types and binary bulk order entry. See the
Definitions Section of the Fee Schedule.
65 ‘‘Full Service MEO Port—Single’’ means an
MEO port that supports all MEO input message
types and binary order entry on a single order-byorder basis, but not bulk orders. See the Definitions
Section of the Fee Schedule.
66 ‘‘Limited Service MEO Port’’ means an MEO
port that supports all MEO input message types, but
does not support bulk order entry and only
supports limited order types, as specified by the
Exchange via Regulatory Circular. See the
Definitions Section of the Fee Schedule.
67 A ‘‘Matching Engine’’ is a part of the
Exchange’s electronic system that processes options
orders and trades on a symbol-by-symbol basis. See
the Definitions Section of the Fee Schedule.
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72147
and one (1) Full Service MEO Port—
Single.
Currently, the Exchange assesses
Members Full Service MEO Port Fees,
either for a Full Service MEO Port—
Bulk and/or for a Full Service MEO
Port—Single, based upon the monthly
total volume executed by a Member and
its Affiliates 68 on the Exchange, across
all origin types, not including Excluded
Contracts,69 as compared to the Total
Consolidated Volume (‘‘TCV’’),70 in all
MIAX Pearl-listed options. The
Exchange adopted a tier-based fee
structure based upon the volume-based
tiers detailed in the definition of ‘‘NonTransaction Fees Volume-Based Tiers’’
described in the Definitions section of
the Fee Schedule. The Exchange
assesses these and other monthly Port
fees to Members in each month the
market participant is credentialed to use
a Port in the production environment.
Full Service MEO Port (Bulk) Fee
Changes
Current Full Service MEO Port (Bulk)
Fees. The Exchange currently assesses
all Members (Market Makers 71 and
Electronic Exchange Members 72
(‘‘EEMs’’)) monthly Full Service MEO
Port—Bulk fees as follows:
(i) if its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $3,000;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
68 ‘‘Affiliate’’ means (i) an affiliate of a Member
of at least 75% common ownership between the
firms as reflected on each firm’s Form BD, Schedule
A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed
EEM of an Appointed Market Maker). See the
Definitions Section of the Fee Schedule.
69 ‘‘Excluded Contracts’’ means any contracts
routed to an away market for execution. See the
Definitions Section of the Fee Schedule.
70 ‘‘TCV’’ means total consolidated volume
calculated as the total national volume in those
classes listed on MIAX Pearl for the month for
which the fees apply, excluding consolidated
volume executed during the period of time in
which the Exchange experiences an Exchange
System Disruption (solely in the option classes of
the affected Matching Engine). See the Definitions
Section of the Fee Schedule.
71 The term ‘‘Market Maker’’ means a Member
registered with the Exchange for the purpose of
making markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange
Rules. See the Definitions Section of the Fee
Schedule and Exchange Rule 100.
72 The term ‘‘Electronic Exchange Member’’ or
‘‘EEM’’ means the holder of a Trading Permit who
is a Member representing as agent Public Customer
Orders or Non-Customer Orders on the Exchange
and those non-Market Maker Members conducting
proprietary trading. Electronic Exchange Members
are deemed ‘‘members’’ under the Exchange Act.
See the Definitions Section of the Fee Schedule and
Exchange Rule 100.
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or volume above 0.30% up to 0.60%,
$4,500; and
(iii) if its volume falls within the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $5,000.
Proposed Full Service MEO Port
(Bulk) Fees. The Exchange proposes to
amend the calculation and amount of
Full Service MEO Port (Bulk) fees for
EEMs and Market Makers. In particular,
for EEMs, the Exchange proposes to
move away from the above-described
volume tier-based fee structure and
instead charge all EEMs that utilize Full
Service MEO Ports (Bulk) a flat monthly
fee of $7,500. For this flat monthly fee,
EEMs will continue to be entitled to two
(2) Full Service MEO Ports (Bulk) for
each Matching Engine for the single
monthly fee of $7,500. The Exchange
now proposes to amend the calculation
and amount of Full Service MEO Port
(Bulk) fees for Market Makers by moving
away from the above-described volume
tier-based fee structure to harmonize the
Full Service MEO Port (Bulk) fee
structure for Market Makers with that of
the Exchange’s affiliates, MIAX and
MIAX Emerald.73 The Exchange
proposes that the amount of the
monthly Full Service MEO Port (Bulk)
fees for Market Makers would be based
on the lesser of either the per class
traded or percentage of total national
average daily volume (‘‘ADV’’)
measurement based on classes traded by
volume. The amount of monthly Market
Maker Full Service MEO Port (Bulk) fee
would be based upon the number of
classes in which the Market Maker was
registered to quote on any given day
within the calendar month, or upon the
class volume percentages. This change
in how Full Service MEO Port (Bulk)
fees are calculated is identical to how
the Exchange assesses Market Makers
Trading Permit fees, which is in line
with how numerous exchanges charge
similar membership fees.
Specifically, the Exchange proposes to
adopt the following Full Service MEO
Port (Bulk) fees for Market Makers: (i)
$5,000 for Market Maker registrations in
up to 10 option classes or up to 20% of
option classes by national ADV; (ii)
$7,500 for Market Maker registrations in
up to 40 option classes or up to 35% of
option classes by ADV; (iii) $10,000 for
Market Maker registrations in up to 100
option classes or up to 50% of option
classes by ADV; and (iv) $12,000 for
Market Maker registrations in over 100
option classes or over 50% of option
classes by ADV up to all option classes
listed on MIAX Pearl. For example, if
Market Maker 1 elects to quote the top
40 option classes which consist of 58%
of the total national average daily
volume in the prior calendar quarter,
the Exchange would assess $7,500 to
Market Maker 1 for the month which is
the lesser of ‘up to 40 classes’ and ‘over
50% of classes by volume up to all
classes listed on MIAX Pearl’. If Market
Maker 2 elects to quote the bottom 1000
option classes which consist of 10% of
the total national average daily volume
in the prior quarter, the Exchange would
assess $5,000 to Market Maker 2 for the
month which is the lesser of ‘over 100
classes’ and ‘up to 20% of classes by
volume. The Exchange notes that the
proposed tiers (ranging from $5,000 to
$12,000) are lower than the tiers that the
Exchange’s affiliates charge for their
comparable ports (ranging from $5,000
to $20,500) for similar per class tier
thresholds.74
With the proposed changes, a Market
Maker would be determined to be
registered in a class if that Market Maker
has been registered in one or more series
in that class.75 The Exchange will assess
MIAX Pearl Options Market Makers the
monthly Market Maker Full Service
MEO Port (Bulk) fee based on the
greatest number of classes listed on
MIAX Pearl Options that the MIAX
Pearl Options Market Maker registered
to quote in on any given day within a
calendar month. Therefore, with the
proposed changes to the calculation of
Market Maker Full Service MEO Port
(Bulk) fees, the Exchange’s Market
Makers would be encouraged to quote in
more series in each class they are
registered in because each additional
series in that class would not count
against their total classes for purposes of
the Full Service MEO Port (Bulk) fee
tiers. The class volume percentage is
based on the total national ADV in
classes listed on MIAX Pearl Options in
the prior calendar quarter. Newly listed
option classes are excluded from the
calculation of the monthly Market
Maker Full Service MEO Port (Bulk) fee
until the calendar quarter following
their listing, at which time the newly
listed option classes will be included in
both the per class count and the
percentage of total national ADV.
The Exchange also proposes to adopt
an alternative lower Full Service MEO
Port (Bulk) fee for Market Makers who
fall within the 2nd, 3rd and 4th levels
of the proposed Market Maker Full
Service MEO Port (Bulk) fee table: (i)
Market Maker registrations in up to 40
74 See
id.
75 Pursuant
73 See
MIAX Fee Schedule, Section 5)d)ii) and
MIAX Emerald Fee Schedule, Section 5)d)ii).
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to Exchange Rule 602(a), a Member
that has qualified as a Market Maker may register
to make markets in individual series of options.
PO 00000
option classes or up to 35% of option
classes by volume; (ii) Market Maker
registrations in up to 100 option classes
or up to 50% of option classes by
volume; and (iii) Market Maker
registrations in over 100 option classes
or over 50% of option classes by volume
up to all option classes listed on MIAX
Pearl Options. In particular, the
Exchange proposes to adopt footnote
‘‘**’’ following the Market Maker Full
Service MEO Port (Bulk) fee table for
these Monthly Full Service MEO Port
(Bulk) tier levels. New proposed
footnote ‘‘**’’ will provide that if the
Market Maker’s total monthly executed
volume during the relevant month is
less than 0.040% of the total monthly
TCV for MIAX Pearl-listed option
classes for that month, then the fee will
be $6,000 instead of the fee otherwise
applicable to such level.
The purpose of the alternative lower
fee designated in proposed footnote
‘‘**’’ is to provide a lower fixed fee to
those Market Makers who are willing to
quote the entire Exchange market (or
substantial amount of the Exchange
market), as objectively measured by
either number of classes assigned or
national ADV, but who do not otherwise
execute a significant amount of volume
on the Exchange. The Exchange believes
that, by offering lower fixed fees to
Market Makers that execute less volume,
the Exchange will retain and attract
smaller-scale Market Makers, which are
an integral component of the option
marketplace, but have been decreasing
in number in recent years, due to
industry consolidation. Since these
smaller-scale Market Makers utilize less
Exchange capacity due to lower overall
volume executed, the Exchange believes
it is reasonable and equitable to offer
such Market Makers a lower fixed fee.
The Exchange notes that the Exchange’s
affiliates, MIAX and MIAX Emerald,
also provide lower MIAX Express
Interface (‘‘MEI’’) Port fees (the
comparable ports on those exchanges)
for Market Makers who quote the entire
MIAX and MIAX Emerald markets (or
substantial amount of those markets), as
objectively measured by either number
of classes assigned or national ADV, but
who do not otherwise execute a
significant amount of volume on MIAX
or MIAX Emerald.76 The proposed
changes to the Full Service MEO Port
(Bulk) fees for Market Makers who fall
within the 2nd, 3rd and 4th levels of the
fee table are based upon a business
Frm 00108
Fmt 4703
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76 See MIAX Fee Schedule, Section 5)d)ii), note
‘‘*’’ and MIAX Emerald Fee Schedule, Section
5)d)ii), note ‘‘D’’.
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determination of current Market Maker
assignments and trading volume.
Unlike other options exchanges that
provide similar port functionality and
charge fees on a per port basis,77 the
Exchange offers Full Service MEO Ports
as a package and provides Members
with the option to receive up to two Full
Service MEO Ports (described above)
per matching engine to which that
Member connects. The Exchange
currently has twelve (12) matching
engines, which means Market Makers
may receive up to twenty-four (24) Full
Service MEO Ports for a single monthly
fee, that can vary based on the lesser of
either the per class traded or percentage
of total national ADV measurement
based on classes traded by volume, as
described above. For illustrative
purposes, the Exchange currently
assesses a fee of $5,000 per month for
Market Makers that reach the highest
Full Service MEO Port (Bulk) tier,
regardless of the number of Full Service
MEO Ports allocated to the Market
Maker. For example, assuming a Market
Maker connects to all twelve (12)
matching engines during a month, with
two Full Service MEO Ports (Bulk) per
matching engine, this results in an
effective fee of $208.33 per Full Service
MEO Port ($5,000 divided by 24) for the
month, as compared to other exchanges
that charge over $1,000 per port and
require multiple ports to connect to all
of their matching engines.78 This fee
had been unchanged since the Exchange
adopted Full Service MEO Port fees in
2018.79 The Exchange proposes to
increase Full Service MEO Port fees,
with the highest monthly fee of $12,000
for the Full Service MEO Ports (Bulk).
Market Makers will continue to receive
two (2) Full Service MEO Ports to each
matching engine to which they connect
for the single flat monthly fee.
Assuming a Market Maker connects to
all twelve (12) matching engines during
the month, with two Full Service MEO
Ports per matching engine, this would
result in an effective fee of $500 per Full
Service MEO Port ($12,000 divided by
24).
FULL SERVICE MEO PORTS (BULK)
Total number of
ports for market
maker to connect
to all match
engines
Number of
match engines
Pricing Based on Market Maker Being Charged the Highest Tier
(Current) .....................................................................................
Pricing Based on Market Maker Being Charged the Highest Tier
(as proposed) .............................................................................
Effective per
port fee
12
24
$5,000
$208.33
12
24
12,000
500
Current Full Service MEO Port
(Single) Fees. The Exchange currently
assesses all Members (Market Makers
and EEMs) monthly Full Service MEO
Port (Single) fees as follows:
(i) if its volume falls within the
parameters of Tier 1 of the NonTransaction Fees Volume-Based Tiers,
or volume up to 0.30%, $2,000;
(ii) if its volume falls within the
parameters of Tier 2 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.30% up to 0.60%,
$3,375; and
(iii) if its volume falls within the
parameters of Tier 3 of the NonTransaction Fees Volume-Based Tiers,
or volume above 0.60%, $3,750.
Proposed Full Service MEO Port
(Single) Fees. The Exchange proposes to
amend the calculation and amount of
Full Service MEO Port (Single) fees for
EEMs and Market Makers. In particular,
the Exchange proposes to move away
from the above-described volume tierbased fee structure and instead charge
all Members that utilize Full Service
MEO Ports (Single) a flat monthly fee of
$4,000. For this flat monthly fee, all
Members will continue to be entitled to
two (2) Full Service MEO Ports (Single)
for each Matching Engine for the single
monthly fee of $4,000.
The Exchange offers various types of
ports with differing prices because each
port accomplishes different tasks, are
suited to different types of Members,
and consume varying capacity amounts
of the network. For instance, MEO ports
allow for a higher throughput and can
handle much higher quote/order rates
than FIX ports. Members that are Market
Makers or high frequency trading firms
utilize these ports (typically coupled
with 10Gb ULL connectivity) because
they transact in significantly higher
amounts of messages being sent to and
from the Exchange, versus FIX port
users, who are traditionally customers
sending only orders to the Exchange
(typically coupled with 1Gb
connectivity). The different types of
ports cater to the different types of
Exchange Memberships and different
capabilities of the various Exchange
Members. Certain Members need ports
and connections that can handle using
far more of the network’s capacity for
message throughput, risk protections,
and the amount of information that the
System has to assess. Those Members
account for the vast majority of network
capacity utilization and volume
executed on the Exchange, as discussed
throughout. For example, three (3)
Members account for 64% of all 10Gb
77 See NYSE American Options Fee Schedule,
Section V.A., Port Fees (each port charged on a per
matching engine basis, with NYSE American having
17 match engines). See NYSE Technology FAQ and
Best Practices: Options, Section 5.1 (How many
matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file
detailing the number of matching engines per
options exchange); NYSE Arca Options Fee
Schedule, Port Fees (each port charged on a per
matching engine basis, NYSE Arca having 19 match
engines); and NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many
matching engines are used by each exchange?)
(September 2020) (providing a link to an Excel file
detailing the number of matching engines per
options exchange). See NASDAQ Fee Schedule,
NASDAQ Options 7 Pricing Schedule, Section 3,
Nasdaq Options Market—Ports and Other Services
(each port charged on a per matching engine basis,
with Nasdaq having multiple matching engines).
See NASDAQ Specialized Quote Interface (SQF)
Specification, Version 6.5b (updated February 13,
2020), Section 2, Architecture, available at https://
www.nasdaq.com/docs/2020/02/18/SpecializedQuote-Interface-SQI-6.5b.pdf (the ‘‘NASDAQ SQF
Interface Specification’’). The NASDAQ SQF
Interface Specification also provides that
NASDAQ’s affiliates, NASDAQ Phlx and NASDAQ
BX, Inc. (‘‘BX’’), have trading infrastructures that
may consist of multiple matching engines with each
matching engine trading only a range of option
classes. Further, the NASDAQ SQF Interface
Specification provides that the SQF infrastructure
is such that the firms connect to one or more servers
residing directly on the matching engine
infrastructure. Since there may be multiple
matching engines, firms will need to connect to
each engine’s infrastructure in order to establish the
ability to quote the symbols handled by that engine.
78 Id. See also infra table on page 129 and
accompanying text.
79 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
Full Service MEO Port (Single) Fee
Changes
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Total fee
(monthly)
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ULL connections and Full Service MEO
Ports purchased.
The Exchange proposes to increase its
monthly Full Service MEO Port fees
since it has not done so since the fees
were adopted in 2018,80 which are
designed to recover a portion of the
costs associated with directly accessing
the Exchange. As described above, the
Exchange’s affiliates, MIAX and MIAX
Emerald, also charge fees for their high
throughput, low latency ports in a
similar fashion as the Exchange
proposes to charge for its MEO Ports—
generally, the more active user the
Member (i.e., the greater number/greater
national ADV of classes assigned to
quote on MIAX and MIAX Emerald), the
higher the MEI Port fee.81 This concept
is, therefore, not new or novel.
Implementation
The proposed fee changes are
immediately effective.
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2. Statutory Basis
The Exchange believes that the
proposed fees are consistent with
section 6(b) of the Act 82 in general, and
furthers the objectives of section 6(b)(4)
of the Act 83 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 84 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 85 and the Staff Guidance,86
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
80 See
id.
MIAX Fee Schedule, Section 5)d)ii); MIAX
Emerald Fee Schedule, Section 5)d)ii).
82 15 U.S.C. 78f(b).
83 15 U.S.C. 78f(b)(4).
84 15 U.S.C. 78f(b)(5).
85 See supra note 27.
86 See supra note 28.
81 See
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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.’’ 87 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.’’ 88
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.’’ 89
The proposed fees are reasonable
because they promote parity among
exchange pricing for access, which
promotes competition, including in the
Exchanges’ ability to competitively
price transaction fees, invest in
infrastructure, new products and other
innovations, all while allowing the
Exchange to recover its costs to provide
dedicated access via 10Gb ULL
connectivity (driven by the bifurcation
of the 10Gb ULL network) and Full
Service MEO Ports. As discussed above,
the Revised Review Process and Staff
Guidance have created an uneven
playing field between legacy and nonlegacy exchanges by severely restricting
non-legacy exchanges from being able to
increase non-transaction related fees to
provide them with additional necessary
revenue to better compete with legacy
87 Id.
88 Id.
89 Id.
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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 commenced operations
in February 2017 90 and adopted its
initial fee schedule, with 10Gb ULL
connectivity fees set at $8,500 (the
Exchange originally had a non-ULL
10Gb connectivity option, which it has
since removed) and a fee waiver for all
Full Service MEO Port fees.91 As a new
exchange entrant, the Exchange chose to
offer Full Service MEO Ports free of
charge to encourage market participants
to trade on the Exchange and
experience, among things, the quality of
the Exchange’s technology and trading
functionality. This practice is not
uncommon. New exchanges often do
not charge fees or charge lower fees for
certain services such as memberships/
trading permits to attract order flow to
90 See MIAX PEARL Successfully Launches
Trading Operations, dated February 6, 2017,
available at https://www.miaxglobal.com/sites/
default/files/alert-files/MIAX_Press_Release_
02062017.pdf.
91 See Securities Exchange Act Release No. 80061
(February 17, 2017), 82 FR 11676 (February 24,
2017) (SR–PEARL–2017–10).
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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.92
Later in 2018, as the Exchange’s
market share increased,93 the Exchange
adopted nominal fees for Full Service
MEO Ports.94 The Exchange last
increased the fees for its 10Gb ULL fiber
connections from $9,300 to $10,000 per
month on January 1, 2021.95 The
Exchange balanced business and
competitive concerns with the need to
financially compete with the larger
92 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).
93 The Exchange experienced a monthly average
trading volume of 3.94% for the month of March
2018. See the ‘‘Market Share’’ section of the
Exchange’s website, available at
www.miaxglobal.com.
94 See Securities Exchange Act Release No. 82867
(March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR–PEARL–2018–07).
95 See Securities Exchange Act Release No. 90981
(January 25, 2021), 86 FR 7582 (January 29, 2021)
(SR–PEARL–2021–01).
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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’. . . .’’ 96
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.’’ 97
Congress directed the Commission to
‘‘rely on ‘competition, whenever
possible, in meeting its regulatory
responsibilities for overseeing the SROs
and the national market system.’ ’’ 98 As
a result, and as evidenced above, the
96 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)).
97 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37499 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
98 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.’’).
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72151
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.’’ 99 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.’’ 100 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.’’ 101
The Exchange believes the competing
exchanges’ 10Gb connectivity and port
fees are useful examples of alternative
approaches to providing and charging
for access and demonstrating how such
fees are competitively set and
constrained. To that end, the Exchange
believes the proposed fees are
competitive and reasonable because the
proposed fees are similar to or less than
fees charged for similar connectivity
and port access provided by other
options exchanges with comparable
market shares. As such, the Exchange
believes that denying its ability to
institute fees that allow the Exchange to
recoup its costs with a reasonable
margin in a manner that is closer to
parity with legacy exchanges, in effect,
impedes its ability to compete,
including in its pricing of transaction
fees and ability to invest in competitive
infrastructure and other offerings.
The following table shows how the
Exchange’s proposed fees remain
similar to or less than fees charged for
similar connectivity and port access
provided by other options exchanges
with similar market share. Each of the
connectivity and port rates in place at
competing options exchanges were filed
with the Commission for immediate
effectiveness and remain in place today.
99 See Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74770 (December 9,
2008) (SR–NYSEArca–2006–21).
100 Id.
101 See Staff Guidance, supra note 28.
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Exchange
MIAX Pearl Options (as proposed) (equity options market share of 6.36% for the month of
August 2023) a.
Type of connection or port
Monthly fee
(per connection or per port)
10Gb ULL connection .................................
Full Service MEO Port (Bulk) for Market
Makers.
$13,500.
Lesser of either the per class basis or percentage of total national ADV by the Market
Maker, as follows:
$5,000—up to 10 classes or up to 20% of
classes by volume.
$7,500 **—up to 40 classes or up to 35% of
classes by volume.
$10,000 **—up to 100 classes or up to 50% of
classes by volume.
$12,000 **—over 100 classes or over 50% of all
classes by volume up to all classes (or $500
per port per matching engine).
** A lower rate of $6,000 will apply to these tiers
if the Market Maker’s total monthly executed
volume is less than 0.040% of total monthly
TCV for MIAX Pearl options.
$7,500 (or $312.50 per port per matching engine).
$4,000 (or $166.66 per port per matching engine).
$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.
Full Service MEO Port (Bulk) for EEMs .....
Full Service MEO Port (Single) for Market
Makers and EEMs.
10Gb Ultra fiber connection ........................
SQF Port d ...................................................
NASDAQ b (equity options market share of
5.80% for the month of August 2023) c.
NASDAQ ISE LLC (‘‘ISE’’) e (equity options market share of 5.58% for the month of August
2023) f.
NYSE American LLC (‘‘NYSE American’’) g (equity options market share of 7.34% for the
month of August 2023) h.
NASDAQ GEMX, LLC (‘‘GEMX’’) i (equity options
market share of 3.03% for the month of August
2023) j.
10Gb Ultra fiber connection ........................
SQF Port .....................................................
10Gb LX LCN connection ...........................
Order/Quote Entry Port ...............................
10Gb Ultra connection ................................
SQF Port .....................................................
$22,000 per connection.
1–40 ports: $450 per port.
41 or more ports: $150 per port.
$15,000 per connection.
$1,250 per port.
a See
the ‘‘Market Share’’ section of the Exchange’s website, available at https://www.miaxglobal.com/.
NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other Services and NASDAQ Rules, General 8: Connectivity, Section 1. CoLocation Services.
c See supra note a.
d Similar to the MIAX Pearl Options’ MEO Ports, SQF ports are primarily utilized by Market Makers.
e See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE Rules, General 8: Connectivity.
f See supra note a.
g See NYSE American Options Fee Schedule, Section V.A. Port Fees and Section V.B. Co-Location Fees.
h See supra note a.
i See GEMX Pricing Schedule, Options 7, Section 6, Connectivity Fees and GEMX Rules, General 8: Connectivity.
j See supra note a.
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b See
The Exchange acknowledges that,
without additional contextual
information, the above table may lead
someone to believe that the Exchange’s
proposed fees for Full Service MEO
Ports is higher than other exchanges
when in fact, that is not true. The
Exchange provides each Member or
non-Member access to two (2) ports on
all twelve (12) matching engines for a
single fee and a vast majority choose to
connect to all twelve (12) matching
engines and utilize both ports for a total
of 24 ports. Other exchanges charge on
a per port basis and require firms to
connect to multiple matching engines,
thereby multiplying the cost to access
their full market.102 On the Exchange,
102 See Specialized Quote Interface Specification,
Nasdaq PHLX, Nasdaq Options Market, Nasdaq BX
Options, Version 6.5a, Section 2, Architecture
(revised August 16, 2019), available at https://
www.nasdaqtrader.com/content/technicalsupport/
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this is not the case. The Exchange
provides each Member or non-Member
access, but does not require they
connect to, all twelve (12) matching
engines.
There is no requirement, regulatory or
otherwise, that any broker-dealer
connect to and access any (or all of) the
available options exchanges. Market
participants may choose to become a
member of one or more options
exchanges based on the market
participant’s assessment of the business
specifications/TradingProducts/SQF6.5a-2019Aug.pdf. The Exchange notes that it is unclear
whether the NASDAQ exchanges include
connectivity to each matching engine for the single
fee or charge per connection, per matching engine.
See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines
are used by each exchange?) (September 2020). The
Exchange notes that NYSE provides a link to an
Excel file detailing the number of matching engines
per options exchange, with Arca and Amex having
19 and 17 matching engines, respectively.
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opportunity relative to the costs of the
Exchange. With this, there is elasticity
of demand for exchange membership.
As an example, one Market Maker
terminated their MIAX Pearl Options
membership effective January 1, 2023 as
a direct result of the proposed
connectivity and port fee changes
proposed by MIAX Pearl Options.
It is not a requirement for market
participants to become members of all
options exchanges; in fact, certain
market participants conduct an options
business as a member of only one
options market.103 A very small number
103 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
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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.104
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.105 The Exchange and its
affiliated options markets, MIAX and
MIAX Emerald, have a total of 46
members. Of those 46 total members, 37
are members of all three affiliated
options markets, two are members of
only two affiliated options markets, and
seven are members of only one affiliated
options market. The Exchange also
notes that no firm is a Member of the
Exchange only. The above data
evidences that a broker-dealer need not
have direct connectivity to all options
exchanges, let alone the Exchange and
its two affiliates, and broker-dealers may
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
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.’’
104 Service Bureaus may obtain ports on behalf of
Members.
105 See Securities Exchange Act Release No.
94894 (May 11, 2022), 87 FR 29987 (May 17, 2022)
(SR–BOX–2022–17) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Amend the Fee Schedule on the BOX Options
Market LLC Facility To Adopt Electronic Market
Maker Trading Permit Fees). The Exchange believes
that BOX’s observation demonstrates that market
making firms can, and do, select which exchanges
they wish to access, and, accordingly, options
exchanges must take competitive considerations
into account when setting fees for such access.
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exchanges discussed above. As noted
above, this is evidenced by the fact that
one MIAX Pearl Options Market Maker
terminated their MIAX Pearl Options
membership effective January 1, 2023 as
a direct result of the proposed
connectivity and port fee changes on
MIAX Pearl Options. Indeed, brokerdealers choose if and how to access a
particular exchange and because it is a
choice, the Exchange must set
reasonable pricing, otherwise
prospective members would not connect
and existing members would disconnect
from the Exchange. The decision to
become a member of an exchange,
particularly for registered market
makers, is complex, and not solely
based on the non-transactional costs
assessed by an exchange. As noted
herein, specific factors include, but are
not limited to: (i) an exchange’s
available liquidity in options series; (ii)
trading functionality offered on a
particular market; (iii) product offerings;
(iv) customer service on an exchange;
and (v) transactional pricing. Becoming
a member of the exchange does not
‘‘lock’’ a potential member into a market
or diminish the overall competition for
exchange services.
In lieu of becoming a member at each
options exchange, a market participant
may join one exchange and elect to have
their orders routed in the event that a
better price is available on an away
market. Nothing in the Order Protection
Rule requires a firm to become a
Member at—or establish connectivity
to—the Exchange.106 If the Exchange is
not at the national best bid or offer
(‘‘NBBO’’),107 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.108
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,109 or
106 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.
107 See Exchange Rule 100.
108 Members may elect to not route their orders
by utilizing the Do Not Route order type. See
Exchange Rule 516(g).
109 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
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72153
request sponsored access 110 through a
member of an exchange in order to
submit a trade directly to an options
exchange.111 A market participant may
either pay the costs associated with
becoming a member of an exchange or,
in the alternative, a market participant
may elect to pay commissions to a
broker-dealer, pay fees to a service
bureau to submit trades, or pay a
member to sponsor the market
participant in order to submit trades
directly to an exchange.
Non-Member third-parties, such as
service bureaus and extranets, resell the
Exchange’s connectivity. This indirect
connectivity is another viable
alternative for market participants to
trade on the Exchange without
connecting directly to the Exchange
(and thus not pay the Exchange’s
connectivity fees), which alternative is
already being used by non-Members and
further constrains the price that the
Exchange is able to charge for
connectivity and other access fees to its
market. The Exchange notes that it
could, but chooses not to, preclude
market participants from reselling its
connectivity. Unlike other exchanges,
the Exchange also does not currently
assess fees on third-party resellers on a
per customer basis (i.e., fees based on
the number of firms that connect to the
Exchange indirectly via the thirdparty).112 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.113 Particularly,
in the event that a market participant
views the Exchange’s direct
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.
110 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.
111 This may include utilizing a floor broker and
submitting the trade to one of the five options
trading floors.
112 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).
113 The Exchange notes that resellers, such as
SFTI, are not required to publicize, let alone justify
or file with the Commission their fees, and as such
could charge the market participant any fees it
deems appropriate (including connectivity fees
higher than the Exchange’s connectivity fees), even
if such fees would otherwise be considered
potentially unreasonable or uncompetitive fees.
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connectivity and access fees as more or
less attractive than competing markets,
that market participant can choose to
connect to the Exchange indirectly or
may choose not to connect to the
Exchange and connect instead to one or
more of the other 15 options markets.
Accordingly, the Exchange believes that
the proposed fees are fair and
reasonable and constrained by
competitive forces.
The Exchange is obligated to regulate
its Members and secure access to its
environment. In order to properly
regulate its Members and secure the
trading environment, the Exchange
takes measures to ensure access is
monitored and maintained with various
controls. Connectivity and ports are
methods utilized by the Exchange to
grant Members secure access to
communicate with the Exchange and
exercise trading rights. When a market
participant elects to be a Member, and
is approved for membership by the
Exchange, the Member is granted
trading rights to enter orders and/or
quotes into Exchange through secure
connections.
Again, there is no legal or regulatory
requirement that a market participant
become a Member of the Exchange. This
is again evidenced by the fact that one
MIAX Pearl Options Market Maker
terminated their MIAX Pearl Options
membership effective January 1, 2023 as
a direct result of the proposed
connectivity and port fee changes on
MIAX Pearl Options. If a market
participant chooses to become a
Member, they may then choose to
purchase connectivity beyond the one
connection that is necessary to quote or
submit orders on the Exchange.
Members may freely choose to rely on
one or many connections, depending on
their business model.
Bifurcation of 10Gb ULL Connectivity
and Related Fees
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The Exchange began to operate on a
single shared network with MIAX when
MIAX Pearl Options commenced
operations as a national securities
exchange on February 7, 2017.114 The
Exchange and MIAX operated on a
single shared network to provide
Members with a single convenient set of
access points for both exchanges. Both
the Exchange and MIAX offer two
114 See Securities Exchange Act Release No.
80061 (February 17, 2017), 82 FR 11676 (February
24, 2017) (establishing MIAX Pearl Options Fee
Schedule and establishing that the MENI can also
be configured to provide network connectivity to
the trading platforms, market data systems, test
systems, and disaster recovery facility of the MIAX
Pearl Options’ affiliate, MIAX, via a single, shared
connection).
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methods of connectivity, 1Gb and 10Gb
ULL connections. The 1Gb connection
services are supported by a discrete set
of switches providing 1Gb access ports
to Members. The 10Gb ULL connection
services are supported by a second and
mutually exclusive set of switches
providing 10Gb ULL access ports to
Members. Previously, both the 1Gb and
10Gb ULL shared extranet ports allowed
Members to use one connection to
access both exchanges, namely their
trading platforms, market data systems,
test systems, and disaster recovery
facilities.
The Exchange stresses that bifurcating
the 10Gb ULL connectivity between the
Exchange and MIAX was not designed
with the objective to generate an overall
increase in access fee revenue. Rather,
the proposed change was necessitated
by 10Gb ULL connectivity experiencing
a significant decrease in port availability
mostly driven by connectivity demands
of latency sensitive Members that seek
to maintain multiple 10Gb ULL
connections on every switch in the
network. Operating two separate
national securities exchanges on a single
shared network provided certain
benefits, such as streamlined
connectivity to multiple exchanges, and
simplified exchange infrastructure.
However, doing so was no longer
sustainable due to ever-increasing
capacity constraints and current system
limitations. The network is not an
unlimited resource. As described more
fully in the proposal to bifurcate the
10Gb ULL network,115 the connectivity
needs of Members and market
participants has increased every year
since the launch of MIAX Pearl Options
and the operations of the Exchange and
MIAX on a single shared 10Gb ULL
network is no longer feasible. This
required constant System expansion to
meet Member demand for additional
ports and 10Gb ULL connections has
resulted in limited available System
headroom, which eventually became
operationally problematic for both the
Exchange and its customers.
As stated above, the shared network is
not an unlimited resource and its
expansion was constrained by MIAX’s
and MIAX Pearl Options’ ability to
provide fair and equitable access to all
market participants of both markets.
Due to the ever-increasing connectivity
demands, the Exchange found it
necessary to bifurcate 10Gb ULL
connectivity to the Exchange’s and
MIAX’s Systems and networks to be
able to continue to meet ongoing and
future 10Gb ULL connectivity and
access demands.116
Unlike the switches that provide 1Gb
connectivity, the availability for
additional 10Gb ULL connections on
each switch had significantly decreased.
This was mostly driven by the
connectivity demands of latency
sensitive Members (e.g., Market Makers
and liquidity removers) that sought to
maintain connectivity across multiple
10Gb ULL switches. Based on the
Exchange’s experience, such Members
did not typically use a shared 10Gb ULL
connection to reach both the Exchange
and MIAX due to related latency
concerns. Instead, those Members
maintain dedicated separate 10Gb ULL
connections for the Exchange and
separate dedicated 10Gb ULL
connections for MIAX. This resulted in
a much higher 10Gb ULL usage per
switch by those Members on the shared
10Gb ULL network than would
otherwise be needed if the Exchange
and MIAX had their own dedicated
10Gb ULL networks. Separation of the
Exchange and MIAX 10Gb ULL
networks naturally lends itself to
reduced 10Gb ULL port consumption on
each switch and, therefore, increased
10Gb ULL port availability for current
Members and new Members.
Prior to bifurcating the 10Gb ULL
network, the Exchange and MIAX
continued to add switches to meet
ongoing demand for 10Gb ULL
connectivity. That was no longer
sustainable because simply adding
additional switches to expand the
current shared 10Gb ULL network
would not adequately alleviate the issue
of limited available port connectivity.
While it would have resulted in a gain
in overall port availability, the existing
switches on the shared 10Gb ULL
network in use would have continued to
suffer from lack of port headroom given
many latency sensitive Members’ needs
for a presence on each switch to reach
both the Exchange and MIAX. This was
because those latency sensitive
Members sought to have a presence on
each switch to maximize the probability
of experiencing the best network
performance. Those Members routinely
decide to rebalance orders and/or
messages over their various connections
to ensure each connection is operating
with maximum efficiency. Simply
adding switches to the extranet would
not have resolved the port availability
needs on the shared 10Gb ULL network
115 See Securities Exchange Act Release Nos.
96553 (December 20, 2022), 87 FR 79379 (December
27, 2022) (SR–PEARL–2022–60); 96545 (December
20, 2022) 87 FR 79393 (December 27, 2022) (SR–
MIAX–2022–48).
116 Currently, the Exchange maintains sufficient
headroom to meet ongoing and future requests for
1Gb connectivity. Therefore, the Exchange did not
propose to alter 1Gb connectivity and continues to
provide 1Gb connectivity over a shared network.
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since many of the latency sensitive
Members were unwilling to relocate
their connections to a new switch due
to the potential detrimental performance
impact. As such, the impact of adding
new switches and rebalancing ports
would not have been effective or
responsive to customer needs. The
Exchange has found that ongoing and
continued rebalancing once additional
switches are added has had, and would
have continued to have had, a
diminishing return on increasing
available 10Gb ULL connectivity.
Based on its experience and expertise,
the Exchange found the most practical
way to increase connectivity availability
on its switches was to bifurcate the
existing 10Gb ULL networks for the
Exchange and MIAX by migrating the
exchanges’ connections from the shared
network onto their own set of switches.
Such changes accordingly necessitated a
review of the Exchange’s previous 10Gb
ULL connectivity fees and related costs.
The proposed fees necessary to allow
the Exchange to cover ongoing costs
related to providing and maintaining
such connectivity, described more fully
below. The ever increasing connectivity
demands that necessitated this change
further support that the proposed fees
are reasonable because this demand
reflects that Members and non-Members
believe they are getting value from the
10Gb ULL connections they purchase.
The Exchange announced on August
12, 2022 the planned network change
and January 23, 2023 implementation
date to provide market participants
adequate time to prepare.117 Since
August 12, 2022, the Exchange has
worked with current 10Gb ULL
subscribers to address their connectivity
needs ahead of the January 23, 2023
date. Based on those interactions and
subscriber feedback, the Exchange
experienced a minimal net increase of
six (6) overall 10Gb ULL connectivity
subscriptions across MIAX Pearl
Options and MIAX. This immaterial
increase in overall connections reflects
a minimal fee impact for all types of
subscribers and reflects that subscribers
elected to reallocate existing 10Gb ULL
connectivity directly to the Exchange or
MIAX, or chose to decrease or cease
connectivity as a result of the change.
Should the Commission Staff
disapprove such fees, it would
effectively dictate how an exchange
manages its technology and would
hamper the Exchange’s ability to
continue to invest in and fund access
services in a manner that allows it to
meet existing and anticipated access
demands of market participants.
117 See
supra note 9.
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Disapproval could also have the adverse
effect of discouraging an exchange from
optimizing its operations and deploying
innovative technology to the benefit of
market participants if it believes the
Commission would later prevent that
exchange from covering its costs and
monetizing its operational
enhancements, thus adversely
impacting competition. Also, as noted
above, the economic consequences of
not being able to better establish fee
parity with other exchanges for nontransaction fees hampers the Exchange’s
ability to compete on transaction fees.
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,118 and Rule 19b–4
thereunder,119 with respect to the types
of information exchanges should
provide when filing fee changes, and
section 6(b) of the Act,120 which
requires, among other things, that
exchange fees be reasonable and
equitably allocated,121 not designed to
permit unfair discrimination,122 and
that they not impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.123 This rule change
proposal addresses those requirements,
118 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
120 15 U.S.C. 78f(b).
121 15 U.S.C. 78f(b)(4).
122 15 U.S.C. 78f(b)(5).
123 15 U.S.C. 78f(b)(8).
119 17
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and the analysis and data in each of the
sections that follow are designed to
clearly and comprehensively show how
they are met.124 The Exchange reiterates
that the legacy exchanges with whom
the Exchange vigorously competes for
order flow and market share, were not
subject to any such diligence or
transparency in setting their baseline
non-transaction fees, most of which
were put in place before the Revised
Review Process and Staff Guidance.
As detailed below, the Exchange
recently calculated its aggregate annual
costs for providing physical 10Gb ULL
connectivity to the Exchange at
$11,567,509 (or approximately $963,959
per month, rounded to the nearest dollar
when dividing the annual cost by 12
months) and its aggregate annual costs
for providing Full Service MEO Ports at
$1,644,132 (or approximately $137,012
per month, rounded to the nearest dollar
when dividing the annual cost by 12
months). In order to cover the aggregate
costs of providing connectivity to its
users (both Members and nonMembers 125) going forward and to make
a modest profit, as described below, the
Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per
month for each physical 10Gb ULL
connection and to remove language
providing for a shared 10Gb ULL
network between the Exchange and
MIAX. The Exchange also proposes to
modify its Fee Schedule to charge tiered
rates for Full Service MEO Ports (Bulk)
depending on the number of classes
assigned or the percentage of national
ADV, which is in line with how the
Exchange’s affiliates, MIAX and MIAX
Emerald, assess fees for their
comparable MEI Ports.
In 2019, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).126 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
124 See
Staff Guidance, supra note 28.
of market participants that obtain
connectivity services from the Exchange but are not
Members include service bureaus and extranets.
Service bureaus offer technology-based services to
other companies for a fee, including order entry
services, and thus, may access application sessions
on behalf of one or more Members. Extranets offer
physical connectivity services to Members and nonMembers.
126 The Exchange frequently updates it Cost
Analysis as strategic initiatives change, costs
increase or decrease, and market participant needs
and trading activity changes. The Exchange’s most
recent Cost Analysis was conducted ahead of this
filing.
125 Types
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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,127 storage needs,
dedicated infrastructure versus shared
infrastructure allocated per platform
based on the resources required to
support each platform, number of
available connections, and employees
allocated time. All of these factors result
in different allocation percentages
among the Exchange and its affiliated
markets, i.e., the different percentages of
the overall cost driver allocated to the
Exchange and its affiliated markets will
cause the dollar amount of the overall
cost allocated among the Exchange and
its affiliated markets to also differ.
Because the Exchange’s parent company
currently owns and operates four
separate and distinct marketplaces, the
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
127 For example, MIAX Pearl Options maintains
12 matching engines, MIAX Pearl Equities
maintains 24 matching engines, MIAX maintains 24
matching engines and MIAX Emerald maintains 12
matching engines.
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marketplace). Rather, the Exchange’s
parent company determines an accurate
cost for each marketplace, which results
in different allocations and amounts
across exchanges for the same cost
drivers, due to the unique factors of
each marketplace as described above.
This allocation methodology also
ensures that no cost would be allocated
twice or double-counted between the
Exchange and its affiliated markets. The
Finance Team then consolidates the
budget and sends it to senior
management, including the Chief
Financial Officer and Chief Executive
Officer, for review and approval. Next,
the budget is presented to the Board of
Directors and the Finance and Audit
Committees for each exchange for their
approval. The above steps encompass
the first step of the cost allocation
process.
The next step involves determining
what portion of the cost allocated to the
Exchange pursuant to the above
methodology is to be allocated to each
core service, e.g., connectivity and
ports, market data, and transaction
services. The Exchange and its affiliated
markets adopted an allocation
methodology with thoughtful and
consistently applied principles to guide
how much of a particular cost amount
allocated to the Exchange should be
allocated within the Exchange to each
core service. This is the final step in the
cost allocation process and is applied to
each of the cost drivers set forth below.
For instance, fixed costs that are not
driven by client activity (e.g., message
rates), such as data center costs, were
allocated more heavily to the provision
of physical connectivity (60.6% of total
expense amount allocated to 10Gb ULL
connectivity), with smaller allocations
to Full Service MEO Ports (3.4%), and
the remainder to the provision of other
connectivity, other ports, transaction
execution, membership services and
market data services (36%). This next
level of the allocation methodology at
the individual exchange level also took
into account factors similar to those set
forth under the first step of the
allocation methodology process
described above, to determine the
appropriate allocation to connectivity or
market data versus allocations for other
services. This allocation methodology
was developed through an assessment of
costs with senior management
intimately familiar with each area of the
Exchange’s operations. After adopting
this allocation methodology, the
Exchange then applied an allocation of
each cost driver to each core service,
resulting in the cost allocations
described below. Each of the below cost
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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
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connectivity and port services. In turn,
the Exchange allocated certain costs
more to physical connectivity and
others to ports, while certain costs were
only allocated to such services at a very
low percentage or not at all, using
consistent allocation methodologies as
described above. Based on this analysis,
the Exchange estimates that the
aggregate monthly cost to provide 10Gb
ULL connectivity and Full Service MEO
Port services, is $1,106,971 (utilizing the
rounded numbers when dividing the
annual cost for 10Gb ULL connectivity
and annual cost for Full Service MEO
Ports by 12 months, then adding both
numbers together), as further detailed
below.
Lastly, the Exchange notes that, based
on: (i) the total expense amounts
contained in this filing (which are 2023
projected expenses), and (ii) the total
expense amounts contained in the
related MIAX Pearl Equities filing (also
2023 projected expenses), MIAX
PEARL, LLC’s total costs have increased
at a greater rate over the last three years
than the total costs of MIAX PEARL,
LLC’s affiliated exchanges, MIAX and
MIAX Emerald. This is also reflected in
the total costs reported in MIAX PEARL,
LLC’s Form 1 filings over the last three
years, when comparing MIAX PEARL,
LLC to MIAX PEARL, LLC’s affiliated
exchanges, MIAX and MIAX Emerald.
This is primarily because that MIAX
PEARL, LLC operates two markets, one
for options and one for equities, while
MIAX and MIAX Emerald each operate
only one market. This is also due to
higher current expense for MIAX
PEARL, LLC for 2022 and 2023, due to
a hardware refresh (i.e., replacing old
hardware with new equipment) for
MIAX Pearl Options, as well as higher
costs associated with MIAX Pearl
Equities due to greater development
efforts to grow that newer
marketplace.128 The Exchange confirms
that there is no double counting of
expenses between the options and
equities platform of MIAX Pearl; the
greater expense amounts of the MIAX
PEARL, LLC (relative to its affiliated
exchanges, MIAX and MIAX Emerald) is
solely attributed to the unique factors of
MIAX Pearl discussed above.
Costs Related To Offering Physical 10Gb
ULL Connectivity
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
physical dedicated 10Gb ULL
connectivity via an unshared network as
well as the percentage of the Exchange’s
overall costs that such costs represent
for each cost driver (e.g., as set forth
below, the Exchange allocated
approximately 26.9% of its overall
Human Resources cost to offering
physical connectivity).
Allocated annual
cost k
Cost drivers
72157
Allocated monthly
cost l
% of all
Human Resources .....................................................................................................
Connectivity (external fees, cabling, switches, etc.) .................................................
Internet Services and External Market Data .............................................................
Data Center ...............................................................................................................
Hardware and Software Maintenance and Licenses ................................................
Depreciation ...............................................................................................................
Allocated Shared Expenses ......................................................................................
$3,675,098
70,163
322,388
739,983
959,157
1,885,969
3,914,751
$306,258
5,847
26,866
61,665
79,930
157,164
326,229
26.3
60.6
73.3
60.6
58.6
58.2
49.2
Total ....................................................................................................................
11,567,509
963,959
40.5
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.
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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 MIAX Pearl
Options’ cost allocation methodology
utilizes the actual projected costs of
MIAX Pearl Options (which are specific
to MIAX Pearl Options, and are
independent of the costs projected and
utilized by MIAX Pearl Options’
affiliated markets) to determine its
actual costs, which may vary across the
Exchange and its affiliated markets
based on factors that are unique to each
marketplace. MIAX Pearl Options
provides additional explanation below
(including the reason for the deviation)
for the significant differences.
The Exchange notes that it and its
affiliated markets have 184 employees
(excluding employees at non-options/
equities exchange subsidiaries of Miami
International Holdings, Inc. (‘‘MIH’’),
the holding company of the Exchange
and its affiliated markets), and each
department leader has direct knowledge
of the time spent by each employee with
respect to the various tasks necessary to
operate the Exchange. Specifically,
twice a year, and as needed with
additional new hires and new project
initiatives, in consultation with
employees as needed, managers and
department heads assign a percentage of
time to every employee and then
allocate that time amongst the Exchange
128 See, e.g., Securities Exchange Act Release Nos.
94301 (February 23, 2022), 87 FR 11739 (March 2,
2022) (SR–PEARL–2022–06) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Amend Rule 2617(b) To Adopt Two New
Routing Options, and To Make Related Changes and
Clarifications to Rules 2614(a)(2)(B) and 2617(b)(2));
94851 (May 4, 2022), 87 FR 28077 (May 10, 2022)
(SR–PEARL–2022–15) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
To Adopt Exchange Rule 532, Order Price
Protection Mechanisms and Risk Controls); 95298
(July 15, 2022), 87 FR 43579 (July 21, 2022) (SR–
PEARL–2022–29) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change by MIAX
PEARL, LLC To Amend the Route to Primary
Auction Routing Option Under Exchange Rule
2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR
55866 (September 12, 2022) (SR–PEARL–2022–34)
(Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Exchange Rule
2614, Orders and Order Instructions, To Adopt the
Primary Peg Order Type); 96205 (November 1,
2022), 87 FR 67080 (November 7, 2022) (SR–
PEARL–2022–43) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend
Rule 2614, Orders and Order Instructions and Rule
2618, Risk Settings and Trading Risk Metrics To
Enhance Existing Risk Controls); 96905 (February
13, 2023), 88 FR 10391 (February 17, 2023) (SR–
PEARL–2023–03) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend
Exchange Rule 2618 To Add Optional Risk Control
Settings); 97236 (March 31, 2023), 88 FR 20597
(April 6, 2023) (SR–PEARL–2023–15) (Notice of
Filing and Immediate Effectiveness of a Proposed
Rule Change To Amend Exchange Rules 2617 and
2626 Regarding Retail Orders Routed Pursuant to
the Route to Primary Auction Routing Option).
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Human Resources
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and its affiliated markets to determine
each market’s individual Human
Resources expense. Then, managers and
department heads assign a percentage of
each employee’s time allocated to the
Exchange into buckets including
network connectivity, ports, market
data, and other exchange services. This
process ensures that every employee is
100% allocated, ensuring there is no
double counting between the Exchange
and its affiliated markets.
For personnel costs (Human
Resources), the Exchange calculated an
allocation of employee time for
employees whose functions include
providing and maintaining physical
connectivity and performance thereof
(primarily the Exchange’s network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity). As described more fully
above, the Exchange’s parent company
allocates costs to the Exchange and its
affiliated markets and then a portion of
the Human Resources costs allocated to
the Exchange is then allocated to
connectivity. From that portion
allocated to the Exchange that applied
to connectivity, the Exchange then
allocated a weighted average of 42.9%
of each employee’s time from the above
group. The Exchange also allocated
Human Resources costs to provide
physical connectivity to a limited subset
of personnel with ancillary functions
related to establishing and maintaining
such connectivity (such as information
security, sales, membership, and finance
personnel). The Exchange allocated cost
on an employee-by-employee basis (i.e.,
only including those personnel who
support functions related to providing
physical connectivity) and then applied
a smaller allocation to such employees’
time to 10Gb ULL connectivity (less
than 17%). 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
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Exchange departments that are
predominately involved in providing
1Gb and 10Gb ULL connectivity:
Business Systems Development, Trading
Systems Development, Systems
Operations and Network Monitoring,
Network and Data Center Operations,
Listings, Trading Operations, and
Project Management. Again, the
Exchange allocated 42.9% of each of
their employee’s time assigned to the
Exchange for 10Gb ULL connectivity, as
stated above. Employees from these
departments perform numerous
functions to support 10Gb ULL
connectivity, such as the installation, relocation, configuration, and
maintenance of 10Gb ULL connections
and the hardware they access. This
hardware includes servers, routers,
switches, firewalls, and monitoring
devices. These employees also perform
software upgrades, vulnerability
assessments, remediation and patch
installs, equipment configuration and
hardening, as well as performance and
capacity management. These employees
also engage in research and
development analysis for equipment
and software supporting 10Gb ULL
connectivity and design, and support
the development and on-going
maintenance of internally-developed
applications as well as data capture and
analysis, and Member and internal
Exchange reports related to network and
system performance. The above list of
employee functions is not exhaustive of
all the functions performed by Exchange
employees to support 10Gb ULL
connectivity, but illustrates the breath of
functions those employees perform in
support of the above cost and time
allocations.
Lastly, the Exchange notes that senior
level executives’ time was only
allocated to the 10Gb ULL connectivity
related Human Resources costs to the
extent that they are involved in
overseeing tasks related to providing
physical connectivity. The Human
Resources cost was calculated using a
blended rate of compensation reflecting
salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity (External Fees, Cabling,
Switches, Etc.)
The Connectivity cost driver includes
external fees paid to connect to other
exchanges and third parties, cabling and
switches required to operate the
Exchange. The Connectivity cost driver
is more narrowly focused on technology
used to complete connections to the
Exchange and to connect to external
markets. The Exchange notes that its
connectivity to external markets is
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required in order to receive market data
to run the Exchange’s matching engine
and basic operations compliant with
existing regulations, primarily
Regulation NMS.
The Exchange relies on various
connectivity providers for connectivity
to the entire U.S. options industry, and
infrastructure services for critical
components of the network that are
necessary to provide and maintain its
System Networks and access to its
System Networks via 10Gb ULL
connectivity. Specifically, the Exchange
utilizes connectivity providers to
connect to other national securities
exchanges and the Options Price
Reporting Authority (‘‘OPRA’’). The
Exchange understands that these service
providers provide services to most, if
not all, of the other U.S. exchanges and
other market participants. Connectivity
provided by these service providers is
critical to the Exchanges daily
operations and performance of its
System Networks to which market
participants connect to via 10Gb ULL
connectivity. Without these services
providers, the Exchange would not be
able to connect to other national
securities exchanges, market data
providers or OPRA and, therefore,
would not be able to operate and
support its System Networks. The
Exchange does not employ a separate
fee to cover its connectivity expense and
recoups that expense, in part, by
charging for 10Gb ULL connectivity.
Internet Services and External Market
Data
The next cost driver consists of
internet Services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
networks, primary and secondary data
centers, and office locations in
Princeton and Miami.
External market data includes fees
paid to third parties, including other
exchanges, to receive market data. The
Exchange includes external market data
fee costs towards the provision of 10Gb
ULL connectivity because such market
data is necessary for certain services
related to connectivity, including pretrade risk checks and checks for other
conditions (e.g., re-pricing of orders to
avoid locked or crossed markets and
trading collars). Since external market
data from other exchanges is consumed
at the Exchange’s matching engine level,
(to which 10Gb ULL connectivity
provides access) in order to validate
orders before additional orders enter the
matching engine or are executed, the
Exchange believes it is reasonable to
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allocate an amount of such costs to
10Gb ULL connectivity.
The Exchange relies on content
service providers for data feeds for the
entire U.S. options industry, as well as
content for critical components of the
network that are necessary to provide
and maintain its System Networks and
access to its System Networks via 10Gb
ULL connectivity. Specifically, the
Exchange utilizes content service
providers to receive market data from
OPRA, other exchanges and market data
providers. The Exchange understands
that these service providers provide
services to most, if not all, of the other
U.S. exchanges and other market
participants. Market data provided these
service providers is critical to the
Exchanges daily operations and
performance of its System Networks to
which market participants connect to
via 10Gb ULL connectivity. Without
these services providers, the Exchange
would not be able to receive market data
and, therefore, would not be able to
operate and support its System
Networks. The Exchange does not
employ a separate fee to cover its
content service provider expense and
recoups that expense, in part, by
charging for 10Gb ULL connectivity.
Lastly, the Exchange notes that the
actual dollar amounts allocated as part
of the second step of the 2023 budget
process differ among the Exchange and
its affiliated markets for the internet
Services and External Market Data cost
driver, even though, but for MIAX
Emerald, the allocation percentages are
generally consistent across markets (e.g.,
MIAX Emerald, MIAX, MIAX Pearl
Options and MIAX Pearl Equities
allocated 84.8%, 73.3%, 73.3% and
72.5%, respectively, to the same cost
driver). This is because: (i) a different
percentage of the overall internet
Services and External Market Data cost
driver was allocated to MIAX Emerald
and its affiliated markets due to the
factors set forth under the first step of
the 2023 budget review process
described above (unique technical
architecture, market structure, and
business requirements of each
marketplace); and (ii) MIAX Emerald
itself allocated a larger portion of this
cost driver to 10Gb ULL connectivity
because of recent initiatives to improve
the latency and determinism of its
systems. The Exchange notes while the
percentage MIAX Emerald allocated to
the internet Services and External
Market Data cost driver is greater than
the Exchange and its other affiliated
markets, the overall dollar amount
allocated to the Exchange under the
initial step of the 2023 budget process
is lower than its affiliated markets.
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However, the Exchange believes that
this is not, in dollar amounts, a
significant difference. This is because
the total dollar amount of expense
covered by this cost driver is relatively
small compared to other cost drivers
and is due to nuances in exchange
architecture that require different initial
allocation amount under the first step of
the 2023 budget process described
above. Thus, non-significant differences
in percentage allocation amounts in a
smaller cost driver create the
appearance of a significant difference,
even though the actual difference in
dollar amounts is small.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment (such as
dedicated space, security services,
cooling and power). The Exchange notes
that it does not own the Primary Data
Center or the Secondary Data Center,
but instead, leases space in data centers
operated by third parties. The Exchange
has allocated a high percentage of the
Data Center cost (60.6%) to physical
10Gb ULL connectivity because the
third-party data centers and the
Exchange’s physical equipment
contained therein is the most direct cost
in providing physical access to the
Exchange. In other words, for the
Exchange to operate in a dedicated
space with connectivity by market
participants to a physical trading
platform, the data centers are a very
tangible cost, and in turn, if the
Exchange did not maintain such a
presence then physical connectivity
would be of no value to market
participants.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to operate and monitor physical
assets necessary to offer physical
connectivity to the Exchange.129 The
129 This expense may be greater than the
Exchange’s affiliated markets, specifically MIAX
and MIAX Emerald, because, unlike the MIAX and
MIAX Emerald, MIAX Pearl (the options and
equities markets) maintains an additional gateway
to accommodate its Members’ and Equity Members’
access and connectivity needs. This added gateway
contributes to the difference in allocations between
MIAX Pearl, MIAX and MIAX Emerald. This
expense also differs in dollar amount among the
MIAX Pearl (options and equities markets), MIAX,
and MIAX Emerald because each market may
maintain and utilize a different amount of hardware
and software based on its market model and
infrastructure needs. The Exchange allocated a
percentage of the overall cost based on actual
amounts of hardware and software utilized by that
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72159
Exchange notes that this allocation is
greater than MIAX and MIAX Emerald
options exchanges by a significant
amount as MIAX Pearl Options
allocated 58.6% of its Hardware and
Software Maintenance and License
expense towards 10Gb ULL
connectivity, while MIAX and MIAX
Emerald allocated 49.8% and 50.9%,
respectively, to the same category of
expense. This is because MIAX Pearl
Options is in the process of replacing
and upgrading various hardware and
software used to operate its options
trading platform in order to maintain
premium network performance. At the
time of this filing, the Exchange is
undergoing a major hardware refresh,
replacing older hardware with new
hardware. This hardware includes
servers, network switches, cables,
optics, protocol data units, and cabinets,
to maintain a state-of-the-art technology
platform. Because of the timing of the
hardware refresh with the timing of this
filing, the Exchange has materially
higher expense than its affiliates. Also,
MIAX Pearl Equities allocated a higher
percentage of the same category of
expense (58%) towards its Hardware
and Software Maintenance and License
expense for 10Gb ULL connectivity,
which MIAX Pearl Equities explains in
its own proposal to amend its 10Gb ULL
connectivity fees.
Depreciation
All physical assets, software and
hardware used to provide 10Gb ULL
connectivity, which also includes assets
used for testing and monitoring of
Exchange infrastructure, were valued at
cost, and depreciated or leased over
periods ranging from three to five years.
Thus, the depreciation cost primarily
relates to servers necessary to operate
the Exchange, some of which are owned
by the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange also included in the
Depreciation cost driver certain
budgeted improvements that the
Exchange intends to capitalize and
depreciate with respect to 10Gb ULL
connectivity in the near-term. As with
the other allocated costs in the
Exchange’s updated Cost Analysis, the
Depreciation cost was therefore
narrowly tailored to depreciation related
to 10Gb ULL connectivity. As noted
above, the Exchange allocated 58.2% of
its allocated depreciation costs to
providing physical 10Gb ULL
connectivity.
market, which resulted in different cost allocations
and dollar amounts.
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The Exchange also notes that this
allocation differs from its affiliated
markets due to a number of factors, such
as the age of physical assets and
software (e.g., older physical assets and
software were previously depreciated
and removed from the allocation), or
certain system enhancements that
required new physical assets and
software, thus providing a higher
contribution to the depreciated cost. For
example, the percentages the Exchange
and its affiliate, MIAX, allocated to the
depreciation of hardware and software
used to provide 10Gb ULL connectivity
are nearly identical. However, the
Exchange’s dollar amount is less than
that of MIAX by approximately $35,000
per month due to two factors: first,
MIAX has undergone a technology
refresh since the time MIAX Pearl
Options launched in 2017, leading to it
having more hardware that software that
is subject to depreciation. Second,
MIAX maintains 24 matching engines
while MIAX Pearl Options maintains
only 12 matching engines. This also
results in more of MIAX’s hardware and
software being subject to depreciation
than MIAX Pearl Options’ hardware and
software due to the greater amount of
equipment and software necessary to
support the greater number of matching
engines on MIAX.
Allocated Shared Expenses
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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.130 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.
130 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.
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The Exchange employed a process to
determine a reasonable percentage to
allocate general shared expenses to
10Gb ULL connectivity pursuant to its
multi-layered allocation process. First,
general expenses were allocated among
the Exchange and affiliated markets as
described above. Then, the general
shared expense assigned to the
Exchange was allocated across core
services of the Exchange, including
connectivity. Then, these costs were
further allocated to sub-categories
within the final categories, i.e., 10Gb
ULL connectivity as a sub-category of
connectivity. In determining the
percentage of general shared expenses
allocated to connectivity that ultimately
apply to 10Gb ULL connectivity, the
Exchange looked at the percentage
allocations of each of the cost drivers
and determined a reasonable allocation
percentage. The Exchange also held
meetings with senior management,
department heads, and the Finance
Team to determine the proper amount of
the shared general expense to allocate to
10Gb ULL connectivity. The Exchange,
therefore, believes it is reasonable to
assign an allocation, in the range of
allocations for other cost drivers, while
continuing to ensure that this expense is
only allocated once. Again, the general
shared expenses are incurred by the
Exchange’s parent company as a result
of operating the Exchange and its
affiliated markets and it is therefore
reasonable to allocate a percentage of
those expenses to the Exchange and
ultimately to specific product offerings
such as 10Gb ULL connectivity.
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 49.2% 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 49.2% 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
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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 38 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 49.2%
allocation of general shared expenses for
physical 10Gb ULL connectivity is
higher than that allocated to general
shared expenses for Full Service MEO
Ports. This is based on its allocation
methodology that weighted costs
attributable to each core service. While
physical connectivity has several areas
where certain tangible costs are heavily
weighted towards providing such
service (e.g., Data Center, as described
above), Full Service MEO Ports do not
require as many broad or indirect
resources as other core services.
*
*
*
*
*
Approximate Cost Per 10Gb Connection
Per Month
After determining the approximate
allocated monthly cost related to 10Gb
connectivity, the total monthly cost for
10Gb ULL connectivity of $963,959 was
divided by the number of physical 10Gb
ULL connections the Exchange
maintained at the time that proposed
pricing was determined (108), to arrive
at a cost of approximately $8,925 per
month, per physical 10Gb ULL
connection. Due to the nature of this
particular cost, this allocation
methodology results in an allocation
among the Exchange and its affiliated
markets based on set quantifiable
criteria, i.e., actual number of 10Gb ULL
connections.
*
*
*
*
*
Costs Related To Offering Full Service
MEO Ports
The following chart details the
individual line-item costs considered by
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the Exchange to be related to offering
Full Service MEO Ports as well as the
percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 8.3% of its
Allocated annual
cost m
Cost drivers
Allocated monthly
cost n
% of all
Human Resources .....................................................................................................
Connectivity (external fees, cabling, switches, etc.) .................................................
Internet Services and External Market Data .............................................................
Data Center ...............................................................................................................
Hardware and Software Maintenance and Licenses ................................................
Depreciation ...............................................................................................................
Allocated Shared Expenses ......................................................................................
$1,159,831
1,589
6,033
41,881
22,438
127,986
284,374
$96,653
132
503
3,490
1,870
10,666
23,698
8.3
1.4
1.4
3.4
1.4
3.9
3.6
Total ....................................................................................................................
1,644,132
137,012
5.8
m See
n See
supra note k (describing rounding of Annual Costs).
supra note l (describing rounding of Monthly Costs based on Annual Costs).
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
Full Service MEO Ports. While some
costs were attempted to be allocated as
equally as possible among the Exchange
and its affiliated markets, the Exchange
notes that some of its cost allocation
percentages for certain cost drivers
differ when compared to the same cost
drivers for the Exchange’s affiliated
markets in their similar proposed fee
changes for connectivity and ports. This
is because the Exchange’s cost
allocation methodology utilizes the
actual projected costs of the Exchange
(which are specific to the Exchange, and
are independent of the costs projected
and utilized by the Exchange’s affiliated
markets) to determine its actual costs,
which may vary across the Exchange
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.
lotter on DSK11XQN23PROD with NOTICES1
overall Human Resources cost to
offering Full Service MEO Ports).
Human Resources
With respect to Full Service MEO
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing Full
Service MEO Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). Just as described above for
10Gb ULL connectivity, the estimates of
Human Resources cost were again
determined by consulting with
department leaders, determining which
employees are involved in tasks related
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to providing Full Service MEO Ports
and maintaining performance thereof,
and confirming that the proposed
allocations were reasonable based on an
understanding of the percentage of their
time such employees devote to tasks
related to providing Full Service MEO
Ports and maintaining performance
thereof. This includes personnel from
the following Exchange departments
that are predominately involved in
providing Full Service MEO Ports:
Business Systems Development, Trading
Systems Development, Systems
Operations and Network Monitoring,
Network and Data Center Operations,
Listings, Trading Operations, and
Project Management. The Exchange
notes that senior level executives were
allocated Human Resources costs to the
extent they are involved in overseeing
tasks specifically related to providing
Full Service MEO Ports. Senior level
executives were only allocated Human
Resources costs to the extent that they
are involved in managing personnel
responsible for tasks integral to
providing Full Service MEO Ports. The
Human Resources cost was again
calculated using a blended rate of
compensation reflecting salary, equity
and bonus compensation, benefits,
payroll taxes, and 401(k) matching
contributions.
Connectivity (External Fees, Cabling,
Switches, Etc.)
The Connectivity cost includes
external fees paid to connect to other
exchanges and cabling and switches, as
described above.
Internet Services and External Market
Data
The next cost driver consists of
internet services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
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networks, primary and secondary data
centers, and office locations in
Princeton and Miami. For purposes of
Full Service MEO Ports, the Exchange
also includes a portion of its costs
related to external market data. External
market data includes fees paid to third
parties, including other exchanges, to
receive and consume market data from
other markets. The Exchange includes
external market data costs towards the
provision of Full Service MEO Ports
because such market data is necessary
(in addition to physical connectivity) to
offer certain services related to such
ports, such as validating orders on entry
against the NBBO and checking for
other conditions (e.g., halted
securities).131 Thus, since market data
from other exchanges is consumed at
the Exchange’s Full Service MEO Port
level in order to validate orders, before
additional processing occurs with
respect to such orders, the Exchange
believes it is reasonable to allocate a
small amount of such costs to Full
Service MEO Ports.
The Exchange notes that the
allocation for the Internet Services and
External Market Data cost driver is
lower than that of its affiliate, MIAX, as
MIAX allocated 7.2% of its Internet
Services and External Market Data
expense towards Limited Service MEI
Ports, while MIAX Pearl Options
allocated 1.4% to its Full Service MEO
Ports for the same cost driver. The
allocation percentages set forth above
differ because they directly correspond
with the number of applicable ports
utilized on each exchange. For August
2023, MIAX Market Makers utilized
1,781 Limited Service MEI ports and
MIAX Emerald Market Makers utilized
131 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).
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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 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 Full Service MEO
Ports in the third-party data centers
where it maintains its equipment as
well as related costs for market data to
then enter the Exchange’s system via
Full Service MEO Ports (the Exchange
does not own the Primary Data Center
or the Secondary Data Center, but
instead, leases space in data centers
operated by third parties).
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
The Exchange notes that this
allocation is less than its affiliate,
MIAX, as MIAX allocated 7.2% of its
Hardware and Software Maintenance
and License expense towards Limited
Service MEI Ports, while MIAX Pearl
Options allocated 1.4% to its Full
Service MEO Ports (Bulk and Single) for
the same category of expense. The
allocation percentages set forth above
differ because they correspond with the
number of applicable ports utilized on
each exchange. For 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
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of expense than MIAX Pearl Options,
which has a lower port count.
Depreciation
The vast majority of the software the
Exchange uses to provide Full Service
MEO Ports has been developed in-house
and the cost of such development,
which takes place over an extended
period of time and includes not just
development work, but also quality
assurance and testing to ensure the
software works as intended, is
depreciated over time once the software
is activated in the production
environment. Hardware used to provide
Full Service MEO Ports includes
equipment used for testing and
monitoring of order entry infrastructure
and other physical equipment the
Exchange purchased and is also
depreciated over time.
All hardware and software, which
also includes assets used for testing and
monitoring of order entry infrastructure,
were valued at cost, depreciated or
leased over periods ranging from three
to five years. Thus, the depreciation cost
primarily relates to servers necessary to
operate the Exchange, some of which is
owned by the Exchange and some of
which is leased by the Exchange in
order to allow efficient periodic
technology refreshes. The Exchange
allocated 3.9% of all depreciation costs
to providing Full Service MEO Ports.
The Exchange allocated depreciation
costs for depreciated software necessary
to operate the Exchange to Full Service
MEO Ports because such software is
related to the provision of Full Service
MEO Ports. As with the other allocated
costs in the Exchange’s updated Cost
Analysis, the Depreciation cost driver
was therefore narrowly tailored to
depreciation related to Full Service
MEO Ports.
The Exchange notes that this
allocation differs from its affiliated
markets due to a number of factors, such
as the age of physical assets and
software (e.g., older physical assets and
software were previously depreciated
and removed from the allocation), or
certain system enhancements that
required new physical assets and
software, thus providing a higher
contribution to the depreciated cost.
For example, the Exchange notes that
the percentage it allocated to the
depreciation cost driver for Full Service
MEO Ports and the percentage its
affiliate, MIAX, allocated to the
depreciation cost driver for MIAX’s
Limited Service MEI Ports, differ by
only 2.4%. However, MIAX’s
approximate dollar amount is greater
than that of MIAX Pearl Options by
approximately $9,000 per month. This
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is due to two primary factors. First,
MIAX has under gone a technology
refresh since the time MIAX Pearl
Options launched in 2017, leading to it
having more hardware that software that
is subject to depreciation. Second,
MIAX maintains 24 matching engines
while MIAX Pearl Options maintains
only 12 matching engines. This also
results in more of MIAX’s hardware and
software being subject to depreciation
than MIAX Pearl Options’ hardware and
software due to the greater amount of
equipment and software necessary to
support the greater number of matching
engines on MIAX.
Allocated Shared Expenses
Finally, a portion of general shared
expenses was allocated to overall Full
Service MEO Ports costs as without
these general shared costs the Exchange
would not be able to operate in the
manner that it does and provide
application sessions. The costs included
in general shared expenses include
general expenses of the Exchange,
including office space and office
expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and
training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange again notes that the cost of
paying directors to serve on its Board of
Directors is included in the calculation
of Allocated Shared Expenses, and thus
a portion of such overall cost amounting
to less than 4.0% of the overall cost for
directors was allocated to providing Full
Service MEO Ports. The Exchange notes
that the 3.6% allocation of general
shared expenses for Full Service MEO
Ports is lower than that allocated to
general shared expenses for physical
connectivity based on its allocation
methodology that weighted costs
attributable to each Core Service based
on an understanding of each area. While
Full Service MEO Ports have several
areas where certain tangible costs are
heavily weighted towards providing
such service (e.g., Data Centers, as
described above), 10Gb ULL
connectivity requires a broader level of
support from Exchange personnel in
different areas, which in turn leads to a
broader general level of cost to the
Exchange.
Lastly, the Exchange notes that this
allocation is less than its affiliate,
MIAX, as MIAX allocated 9.8% of its
Allocated Shared Expense towards
Limited Service MEI Ports, while MIAX
Pearl Options allocated 3.6% to its Full
Service MEO Ports (Bulk and Single) for
the same category of expense. The
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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, thus resulting in a smaller cost
allocation. There is increased cost
associated with supporting a higher
number of ports (requiring more
hardware and other technical
infrastructure), thus the Exchange
allocates a higher percentage of expense
than MIAX Pearl Options which has a
lower port count.
*
*
*
*
*
Approximate Cost Per Full Service MEO
Port Per Month
Based on May 2023 data, the total
monthly cost allocated to Full Service
MEO Ports of $137,012 was divided by
the number of chargeable Full Service
MEO Ports the Exchange maintained at
the time that proposed pricing was
determined (25 total; 25 Full Service
MEO Port, Bulk, and 0 Full Service
MEO Port, Single), to arrive at a cost of
approximately $5,480 per month, per
charged Full Service MEO Port.
*
*
*
*
*
lotter on DSK11XQN23PROD with NOTICES1
Cost Analysis—Additional Discussion
In conducting its Cost Analysis, the
Exchange did not allocate any of its
expenses in full to any core services
(including physical connectivity or Full
Service MEO Ports) and did not doublecount any expenses. Instead, as
described above, the Exchange allocated
applicable cost drivers across its core
services and used the same Cost
Analysis to form the basis of this
proposal and the filings the Exchange
submitted proposing fees for proprietary
data feeds offered by the Exchange. For
instance, in calculating the Human
Resources expenses to be allocated to
physical connections based upon the
above described methodology, the
Exchange has a team of employees
dedicated to network infrastructure and
with respect to such employees the
Exchange allocated network
infrastructure personnel with a high
percentage of the cost of such personnel
(42.9%) given their focus on functions
necessary to provide physical
connections. The salaries of those same
personnel were allocated only 12.3% to
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Full Service MEO Ports and the
remaining 44.8% was allocated to 1Gb
connectivity, other port services,
transaction services, membership
services and market data. The Exchange
did not allocate any other Human
Resources expense for providing
physical connections to any other
employee group, outside of a smaller
allocation of 16.9% for 10Gb ULL
connectivity or 17.3% for the entire
network, of the cost associated with
certain specified personnel who work
closely with and support network
infrastructure personnel. In contrast, the
Exchange allocated much smaller
percentages of costs (6.0% or less)
across a wider range of personnel
groups in order to allocate Human
Resources costs to providing Full
Service MEO Ports. This is because a
much wider range of personnel are
involved in functions necessary to offer,
monitor and maintain Full Service MEO
Ports but the tasks necessary to do so are
not a primary or full-time function.
In total, the Exchange allocated 26.9%
of its personnel costs to providing 10Gb
ULL and 1Gb ULL connectivity and
8.3% of its personnel costs to providing
Full Service MEO Ports, for a total
allocation of 35.2% Human Resources
expense to provide these specific
connectivity and port services. In turn,
the Exchange allocated the remaining
64.8% of its Human Resources expense
to membership services, transaction
services, other port services and market
data. Thus, again, the Exchange’s
allocations of cost across core services
were based on real costs of operating the
Exchange and were not double-counted
across the core services or their
associated revenue streams.
As another example, the Exchange
allocated depreciation expense to all
core services, including physical
connections and Full Service MEO
Ports, but in different amounts. The
Exchange believes it is reasonable to
allocate the identified portion of such
expense because such expense includes
the actual cost of the computer
equipment, such as dedicated servers,
computers, laptops, monitors,
information security appliances and
storage, and network switching
infrastructure equipment, including
switches and taps that were purchased
to operate and support the network.
Without this equipment, the Exchange
would not be able to operate the
network and provide connectivity
services to its Members and nonMembers and their customers. However,
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing
connectivity services, but instead
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72163
allocated approximately 62.1% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (58.2% attributed to 10Gb ULL
physical connections and 3.9% to Full
Service MEO Ports). The Exchange
allocated the remaining depreciation
and amortization expense
(approximately 37.9%) toward the cost
of providing transaction services,
membership services, other port
services and market data.
The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated. The Exchange does
not yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
connectivity, the Exchange will have to
be successful in retaining existing
clients that wish to maintain physical
connectivity and/or Full Service MEO
Ports or in obtaining new clients that
will purchase such services. Similarly,
the Exchange will have to be successful
in retaining a positive net capture on
transaction fees in order to realize the
anticipated revenue from transaction
pricing.
The Exchange notes that the Cost
Analysis is based on the Exchange’s
2023 fiscal year of operations and
projections. It is possible, however, that
actual costs may be higher or lower. To
the extent the Exchange sees growth in
use of connectivity services it will
receive additional revenue to offset
future cost increases.
However, if use of connectivity
services is static or decreases, the
Exchange might not realize the revenue
that it anticipates or needs in order to
cover applicable costs. Accordingly, the
Exchange is committing to conduct a
one-year review after implementation of
these fees. The Exchange expects that it
may propose to adjust fees at that time,
to increase fees in the event that
revenues fail to cover costs and a
reasonable mark-up of such costs.
Similarly, the Exchange may propose to
decrease fees in the event that revenue
materially exceeds our current
projections. In addition, the Exchange
will periodically conduct a review to
inform its decision making on whether
a fee change is appropriate (e.g., to
monitor for costs increasing/decreasing
or subscribers increasing/decreasing,
etc. in ways that suggest the 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
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mark-up materially exceeds our current
projections. In the event that the
Exchange determines to propose a fee
change, the results of a timely review,
including an updated cost estimate, will
be included in the rule filing proposing
the fee change. More generally, we
believe that it is appropriate for an
exchange to refresh and update
information about its relevant costs and
revenues in seeking any future changes
to fees, and the Exchange commits to do
so.
Projected Revenue 132
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
132 For
purposes of calculating revenue for 10Gb
ULL connectivity, the Exchange used revenues for
February 2023, the first full month for which it
provided dedicated 10Gb ULL connectivity to
MIAX Pearl Options and ceased operating a shared
10Gb ULL network with MIAX.
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Exchange must cover its expenses from
these five primary sources of revenue.
The Exchange’s Cost Analysis
estimates the annual cost to provide
10Gb ULL connectivity services will
equal $11,567,509. Based on current
10Gb ULL connectivity services usage,
the Exchange would generate annual
revenue of approximately $17,496,000.
The Exchange believes this represents a
modest profit of 34% when compared to
the cost of providing 10Gb ULL
connectivity services, which could
decrease over time.133 Importantly, the
Exchange’s affiliated markets submitted
similar filings to also amend their fees
for 10Gb ULL connectivity 134 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.135
The Exchange’s Cost Analysis
estimates the annual cost to provide
Full Service MEO Port services will
equal $1,644,132. Based on current Full
Service MEO Port services usage, the
Exchange would generate annual
revenue of approximately $1,644,000.
The Exchange believes this would result
in a small negative margin after
calculating the cost of providing Full
Service MEO Port services, which could
decrease further over time.136
Based on the above discussion, even
if the Exchange earns the above revenue
or incrementally more or less, the
proposed fees are fair and reasonable
because they will not result in excessive
pricing that deviates from that of other
133 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).
134 See SR–PEARL–2023–51, SR–MIAX–2023–39,
and SR–EMERALD–2023–27.
135 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).
136 Id.
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exchanges or a supra-competitive profit,
when comparing the total expense of the
Exchange associated with providing
10Gb ULL connectivity and Full Service
MEO Port services versus the total
projected revenue of the Exchange
associated with network 10Gb ULL
connectivity and Full Service MEO Port
services.
The Exchange also notes that this the
resultant profit margin differs slightly
from the profit margins set forth in
similar fee filings by its affiliated
markets. This is not atypical among
exchanges and is due to a number of
factors that differ between these four
markets, including: different market
models, market structures, and product
offerings (equities, options, price-time,
pro-rata, simple, and complex); different
pricing models; different number of
market participants and connectivity
subscribers; different maintenance and
operations costs, as described in the cost
allocation methodology above; different
technical architecture (e.g., the number
of matching engines per exchange, i.e.,
the Exchange maintains 12 matching
engines while MIAX maintains 24
matching engines); and different
maturity phase of the Exchange and its
affiliated markets (i.e., start-up versus
growth versus more mature). All of
these factors contribute to a unique and
differing level of profit margin per
exchange.
Further, the Exchange proposes to
charge rates that are comparable to, or
lower than, similar fees for similar
products charged by competing
exchanges. For example, for 10Gb ULL
connectivity, the Exchange proposes a
lower fee than the fee charged by
Nasdaq for its comparable 10Gb Ultra
fiber connection ($13,500 per month for
the Exchange vs. $15,000 per month for
Nasdaq).137 NYSE American charges
even higher fees for its comparable
10GB LX LCN connection than the
Exchange’s proposed fees ($13,500 for
the Exchange vs. $22,000 per month for
NYSE American).138 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
137 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services.
138 See NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. CoLocation Fees.
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ULL connectivity on the Exchange than
its affiliated markets or vice versa).
*
*
*
*
*
The Exchange has operated at a
cumulative net annual loss since it
launched operations in 2017.139 This is
due to a number of factors, one of which
is choosing to forgo revenue by offering
certain products, such as low latency
connectivity, at lower rates than other
options exchanges to attract order flow
and encourage market participants to
experience the high determinism, low
latency, and resiliency of the Exchange’s
trading systems. The Exchange does not
believe it should now be penalized for
seeking to raise its fees as it now needs
to upgrade its technology and absorb
increased costs. Therefore, the Exchange
believes the proposed fees are
reasonable because they are based on
both relative costs to the Exchange to
provide dedicated 10Gb ULL
connectivity and Full Service MEO
Ports, the extent to which the product
drives the Exchange’s overall costs and
the relative value of the product, as well
as the Exchange’s objective to make
access to its Systems broadly available
to market participants. The Exchange
also believes the proposed fees are
reasonable because they are designed to
generate annual revenue to recoup the
Exchange’s costs of providing dedicated
10Gb ULL connectivity and Full Service
MEO Ports.
The Exchange notes that its revenue
estimate is based on projections and
will only be realized to the extent
customer activity produces the revenue
estimated. As a competitor in the hypercompetitive exchange environment, and
an exchange focused on driving
competition, the Exchange does not yet
know whether such projections will be
realized. For instance, in order to
generate the revenue expected from
10Gb ULL connectivity and Full Service
MEO Ports, the Exchange will have to be
successful in retaining existing clients
that wish to utilize 10Gb ULL
connectivity and Full Service MEO
Ports and/or obtaining new clients that
will purchase such access. To the extent
the Exchange is successful in
encouraging new clients to utilize 10Gb
ULL connectivity and Full Service MEO
Ports, the Exchange does not believe it
should be penalized for such success.
To the extent the Exchange has
mispriced and experiences a net loss in
connectivity clients or in transaction
139 The Exchange has incurred a cumulative loss
of $83 million since its inception in 2017 through
full year 2022. See Exchange’s Form 1/A,
Application for Registration or Exemption from
Registration as a National Securities Exchange, filed
June 26, 2023, available at https://www.sec.gov/
Archives/edgar/vprr/2300/23007743.pdf.
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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
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
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72165
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
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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.140 Thus, as the number of messages
an entity increases, certain other costs
incurred by the Exchange that are
correlated to, though not directly
affected by, connection costs (e.g.,
storage costs, surveillance costs, service
expenses) also increase. Given this
difference in network utilization rate,
the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users
pay for the vast majority of the shared
network resources from which all
market participants’ benefit.
Full Service MEO Ports
The tiered pricing structure for Full
Service MEO Ports has been in effect
since 2018.141 The Exchange now
proposes a pricing structure that is used
by the Exchange’s affiliates, MIAX and
MIAX Emerald, except with lower
pricing for each tier for Full Service
MEO Ports (Bulk) and a flat fee for Full
Service MEO Ports (Single). Members
that are frequently in the highest tier for
Full Service MEO Ports consume the
most bandwidth and resources of the
network. Specifically, as noted above for
10Gb ULL connectivity, Market Makers
who reach the highest tier for Full
Service MEO Ports (Bulk) account for
greater than 84% of ADV on the
Exchange, while Market Makers that are
typically in the lowest Tier for Full
Service MEO Ports, account for less than
14% of ADV on the Exchange. The
remaining 1% is accounted for by
Market Makers who are frequently in
the middle Tier for Full Service MEO
Ports (Bulk).
To achieve a consistent, premium
network performance, the Exchange
must build out and maintain a network
that has the capacity to handle the
message rate requirements of its most
heavy network consumers during
anticipated peak market conditions. The
need to support billions of messages per
day consume the Exchange’s resources
140 17 CFR 240.17a-1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
141 See Securities Exchange Act Release No.
82867 (March 13, 2018), 83 FR 12044 (March 19,
2018) (SR–PEARL–2018–07).
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and significantly contribute to the
overall network connectivity expense
for storage and network transport
capabilities. The Exchange must also
purchase additional storage capacity on
an ongoing basis to ensure it has
sufficient capacity to store these
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.142 Thus, as the number of
connections a Market Maker has
increases, the related pull on Exchange
resources also increases. The Exchange
sought to design the proposed tieredpricing structure to set the amount of
the fees to relate to the number of
connections a firm purchases. The more
connections purchased by a Market
Maker likely results in greater
expenditure of Exchange resources and
increased cost to the Exchange.
The Exchange further believes that the
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because, for the flat fee,
the Exchange provides each Member
two (2) Full Service MEO Ports for each
matching engine to which that Member
is connected. Unlike other options
exchanges that provide similar port
functionality and charge fees on a per
port basis,143 the Exchange offers Full
Service MEO Ports as a package and
provides Members with the option to
receive up to two Full Service MEO
Ports per matching engine to which it
connects. The Exchange currently has
twelve (12) matching engines, which
means Members may receive up to
twenty-four (24) Full Service MEO Ports
for a single monthly fee, that can vary
based on certain volume percentages.
The Exchange currently assesses
Members a fee of $5,000 per month in
the highest Full Service MEO Port—
Bulk Tier, regardless of the number of
Full Service MEO Ports allocated to the
Member. Assuming a Member connects
to all twelve (12) matching engines
during a month, with two Full Service
MEO Ports per matching engine, this
results in a cost of $208.33 per Full
Service MEO Port—Bulk ($5,000
divided by 24) for the month. This fee
has been unchanged since the Exchange
adopted Full Service MEO Port fees in
2018.144 Members will continue to
receive two (2) Full Service MEO Ports
to each matching engine to which they
142 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
143 See supra table on page 129 and
accompanying text.
144 See Securities Exchange Act Release No.
82867 (March 13, 2018), 83 FR 12044 (March 19,
2018) (SR–PEARL–2018–07).
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are connected for the single flat monthly
fee. Assuming a Member connects to all
twelve (12) matching engines during the
month, and achieves the highest Tier for
that month, with two Full Service MEO
Ports (Bulk) per matching engine, this
would result in a cost of $500 per Full
Service MEO Port ($12,000 divided by
24).
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed
fees will not result in any burden on
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
proposed fees will allow the Exchange
to recoup some of its costs in providing
10Gb ULL connectivity and Full Service
MEO Ports at below market rates to
market participants since the Exchange
launched operations. As described
above, the Exchange has operated at a
cumulative net annual loss since it
launched operations in 2017 145 due to
providing a low-cost alternative to
attract order flow and encourage market
participants to experience the high
determinism and resiliency of the
Exchange’s trading Systems. To do so,
the Exchange chose to waive the fees for
some non-transaction related services
and Exchange products or provide them
at a very lower fee, which was not
profitable to the Exchange. This resulted
in the Exchange forgoing revenue it
could have generated from assessing any
fees or higher fees. The Exchange could
have sought to charge higher fees at the
outset, but that could have served to
discourage participation on the
Exchange. Instead, the Exchange chose
to provide a low-cost exchange
alternative to the options industry,
which resulted in lower initial
revenues. Examples of this are 10Gb
ULL connectivity and Full Service MEO
Ports, for which the Exchange only now
seeks to adopt fees at a level similar to
or lower than those of other options
exchanges.
Further, the Exchange does not
believe that the proposed fee increase
for the 10Gb ULL connection change
would place certain market participants
at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. As is
145 See
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the case with the current proposed flat
fee, the proposed fee would apply
uniformly to all market participants
regardless of the number of connections
they choose to purchase. The proposed
fee does not favor certain categories of
market participants in a manner that
would impose an undue burden on
competition.
The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. In particular,
Exchange personnel has been informally
discussing potential fees for
connectivity services with a diverse
group of market participants that are
connected to the Exchange (including
large and small firms, firms with large
connectivity service footprints and
small connectivity service footprints, as
well as extranets and service bureaus)
for several months leading up to that
time. The Exchange does not believe the
proposed fees for connectivity services
would negatively impact the ability of
Members, non-Members (extranets or
service bureaus), third-parties that
purchase the Exchange’s connectivity
and resell it, and customers of those
resellers to compete with other market
participants or that they are placed at a
disadvantage.
The Exchange does anticipate,
however, that some market participants
may reduce or discontinue use of
connectivity services provided directly
by the Exchange in response to the
proposed fees. In fact, as mentioned
above, one MIAX Pearl Options Market
Maker terminated their membership on
January 1, 2023 as a direct result of the
proposed fee changes.146 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
146 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 135. The Exchange does not
believe a similar analysis would be useful here
because it is amending existing fees, not proposing
to charge a new fee where existing subscribers may
terminate connections because they are no longer
enjoying the service at no cost.
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a barrier to entry to smaller participants.
The Exchange believes its proposed
pricing is reasonable and, when coupled
with the availability of third-party
providers that also offer connectivity
solutions, that participation on the
Exchange is affordable for all market
participants, including smaller trading
firms. As described above, the
connectivity services purchased by
market participants typically increase
based on their additional message traffic
and/or the complexity of their
operations. The market participants that
utilize more connectivity services
typically utilize the most bandwidth,
and those are the participants that
consume the most resources from the
network. Accordingly, the proposed fees
for connectivity services do not favor
certain categories of market participants
in a manner that would impose a
burden on competition; rather, the
allocation of the proposed connectivity
fees reflects the network resources
consumed by the various size of market
participants and the costs to the
Exchange of providing such
connectivity services.
Inter-Market Competition
The Exchange also does not believe
that the proposed rule change and price
increase will result in any burden on
inter-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. As this is a
fee increase, arguably if set too high,
this fee would make it easier for other
exchanges to compete with the
Exchange. Only if this were a
substantial fee decrease could this be
considered a form of predatory pricing.
In contrast, the Exchange believes that,
without this fee increase, we are
potentially at a competitive
disadvantage to certain other exchanges
that have in place higher fees for similar
services. As we have noted, the
Exchange believes that connectivity fees
can be used to foster more competitive
transaction pricing and additional
infrastructure investment and there are
other options markets of which market
participants may connect to trade
options at higher rates than the
Exchange’s. Accordingly, the Exchange
does not believe its proposed fee
changes impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
The Exchange also believes that the
proposed fees for 10Gb connectivity are
appropriate and warranted and would
not impose any burden on competition.
This is a technology driven change
designed to meet customer needs. The
proposed fees would assist the
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72167
Exchange in recovering costs related to
providing dedicated 10Gb connectivity
to the Exchange while enabling it to
continue to meet current and
anticipated demands for connectivity by
its Members and other market
participants. Separating its 10Gb
network from MIAX enables the
Exchange to better compete with other
exchanges by ensuring it can continue
to provide adequate connectivity to
existing and new Members, which may
increase in ability to compete for order
flow and deepen its liquidity pool,
improving the overall quality of its
market. The proposed rates for 10Gb
ULL connectivity are structured to
enable the Exchange to bifurcate its
10Gb ULL network shared with MIAX
so that it can continue to meet current
and anticipated connectivity demands
of all market participants.
Similarly, and also in connection with
a technology change, Cboe Exchange,
Inc. (‘‘Cboe’’) amended its access and
connectivity fees, including port fees.147
Specifically, Cboe adopted certain
logical ports to allow for the delivery
and/or receipt of trading messages—i.e.,
orders, accepts, cancels, transactions,
etc. Cboe established tiered pricing for
BOE and FIX logical ports,148 tiered
pricing for BOE Bulk ports, and flat
prices for DROP, Purge Ports, GRP Ports
and Multicast PITCH/Top Spin Server
Ports. Cboe argued in its fee proposal
that the proposed pricing more closely
aligned its access fees to those of its
affiliated exchanges as the affiliated
exchanges offer substantially similar
connectivity and functionality and are
on the same platform that Cboe migrated
to.149 Cboe justified its proposal by
stating that, ‘‘. . . the Exchange believes
substitutable products and services are
in fact available to market participants,
including, among other things, other
options exchanges a market participant
may connect to in lieu of the Exchange,
indirect connectivity to the Exchange
via a third-party reseller of connectivity
and/or trading of any options product,
including proprietary products, in the
Over-the-Counter (OTC) markets.’’ 150
147 See Securities Exchange Act Release No.
90333 (November 4, 2020), 85 FR 71666 (November
10, 2020) (SR–CBOE–2020–105). The Exchange
notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
148 See Cboe Fee Schedule, Page 12, Logical
Connectivity Fees, available at https://
cdn.cboe.com/resources/membership/Cboe_
FeeSchedule.pdf (BOE/FIX logical monthly port
fees of $750 per port for ports 1–5 and $800 per port
for port 6 or more; and BOE Bulk logical monthly
port fees of $1,500 per port for ports 1–5, $2,500
per port for ports 6–30, and $3,000 for port 31 or
more).
149 See supra note 147 at 71676.
150 Id.
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The Exchange concurs with the
following statement by Cboe,
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The rule structure for options exchanges
are also fundamentally different from those
of equities exchanges. In particular, options
market participants are not forced to connect
to (and purchase market data from) all
options exchanges. For example, there are
many order types that are available in the
equities markets that are not utilized in the
options markets, which relate to mid-point
pricing and pegged pricing which require
connection to the SIPs and each of the
equities exchanges in order to properly
execute those orders in compliance with best
execution obligations. Additionally, in the
options markets, the linkage routing and
trade through protection are handled by the
exchanges, not by the individual members.
Thus not connecting to an options exchange
or disconnecting from an options exchange
does not potentially subject a broker-dealer to
violate order protection requirements. Gone
are the days when the retail brokerage firms
(such as Fidelity, Schwab, and eTrade) were
members of the options exchanges—they are
not members of the Exchange or its affiliates,
they do not purchase connectivity to the
Exchange, and they do not purchase market
data from the Exchange. Accordingly, not
only is there not an actual regulatory
requirement to connect to every options
exchange, the Exchange believes there is also
no ‘‘de facto’’ or practical requirement as
well, as further evidenced by the recent
significant reduction in the number of
broker-dealers that are members of all
options exchanges.151
The Cboe proposal also referenced the
National Market System Plan Governing
the Consolidated Audit Trail (‘‘CAT
NMS Plan’’),152 wherein the
Commission discussed the existence of
competition in the marketplace
generally, and particularly for
exchanges with unique business
models. The Commission acknowledged
that, even if an exchange were to exit
the marketplace due to its proposed feerelated change, it would not
significantly impact competition in the
market for exchange trading services
because these markets are served by
multiple competitors.153 Further, the
Commission explicitly stated that
‘‘[c]onsequently, demand for these
services in the event of the exit of a
competitor is likely to be swiftly met by
existing competitors.’’ 154 Finally, the
Commission recognized that while some
exchanges may have a unique business
model that is not currently offered by
competitors, a competitor could create
similar business models if demand were
adequate, and if a competitor did not do
151 Id.
at 71676.
152 See Securities Exchange Act Release No.
86901 (September 9, 2019), 84 FR 48458 (September
13, 2019) (File No. S7–13–19).
153 Id.
154 Id.
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so, the Commission believes it would be
likely that new entrants would do so if
the exchange with that unique business
model was otherwise profitable.155
Cboe also filed to establish a monthly
fee for Certification Logical Ports of
$250 per Certification Logical Port.156
Cboe reasoned that purchasing
additional Certification Logical Ports,
beyond the one Certification Logical
Port per logical port type offered in the
production environment free of charge,
is voluntary and not required in order
to participate in the production
environment, including live production
trading on the Exchange.157
In its statutory basis, Cboe justified
the new port fee by stating that it
believed the Certification Logical Port
fee were reasonable because while such
ports were no longer completely free,
TPHs and non-TPHs would continue to
be entitled to receive free of charge one
Certification Logical Port for each type
of logical port that is currently offered
in the production environment.158 Cboe
noted that other exchanges assess
similar fees and cited to NASDAQ LLC
and MIAX.159 Cboe also noted that the
decision to purchase additional ports is
optional and no market participant is
required or under any regulatory
obligation to purchase excess
Certification Logical Ports in order to
access the Exchange’s certification
environment.160 Finally, similar
proposals to adopt a Certification
Logical Port monthly fee were filed by
Cboe BYX Exchange, Inc.,161 BZX,162
and Cboe EDGA Exchange, Inc.163
The Cboe fee proposals described
herein were filed subsequent to the D.C.
Circuit decision in Susquehanna Int’l
Grp., LLC v. SEC, 866 F.3d 442 (D.C. Cir.
155 Id.
156 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
2022) (SR–Cboe-2022–011). Cboe offers BOE and
FIX Logical Ports, BOE Bulk Logical Ports, DROP
Logical Ports, Purge Ports, GRP Ports and Multicast
PITCH/Top Spin Server Ports. For each type of the
aforementioned logical ports that are used in the
production environment, the Exchange also offers
corresponding ports which provide Trading Permit
Holders and non-TPHs access to the Exchange’s
certification environment to test proprietary
systems and applications (i.e., ‘‘Certification Logical
Ports’’).
157 See Securities Exchange Act Release No.
94512 (March 24, 2002), 87 FR 18425 (March 30,
2022) (SR–Cboe-2022–011).
158 Id. at 18426.
159 Id.
160 Id.
161 See Securities Exchange Act Release No.
94507 (March 24, 2002), 87 FR 18439 (March 30,
2022) (SR–CboeBYX–2022–004).
162 See Securities Exchange Act Release No.
94511 (March 24, 2002), 87 FR 18411 (March 30,
2022) (SR–CboeBZX–2022–021).
163 See Securities Exchange Act Release No.
94517 (March 25, 2002), 87 FR 18848 (March 31,
2022) (SR–CboeEDGA–2022–004).
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
2017), meaning that such fee filings
were subject to the same (and current)
standard for SEC review and approval as
this proposal. In summary, the
Exchange requests the Commission
apply the same standard of review to
this proposal which was applied to the
various Cboe and Cboe affiliated
markets’ filings with respect to nontransaction fees. If the Commission were
to apply a different standard of review
to this proposal than it applied to other
exchange fee filings it would create a
burden on competition such that it
would impair the Exchange’s ability to
make necessary technology driven
changes, such as bifurcating its 10Gb
ULL network, because it would be
unable to monetize or recoup costs
related to that change and compete with
larger, non-legacy exchanges.
*
*
*
*
*
In conclusion, as discussed
thoroughly above, the Exchange
regrettably believes that the application
of the Revised Review Process and Staff
Guidance has adversely affected intermarket competition among legacy and
non-legacy exchanges by impeding the
ability of non-legacy exchanges to adopt
or increase fees for their market data
and access services (including
connectivity and port products and
services) that are on parity or
commensurate with fee levels
previously established by legacy
exchanges. Since the adoption of the
Revised Review Process and Staff
Guidance, and even more so recently, it
has become extraordinarily difficult to
adopt or increase fees to generate
revenue necessary to invest in systems,
provide innovative trading products and
solutions, and improve competitive
standing to the benefit of non-legacy
exchanges’ market participants.
Although the Staff Guidance served an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable, it
has also negatively impacted non-legacy
exchanges in particular in their efforts
to adopt or increase fees that would
enable them to more fairly compete with
legacy exchanges, despite providing
enhanced disclosures and rationale
under both competitive and cost basis
approaches provided for by the Revised
Review Process and Staff Guidance to
support their proposed fee changes.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange received one comment
letter on the Initial Proposal, one
E:\FR\FM\19OCN1.SGM
19OCN1
Federal Register / Vol. 88, No. 201 / Thursday, October 19, 2023 / Notices
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.164 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,165 and Rule
19b–4(f)(2) 166 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
lotter on DSK11XQN23PROD with NOTICES1
164 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.
165 15 U.S.C. 78s(b)(3)(A)(ii).
166 17 CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
17:48 Oct 18, 2023
Jkt 262001
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
PEARL–2023–55 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–PEARL–2023–55. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–PEARL–2023–55 and should be
submitted on or before November 9,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.167
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–23044 Filed 10–18–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98749; File No. SR–GEMX–
2023–12]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Its GPS
Antenna Fees at General 8, Section 1
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
September 29, 2023, Nasdaq GEMX,
LLC (‘‘GEMX’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the 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 proposes to amend the
Exchange’s GPS antenna fees at General
8, Section 1, as described further below.
While these amendments are effective
upon filing, the Exchange has
designated the proposed amendments to
be operative on October 1, 2023.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/gemx/rules, at the principal
office of the Exchange, 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
167 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00129
Fmt 4703
Sfmt 4703
72169
2 17
E:\FR\FM\19OCN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
19OCN1
]]>Agencies
[Federal Register Volume 88, Number 201 (Thursday, October 19, 2023)]
[Notices]
[Pages 72142-72169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23044]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98753; File No. SR-PEARL-2023-55]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
Pearl Options Exchange Fee Schedule To Modify Certain Connectivity and
Port Fees
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 PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Pearl Options
Exchange Fee Schedule (the ``Fee Schedule'') to amend certain
connectivity and port fees.\3\
---------------------------------------------------------------------------
\3\ All references to the ``Exchange'' in this filing mean MIAX
Pearl Options. Any references to the equities trading facility of
MIAX PEARL, LLC, will specifically be referred to as ``MIAX Pearl
Equities.''
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings, at MIAX Pearl's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule as follows: (1)
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'')
fiber connection for Members \4\ and non-Members; (2) amend the
calculation of fees for MIAX Express Network Full Service (``MEO'') \5\
Ports (Bulk and Single); and (3) amend the fees for Full Service MEO
Ports (Bulk and Single). The Exchange and its affiliate, Miami
International Securities Exchange, LLC (``MIAX'') operated 10Gb ULL
connectivity on a single shared network that provided access to both
exchanges via a single 10Gb ULL connection. The Exchange last increased
fees for 10Gb ULL connections from $9,300 to $10,000 per month on
January 1, 2021.\6\ At the same time, MIAX also increased its 10Gb ULL
connectivity fee from $9,300 to $10,000 per month.\7\ The Exchange and
MIAX shared a combined cost analysis in those filings due to the single
shared 10Gb ULL connectivity network for both exchanges. In those
filings, the Exchange and MIAX allocated a combined total of $17.9
million in expenses to providing 10Gb ULL connectivity.\8\
---------------------------------------------------------------------------
\4\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\5\ The term ``MEO Interface'' or ``MEO'' means a binary order
interface for certain order types as set forth in Rule 516 into the
MIAX Pearl System. See the Definitions Section of the Fee Schedule
and Exchange Rule 100.
\6\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
\7\ See Securities Exchange Act Release No. 90980 (January 25,
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
\8\ See id.
---------------------------------------------------------------------------
Beginning in late January 2023, the Exchange also recently
determined a substantial operational need to no longer operate 10Gb ULL
connectivity on a single shared network with MIAX. The Exchange
bifurcated 10Gb ULL connectivity due to ever-increasing capacity
constraints and to enable it to continue to satisfy the anticipated
access needs for Members and other market participants.\9\ Since the
time of the 2021 increase discussed above,\10\ the Exchange experienced
ongoing increases in expenses, particularly internal expenses.\11\ As
discussed more fully below, the Exchange recently calculated increased
annual aggregate
[[Page 72143]]
costs of $11,567,509 for providing 10Gb ULL connectivity on a single
unshared network (an overall increase over its prior cost to provide
10Gb ULL connectivity on a shared network with MIAX) and $1,644,132 for
providing Full Service MEO Ports.\12\
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\9\ See MIAX Options and MIAX Pearl Options--Announce planned
network changes related to shared 10G ULL extranet, issued August
12, 2022, available at https://www.miaxglobal.com/alert/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-0. The Exchange will continue to provide access to both the
Exchange and MIAX over a single shared 1Gb connection. See
Securities Exchange Act Release Nos. 96553 (December 20, 2022), 87
FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 (December 20,
2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-48).
\10\ The Exchange notes it last filed to amend the fees for Full
Service MEO Ports in 2018 (excluding filings made in July 2021
through early 2022), prior to which the Exchange provided Full
Service MEO Ports free of charge since the it launched operations in
2017 and absorbed all costs since that time. See Securities Exchange
Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018)
(SR-PEARL-2018-07).
\11\ For example, the New York Stock Exchange, Inc.'s (``NYSE'')
Secure Financial Transaction Infrastructure (``SFTI'') network,
which contributes to the Exchange's connectivity cost, increased its
fees by approximately 9% since 2021. Similarly, since 2021, the
Exchange, and its affiliates, experienced an increase in data center
costs of approximately 17% and an increase in hardware and software
costs of approximately 19%. These percentages are based on the
Exchange's actual 2021 and proposed 2023 budgets.
\12\ For the avoidance of doubt, all references to costs in this
filing, including the cost categories discussed below, refer to
costs incurred by MIAX Pearl Options only and not MIAX Pearl
Equities, the equities trading facility.
---------------------------------------------------------------------------
Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity services.
Subscribers expect the Exchange to provide this level of support so
they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and Full Service MEO Ports (Bulk and
Single) in order to recoup cost related to bifurcating 10Gb
connectivity to the Exchange and MIAX as well as the ongoing costs and
increase in expenses set forth below in the Exchange's cost
analysis.\13\ The Exchange proposes to implement the changes to the Fee
Schedule pursuant to this proposal immediately. The Exchange initially
filed the proposal on December 30, 2022 (SR-PEARL-2022-62) (the
``Initial Proposal'').\14\ On February 23, 2023, the Exchange withdrew
the Initial Proposal and replaced it with a revised proposal (SR-PEARL-
2023-08) (the ``Second Proposal'').\15\ On April 20, 2023, the Exchange
withdrew the Second Proposal and replaced it with a revised proposal
(SR-PEARL-2023-19) (the ``Third Proposal'').\16\ On June 16, 2023, the
Exchange withdrew the Third Proposal and replaced it with a revised
proposal (SR-PEARL-2023-27) (the ``Fourth Proposal'').\17\ On August 8,
2023, the Exchange withdrew the Fourth Proposal and replaced it with a
revised proposal (SR-PEARL-2023-35) (the ``Fifth Proposal'').\18\ 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-PEARL-2023-55) (the ``Sixth Proposal'').
---------------------------------------------------------------------------
\13\ The Exchange notes that MIAX will make a similar filing to
increase its 10Gb ULL connectivity fees.
\14\ See Securities Exchange Act Release No. 96632 (January 10,
2023), 88 FR 2707 (January 17, 2023) (SR-PEARL-2022-62).
\15\ See Securities Exchange Act Release No. 97082 (March 8,
2023), 88 FR 15825 (March 14, 2023) (SR-PEARL-2023-05).
\16\ See Securities Exchange Act Release No. 97420 (May 2,
2023), 88 FR 29701 (May 8, 2023) (SR-PEARL-2023-19).
\17\ The Exchange met with Commission Staff to discuss the Third
Proposal during which the Commission Staff provided feedback and
requested additional information, including, most recently,
information about total costs related to certain third party
vendors. Such vendor cost information is subject to confidentiality
restrictions. The Exchange provided this information to Commission
Staff under separate cover with a request for confidentiality. While
the Exchange will continue to be responsive to Commission Staff's
information requests, the Exchange believes that the Commission
should, at this point, issue substantially more detailed guidance
for exchanges to follow in the process of pursuing a cost-based
approach to fee filings, and that, for the purposes of fair
competition, detailed disclosures by exchanges, such as those that
the Exchange is providing now, should be consistent across all
exchanges, including for those that have resisted a cost-based
approach to fee filings, in the interests of fair and even
disclosure and fair competition. See Securities Exchange Act Release
No. 97815 (June 27, 2023), 88 FR 42759 (July 3, 2023) (SR-PEARL-
2023-27).
\18\ See Securities Exchange Act Release No. 98180 (August 21,
2023), 88 FR 58404 (August 25, 2023) (SR-PEARL-2023-35). 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. 98658 (September 29, 2023) (SR-PEARL-2023-35).
---------------------------------------------------------------------------
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 (separately among
MIAX Pearl Options and MIAX Pearl Equities, MIAX and MIAX Emerald \19\
(together with MIAX and MIAX Pearl Equities, the ``affiliated
markets'')) to ensure no cost was allocated more than once, as well as
additional detail supporting its cost allocation processes and
explanations as to why a cost allocation in this proposal may differ
from the same cost allocation in a similar proposal submitted by one of
its affiliated markets. Although the baseline cost analysis used to
justify the proposed fees was made in the Initial, Second, Third,
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 Full Service MEO Ports with a
reasonable mark-up over those costs.
---------------------------------------------------------------------------
\19\ The term ``MIAX Emerald'' means MIAX Emerald, LLC. See
Exchange Rule 100.
---------------------------------------------------------------------------
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \20\ 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.\21\ 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.\22\ 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'').\23\ 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.'' \24\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\25\ 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
[[Page 72144]]
court's mandate.'' \26\ Both the Remand Order and the Order Denying
Reconsideration were appealed to the D.C. Circuit.
---------------------------------------------------------------------------
\20\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\21\ Id.
\22\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\23\ 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).
\24\ Id. at page 2.
\25\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\26\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
---------------------------------------------------------------------------
While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased the level of
information needed for the Commission to believe that an exchange's
filing satisfied its obligations under the Act with respect to changing
a fee.\27\ 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.
---------------------------------------------------------------------------
\27\ 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.'' \28\ 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.'' \29\ 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.'' \30\
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\28\ 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'').
\29\ Id.
\30\ Id.
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Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC \31\ and remanded for further proceedings consistent
with its opinion.\32\ 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.'' \33\
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.\34\ The Commission
further invited ``the parties to submit briefing stating whether the
challenges asserted in the applications for review . . . should be
dismissed, and specifically identifying any challenge that they contend
should not be dismissed pursuant to the holding of Nasdaq v. SEC.''
\35\ 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.\36\
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\31\ 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.
\32\ 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.
\33\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\34\ 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'').
\35\ Id.
\36\ 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.'' \37\
As such, all of those fees remained in place and amounted to a baseline
set of fees for those exchanges that had the benefit of getting their
fees in place before the Commission Staff's fee review process
materially changed. The net result of this history and lack of
resolution in the D.C. Circuit Court resulted in an uneven competitive
landscape where the Commission subjects all new non-transaction fee
filings to the new Revised Review Process, while allowing the
previously challenged fee filings, mostly submitted by incumbent
exchanges prior to 2019, to remain in effect and not subject to the
``record'' or ``review'' earlier intended by the Commission.
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\37\ See supra note 31, at page 2.
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While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\38\ 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 \39\
[[Page 72145]]
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.\40\ These fees remain in effect today.
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\38\ 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.
\39\ 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.
\40\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as MIAX Pearl, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\41\
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 \42\ and $80,383,000 for
2021.\43\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \44\ and $22,843,000 for
2021.\45\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \46\ and $44,800,000 for
2021.\47\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \48\ and $30,687,000 for
2021.\49\ 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.\50\ 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.'' \51\
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\41\ The Exchange has filed, and subsequently withdrew, various
forms of this proposed fee change numerous times since August 2021
with each proposal containing hundreds of cost and revenue
disclosures never previously disclosed by legacy exchanges in their
access and market data fee filings prior to 2019.
\42\ 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.
\43\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\44\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\45\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\46\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\47\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\48\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\49\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\50\ 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.
\51\ 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.
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The much higher non-transaction fees charged by the legacy
exchanges provides them with two significant competitive advantages.
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing
and advertising on major media outlets,\52\ 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),\53\ 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
[[Page 72146]]
subjecting one exchange to a materially different standard than that
historically applied to legacy exchanges for non-transaction fees
leaves that exchange at a disadvantage in its ability to compete with
its pricing of transaction fees.
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\52\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
\53\ 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).
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While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its content . . .'',\54\ this is not the reality experienced by
exchanges such as MIAX Pearl. As such, non-legacy exchanges are forced
to rely on an opaque cost-based justification standard. However,
because the Staff Guidance is devoid of detail on what must be
contained in cost-based justification, this standard is nearly
impossible to meet despite repeated good-faith efforts by the Exchange
to provide substantial amount of cost-related details. For example, the
Exchange has attempted to increase fees using a cost-based
justification numerous times, having submitted over six filings.\55\
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
\56\ in a manner that is not possible to achieve. This essentially
nullifies the cost-based approach for exchanges as a legitimate
alternative as laid out in the Staff Guidance. By refusing to accept a
reasonable cost-based argument to justify non-transaction fees (in
addition to refusing to accept a competition-based argument as
described above), or by failing to provide the detail required to
achieve that standard, the Commission Staff is effectively preventing
non-legacy exchanges from making any non-transaction fee changes, which
benefits the legacy exchanges and is anticompetitive to the non-legacy
exchanges. This does not meet the fairness standard under the Act and
is discriminatory.
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\54\ See supra note 28, at note 1.
\55\ See Securities Exchange Act Release Nos. 92798 (August 27,
2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-33); 92644
(August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36);
93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR-PEARL-
2021-45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 2021)
(SR-PEARL-2021-53); 93774 (December 14, 2021), 86 FR 71952 (December
20, 2021) (SR-PEARL-2021-57); 93894 (January 4, 2022), 87 FR 1203
(January 10, 2022) (SR-PEARL-2021-58); 94258 (February 15, 2022), 87
FR 9659 (February 22, 2022) (SR-PEARL-2022-03); 94286 (February 18,
2022), 87 FR 10860 (February 25, 2022) (SR-PEARL-2022-04); 94721
(April 14, 2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11);
94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-
12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 2022) (SR-PEARL-
2022-18).
\56\ 15 U.S.C. 78f(b)(4).
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Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\57\ 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; \58\ or (c) accept that
certain competition-based arguments are applicable given the linkage
between non-transaction fees and transaction fees, especially where
non-transaction fees among exchanges are based upon disparate standards
of review, lack parity, and impede fair competition. Considering the
absence of any such framework or clarity, the Exchange believes that
the Commission does not have a reasonable basis to deny the Exchange
this change in fees, where the proposed change would result in fees
meaningfully lower than comparable fees at competing exchanges and
where the associated non-transaction revenue is meaningfully lower than
competing exchanges.
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\57\ 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.
\58\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
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In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and place a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other options exchanges for connectivity. If the Commission Staff
were to disapprove this proposal, that action, and not market forces,
would substantially affect whether the Exchange can be successful in
its competition with other options exchanges. Disapproval of this
filing could also be viewed as an arbitrary and capricious decision
should the Commission Staff continue to ignore its past treatment of
non-transaction fee filings before implementation of the Revised Review
Process and Staff Guidance and refuse to allow such filings to be
approved despite significantly enhanced arguments and cost
disclosures.\59\
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\59\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
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* * * * *
10Gb ULL Connectivity Fee Change
MIAX Pearl Options filed a proposal to no longer operate 10Gb
connectivity to MIAX Pearl Options on a single shared network with its
affiliate, MIAX. This change is an operational necessity due to ever-
increasing capacity constraints and to accommodate anticipated access
needs for Members and other market participants.\60\ This proposal: (i)
sets forth the applicable fees for the bifurcated 10Gb ULL network;
(ii) removes provisions in the Fee Schedule that provide for a shared
10Gb ULL network; and (iii) specifies that market participants may
continue to connect to both MIAX Pearl Options and MIAX via the 1Gb
network.
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\60\ See supra note 9.
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MIAX Pearl Options bifurcated the MIAX Pearl Options and MIAX 10Gb
ULL networks in the first quarter of 2023, which change became
effective on January 23, 2023. The Exchange issued an alert on August
12, 2022 publicly announcing the planned network change and
implementation plan and dates to provide market participants adequate
time to prepare.\61\ Upon bifurcation of the 10Gb ULL network,
subscribers need to purchase separate connections to MIAX Pearl Options
and MIAX at the applicable rate. The Exchange's proposed amended rate
for 10Gb ULL connectivity is described below. Prior to the bifurcation
of the
[[Page 72147]]
10Gb ULL networks, subscribers to 10Gb ULL connectivity were able to
connect to both MIAX Pearl Options and MIAX at the applicable rate set
forth below.
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\61\ Id.
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The Exchange, therefore, proposes to amend the Fee Schedule to
increase the fees for Members and non-Members to access the Exchange's
system networks \62\ via a 10Gb ULL fiber connection and to specify
that this fee is for a dedicated connection to MIAX Pearl Options and
no longer provides access to MIAX. Specifically, MIAX Pearl Options
proposes to amend Sections 5)a)-b) of the Fee Schedule to increase the
10Gb ULL connectivity fee for Members and non-Members from $10,000 per
month to $13,500 per month (``10Gb ULL Fee'').\63\ The Exchange also
proposes to amend the Fee Schedule to reflect the bifurcation of the
10Gb ULL network and specify that only the 1Gb network provides access
to both MIAX Pearl Options and MIAX.
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\62\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\63\ Market participants that purchase additional 10Gb ULL
connections as a result of this change will not be subject to the
Exchange's Member Network Connectivity Testing and Certification Fee
under Section 4)c) of the Exchange's Fee Schedule. See Section 4)c)
of the Exchange's fee schedule available at https://www.miaxglobal.com/markets/us-options/pearl-options/fees (providing
that ``Network Connectivity Testing and Certification Fees will not
be assessed in situations where the Exchange initiates a mandatory
change to the Exchange's system that requires testing and
certification. Member Network Connectivity Testing and Certification
Fees will not be assessed for testing and certification of
connectivity to the Exchange's Disaster Recovery Facility.'').
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The Exchange proposes to make the following changes to reflect the
bifurcated 10Gb ULL network for the Exchange and MIAX. First, in the
Definitions section of the Fee Schedule, the Exchange proposes to amend
the last sentence in the definition of ``MENI'' to specify that the
MENI can be configured to provide network connectivity to the trading
platforms, market data systems, test systems, and disaster recovery
facilities of the Exchange's affiliate, MIAX, via a single, shared 1Gb
connection. Next, the Exchange proposes to amend the explanatory
paragraphs below the network connectivity fee tables in Sections
(5)(a)-(b) of the Fee Schedule to specify that, with the bifurcated
10Gb ULL network, Members (and non-Members) utilizing the MENI to
connect to the trading platforms, market data systems, test systems,
and disaster recovery facilities of the Exchange and MIAX via a single,
can only do so via a shared 1Gb connection.
The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange will continue to pro-rate the fees when a
Member or non-Member makes a change to the connectivity (by adding or
deleting connections) with such pro-rated fees based on the number of
trading days that the Member or non-Member has been credentialed to
utilize any of the Exchange APIs or market data feeds in the production
environment through such connection, divided by the total number of
trading days in such month multiplied by the applicable monthly rate.
Full Service MEO Ports--Bulk and Single
Background
The Exchange also proposes to amend Section 5)d) of the Fee
Schedule to amend the calculation and amount of fees for Full Service
MEO Ports. The Exchange currently offers different types of MEO Ports
depending on the services required by the Member, including a Full
Service MEO Port-Bulk,\64\ a Full Service MEO Port-Single,\65\ and a
Limited Service MEO Port.\66\ For one monthly price, a Member may be
allocated two (2) Full-Service MEO Ports of either type per matching
engine \67\ and may request Limited Service MEO Ports for which MIAX
Pearl will assess Members Limited Service MEO Port fees based on a
sliding scale for the number of Limited Service MEO Ports utilized each
month. The two (2) Full-Service MEO Ports that may be allocated per
matching engine to a Member may consist of: (a) two (2) Full Service
MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--Single; or (c) one
(1) Full Service MEO Port--Bulk and one (1) Full Service MEO Port--
Single.
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\64.\ ``Full Service MEO Port--Bulk'' means an MEO port that
supports all MEO input message types and binary bulk order entry.
See the Definitions Section of the Fee Schedule.
\65\ ``Full Service MEO Port--Single'' means an MEO port that
supports all MEO input message types and binary order entry on a
single order-by-order basis, but not bulk orders. See the
Definitions Section of the Fee Schedule.
\66\ ``Limited Service MEO Port'' means an MEO port that
supports all MEO input message types, but does not support bulk
order entry and only supports limited order types, as specified by
the Exchange via Regulatory Circular. See the Definitions Section of
the Fee Schedule.
\67\ A ``Matching Engine'' is a part of the Exchange's
electronic system that processes options orders and trades on a
symbol-by-symbol basis. See the Definitions Section of the Fee
Schedule.
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Currently, the Exchange assesses Members Full Service MEO Port
Fees, either for a Full Service MEO Port--Bulk and/or for a Full
Service MEO Port--Single, based upon the monthly total volume executed
by a Member and its Affiliates \68\ on the Exchange, across all origin
types, not including Excluded Contracts,\69\ as compared to the Total
Consolidated Volume (``TCV''),\70\ in all MIAX Pearl-listed options.
The Exchange adopted a tier-based fee structure based upon the volume-
based tiers detailed in the definition of ``Non-Transaction Fees
Volume-Based Tiers'' described in the Definitions section of the Fee
Schedule. The Exchange assesses these and other monthly Port fees to
Members in each month the market participant is credentialed to use a
Port in the production environment.
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\68\ ``Affiliate'' means (i) an affiliate of a Member of at
least 75% common ownership between the firms as reflected on each
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an
Appointed EEM (or, conversely, the Appointed EEM of an Appointed
Market Maker). See the Definitions Section of the Fee Schedule.
\69\ ``Excluded Contracts'' means any contracts routed to an
away market for execution. See the Definitions Section of the Fee
Schedule.
\70\ ``TCV'' means total consolidated volume calculated as the
total national volume in those classes listed on MIAX Pearl for the
month for which the fees apply, excluding consolidated volume
executed during the period of time in which the Exchange experiences
an Exchange System Disruption (solely in the option classes of the
affected Matching Engine). See the Definitions Section of the Fee
Schedule.
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Full Service MEO Port (Bulk) Fee Changes
Current Full Service MEO Port (Bulk) Fees. The Exchange currently
assesses all Members (Market Makers \71\ and Electronic Exchange
Members \72\ (``EEMs'')) monthly Full Service MEO Port--Bulk fees as
follows:
---------------------------------------------------------------------------
\71\ The term ``Market Maker'' means a Member registered with
the Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in Chapter VI of Exchange Rules. See the
Definitions Section of the Fee Schedule and Exchange Rule 100.
\72\ The term ``Electronic Exchange Member'' or ``EEM'' means
the holder of a Trading Permit who is a Member representing as agent
Public Customer Orders or Non-Customer Orders on the Exchange and
those non-Market Maker Members conducting proprietary trading.
Electronic Exchange Members are deemed ``members'' under the
Exchange Act. See the Definitions Section of the Fee Schedule and
Exchange Rule 100.
---------------------------------------------------------------------------
(i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers,
[[Page 72148]]
or volume above 0.30% up to 0.60%, $4,500; and
(iii) if its volume falls within the parameters of Tier 3 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
Proposed Full Service MEO Port (Bulk) Fees. The Exchange proposes
to amend the calculation and amount of Full Service MEO Port (Bulk)
fees for EEMs and Market Makers. In particular, for EEMs, the Exchange
proposes to move away from the above-described volume tier-based fee
structure and instead charge all EEMs that utilize Full Service MEO
Ports (Bulk) a flat monthly fee of $7,500. For this flat monthly fee,
EEMs will continue to be entitled to two (2) Full Service MEO Ports
(Bulk) for each Matching Engine for the single monthly fee of $7,500.
The Exchange now proposes to amend the calculation and amount of Full
Service MEO Port (Bulk) fees for Market Makers by moving away from the
above-described volume tier-based fee structure to harmonize the Full
Service MEO Port (Bulk) fee structure for Market Makers with that of
the Exchange's affiliates, MIAX and MIAX Emerald.\73\ The Exchange
proposes that the amount of the monthly Full Service MEO Port (Bulk)
fees for Market Makers would be based on the lesser of either the per
class traded or percentage of total national average daily volume
(``ADV'') measurement based on classes traded by volume. The amount of
monthly Market Maker Full Service MEO Port (Bulk) fee would be based
upon the number of classes in which the Market Maker was registered to
quote on any given day within the calendar month, or upon the class
volume percentages. This change in how Full Service MEO Port (Bulk)
fees are calculated is identical to how the Exchange assesses Market
Makers Trading Permit fees, which is in line with how numerous
exchanges charge similar membership fees.
---------------------------------------------------------------------------
\73\ See MIAX Fee Schedule, Section 5)d)ii) and MIAX Emerald Fee
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------
Specifically, the Exchange proposes to adopt the following Full
Service MEO Port (Bulk) fees for Market Makers: (i) $5,000 for Market
Maker registrations in up to 10 option classes or up to 20% of option
classes by national ADV; (ii) $7,500 for Market Maker registrations in
up to 40 option classes or up to 35% of option classes by ADV; (iii)
$10,000 for Market Maker registrations in up to 100 option classes or
up to 50% of option classes by ADV; and (iv) $12,000 for Market Maker
registrations in over 100 option classes or over 50% of option classes
by ADV up to all option classes listed on MIAX Pearl. For example, if
Market Maker 1 elects to quote the top 40 option classes which consist
of 58% of the total national average daily volume in the prior calendar
quarter, the Exchange would assess $7,500 to Market Maker 1 for the
month which is the lesser of `up to 40 classes' and `over 50% of
classes by volume up to all classes listed on MIAX Pearl'. If Market
Maker 2 elects to quote the bottom 1000 option classes which consist of
10% of the total national average daily volume in the prior quarter,
the Exchange would assess $5,000 to Market Maker 2 for the month which
is the lesser of `over 100 classes' and `up to 20% of classes by
volume. The Exchange notes that the proposed tiers (ranging from $5,000
to $12,000) are lower than the tiers that the Exchange's affiliates
charge for their comparable ports (ranging from $5,000 to $20,500) for
similar per class tier thresholds.\74\
---------------------------------------------------------------------------
\74\ See id.
---------------------------------------------------------------------------
With the proposed changes, a Market Maker would be determined to be
registered in a class if that Market Maker has been registered in one
or more series in that class.\75\ The Exchange will assess MIAX Pearl
Options Market Makers the monthly Market Maker Full Service MEO Port
(Bulk) fee based on the greatest number of classes listed on MIAX Pearl
Options that the MIAX Pearl Options Market Maker registered to quote in
on any given day within a calendar month. Therefore, with the proposed
changes to the calculation of Market Maker Full Service MEO Port (Bulk)
fees, the Exchange's Market Makers would be encouraged to quote in more
series in each class they are registered in because each additional
series in that class would not count against their total classes for
purposes of the Full Service MEO Port (Bulk) fee tiers. The class
volume percentage is based on the total national ADV in classes listed
on MIAX Pearl Options in the prior calendar quarter. Newly listed
option classes are excluded from the calculation of the monthly Market
Maker Full Service MEO Port (Bulk) fee until the calendar quarter
following their listing, at which time the newly listed option classes
will be included in both the per class count and the percentage of
total national ADV.
---------------------------------------------------------------------------
\75\ Pursuant to Exchange Rule 602(a), a Member that has
qualified as a Market Maker may register to make markets in
individual series of options.
---------------------------------------------------------------------------
The Exchange also proposes to adopt an alternative lower Full
Service MEO Port (Bulk) fee for Market Makers who fall within the 2nd,
3rd and 4th levels of the proposed Market Maker Full Service MEO Port
(Bulk) fee table: (i) Market Maker registrations in up to 40 option
classes or up to 35% of option classes by volume; (ii) Market Maker
registrations in up to 100 option classes or up to 50% of option
classes by volume; and (iii) Market Maker registrations in over 100
option classes or over 50% of option classes by volume up to all option
classes listed on MIAX Pearl Options. In particular, the Exchange
proposes to adopt footnote ``**'' following the Market Maker Full
Service MEO Port (Bulk) fee table for these Monthly Full Service MEO
Port (Bulk) tier levels. New proposed footnote ``**'' will provide that
if the Market Maker's total monthly executed volume during the relevant
month is less than 0.040% of the total monthly TCV for MIAX Pearl-
listed option classes for that month, then the fee will be $6,000
instead of the fee otherwise applicable to such level.
The purpose of the alternative lower fee designated in proposed
footnote ``**'' is to provide a lower fixed fee to those Market Makers
who are willing to quote the entire Exchange market (or substantial
amount of the Exchange market), as objectively measured by either
number of classes assigned or national ADV, but who do not otherwise
execute a significant amount of volume on the Exchange. The Exchange
believes that, by offering lower fixed fees to Market Makers that
execute less volume, the Exchange will retain and attract smaller-scale
Market Makers, which are an integral component of the option
marketplace, but have been decreasing in number in recent years, due to
industry consolidation. Since these smaller-scale Market Makers utilize
less Exchange capacity due to lower overall volume executed, the
Exchange believes it is reasonable and equitable to offer such Market
Makers a lower fixed fee. The Exchange notes that the Exchange's
affiliates, MIAX and MIAX Emerald, also provide lower MIAX Express
Interface (``MEI'') Port fees (the comparable ports on those exchanges)
for Market Makers who quote the entire MIAX and MIAX Emerald markets
(or substantial amount of those markets), as objectively measured by
either number of classes assigned or national ADV, but who do not
otherwise execute a significant amount of volume on MIAX or MIAX
Emerald.\76\ The proposed changes to the Full Service MEO Port (Bulk)
fees for Market Makers who fall within the 2nd, 3rd and 4th levels of
the fee table are based upon a business
[[Page 72149]]
determination of current Market Maker assignments and trading volume.
---------------------------------------------------------------------------
\76\ See MIAX Fee Schedule, Section 5)d)ii), note ``*'' and MIAX
Emerald Fee Schedule, Section 5)d)ii), note ``[ssquf]''.
---------------------------------------------------------------------------
Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\77\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports (described
above) per matching engine to which that Member connects. The Exchange
currently has twelve (12) matching engines, which means Market Makers
may receive up to twenty-four (24) Full Service MEO Ports for a single
monthly fee, that can vary based on the lesser of either the per class
traded or percentage of total national ADV measurement based on classes
traded by volume, as described above. For illustrative purposes, the
Exchange currently assesses a fee of $5,000 per month for Market Makers
that reach the highest Full Service MEO Port (Bulk) tier, regardless of
the number of Full Service MEO Ports allocated to the Market Maker. For
example, assuming a Market Maker connects to all twelve (12) matching
engines during a month, with two Full Service MEO Ports (Bulk) per
matching engine, this results in an effective fee of $208.33 per Full
Service MEO Port ($5,000 divided by 24) for the month, as compared to
other exchanges that charge over $1,000 per port and require multiple
ports to connect to all of their matching engines.\78\ This fee had
been unchanged since the Exchange adopted Full Service MEO Port fees in
2018.\79\ The Exchange proposes to increase Full Service MEO Port fees,
with the highest monthly fee of $12,000 for the Full Service MEO Ports
(Bulk). Market Makers will continue to receive two (2) Full Service MEO
Ports to each matching engine to which they connect for the single flat
monthly fee. Assuming a Market Maker connects to all twelve (12)
matching engines during the month, with two Full Service MEO Ports per
matching engine, this would result in an effective fee of $500 per Full
Service MEO Port ($12,000 divided by 24).
---------------------------------------------------------------------------
\77\ See NYSE American Options Fee Schedule, Section V.A., Port
Fees (each port charged on a per matching engine basis, with NYSE
American having 17 match engines). See NYSE Technology FAQ and Best
Practices: Options, Section 5.1 (How many matching engines are used
by each exchange?) (September 2020) (providing a link to an Excel
file detailing the number of matching engines per options exchange);
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a
per matching engine basis, NYSE Arca having 19 match engines); and
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How
many matching engines are used by each exchange?) (September 2020)
(providing a link to an Excel file detailing the number of matching
engines per options exchange). See NASDAQ Fee Schedule, NASDAQ
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports
and Other Services (each port charged on a per matching engine
basis, with Nasdaq having multiple matching engines). See NASDAQ
Specialized Quote Interface (SQF) Specification, Version 6.5b
(updated February 13, 2020), Section 2, Architecture, available at
https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface Specification''). The
NASDAQ SQF Interface Specification also provides that NASDAQ's
affiliates, NASDAQ Phlx and NASDAQ BX, Inc. (``BX''), have trading
infrastructures that may consist of multiple matching engines with
each matching engine trading only a range of option classes.
Further, the NASDAQ SQF Interface Specification provides that the
SQF infrastructure is such that the firms connect to one or more
servers residing directly on the matching engine infrastructure.
Since there may be multiple matching engines, firms will need to
connect to each engine's infrastructure in order to establish the
ability to quote the symbols handled by that engine.
\78\ Id. See also infra table on page 129 and accompanying text.
\79\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
Full Service MEO Ports (Bulk)
----------------------------------------------------------------------------------------------------------------
Total number of
ports for market
Number of match maker to connect Total fee Effective per
engines to all match (monthly) port fee
engines
----------------------------------------------------------------------------------------------------------------
Pricing Based on Market Maker Being 12 24 $5,000 $208.33
Charged the Highest Tier (Current)....
Pricing Based on Market Maker Being 12 24 12,000 500
Charged the Highest Tier (as proposed)
----------------------------------------------------------------------------------------------------------------
Full Service MEO Port (Single) Fee Changes
Current Full Service MEO Port (Single) Fees. The Exchange currently
assesses all Members (Market Makers and EEMs) monthly Full Service MEO
Port (Single) fees as follows:
(i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
(ii) if its volume falls within the parameters of Tier 2 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to
0.60%, $3,375; and
(iii) if its volume falls within the parameters of Tier 3 of the
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
Proposed Full Service MEO Port (Single) Fees. The Exchange proposes
to amend the calculation and amount of Full Service MEO Port (Single)
fees for EEMs and Market Makers. In particular, the Exchange proposes
to move away from the above-described volume tier-based fee structure
and instead charge all Members that utilize Full Service MEO Ports
(Single) a flat monthly fee of $4,000. For this flat monthly fee, all
Members will continue to be entitled to two (2) Full Service MEO Ports
(Single) for each Matching Engine for the single monthly fee of $4,000.
The Exchange offers various types of ports with differing prices
because each port accomplishes different tasks, are suited to different
types of Members, and consume varying capacity amounts of the network.
For instance, MEO ports allow for a higher throughput and can handle
much higher quote/order rates than FIX ports. Members that are Market
Makers or high frequency trading firms utilize these ports (typically
coupled with 10Gb ULL connectivity) because they transact in
significantly higher amounts of messages being sent to and from the
Exchange, versus FIX port users, who are traditionally customers
sending only orders to the Exchange (typically coupled with 1Gb
connectivity). The different types of ports cater to the different
types of Exchange Memberships and different capabilities of the various
Exchange Members. Certain Members need ports and connections that can
handle using far more of the network's capacity for message throughput,
risk protections, and the amount of information that the System has to
assess. Those Members account for the vast majority of network capacity
utilization and volume executed on the Exchange, as discussed
throughout. For example, three (3) Members account for 64% of all 10Gb
[[Page 72150]]
ULL connections and Full Service MEO Ports purchased.
The Exchange proposes to increase its monthly Full Service MEO Port
fees since it has not done so since the fees were adopted in 2018,\80\
which are designed to recover a portion of the costs associated with
directly accessing the Exchange. As described above, the Exchange's
affiliates, MIAX and MIAX Emerald, also charge fees for their high
throughput, low latency ports in a similar fashion as the Exchange
proposes to charge for its MEO Ports--generally, the more active user
the Member (i.e., the greater number/greater national ADV of classes
assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port
fee.\81\ This concept is, therefore, not new or novel.
---------------------------------------------------------------------------
\80\ See id.
\81\ See MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------
Implementation
The proposed fee changes are immediately effective.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
section 6(b) of the Act \82\ in general, and furthers the objectives of
section 6(b)(4) of the Act \83\ 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 \84\ 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.
---------------------------------------------------------------------------
\82\ 15 U.S.C. 78f(b).
\83\ 15 U.S.C. 78f(b)(4).
\84\ 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 \85\ and
the Staff Guidance,\86\ 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.
---------------------------------------------------------------------------
\85\ See supra note 27.
\86\ See supra note 28.
---------------------------------------------------------------------------
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.''
\87\ 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.'' \88\ 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.'' \89\
---------------------------------------------------------------------------
\87\ Id.
\88\ Id.
\89\ Id.
---------------------------------------------------------------------------
The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 10Gb ULL connectivity (driven by the bifurcation of the 10Gb ULL
network) and Full Service MEO Ports. As discussed above, the Revised
Review Process and Staff Guidance have created an uneven playing field
between legacy and non-legacy exchanges by severely restricting non-
legacy exchanges from being able to increase non-transaction related
fees to provide them with additional necessary revenue to better
compete with legacy exchanges, which largely set fees prior to the
Revised Review Process. The much higher non-transaction fees charged by
the legacy exchanges provides them with two significant competitive
advantages: (i) additional non-transaction revenue that may be used to
fund areas other than the non-transaction service related to the fee,
such as investments in infrastructure, advertising, new products and
other innovations; and (ii) greater flexibility to lower their
transaction fees by using the revenue from the higher non-transaction
fees to subsidize transaction fee rates. The latter is more immediately
impactful in competition for order flow and market share, given the
variable nature of this cost on Member firms. The absence of a
reasonable path forward to increase non-transaction fees to comparable
(or lower rates) limits the Exchange's flexibility to, among other
things, make additional investments in infrastructure and advertising,
diminishes the ability to remain competitive on transaction fees, and
hinders the ability to compete for order flow and market share. Again,
there is little doubt that subjecting one exchange to a materially
different standard than that applied to other exchanges for non-
transaction fees leaves that exchange at a disadvantage in its ability
to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which
Promotes Competition
The Exchange commenced operations in February 2017 \90\ and adopted
its initial fee schedule, with 10Gb ULL connectivity fees set at $8,500
(the Exchange originally had a non-ULL 10Gb connectivity option, which
it has since removed) and a fee waiver for all Full Service MEO Port
fees.\91\ As a new exchange entrant, the Exchange chose to offer Full
Service MEO Ports free of charge to encourage market participants to
trade on the Exchange and experience, among things, the quality of the
Exchange's technology and trading functionality. This practice is not
uncommon. New exchanges often do not charge fees or charge lower fees
for certain services such as memberships/trading permits to attract
order flow to
---------------------------------------------------------------------------
\90\ See MIAX PEARL Successfully Launches Trading Operations,
dated February 6, 2017, available at https://www.miaxglobal.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf.
\91\ See Securities Exchange Act Release No. 80061 (February 17,
2017), 82 FR 11676 (February 24, 2017) (SR-PEARL-2017-10).
---------------------------------------------------------------------------
[[Page 72151]]
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.\92\
---------------------------------------------------------------------------
\92\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he
Exchange established this lower (when compared to other options
exchanges in the industry) Participant Fee in order to encourage
market participants to become Participants of BOX . . .''). See also
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the
initial fee schedule and stating that ``[u]nder the initial proposed
Fee Schedule, the Exchange proposes to make clear that it does not
charge any fees for membership, market data products, physical
connectivity or application sessions.''). MEMX's market share has
increased and recently proposed to adopt numerous non-transaction
fees, including fees for membership, market data, and connectivity.
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7,
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for
connectivity). See also, e.g., Securities Exchange Act Release No.
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange
after initially setting such fees at zero).
---------------------------------------------------------------------------
Later in 2018, as the Exchange's market share increased,\93\ the
Exchange adopted nominal fees for Full Service MEO Ports.\94\ The
Exchange last increased the fees for its 10Gb ULL fiber connections
from $9,300 to $10,000 per month on January 1, 2021.\95\ 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.
---------------------------------------------------------------------------
\93\ The Exchange experienced a monthly average trading volume
of 3.94% for the month of March 2018. See the ``Market Share''
section of the Exchange's website, available at www.miaxglobal.com.
\94\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
\95\ See Securities Exchange Act Release No. 90981 (January 25,
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
---------------------------------------------------------------------------
The proposed changes to the Fee Schedule are reasonable in several
respects. As a threshold matter, the Exchange is subject to significant
competitive forces, which constrains its pricing determinations for
transaction fees as well as non-transaction fees. The fact that the
market for order flow is competitive has long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .'' \96\
---------------------------------------------------------------------------
\96\ 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.'' \97\
---------------------------------------------------------------------------
\97\ 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.' '' \98\ 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.'' \99\ 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.'' \100\ 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.'' \101\
---------------------------------------------------------------------------
\98\ 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.'').
\99\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21).
\100\ Id.
\101\ See Staff Guidance, supra note 28.
---------------------------------------------------------------------------
The Exchange believes the competing exchanges' 10Gb connectivity
and port fees are useful examples of alternative approaches to
providing and charging for access and demonstrating how such fees are
competitively set and constrained. To that end, the Exchange believes
the proposed fees are competitive and reasonable because the proposed
fees are similar to or less than fees charged for similar connectivity
and port access provided by other options exchanges with comparable
market shares. As such, the Exchange believes that denying its ability
to institute fees that allow the Exchange to recoup its costs with a
reasonable margin in a manner that is closer to parity with legacy
exchanges, in effect, impedes its ability to compete, including in its
pricing of transaction fees and ability to invest in competitive
infrastructure and other offerings.
The following table shows how the Exchange's proposed fees remain
similar to or less than fees charged for similar connectivity and port
access provided by other options exchanges with similar market share.
Each of the connectivity and port rates in place at competing options
exchanges were filed with the Commission for immediate effectiveness
and remain in place today.
[[Page 72152]]
------------------------------------------------------------------------
Monthly fee (per
Exchange Type of connection connection or per
or port port)
------------------------------------------------------------------------
MIAX Pearl Options (as 10Gb ULL connection $13,500.
proposed) (equity options Full Service MEO Lesser of either the
market share of 6.36% for Port (Bulk) for per class basis or
the month of August 2023) Market Makers. percentage of total
\a\. national ADV by the
Market Maker, as
follows:
$5,000--up to 10
classes or up to
20% of classes by
volume.
$7,500 **--up to 40
classes or up to
35% of classes by
volume.
$10,000 **--up to
100 classes or up
to 50% of classes
by volume.
$12,000 **--over 100
classes or over 50%
of all classes by
volume up to all
classes (or $500
per port per
matching engine).
** A lower rate of
$6,000 will apply
to these tiers if
the Market Maker's
total monthly
executed volume is
less than 0.040% of
total monthly TCV
for MIAX Pearl
options.
Full Service MEO $7,500 (or $312.50
Port (Bulk) for per port per
EEMs. matching engine).
Full Service MEO $4,000 (or $166.66
Port (Single) for per port per
Market Makers and matching engine).
EEMs.
NASDAQ \b\ (equity options 10Gb Ultra fiber $15,000 per
market share of 5.80% for connection. connection.
the month of August 2023) SQF Port \d\....... 1-5 ports: $1,500
\c\. per port.
6-20 ports: $1,000
per port.
21 or more ports:
$500 per port.
NASDAQ ISE LLC (``ISE'') \e\ 10Gb Ultra fiber $15,000 per
(equity options market share connection. connection.
of 5.58% for the month of SQF Port........... $1,100 per port.
August 2023) \f\.
NYSE American LLC (``NYSE 10Gb LX LCN $22,000 per
American'') \g\ (equity connection. connection.
options market share of Order/Quote Entry 1-40 ports: $450 per
7.34% for the month of Port. port.
August 2023) \h\. 41 or more ports:
$150 per port.
NASDAQ GEMX, LLC (``GEMX'') 10Gb Ultra $15,000 per
\i\ (equity options market connection. connection.
share of 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\ Similar to the MIAX Pearl Options' MEO Ports, SQF ports are
primarily utilized by Market Makers.
\e\ See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees
and ISE Rules, General 8: Connectivity.
\f\ See supra note a.
\g\ See NYSE American Options Fee Schedule, Section V.A. Port Fees and
Section V.B. Co-Location Fees.
\h\ See supra note a.
\i\ See GEMX Pricing Schedule, Options 7, Section 6, Connectivity Fees
and GEMX Rules, General 8: Connectivity.
\j\ See supra note a.
The Exchange acknowledges that, without additional contextual
information, the above table may lead someone to believe that the
Exchange's proposed fees for Full Service MEO Ports is higher than
other exchanges when in fact, that is not true. The Exchange provides
each Member or non-Member access to two (2) ports on all twelve (12)
matching engines for a single fee and a vast majority choose to connect
to all twelve (12) matching engines and utilize both ports for a total
of 24 ports. Other exchanges charge on a per port basis and require
firms to connect to multiple matching engines, thereby multiplying the
cost to access their full market.\102\ On the Exchange, this is not the
case. The Exchange provides each Member or non-Member access, but does
not require they connect to, all twelve (12) matching engines.
---------------------------------------------------------------------------
\102\ See Specialized Quote Interface Specification, Nasdaq
PHLX, Nasdaq Options Market, Nasdaq BX Options, Version 6.5a,
Section 2, Architecture (revised August 16, 2019), available at
https://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------
There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options
exchanges. Market participants may choose to become a member of one or
more options exchanges based on the market participant's assessment of
the business opportunity relative to the costs of the Exchange. With
this, there is elasticity of demand for exchange membership. As an
example, one Market Maker terminated their MIAX Pearl Options
membership effective January 1, 2023 as a direct result of the proposed
connectivity and port fee changes proposed by MIAX Pearl Options.
It is not a requirement for market participants to become members
of all options exchanges; in fact, certain market participants conduct
an options business as a member of only one options market.\103\ A very
small number
[[Page 72153]]
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.\104\
---------------------------------------------------------------------------
\103\ 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.''
\104\ 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.\105\ The Exchange and its affiliated
options markets, MIAX and MIAX Emerald, have a total of 46 members. Of
those 46 total members, 37 are members of all three affiliated options
markets, two are members of only two affiliated options markets, and
seven are members of only one affiliated options market. The Exchange
also notes that no firm is a Member of the Exchange only. The above
data evidences that a broker-dealer need not have direct connectivity
to all options exchanges, let alone the Exchange and its two
affiliates, and broker-dealers may elect to do so based on their own
business decisions and need to directly access each exchange's
liquidity pool.
---------------------------------------------------------------------------
\105\ See Securities Exchange Act Release No. 94894 (May 11,
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change to Amend the
Fee Schedule on the BOX Options Market LLC Facility To Adopt
Electronic Market Maker Trading Permit Fees). The Exchange believes
that BOX's observation demonstrates that market making firms can,
and do, select which exchanges they wish to access, and,
accordingly, options exchanges must take competitive considerations
into account when setting fees for such access.
---------------------------------------------------------------------------
Not only is there not an actual regulatory requirement to connect
to every options exchange, the Exchange believes there is also no ``de
facto'' or practical requirement as well, as further evidenced by the
broker-dealer membership analysis of the options exchanges discussed
above. As noted above, this is evidenced by the fact that one MIAX
Pearl Options Market Maker terminated their MIAX Pearl Options
membership effective January 1, 2023 as a direct result of the proposed
connectivity and port fee changes on MIAX Pearl Options. Indeed,
broker-dealers choose if and how to access a particular exchange and
because it is a choice, the Exchange must set reasonable pricing,
otherwise prospective members would not connect and existing members
would disconnect from the Exchange. The decision to become a member of
an exchange, particularly for registered market makers, is complex, and
not solely based on the non-transactional costs assessed by an
exchange. As noted herein, specific factors include, but are not
limited to: (i) an exchange's available liquidity in options series;
(ii) trading functionality offered on a particular market; (iii)
product offerings; (iv) customer service on an exchange; and (v)
transactional pricing. Becoming a member of the exchange does not
``lock'' a potential member into a market or diminish the overall
competition for exchange services.
In lieu of becoming a member at each options exchange, a market
participant may join one exchange and elect to have their orders routed
in the event that a better price is available on an away market.
Nothing in the Order Protection Rule requires a firm to become a Member
at--or establish connectivity to--the Exchange.\106\ If the Exchange is
not at the national best bid or offer (``NBBO''),\107\ 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.\108\
---------------------------------------------------------------------------
\106\ 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.
\107\ See Exchange Rule 100.
\108\ 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,\109\ or request
sponsored access \110\ through a member of an exchange in order to
submit a trade directly to an options exchange.\111\ 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.
---------------------------------------------------------------------------
\109\ 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.
\110\ 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.
\111\ 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).\112\ 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.\113\ Particularly, in the
event that a market participant views the Exchange's direct
[[Page 72154]]
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.
---------------------------------------------------------------------------
\112\ 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).
\113\ The Exchange notes that resellers, such as SFTI, are not
required to publicize, let alone justify or file with the Commission
their fees, and as such could charge the market participant any fees
it deems appropriate (including connectivity fees higher than the
Exchange's connectivity fees), even if such fees would otherwise be
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------
The Exchange is obligated to regulate its Members and secure access
to its environment. In order to properly regulate its Members and
secure the trading environment, the Exchange takes measures to ensure
access is monitored and maintained with various controls. Connectivity
and ports are methods utilized by the Exchange to grant Members secure
access to communicate with the Exchange and exercise trading rights.
When a market participant elects to be a Member, and is approved for
membership by the Exchange, the Member is granted trading rights to
enter orders and/or quotes into Exchange through secure connections.
Again, there is no legal or regulatory requirement that a market
participant become a Member of the Exchange. This is again evidenced by
the fact that one MIAX Pearl Options Market Maker terminated their MIAX
Pearl Options membership effective January 1, 2023 as a direct result
of the proposed connectivity and port fee changes on MIAX Pearl
Options. If a market participant chooses to become a Member, they may
then choose to purchase connectivity beyond the one connection that is
necessary to quote or submit orders on the Exchange. Members may freely
choose to rely on one or many connections, depending on their business
model.
Bifurcation of 10Gb ULL Connectivity and Related Fees
The Exchange began to operate on a single shared network with MIAX
when MIAX Pearl Options commenced operations as a national securities
exchange on February 7, 2017.\114\ The Exchange and MIAX operated on a
single shared network to provide Members with a single convenient set
of access points for both exchanges. Both the Exchange and MIAX offer
two methods of connectivity, 1Gb and 10Gb ULL connections. The 1Gb
connection services are supported by a discrete set of switches
providing 1Gb access ports to Members. The 10Gb ULL connection services
are supported by a second and mutually exclusive set of switches
providing 10Gb ULL access ports to Members. Previously, both the 1Gb
and 10Gb ULL shared extranet ports allowed Members to use one
connection to access both exchanges, namely their trading platforms,
market data systems, test systems, and disaster recovery facilities.
---------------------------------------------------------------------------
\114\ See Securities Exchange Act Release No. 80061 (February
17, 2017), 82 FR 11676 (February 24, 2017) (establishing MIAX Pearl
Options Fee Schedule and establishing that the MENI can also be
configured to provide network connectivity to the trading platforms,
market data systems, test systems, and disaster recovery facility of
the MIAX Pearl Options' affiliate, MIAX, via a single, shared
connection).
---------------------------------------------------------------------------
The Exchange stresses that bifurcating the 10Gb ULL connectivity
between the Exchange and MIAX was not designed with the objective to
generate an overall increase in access fee revenue. Rather, the
proposed change was necessitated by 10Gb ULL connectivity experiencing
a significant decrease in port availability mostly driven by
connectivity demands of latency sensitive Members that seek to maintain
multiple 10Gb ULL connections on every switch in the network. Operating
two separate national securities exchanges on a single shared network
provided certain benefits, such as streamlined connectivity to multiple
exchanges, and simplified exchange infrastructure. However, doing so
was no longer sustainable due to ever-increasing capacity constraints
and current system limitations. The network is not an unlimited
resource. As described more fully in the proposal to bifurcate the 10Gb
ULL network,\115\ the connectivity needs of Members and market
participants has increased every year since the launch of MIAX Pearl
Options and the operations of the Exchange and MIAX on a single shared
10Gb ULL network is no longer feasible. This required constant System
expansion to meet Member demand for additional ports and 10Gb ULL
connections has resulted in limited available System headroom, which
eventually became operationally problematic for both the Exchange and
its customers.
---------------------------------------------------------------------------
\115\ See Securities Exchange Act Release Nos. 96553 (December
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
---------------------------------------------------------------------------
As stated above, the shared network is not an unlimited resource
and its expansion was constrained by MIAX's and MIAX Pearl Options'
ability to provide fair and equitable access to all market participants
of both markets. Due to the ever-increasing connectivity demands, the
Exchange found it necessary to bifurcate 10Gb ULL connectivity to the
Exchange's and MIAX's Systems and networks to be able to continue to
meet ongoing and future 10Gb ULL connectivity and access demands.\116\
---------------------------------------------------------------------------
\116\ Currently, the Exchange maintains sufficient headroom to
meet ongoing and future requests for 1Gb connectivity. Therefore,
the Exchange did not propose to alter 1Gb connectivity and continues
to provide 1Gb connectivity over a shared network.
---------------------------------------------------------------------------
Unlike the switches that provide 1Gb connectivity, the availability
for additional 10Gb ULL connections on each switch had significantly
decreased. This was mostly driven by the connectivity demands of
latency sensitive Members (e.g., Market Makers and liquidity removers)
that sought to maintain connectivity across multiple 10Gb ULL switches.
Based on the Exchange's experience, such Members did not typically use
a shared 10Gb ULL connection to reach both the Exchange and MIAX due to
related latency concerns. Instead, those Members maintain dedicated
separate 10Gb ULL connections for the Exchange and separate dedicated
10Gb ULL connections for MIAX. This resulted in a much higher 10Gb ULL
usage per switch by those Members on the shared 10Gb ULL network than
would otherwise be needed if the Exchange and MIAX had their own
dedicated 10Gb ULL networks. Separation of the Exchange and MIAX 10Gb
ULL networks naturally lends itself to reduced 10Gb ULL port
consumption on each switch and, therefore, increased 10Gb ULL port
availability for current Members and new Members.
Prior to bifurcating the 10Gb ULL network, the Exchange and MIAX
continued to add switches to meet ongoing demand for 10Gb ULL
connectivity. That was no longer sustainable because simply adding
additional switches to expand the current shared 10Gb ULL network would
not adequately alleviate the issue of limited available port
connectivity. While it would have resulted in a gain in overall port
availability, the existing switches on the shared 10Gb ULL network in
use would have continued to suffer from lack of port headroom given
many latency sensitive Members' needs for a presence on each switch to
reach both the Exchange and MIAX. This was because those latency
sensitive Members sought to have a presence on each switch to maximize
the probability of experiencing the best network performance. Those
Members routinely decide to rebalance orders and/or messages over their
various connections to ensure each connection is operating with maximum
efficiency. Simply adding switches to the extranet would not have
resolved the port availability needs on the shared 10Gb ULL network
[[Page 72155]]
since many of the latency sensitive Members were unwilling to relocate
their connections to a new switch due to the potential detrimental
performance impact. As such, the impact of adding new switches and
rebalancing ports would not have been effective or responsive to
customer needs. The Exchange has found that ongoing and continued
rebalancing once additional switches are added has had, and would have
continued to have had, a diminishing return on increasing available
10Gb ULL connectivity.
Based on its experience and expertise, the Exchange found the most
practical way to increase connectivity availability on its switches was
to bifurcate the existing 10Gb ULL networks for the Exchange and MIAX
by migrating the exchanges' connections from the shared network onto
their own set of switches. Such changes accordingly necessitated a
review of the Exchange's previous 10Gb ULL connectivity fees and
related costs. The proposed fees necessary to allow the Exchange to
cover ongoing costs related to providing and maintaining such
connectivity, described more fully below. The ever increasing
connectivity demands that necessitated this change further support that
the proposed fees are reasonable because this demand reflects that
Members and non-Members believe they are getting value from the 10Gb
ULL connections they purchase.
The Exchange announced on August 12, 2022 the planned network
change and January 23, 2023 implementation date to provide market
participants adequate time to prepare.\117\ Since August 12, 2022, the
Exchange has worked with current 10Gb ULL subscribers to address their
connectivity needs ahead of the January 23, 2023 date. Based on those
interactions and subscriber feedback, the Exchange experienced a
minimal net increase of six (6) overall 10Gb ULL connectivity
subscriptions across MIAX Pearl Options and MIAX. This immaterial
increase in overall connections reflects a minimal fee impact for all
types of subscribers and reflects that subscribers elected to
reallocate existing 10Gb ULL connectivity directly to the Exchange or
MIAX, or chose to decrease or cease connectivity as a result of the
change.
---------------------------------------------------------------------------
\117\ See supra note 9.
---------------------------------------------------------------------------
Should the Commission Staff disapprove such fees, it would
effectively dictate how an exchange manages its technology and would
hamper the Exchange's ability to continue to invest in and fund access
services in a manner that allows it to meet existing and anticipated
access demands of market participants. Disapproval could also have the
adverse effect of discouraging an exchange from optimizing its
operations and deploying innovative technology to the benefit of market
participants if it believes the Commission would later prevent that
exchange from covering its costs and monetizing its operational
enhancements, thus adversely impacting competition. Also, as noted
above, the economic consequences of not being able to better establish
fee parity with other exchanges for non-transaction fees hampers the
Exchange's ability to compete on transaction fees.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity and port services, the
Exchange is especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and in carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level of diligence and transparency is called for by the
requirements of section 19(b)(1) under the Act,\118\ and Rule 19b-4
thereunder,\119\ with respect to the types of information exchanges
should provide when filing fee changes, and section 6(b) of the
Act,\120\ which requires, among other things, that exchange fees be
reasonable and equitably allocated,\121\ not designed to permit unfair
discrimination,\122\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\123\ 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.\124\ 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.
---------------------------------------------------------------------------
\118\ 15 U.S.C. 78s(b)(1).
\119\ 17 CFR 240.19b-4.
\120\ 15 U.S.C. 78f(b).
\121\ 15 U.S.C. 78f(b)(4).
\122\ 15 U.S.C. 78f(b)(5).
\123\ 15 U.S.C. 78f(b)(8).
\124\ See Staff Guidance, supra note 28.
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $11,567,509 (or approximately $963,959 per month, rounded
to the nearest dollar when dividing the annual cost by 12 months) and
its aggregate annual costs for providing Full Service MEO Ports at
$1,644,132 (or approximately $137,012 per month, rounded to the nearest
dollar when dividing the annual cost by 12 months). In order to cover
the aggregate costs of providing connectivity to its users (both
Members and non-Members \125\) going forward and to make a modest
profit, as described below, the Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per month for each physical 10Gb
ULL connection and to remove language providing for a shared 10Gb ULL
network between the Exchange and MIAX. The Exchange also proposes to
modify its Fee Schedule to charge tiered rates for Full Service MEO
Ports (Bulk) depending on the number of classes assigned or the
percentage of national ADV, which is in line with how the Exchange's
affiliates, MIAX and MIAX Emerald, assess fees for their comparable MEI
Ports.
---------------------------------------------------------------------------
\125\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services, and thus, may access application sessions on behalf of one
or more Members. Extranets offer physical connectivity services to
Members and non-Members.
---------------------------------------------------------------------------
In 2019, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\126\ 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
[[Page 72156]]
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'').
---------------------------------------------------------------------------
\126\ 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,\127\ storage needs, dedicated
infrastructure versus shared infrastructure allocated per platform
based on the resources required to support each platform, number of
available connections, and employees allocated time. All of these
factors result in different allocation percentages among the Exchange
and its affiliated markets, i.e., the different percentages of the
overall cost driver allocated to the Exchange and its affiliated
markets will cause the dollar amount of the overall cost allocated
among the Exchange and its affiliated markets to also differ. Because
the Exchange's parent company currently owns and operates four separate
and distinct marketplaces, the 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.
---------------------------------------------------------------------------
\127\ For example, MIAX Pearl Options maintains 12 matching
engines, MIAX Pearl Equities maintains 24 matching engines, MIAX
maintains 24 matching engines and MIAX Emerald maintains 12 matching
engines.
---------------------------------------------------------------------------
The next step involves determining what portion of the cost
allocated to the Exchange pursuant to the above methodology is to be
allocated to each core service, e.g., connectivity and ports, market
data, and transaction services. The Exchange and its affiliated markets
adopted an allocation methodology with thoughtful and consistently
applied principles to guide how much of a particular cost amount
allocated to the Exchange should be allocated within the Exchange to
each core service. This is the final step in the cost allocation
process and is applied to each of the cost drivers set forth below. For
instance, fixed costs that are not driven by client activity (e.g.,
message rates), such as data center costs, were allocated more heavily
to the provision of physical connectivity (60.6% of total expense
amount allocated to 10Gb ULL connectivity), with smaller allocations to
Full Service MEO Ports (3.4%), and the remainder to the provision of
other connectivity, other ports, transaction execution, membership
services and market data services (36%). This next level of the
allocation methodology at the individual exchange level also took into
account factors similar to those set forth under the first step of the
allocation methodology process described above, to determine the
appropriate allocation to connectivity or market data versus
allocations for other services. This allocation methodology was
developed through an assessment of costs with senior management
intimately familiar with each area of the Exchange's operations. After
adopting this allocation methodology, the Exchange then applied an
allocation of each cost driver to each core service, resulting in the
cost allocations described below. Each of the below cost allocations is
unique to the Exchange and represents a percentage of overall cost that
was allocated to the Exchange pursuant to the initial allocation
described above.
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity and
port services, membership fees, regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue. The Exchange also notes that as a general
matter each of these sources of revenue is based on services that are
interdependent. For instance, the Exchange's system for executing
transactions is dependent on physical hardware and connectivity; only
Members and parties that they sponsor to participate directly on the
Exchange may submit orders to the Exchange; many Members (but not all)
consume market data from the Exchange in order to trade on the
Exchange; and the Exchange consumes market data from external sources
in order to comply with regulatory obligations. Accordingly, given this
interdependence, the allocation of costs to each service or revenue
source required judgment of the Exchange and was weighted based on
estimates of the Exchange that the Exchange believes are reasonable, as
set forth below. While there is no standardized and generally accepted
methodology for the allocation of an exchange's costs, the Exchange's
methodology is the result of an extensive review and analysis and will
be consistently applied going forward for any other potential fee
proposals. In the absence of the Commission attempting to specify a
methodology for the allocation of exchanges' interdependent costs, the
Exchange will continue to be left with its best efforts to attempt to
conduct such an allocation in a thoughtful and reasonable manner.
Through the Exchange's extensive updated Cost Analysis, which was
again recently further refined, the Exchange analyzed every expense
item in the Exchange's general expense ledger to determine whether each
such expense relates to the provision of connectivity and port
services, and, if such expense did so relate, what portion (or
percentage) of such expense actually supports the provision of
connectivity and port services, and thus bears a relationship that is,
``in nature and closeness,'' directly related to network
[[Page 72157]]
connectivity and port services. In turn, the Exchange allocated certain
costs more to physical connectivity and others to ports, while certain
costs were only allocated to such services at a very low percentage or
not at all, using consistent allocation methodologies as described
above. Based on this analysis, the Exchange estimates that the
aggregate monthly cost to provide 10Gb ULL connectivity and Full
Service MEO Port services, is $1,106,971 (utilizing the rounded numbers
when dividing the annual cost for 10Gb ULL connectivity and annual cost
for Full Service MEO Ports by 12 months, then adding both numbers
together), as further detailed below.
Lastly, the Exchange notes that, based on: (i) the total expense
amounts contained in this filing (which are 2023 projected expenses),
and (ii) the total expense amounts contained in the related MIAX Pearl
Equities filing (also 2023 projected expenses), MIAX PEARL, LLC's total
costs have increased at a greater rate over the last three years than
the total costs of MIAX PEARL, LLC's affiliated exchanges, MIAX and
MIAX Emerald. This is also reflected in the total costs reported in
MIAX PEARL, LLC's Form 1 filings over the last three years, when
comparing MIAX PEARL, LLC to MIAX PEARL, LLC's affiliated exchanges,
MIAX and MIAX Emerald. This is primarily because that MIAX PEARL, LLC
operates two markets, one for options and one for equities, while MIAX
and MIAX Emerald each operate only one market. This is also due to
higher current expense for MIAX PEARL, LLC for 2022 and 2023, due to a
hardware refresh (i.e., replacing old hardware with new equipment) for
MIAX Pearl Options, as well as higher costs associated with MIAX Pearl
Equities due to greater development efforts to grow that newer
marketplace.\128\ The Exchange confirms that there is no double
counting of expenses between the options and equities platform of MIAX
Pearl; the greater expense amounts of the MIAX PEARL, LLC (relative to
its affiliated exchanges, MIAX and MIAX Emerald) is solely attributed
to the unique factors of MIAX Pearl discussed above.
---------------------------------------------------------------------------
\128\ See, e.g., Securities Exchange Act Release Nos. 94301
(February 23, 2022), 87 FR 11739 (March 2, 2022) (SR-PEARL-2022-06)
(Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Rule 2617(b) To Adopt Two New Routing Options, and
To Make Related Changes and Clarifications to Rules 2614(a)(2)(B)
and 2617(b)(2)); 94851 (May 4, 2022), 87 FR 28077 (May 10, 2022)
(SR-PEARL-2022-15) (Notice of Filing and Immediate Effectiveness of
a Proposed Rule Change To Adopt Exchange Rule 532, Order Price
Protection Mechanisms and Risk Controls); 95298 (July 15, 2022), 87
FR 43579 (July 21, 2022) (SR-PEARL-2022-29) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC
To Amend the Route to Primary Auction Routing Option Under Exchange
Rule 2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR 55866
(September 12, 2022) (SR-PEARL-2022-34) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend Exchange
Rule 2614, Orders and Order Instructions, To Adopt the Primary Peg
Order Type); 96205 (November 1, 2022), 87 FR 67080 (November 7,
2022) (SR-PEARL-2022-43) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders
and Order Instructions and Rule 2618, Risk Settings and Trading Risk
Metrics To Enhance Existing Risk Controls); 96905 (February 13,
2023), 88 FR 10391 (February 17, 2023) (SR-PEARL-2023-03) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend Exchange Rule 2618 To Add Optional Risk Control Settings);
97236 (March 31, 2023), 88 FR 20597 (April 6, 2023) (SR-PEARL-2023-
15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change To Amend Exchange Rules 2617 and 2626 Regarding Retail Orders
Routed Pursuant to the Route to Primary Auction Routing Option).
---------------------------------------------------------------------------
Costs Related To Offering Physical 10Gb ULL Connectivity
The following chart details the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
10Gb ULL connectivity via an unshared network as well as the percentage
of the Exchange's overall costs that such costs represent for each cost
driver (e.g., as set forth below, the Exchange allocated approximately
26.9% of its overall Human Resources cost to offering physical
connectivity).
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \k\ cost \l\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources........................................ $3,675,098 $306,258 26.3
Connectivity (external fees, cabling, switches, etc.).. 70,163 5,847 60.6
Internet Services and External Market Data............. 322,388 26,866 73.3
Data Center............................................ 739,983 61,665 60.6
Hardware and Software Maintenance and Licenses......... 959,157 79,930 58.6
Depreciation........................................... 1,885,969 157,164 58.2
Allocated Shared Expenses.............................. 3,914,751 326,229 49.2
--------------------------------------------------------
Total.............................................. 11,567,509 963,959 40.5
----------------------------------------------------------------------------------------------------------------
k. The Annual Cost includes figures rounded to the nearest dollar.
l. The Monthly Cost was determined by dividing the Annual Cost for each line item by twelve (12) months and
rounding up or down to the nearest dollar.
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 10Gb ULL
connectivity. While some costs were attempted to be allocated as
equally as possible among the Exchange and its affiliated markets, the
Exchange notes that some of its cost allocation percentages for certain
cost drivers differ when compared to the same cost drivers for the
Exchange's affiliated markets in their similar proposed fee changes for
connectivity and ports. This is because MIAX Pearl Options' cost
allocation methodology utilizes the actual projected costs of MIAX
Pearl Options (which are specific to MIAX Pearl Options, and are
independent of the costs projected and utilized by MIAX Pearl Options'
affiliated markets) to determine its actual costs, which may vary
across the Exchange and its affiliated markets based on factors that
are unique to each marketplace. MIAX Pearl Options provides additional
explanation below (including the reason for the deviation) for the
significant differences.
Human Resources
The Exchange notes that it and its affiliated markets have 184
employees (excluding employees at non-options/equities exchange
subsidiaries of Miami International Holdings, Inc. (``MIH''), the
holding company of the Exchange and its affiliated markets), and each
department leader has direct knowledge of the time spent by each
employee with respect to the various tasks necessary to operate the
Exchange. Specifically, twice a year, and as needed with additional new
hires and new project initiatives, in consultation with employees as
needed, managers and department heads assign a percentage of time to
every employee and then allocate that time amongst the Exchange
[[Page 72158]]
and its affiliated markets to determine each market's individual Human
Resources expense. Then, managers and department heads assign a
percentage of each employee's time allocated to the Exchange into
buckets including network connectivity, ports, market data, and other
exchange services. This process ensures that every employee is 100%
allocated, ensuring there is no double counting between the Exchange
and its affiliated markets.
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity). As described more fully above, the Exchange's parent
company allocates costs to the Exchange and its affiliated markets and
then a portion of the Human Resources costs allocated to the Exchange
is then allocated to connectivity. From that portion allocated to the
Exchange that applied to connectivity, the Exchange then allocated a
weighted average of 42.9% of each employee's time from the above group.
The Exchange also allocated Human Resources costs to provide physical
connectivity to a limited subset of personnel with ancillary functions
related to establishing and maintaining such connectivity (such as
information security, sales, membership, and finance personnel). The
Exchange allocated cost on an employee-by-employee basis (i.e., only
including those personnel who support functions related to providing
physical connectivity) and then applied a smaller allocation to such
employees' time to 10Gb ULL connectivity (less than 17%). 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 42.9% of each of their employee's time assigned to
the Exchange for 10Gb ULL connectivity, as stated above. Employees from
these departments perform numerous functions to support 10Gb ULL
connectivity, such as the installation, re-location, configuration, and
maintenance of 10Gb ULL connections and the hardware they access. This
hardware includes servers, routers, switches, firewalls, and monitoring
devices. These employees also perform software upgrades, vulnerability
assessments, remediation and patch installs, equipment configuration
and hardening, as well as performance and capacity management. These
employees also engage in research and development analysis for
equipment and software supporting 10Gb ULL connectivity and design, and
support the development and on-going maintenance of internally-
developed applications as well as data capture and analysis, and Member
and internal Exchange reports related to network and system
performance. The above list of employee functions is not exhaustive of
all the functions performed by Exchange employees to support 10Gb ULL
connectivity, but illustrates the breath of functions those employees
perform in support of the above cost and time allocations.
Lastly, the Exchange notes that senior level executives' time was
only allocated to the 10Gb ULL connectivity related Human Resources
costs to the extent that they are involved in overseeing tasks related
to providing physical connectivity. The Human Resources cost was
calculated using a blended rate of compensation reflecting salary,
equity and bonus compensation, benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity (External Fees, Cabling, Switches, Etc.)
The Connectivity cost driver includes external fees paid to connect
to other exchanges and third parties, cabling and switches required to
operate the Exchange. The Connectivity cost driver is more narrowly
focused on technology used to complete connections to the Exchange and
to connect to external markets. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity providers for
connectivity to the entire U.S. options industry, and infrastructure
services for critical components of the network that are necessary to
provide and maintain its System Networks and access to its System
Networks via 10Gb ULL connectivity. Specifically, the Exchange utilizes
connectivity providers to connect to other national securities
exchanges and the Options Price Reporting Authority (``OPRA''). The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity provided by these service providers is
critical to the Exchanges daily operations and performance of its
System Networks to which market participants connect to via 10Gb ULL
connectivity. Without these services providers, the Exchange would not
be able to connect to other national securities exchanges, market data
providers or OPRA and, therefore, would not be able to operate and
support its System Networks. The Exchange does not employ a separate
fee to cover its connectivity expense and recoups that expense, in
part, by charging for 10Gb ULL connectivity.
Internet Services and External Market Data
The next cost driver consists of internet Services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami.
External market data includes fees paid to third parties, including
other exchanges, to receive market data. The Exchange includes external
market data fee costs towards the provision of 10Gb ULL connectivity
because such market data is necessary for certain services related to
connectivity, including pre-trade risk checks and checks for other
conditions (e.g., re-pricing of orders to avoid locked or crossed
markets and trading collars). Since external market data from other
exchanges is consumed at the Exchange's matching engine level, (to
which 10Gb ULL connectivity provides access) in order to validate
orders before additional orders enter the matching engine or are
executed, the Exchange believes it is reasonable to
[[Page 72159]]
allocate an amount of such costs to 10Gb ULL connectivity.
The Exchange relies on content service providers for data feeds for
the entire U.S. options industry, as well as content for critical
components of the network that are necessary to provide and maintain
its System Networks and access to its System Networks via 10Gb ULL
connectivity. Specifically, the Exchange utilizes content service
providers to receive market data from OPRA, other exchanges and market
data providers. The Exchange understands that these service providers
provide services to most, if not all, of the other U.S. exchanges and
other market participants. Market data provided these service providers
is critical to the Exchanges daily operations and performance of its
System Networks to which market participants connect to via 10Gb ULL
connectivity. Without these services providers, the Exchange would not
be able to receive market data and, therefore, would not be able to
operate and support its System Networks. The Exchange does not employ a
separate fee to cover its content service provider expense and recoups
that expense, in part, by charging for 10Gb ULL connectivity.
Lastly, the Exchange notes that the actual dollar amounts allocated
as part of the second step of the 2023 budget process differ among the
Exchange and its affiliated markets for the internet Services and
External Market Data cost driver, even though, but for MIAX Emerald,
the allocation percentages are generally consistent across markets
(e.g., MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl Equities
allocated 84.8%, 73.3%, 73.3% and 72.5%, respectively, to the same cost
driver). This is because: (i) a different percentage of the overall
internet Services and External Market Data cost driver was allocated to
MIAX Emerald and its affiliated markets due to the factors set forth
under the first step of the 2023 budget review process described above
(unique technical architecture, market structure, and business
requirements of each marketplace); and (ii) MIAX Emerald itself
allocated a larger portion of this cost driver to 10Gb ULL connectivity
because of recent initiatives to improve the latency and determinism of
its systems. The Exchange notes while the percentage MIAX Emerald
allocated to the internet Services and External Market Data cost driver
is greater than the Exchange and its other affiliated markets, the
overall dollar amount allocated to the Exchange under the initial step
of the 2023 budget process is lower than its affiliated markets.
However, the Exchange believes that this is not, in dollar amounts, a
significant difference. This is because the total dollar amount of
expense covered by this cost driver is relatively small compared to
other cost drivers and is due to nuances in exchange architecture that
require different initial allocation amount under the first step of the
2023 budget process described above. Thus, non-significant differences
in percentage allocation amounts in a smaller cost driver create the
appearance of a significant difference, even though the actual
difference in dollar amounts is small.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (60.6%) to
physical 10Gb ULL connectivity because the third-party data centers and
the Exchange's physical equipment contained therein is the most direct
cost in providing physical access to the Exchange. In other words, for
the Exchange to operate in a dedicated space with connectivity by
market participants to a physical trading platform, the data centers
are a very tangible cost, and in turn, if the Exchange did not maintain
such a presence then physical connectivity would be of no value to
market participants.
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.\129\ The Exchange notes that
this allocation is greater than MIAX and MIAX Emerald options exchanges
by a significant amount as MIAX Pearl Options allocated 58.6% of its
Hardware and Software Maintenance and License expense towards 10Gb ULL
connectivity, while MIAX and MIAX Emerald allocated 49.8% and 50.9%,
respectively, to the same category of expense. This is because MIAX
Pearl Options is in the process of replacing and upgrading various
hardware and software used to operate its options trading platform in
order to maintain premium network performance. At the time of this
filing, the Exchange is undergoing a major hardware refresh, replacing
older hardware with new hardware. This hardware includes servers,
network switches, cables, optics, protocol data units, and cabinets, to
maintain a state-of-the-art technology platform. Because of the timing
of the hardware refresh with the timing of this filing, the Exchange
has materially higher expense than its affiliates. Also, MIAX Pearl
Equities allocated a higher percentage of the same category of expense
(58%) towards its Hardware and Software Maintenance and License expense
for 10Gb ULL connectivity, which MIAX Pearl Equities explains in its
own proposal to amend its 10Gb ULL connectivity fees.
---------------------------------------------------------------------------
\129\ This expense may be greater than the Exchange's affiliated
markets, specifically MIAX and MIAX Emerald, because, unlike the
MIAX and MIAX Emerald, MIAX Pearl (the options and equities markets)
maintains an additional gateway to accommodate its Members' and
Equity Members' access and connectivity needs. This added gateway
contributes to the difference in allocations between MIAX Pearl,
MIAX and MIAX Emerald. This expense also differs in dollar amount
among the MIAX Pearl (options and equities markets), MIAX, and MIAX
Emerald because each market may maintain and utilize a different
amount of hardware and software based on its market model and
infrastructure needs. The Exchange allocated a percentage of the
overall cost based on actual amounts of hardware and software
utilized by that market, which resulted in different cost
allocations and dollar amounts.
---------------------------------------------------------------------------
Depreciation
All physical assets, software and hardware used to provide 10Gb ULL
connectivity, which also includes assets used for testing and
monitoring of Exchange infrastructure, were valued at cost, and
depreciated or leased over periods ranging from three to five years.
Thus, the depreciation cost primarily relates to servers necessary to
operate the Exchange, some of which are owned by the Exchange and some
of which are leased by the Exchange in order to allow efficient
periodic technology refreshes. The Exchange also included in the
Depreciation cost driver certain budgeted improvements that the
Exchange intends to capitalize and depreciate with respect to 10Gb ULL
connectivity in the near-term. As with the other allocated costs in the
Exchange's updated Cost Analysis, the Depreciation cost was therefore
narrowly tailored to depreciation related to 10Gb ULL connectivity. As
noted above, the Exchange allocated 58.2% of its allocated depreciation
costs to providing physical 10Gb ULL connectivity.
[[Page 72160]]
The Exchange also notes that this allocation differs from its
affiliated markets due to a number of factors, such as the age of
physical assets and software (e.g., older physical assets and software
were previously depreciated and removed from the allocation), or
certain system enhancements that required new physical assets and
software, thus providing a higher contribution to the depreciated cost.
For example, the percentages the Exchange and its affiliate, MIAX,
allocated to the depreciation of hardware and software used to provide
10Gb ULL connectivity are nearly identical. However, the Exchange's
dollar amount is less than that of MIAX by approximately $35,000 per
month due to two factors: first, MIAX has undergone a technology
refresh since the time MIAX Pearl Options launched in 2017, leading to
it having more hardware that software that is subject to depreciation.
Second, MIAX maintains 24 matching engines while MIAX Pearl Options
maintains only 12 matching engines. This also results in more of MIAX's
hardware and software being subject to depreciation than MIAX Pearl
Options' hardware and software due to the greater amount of equipment
and software necessary to support the greater number of matching
engines on MIAX.
Allocated Shared Expenses
Finally, as with other exchange products and services, a portion of
general shared expenses was allocated to overall physical connectivity
costs. These general shared costs are integral to exchange operations,
including its ability to provide physical connectivity. Costs included
in general shared expenses include office space and office expenses
(e.g., occupancy and overhead expenses), utilities, recruiting and
training, marketing and advertising costs, professional fees for legal,
tax and accounting services (including external and internal audit
expenses), and telecommunications. Similarly, the cost of paying
directors to serve on the Exchange's Board of Directors is also
included in the Exchange's general shared expense cost driver.\130\
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.
---------------------------------------------------------------------------
\130\ 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 10Gb ULL
connectivity. The Exchange, therefore, believes it is reasonable to
assign an allocation, in the range of allocations for other cost
drivers, while continuing to ensure that this expense is only allocated
once. Again, the general shared expenses are incurred by the Exchange's
parent company as a result of operating the Exchange and its affiliated
markets and it is therefore reasonable to allocate a percentage of
those expenses to the Exchange and ultimately to specific product
offerings such as 10Gb ULL connectivity.
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 49.2% 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 49.2% 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 38
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 49.2% allocation of general shared
expenses for physical 10Gb ULL connectivity is higher than that
allocated to general shared expenses for Full Service MEO Ports. This
is based on its allocation methodology that weighted costs attributable
to each core service. While physical connectivity has several areas
where certain tangible costs are heavily weighted towards providing
such service (e.g., Data Center, as described above), Full Service MEO
Ports do not require as many broad or indirect resources as other core
services.
* * * * *
Approximate Cost Per 10Gb Connection Per Month
After determining the approximate allocated monthly cost related to
10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of
$963,959 was divided by the number of physical 10Gb ULL connections the
Exchange maintained at the time that proposed pricing was determined
(108), to arrive at a cost of approximately $8,925 per month, per
physical 10Gb ULL connection. Due to the nature of this particular
cost, this allocation methodology results in an allocation among the
Exchange and its affiliated markets based on set quantifiable criteria,
i.e., actual number of 10Gb ULL connections.
* * * * *
Costs Related To Offering Full Service MEO Ports
The following chart details the individual line-item costs
considered by
[[Page 72161]]
the Exchange to be related to offering Full Service MEO Ports as well
as the percentage of the Exchange's overall costs such costs represent
for such area (e.g., as set forth below, the Exchange allocated
approximately 8.3% of its overall Human Resources cost to offering Full
Service MEO Ports).
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \m\ cost \n\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources........................................ $1,159,831 $96,653 8.3
Connectivity (external fees, cabling, switches, etc.).. 1,589 132 1.4
Internet Services and External Market Data............. 6,033 503 1.4
Data Center............................................ 41,881 3,490 3.4
Hardware and Software Maintenance and Licenses......... 22,438 1,870 1.4
Depreciation........................................... 127,986 10,666 3.9
Allocated Shared Expenses.............................. 284,374 23,698 3.6
--------------------------------------------------------
Total.............................................. 1,644,132 137,012 5.8
----------------------------------------------------------------------------------------------------------------
\m\ See supra note k (describing rounding of Annual Costs).
\n\ See supra note l (describing rounding of Monthly Costs based on Annual Costs).
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering Full Service MEO
Ports. While some costs were attempted to be allocated as equally as
possible among the Exchange and its affiliated markets, the Exchange
notes that some of its cost allocation percentages for certain cost
drivers differ when compared to the same cost drivers for the
Exchange's affiliated markets in their similar proposed fee changes for
connectivity and ports. This is because the Exchange's cost allocation
methodology utilizes the actual projected costs of the Exchange (which
are specific to the Exchange, and are independent of the costs
projected and utilized by the Exchange's affiliated markets) to
determine its actual costs, which may vary across the Exchange and its
affiliated markets based on factors that are unique to each
marketplace. The Exchange provides additional explanation below
(including the reason for the deviation) for the significant
differences.
Human Resources
With respect to Full Service MEO Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Full Service MEO Ports and
maintaining performance thereof (including a broader range of employees
such as technical operations personnel, market operations personnel,
and software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). Just
as described above for 10Gb ULL connectivity, the estimates of Human
Resources cost were again determined by consulting with department
leaders, determining which employees are involved in tasks related to
providing Full Service MEO Ports and maintaining performance thereof,
and confirming that the proposed allocations were reasonable based on
an understanding of the percentage of their time such employees devote
to tasks related to providing Full Service MEO Ports and maintaining
performance thereof. This includes personnel from the following
Exchange departments that are predominately involved in providing Full
Service MEO Ports: Business Systems Development, Trading Systems
Development, Systems Operations and Network Monitoring, Network and
Data Center Operations, Listings, Trading Operations, and Project
Management. The Exchange notes that senior level executives were
allocated Human Resources costs to the extent they are involved in
overseeing tasks specifically related to providing Full Service MEO
Ports. Senior level executives were only allocated Human Resources
costs to the extent that they are involved in managing personnel
responsible for tasks integral to providing Full Service MEO Ports. The
Human Resources cost was again calculated using a blended rate of
compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
Connectivity (External Fees, Cabling, Switches, Etc.)
The Connectivity cost includes external fees paid to connect to
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. For purposes of Full Service MEO
Ports, the Exchange also includes a portion of its costs related to
external market data. External market data includes fees paid to third
parties, including other exchanges, to receive and consume market data
from other markets. The Exchange includes external market data costs
towards the provision of Full Service MEO Ports because such market
data is necessary (in addition to physical connectivity) to offer
certain services related to such ports, such as validating orders on
entry against the NBBO and checking for other conditions (e.g., halted
securities).\131\ Thus, since market data from other exchanges is
consumed at the Exchange's Full Service MEO Port level in order to
validate orders, before additional processing occurs with respect to
such orders, the Exchange believes it is reasonable to allocate a small
amount of such costs to Full Service MEO Ports.
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\131\ 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).
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The Exchange notes that the allocation for the Internet Services
and External Market Data cost driver is lower than that of its
affiliate, MIAX, as MIAX allocated 7.2% of its Internet Services and
External Market Data expense towards Limited Service MEI Ports, while
MIAX Pearl Options allocated 1.4% to its Full Service MEO Ports for the
same cost driver. The allocation percentages set forth above differ
because they directly correspond with the number of applicable ports
utilized on each exchange. For August 2023, MIAX Market Makers utilized
1,781 Limited Service MEI ports and MIAX Emerald Market Makers utilized
[[Page 72162]]
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 and
internet Service), thus the Exchange allocates a higher percentage of
expense than MIAX Pearl Options, which has a lower port count.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide Full Service MEO Ports in the third-party data
centers where it maintains its equipment as well as related costs for
market data to then enter the Exchange's system via Full Service MEO
Ports (the Exchange does not own the Primary Data Center or the
Secondary Data Center, but instead, leases space in data centers
operated by third parties).
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
The Exchange notes that this allocation is less than its affiliate,
MIAX, as MIAX allocated 7.2% of its Hardware and Software Maintenance
and License expense towards Limited Service MEI Ports, while MIAX Pearl
Options allocated 1.4% to its Full Service MEO Ports (Bulk and Single)
for the same category of expense. The allocation percentages set forth
above differ because they correspond with the number of applicable
ports utilized on each exchange. For 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 Full
Service MEO Ports has been developed in-house and the cost of such
development, which takes place over an extended period of time and
includes not just development work, but also quality assurance and
testing to ensure the software works as intended, is depreciated over
time once the software is activated in the production environment.
Hardware used to provide Full Service MEO Ports includes equipment used
for testing and monitoring of order entry infrastructure and other
physical equipment the Exchange purchased and is also depreciated over
time.
All hardware and software, which also includes assets used for
testing and monitoring of order entry infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 3.9% of
all depreciation costs to providing Full Service MEO Ports. The
Exchange allocated depreciation costs for depreciated software
necessary to operate the Exchange to Full Service MEO Ports because
such software is related to the provision of Full Service MEO Ports. As
with the other allocated costs in the Exchange's updated Cost Analysis,
the Depreciation cost driver was therefore narrowly tailored to
depreciation related to Full Service MEO Ports.
The Exchange notes that this allocation differs from its affiliated
markets due to a number of factors, such as the age of physical assets
and software (e.g., older physical assets and software were previously
depreciated and removed from the allocation), or certain system
enhancements that required new physical assets and software, thus
providing a higher contribution to the depreciated cost.
For example, the Exchange notes that the percentage it allocated to
the depreciation cost driver for Full Service MEO Ports and the
percentage its affiliate, MIAX, allocated to the depreciation cost
driver for MIAX's Limited Service MEI Ports, differ by only 2.4%.
However, MIAX's approximate dollar amount is greater than that of MIAX
Pearl Options by approximately $9,000 per month. This is due to two
primary factors. First, MIAX has under gone a technology refresh since
the time MIAX Pearl Options launched in 2017, leading to it having more
hardware that software that is subject to depreciation. Second, MIAX
maintains 24 matching engines while MIAX Pearl Options maintains only
12 matching engines. This also results in more of MIAX's hardware and
software being subject to depreciation than MIAX Pearl Options'
hardware and software due to the greater amount of equipment and
software necessary to support the greater number of matching engines on
MIAX.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall Full Service MEO Ports costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 4.0% of the overall cost for
directors was allocated to providing Full Service MEO Ports. The
Exchange notes that the 3.6% allocation of general shared expenses for
Full Service MEO Ports is lower than that allocated to general shared
expenses for physical connectivity based on its allocation methodology
that weighted costs attributable to each Core Service based on an
understanding of each area. While Full Service MEO Ports have several
areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Centers, as described above), 10Gb
ULL connectivity requires a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange.
Lastly, the Exchange notes that this allocation is less than its
affiliate, MIAX, as MIAX allocated 9.8% of its Allocated Shared Expense
towards Limited Service MEI Ports, while MIAX Pearl Options allocated
3.6% to its Full Service MEO Ports (Bulk and Single) for the same
category of expense. The
[[Page 72163]]
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, thus resulting in a
smaller cost allocation. There is increased cost associated with
supporting a higher number of ports (requiring more hardware and other
technical infrastructure), thus the Exchange allocates a higher
percentage of expense than MIAX Pearl Options which has a lower port
count.
* * * * *
Approximate Cost Per Full Service MEO Port Per Month
Based on May 2023 data, the total monthly cost allocated to Full
Service MEO Ports of $137,012 was divided by the number of chargeable
Full Service MEO Ports the Exchange maintained at the time that
proposed pricing was determined (25 total; 25 Full Service MEO Port,
Bulk, and 0 Full Service MEO Port, Single), to arrive at a cost of
approximately $5,480 per month, per charged Full Service MEO Port.
* * * * *
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or Full Service MEO Ports) and did not double- count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections based upon the above described
methodology, the Exchange has a team of employees dedicated to network
infrastructure and with respect to such employees the Exchange
allocated network infrastructure personnel with a high percentage of
the cost of such personnel (42.9%) given their focus on functions
necessary to provide physical connections. The salaries of those same
personnel were allocated only 12.3% to Full Service MEO Ports and the
remaining 44.8% was allocated to 1Gb connectivity, other port services,
transaction services, membership services and market data. The Exchange
did not allocate any other Human Resources expense for providing
physical connections to any other employee group, outside of a smaller
allocation of 16.9% for 10Gb ULL connectivity or 17.3% for the entire
network, of the cost associated with certain specified personnel who
work closely with and support network infrastructure personnel. In
contrast, the Exchange allocated much smaller percentages of costs
(6.0% or less) across a wider range of personnel groups in order to
allocate Human Resources costs to providing Full Service MEO Ports.
This is because a much wider range of personnel are involved in
functions necessary to offer, monitor and maintain Full Service MEO
Ports but the tasks necessary to do so are not a primary or full-time
function.
In total, the Exchange allocated 26.9% of its personnel costs to
providing 10Gb ULL and 1Gb ULL connectivity and 8.3% of its personnel
costs to providing Full Service MEO Ports, for a total allocation of
35.2% Human Resources expense to provide these specific connectivity
and port services. In turn, the Exchange allocated the remaining 64.8%
of its Human Resources expense to membership services, transaction
services, other port services and market data. Thus, again, the
Exchange's allocations of cost across core services were based on real
costs of operating the Exchange and were not double-counted across the
core services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and Full Service MEO
Ports, but in different amounts. The Exchange believes it is reasonable
to allocate the identified portion of such expense because such expense
includes the actual cost of the computer equipment, such as dedicated
servers, computers, laptops, monitors, information security appliances
and storage, and network switching infrastructure equipment, including
switches and taps that were purchased to operate and support the
network. Without this equipment, the Exchange would not be able to
operate the network and provide connectivity services to its Members
and non-Members and their customers. However, the Exchange did not
allocate all of the depreciation and amortization expense toward the
cost of providing connectivity services, but instead allocated
approximately 62.1% of the Exchange's overall depreciation and
amortization expense to connectivity services (58.2% attributed to 10Gb
ULL physical connections and 3.9% to Full Service MEO Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 37.9%) toward the cost of providing transaction
services, membership services, other port services and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or Full Service MEO Ports or in obtaining new clients
that will purchase such services. Similarly, the Exchange will have to
be successful in retaining a positive net capture on transaction fees
in order to realize the anticipated revenue from transaction pricing.
The Exchange notes that the Cost Analysis is based on the
Exchange's 2023 fiscal year of operations and projections. It is
possible, however, that actual costs may be higher or lower. To the
extent the Exchange sees growth in use of connectivity services it will
receive additional revenue to offset future cost increases.
However, if use of connectivity services is static or decreases,
the Exchange might not realize the revenue that it anticipates or needs
in order to cover applicable costs. Accordingly, the Exchange is
committing to conduct a one-year review after implementation of these
fees. The Exchange expects that it may propose to adjust fees at that
time, to increase fees in the event that revenues fail to cover costs
and a reasonable mark-up of such costs. Similarly, the Exchange may
propose to decrease fees in the event that revenue materially exceeds
our current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the
[[Page 72164]]
mark-up materially exceeds our current projections. In the event that
the Exchange determines to propose a fee change, the results of a
timely review, including an updated cost estimate, will be included in
the rule filing proposing the fee change. More generally, we believe
that it is appropriate for an exchange to refresh and update
information about its relevant costs and revenues in seeking any future
changes to fees, and the Exchange commits to do so.
Projected Revenue \132\
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\132\ For purposes of calculating revenue for 10Gb ULL
connectivity, the Exchange used revenues for February 2023, the
first full month for which it provided dedicated 10Gb ULL
connectivity to MIAX Pearl Options and ceased operating a shared
10Gb ULL network with MIAX.
---------------------------------------------------------------------------
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity and port services. Much of the cost relates to monitoring
and analysis of data and performance of the network via the
subscriber's connection(s). The above cost, namely those associated
with hardware, software, and human capital, enable the Exchange to
measure network performance with nanosecond granularity. These same
costs are also associated with time and money spent seeking to
continuously improve the network performance, improving the
subscriber's experience, based on monitoring and analysis activity. The
Exchange routinely works to improve the performance of the network's
hardware and software. The costs associated with maintaining and
enhancing a state-of-the-art exchange network is a significant expense
for the Exchange, and thus the Exchange believes that it is reasonable
and appropriate to help offset those costs by amending fees for
connectivity services. Subscribers, particularly those of 10Gb ULL
connectivity, expect the Exchange to provide this level of support to
connectivity so they continue to receive the performance they expect.
This differentiates the Exchange from its competitors. As detailed
above, the Exchange has five primary sources of revenue that it can
potentially use to fund its operations: transaction fees, fees for
connectivity services, membership and regulatory fees, and market data
fees. Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue.
The Exchange's Cost Analysis estimates the annual cost to provide
10Gb ULL connectivity services will equal $11,567,509. Based on current
10Gb ULL connectivity services usage, the Exchange would generate
annual revenue of approximately $17,496,000. The Exchange believes this
represents a modest profit of 34% when compared to the cost of
providing 10Gb ULL connectivity services, which could decrease over
time.\133\ Importantly, the Exchange's affiliated markets submitted
similar filings to also amend their fees for 10Gb ULL connectivity
\134\ 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.\135\
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\133\ 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).
\134\ See SR-PEARL-2023-51, SR-MIAX-2023-39, and SR-EMERALD-
2023-27.
\135\ 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
Full Service MEO Port services will equal $1,644,132. Based on current
Full Service MEO Port services usage, the Exchange would generate
annual revenue of approximately $1,644,000. The Exchange believes this
would result in a small negative margin after calculating the cost of
providing Full Service MEO Port services, which could decrease further
over time.\136\
---------------------------------------------------------------------------
\136\ Id.
---------------------------------------------------------------------------
Based on the above discussion, even if the Exchange earns the above
revenue or incrementally more or less, the proposed fees are fair and
reasonable because they will not result in excessive pricing that
deviates from that of other exchanges or a supra-competitive profit,
when comparing the total expense of the Exchange associated with
providing 10Gb ULL connectivity and Full Service MEO Port services
versus the total projected revenue of the Exchange associated with
network 10Gb ULL connectivity and Full Service MEO Port services.
The Exchange also notes that this the resultant profit margin
differs slightly from the profit margins set forth in similar fee
filings by its affiliated markets. This is not atypical among exchanges
and is due to a number of factors that differ between these four
markets, including: different market models, market structures, and
product offerings (equities, options, price-time, pro-rata, simple, and
complex); different pricing models; different number of market
participants and connectivity subscribers; different maintenance and
operations costs, as described in the cost allocation methodology
above; different technical architecture (e.g., the number of matching
engines per exchange, i.e., the Exchange maintains 12 matching engines
while MIAX maintains 24 matching engines); and different maturity phase
of the Exchange and its affiliated markets (i.e., start-up versus
growth versus more mature). All of these factors contribute to a unique
and differing level of profit margin per exchange.
Further, the Exchange proposes to charge rates that are comparable
to, or lower than, similar fees for similar products charged by
competing exchanges. For example, for 10Gb ULL connectivity, the
Exchange proposes a lower fee than the fee charged by Nasdaq for its
comparable 10Gb Ultra fiber connection ($13,500 per month for the
Exchange vs. $15,000 per month for Nasdaq).\137\ NYSE American charges
even higher fees for its comparable 10GB LX LCN connection than the
Exchange's proposed fees ($13,500 for the Exchange vs. $22,000 per
month for NYSE American).\138\ 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
[[Page 72165]]
ULL connectivity on the Exchange than its affiliated markets or vice
versa).
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\137\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\138\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
---------------------------------------------------------------------------
* * * * *
The Exchange has operated at a cumulative net annual loss since it
launched operations in 2017.\139\ This is due to a number of factors,
one of which is choosing to forgo revenue by offering certain products,
such as low latency connectivity, at lower rates than other options
exchanges to attract order flow and encourage market participants to
experience the high determinism, low latency, and resiliency of the
Exchange's trading systems. The Exchange does not believe it should now
be penalized for seeking to raise its fees as it now needs to upgrade
its technology and absorb increased costs. Therefore, the Exchange
believes the proposed fees are reasonable because they are based on
both relative costs to the Exchange to provide dedicated 10Gb ULL
connectivity and Full Service MEO Ports, the extent to which the
product drives the Exchange's overall costs and the relative value of
the product, as well as the Exchange's objective to make access to its
Systems broadly available to market participants. The Exchange also
believes the proposed fees are reasonable because they are designed to
generate annual revenue to recoup the Exchange's costs of providing
dedicated 10Gb ULL connectivity and Full Service MEO Ports.
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\139\ The Exchange has incurred a cumulative loss of $83 million
since its inception in 2017 through full year 2022. See Exchange's
Form 1/A, Application for Registration or Exemption from
Registration as a National Securities Exchange, filed June 26, 2023,
available at https://www.sec.gov/Archives/edgar/vprr/2300/23007743.pdf.
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The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 10Gb ULL connectivity and Full Service MEO Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Full Service MEO Ports and/or
obtaining new clients that will purchase such access. To the extent the
Exchange is successful in encouraging new clients to utilize 10Gb ULL
connectivity and Full Service MEO Ports, the Exchange does not believe
it should be penalized for such success. To the extent the Exchange has
mispriced and experiences a net loss in connectivity clients or in
transaction activity, the Exchange could experience a net reduction in
revenue. While the Exchange is supportive of transparency around costs
and potential margins (applied across all exchanges), as well as
periodic review of revenues and applicable costs (as discussed below),
the Exchange does not believe that these estimates should form the sole
basis of whether or not a proposed fee is reasonable or can be adopted.
Instead, the Exchange believes that the information should be used
solely to confirm that an Exchange is not earning--or seeking to earn--
supra-competitive profits. The Exchange believes the Cost Analysis and
related projections in this filing demonstrate this fact.
The Exchange is owned by a holding company that is the parent
company of four exchange markets and, therefore, the Exchange and its
affiliated markets must allocate shared costs across all of those
markets accordingly, pursuant to the above-described allocation
methodology. In contrast, the Investors Exchange LLC (``IEX'') and
MEMX, which are currently each operating only one exchange, in their
recent non-transaction fee filings allocate the entire amount of that
same cost to a single exchange. This can result in lower profit margins
for the non-transaction fees proposed by IEX and MEMX because the
single allocated cost does not experience the efficiencies and
synergies that result from sharing costs across multiple platforms. The
Exchange and its affiliated markets often share a single cost, which
results in cost efficiencies that can cause a broader gap between the
allocated cost amount and projected revenue, even though the fee levels
being proposed are lower or competitive with competing markets (as
described above). To the extent that the application of a cost-based
standard results in Commission Staff making determinations as to the
appropriateness of certain profit margins, the Exchange believes that
Commission Staff should also consider whether the proposed fee level is
comparable to, or competitive with, the same fee charged by competing
exchanges and how different cost allocation methodologies (such as
across multiple markets) may result in different profit margins for
comparable fee levels. Further, if Commission Staff is making
determinations as to appropriate profit margins in their approval of
exchange fees, the Exchange believes that the Commission should be
clear to all market participants as to what they have determined is an
appropriate profit margin and should apply such determinations
consistently and, in the case of certain legacy exchanges,
retroactively, if such standards are to avoid having a discriminatory
effect.
Further, as is reflected in the proposal, the Exchange continuously
and aggressively works to control its costs as a matter of good
business practice. A potential profit margin should not be evaluated
solely on its size; that assessment should also consider cost
management and whether the ultimate fee reflects the value of the
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
[[Page 72166]]
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.\140\ 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.
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\140\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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Full Service MEO Ports
The tiered pricing structure for Full Service MEO Ports has been in
effect since 2018.\141\ The Exchange now proposes a pricing structure
that is used by the Exchange's affiliates, MIAX and MIAX Emerald,
except with lower pricing for each tier for Full Service MEO Ports
(Bulk) and a flat fee for Full Service MEO Ports (Single). Members that
are frequently in the highest tier for Full Service MEO Ports consume
the most bandwidth and resources of the network. Specifically, as noted
above for 10Gb ULL connectivity, Market Makers who reach the highest
tier for Full Service MEO Ports (Bulk) account for greater than 84% of
ADV on the Exchange, while Market Makers that are typically in the
lowest Tier for Full Service MEO Ports, account for less than 14% of
ADV on the Exchange. The remaining 1% is accounted for by Market Makers
who are frequently in the middle Tier for Full Service MEO Ports
(Bulk).
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\141\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
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To achieve a consistent, premium network performance, the Exchange
must build out and maintain a network that has the capacity to handle
the message rate requirements of its most heavy network consumers
during anticipated peak market conditions. The need to support billions
of messages per day consume the Exchange's resources and significantly
contribute to the overall network connectivity expense for storage and
network transport capabilities. The Exchange must also purchase
additional storage capacity on an ongoing basis to ensure it has
sufficient capacity to store these messages as part of it surveillance
program and to satisfy its record keeping requirements under the
Exchange Act.\142\ Thus, as the number of connections a Market Maker
has increases, the related pull on Exchange resources also increases.
The Exchange sought to design the proposed tiered-pricing structure to
set the amount of the fees to relate to the number of connections a
firm purchases. The more connections purchased by a Market Maker likely
results in greater expenditure of Exchange resources and increased cost
to the Exchange.
---------------------------------------------------------------------------
\142\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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The Exchange further believes that the proposed fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for the flat fee, the Exchange provides each Member two (2)
Full Service MEO Ports for each matching engine to which that Member is
connected. Unlike other options exchanges that provide similar port
functionality and charge fees on a per port basis,\143\ the Exchange
offers Full Service MEO Ports as a package and provides Members with
the option to receive up to two Full Service MEO Ports per matching
engine to which it connects. The Exchange currently has twelve (12)
matching engines, which means Members may receive up to twenty-four
(24) Full Service MEO Ports for a single monthly fee, that can vary
based on certain volume percentages. The Exchange currently assesses
Members a fee of $5,000 per month in the highest Full Service MEO
Port--Bulk Tier, regardless of the number of Full Service MEO Ports
allocated to the Member. Assuming a Member connects to all twelve (12)
matching engines during a month, with two Full Service MEO Ports per
matching engine, this results in a cost of $208.33 per Full Service MEO
Port--Bulk ($5,000 divided by 24) for the month. This fee has been
unchanged since the Exchange adopted Full Service MEO Port fees in
2018.\144\ Members will continue to receive two (2) Full Service MEO
Ports to each matching engine to which they are connected for the
single flat monthly fee. Assuming a Member connects to all twelve (12)
matching engines during the month, and achieves the highest Tier for
that month, with two Full Service MEO Ports (Bulk) per matching engine,
this would result in a cost of $500 per Full Service MEO Port ($12,000
divided by 24).
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\143\ See supra table on page 129 and accompanying text.
\144\ See Securities Exchange Act Release No. 82867 (March 13,
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Full Service MEO Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange has operated at a cumulative net annual
loss since it launched operations in 2017 \145\ due to providing a low-
cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems. To do so, the Exchange chose to waive the
fees for some non-transaction related services and Exchange products or
provide them at a very lower fee, which was not profitable to the
Exchange. This resulted in the Exchange forgoing revenue it could have
generated from assessing any fees or higher fees. The Exchange could
have sought to charge higher fees at the outset, but that could have
served to discourage participation on the Exchange. Instead, the
Exchange chose to provide a low-cost exchange alternative to the
options industry, which resulted in lower initial revenues. Examples of
this are 10Gb ULL connectivity and Full Service MEO Ports, for which
the Exchange only now seeks to adopt fees at a level similar to or
lower than those of other options exchanges.
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\145\ See supra note 135.
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Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As is
[[Page 72167]]
the case with the current proposed flat fee, the proposed fee would
apply uniformly to all market participants regardless of the number of
connections they choose to purchase. The proposed fee does not favor
certain categories of market participants in a manner that would impose
an undue burden on competition.
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and
customers of those resellers to compete with other market participants
or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Options Market Maker
terminated their membership on January 1, 2023 as a direct result of
the proposed fee changes.\146\ The Exchange does not believe that the
proposed fees for connectivity services place certain market
participants at a relative disadvantage to other market participants
because the proposed connectivity pricing is associated with relative
usage of the Exchange by each market participant and does not impose a
barrier to entry to smaller participants. The Exchange believes its
proposed pricing is reasonable and, when coupled with the availability
of third-party providers that also offer connectivity solutions, that
participation on the Exchange is affordable for all market
participants, including smaller trading firms. As described above, the
connectivity services purchased by market participants typically
increase based on their additional message traffic and/or the
complexity of their operations. The market participants that utilize
more connectivity services typically utilize the most bandwidth, and
those are the participants that consume the most resources from the
network. Accordingly, the proposed fees for connectivity services do
not favor certain categories of market participants in a manner that
would impose a burden on competition; rather, the allocation of the
proposed connectivity fees reflects the network resources consumed by
the various size of market participants and the costs to the Exchange
of providing such connectivity services.
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\146\ 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 135. The
Exchange does not believe a similar analysis would be useful here
because it is amending existing fees, not proposing to charge a new
fee where existing subscribers may terminate connections because
they are no longer enjoying the service at no cost.
---------------------------------------------------------------------------
Inter-Market Competition
The Exchange also does not believe that the proposed rule change
and price increase will result in any burden on inter-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. As this is a fee increase, arguably if set too
high, this fee would make it easier for other exchanges to compete with
the Exchange. Only if this were a substantial fee decrease could this
be considered a form of predatory pricing. In contrast, the Exchange
believes that, without this fee increase, we are potentially at a
competitive disadvantage to certain other exchanges that have in place
higher fees for similar services. As we have noted, the Exchange
believes that connectivity fees can be used to foster more competitive
transaction pricing and additional infrastructure investment and there
are other options markets of which market participants may connect to
trade options at higher rates than the Exchange's. Accordingly, the
Exchange does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
The Exchange also believes that the proposed fees for 10Gb
connectivity are appropriate and warranted and would not impose any
burden on competition. This is a technology driven change designed to
meet customer needs. The proposed fees would assist the Exchange in
recovering costs related to providing dedicated 10Gb connectivity to
the Exchange while enabling it to continue to meet current and
anticipated demands for connectivity by its Members and other market
participants. Separating its 10Gb network from MIAX enables the
Exchange to better compete with other exchanges by ensuring it can
continue to provide adequate connectivity to existing and new Members,
which may increase in ability to compete for order flow and deepen its
liquidity pool, improving the overall quality of its market. The
proposed rates for 10Gb ULL connectivity are structured to enable the
Exchange to bifurcate its 10Gb ULL network shared with MIAX so that it
can continue to meet current and anticipated connectivity demands of
all market participants.
Similarly, and also in connection with a technology change, Cboe
Exchange, Inc. (``Cboe'') amended its access and connectivity fees,
including port fees.\147\ Specifically, Cboe adopted certain logical
ports to allow for the delivery and/or receipt of trading messages--
i.e., orders, accepts, cancels, transactions, etc. Cboe established
tiered pricing for BOE and FIX logical ports,\148\ tiered pricing for
BOE Bulk ports, and flat prices for DROP, Purge Ports, GRP Ports and
Multicast PITCH/Top Spin Server Ports. Cboe argued in its fee proposal
that the proposed pricing more closely aligned its access fees to those
of its affiliated exchanges as the affiliated exchanges offer
substantially similar connectivity and functionality and are on the
same platform that Cboe migrated to.\149\ Cboe justified its proposal
by stating that, ``. . . the Exchange believes substitutable products
and services are in fact available to market participants, including,
among other things, other options exchanges a market participant may
connect to in lieu of the Exchange, indirect connectivity to the
Exchange via a third-party reseller of connectivity and/or trading of
any options product, including proprietary products, in the Over-the-
Counter (OTC) markets.'' \150\
[[Page 72168]]
The Exchange concurs with the following statement by Cboe,
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\147\ See Securities Exchange Act Release No. 90333 (November 4,
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105). The
Exchange notes that Cboe submitted this filing after the Staff
Guidance and contained no cost based justification.
\148\ See Cboe Fee Schedule, Page 12, Logical Connectivity Fees,
available at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf (BOE/FIX logical monthly port fees of $750 per
port for ports 1-5 and $800 per port for port 6 or more; and BOE
Bulk logical monthly port fees of $1,500 per port for ports 1-5,
$2,500 per port for ports 6-30, and $3,000 for port 31 or more).
\149\ See supra note 147 at 71676.
\150\ Id.
The rule structure for options exchanges are also fundamentally
different from those of equities exchanges. In particular, options
market participants are not forced to connect to (and purchase
market data from) all options exchanges. For example, there are many
order types that are available in the equities markets that are not
utilized in the options markets, which relate to mid-point pricing
and pegged pricing which require connection to the SIPs and each of
the equities exchanges in order to properly execute those orders in
compliance with best execution obligations. Additionally, in the
options markets, the linkage routing and trade through protection
are handled by the exchanges, not by the individual members. Thus
not connecting to an options exchange or disconnecting from an
options exchange does not potentially subject a broker-dealer to
violate order protection requirements. Gone are the days when the
retail brokerage firms (such as Fidelity, Schwab, and eTrade) were
members of the options exchanges--they are not members of the
Exchange or its affiliates, they do not purchase connectivity to the
Exchange, and they do not purchase market data from the Exchange.
Accordingly, not only is there not an actual regulatory requirement
to connect to every options exchange, the Exchange believes there is
also no ``de facto'' or practical requirement as well, as further
evidenced by the recent significant reduction in the number of
broker-dealers that are members of all options exchanges.\151\
---------------------------------------------------------------------------
\151\ Id. at 71676.
The Cboe proposal also referenced the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\152\ wherein
the Commission discussed the existence of competition in the
marketplace generally, and particularly for exchanges with unique
business models. The Commission acknowledged that, even if an exchange
were to exit the marketplace due to its proposed fee-related change, it
would not significantly impact competition in the market for exchange
trading services because these markets are served by multiple
competitors.\153\ Further, the Commission explicitly stated that
``[c]onsequently, demand for these services in the event of the exit of
a competitor is likely to be swiftly met by existing competitors.''
\154\ Finally, the Commission recognized that while some exchanges may
have a unique business model that is not currently offered by
competitors, a competitor could create similar business models if
demand were adequate, and if a competitor did not do so, the Commission
believes it would be likely that new entrants would do so if the
exchange with that unique business model was otherwise profitable.\155\
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\152\ See Securities Exchange Act Release No. 86901 (September
9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
\153\ Id.
\154\ Id.
\155\ Id.
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Cboe also filed to establish a monthly fee for Certification
Logical Ports of $250 per Certification Logical Port.\156\ Cboe
reasoned that purchasing additional Certification Logical Ports, beyond
the one Certification Logical Port per logical port type offered in the
production environment free of charge, is voluntary and not required in
order to participate in the production environment, including live
production trading on the Exchange.\157\
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\156\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011). Cboe offers
BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical
Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server
Ports. For each type of the aforementioned logical ports that are
used in the production environment, the Exchange also offers
corresponding ports which provide Trading Permit Holders and non-
TPHs access to the Exchange's certification environment to test
proprietary systems and applications (i.e., ``Certification Logical
Ports'').
\157\ See Securities Exchange Act Release No. 94512 (March 24,
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011).
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In its statutory basis, Cboe justified the new port fee by stating
that it believed the Certification Logical Port fee were reasonable
because while such ports were no longer completely free, TPHs and non-
TPHs would continue to be entitled to receive free of charge one
Certification Logical Port for each type of logical port that is
currently offered in the production environment.\158\ Cboe noted that
other exchanges assess similar fees and cited to NASDAQ LLC and
MIAX.\159\ Cboe also noted that the decision to purchase additional
ports is optional and no market participant is required or under any
regulatory obligation to purchase excess Certification Logical Ports in
order to access the Exchange's certification environment.\160\ Finally,
similar proposals to adopt a Certification Logical Port monthly fee
were filed by Cboe BYX Exchange, Inc.,\161\ BZX,\162\ and Cboe EDGA
Exchange, Inc.\163\
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\158\ Id. at 18426.
\159\ Id.
\160\ Id.
\161\ See Securities Exchange Act Release No. 94507 (March 24,
2002), 87 FR 18439 (March 30, 2022) (SR-CboeBYX-2022-004).
\162\ See Securities Exchange Act Release No. 94511 (March 24,
2002), 87 FR 18411 (March 30, 2022) (SR-CboeBZX-2022-021).
\163\ See Securities Exchange Act Release No. 94517 (March 25,
2002), 87 FR 18848 (March 31, 2022) (SR-CboeEDGA-2022-004).
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The Cboe fee proposals described herein were filed subsequent to
the D.C. Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866
F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject
to the same (and current) standard for SEC review and approval as this
proposal. In summary, the Exchange requests the Commission apply the
same standard of review to this proposal which was applied to the
various Cboe and Cboe affiliated markets' filings with respect to non-
transaction fees. If the Commission were to apply a different standard
of review to this proposal than it applied to other exchange fee
filings it would create a burden on competition such that it would
impair the Exchange's ability to make necessary technology driven
changes, such as bifurcating its 10Gb ULL network, because it would be
unable to monetize or recoup costs related to that change and compete
with larger, non-legacy exchanges.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange received one comment letter on the Initial Proposal,
one
[[Page 72169]]
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.\164\ 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.
---------------------------------------------------------------------------
\164\ 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.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to section
19(b)(3)(A)(ii) of the Act,\165\ and Rule 19b-4(f)(2) \166\ 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.
---------------------------------------------------------------------------
\165\ 15 U.S.C. 78s(b)(3)(A)(ii).
\166\ 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-PEARL-2023-55 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-PEARL-2023-55. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-PEARL-2023-55 and should be
submitted on or before November 9, 2023.
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\167\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\167\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-23044 Filed 10-18-23; 8:45 am]
BILLING CODE 8011-01-P
