Self-Regulatory Organizations; MEMX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Exchange's Fee Schedule To Adopt Connectivity and Application Session Fees for MEMX Options, 16049-16061 [2024-04695]
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Federal Register / Vol. 89, No. 45 / Wednesday, March 6, 2024 / Notices
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:
ddrumheller on DSK120RN23PROD with NOTICES1
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ISE–2024–07 on the subject line.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–04704 Filed 3–5–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99635; File No. SR–MEMX–
2024–06]
Self-Regulatory Organizations; MEMX
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend the Exchange’s Fee
Schedule To Adopt Connectivity and
Application Session Fees for MEMX
Options
February 29, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
15, 2024, MEMX LLC (‘‘MEMX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘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 is filing a proposal to
amend the Fee Schedule to: (i) apply the
Exchange’s current Connectivity and
Application Session fees to MEMX
Options Users, and (ii) make an
organizational change to its existing fee
schedule for the Exchange’s pre-existing
equities market (‘‘MEMX Equities’’), in
order to create a separate fee schedule
for Connectivity Fees (for both MEMX
Equities and MEMX Options). The
Exchange proposes to implement the
changes to the Fee Schedule pursuant to
this proposal immediately. The text of
the proposed rule change is provided in
Exhibit 5.
18 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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16049
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
Background
The Exchange is filing a proposal to
amend the Fee Schedule to: (i) apply the
Exchange’s current Connectivity and
Application Session fees to MEMX
Options Users, and (ii) make an
organizational change to its existing fee
schedule for the Exchange’s pre-existing
equities market (‘‘MEMX Equities’’), in
order to create a separate fee schedule
for Connectivity Fees (for both MEMX
Equities and MEMX Options). The
Exchange believes that these changes
will provide greater transparency to
Members about how the Exchange
assesses fees, as well as allowing
Members to more easily validate their
bills on a monthly basis. The Exchange
notes that none of these changes amend
any existing fee applicable to MEMX
Equities. The Exchange is proposing to
implement the proposal immediately.
The Exchange previously filed the
proposal on October 24, 2023 (SR–
MEMX–2023–29) (the ‘‘Initial
Proposal’’). The Exchange withdrew the
Initial Proposal and replaced the
proposal with SR–MEMX–2023–39 (the
‘‘Second Proposal’’). The Exchange
recently withdrew the Second Proposal
and is replacing it with the current
filing (SR–MEMX–2024–06).
As set forth below, the Exchange
believes that its proposal provides a
great deal of transparency regarding the
cost of providing connectivity services
and anticipated revenue and that the
proposal is consistent with the Act and
associated guidance. The Exchange is
re-filing this proposal promptly
following the withdrawal of the Second
Proposal in order to update the Cost
Analysis included in the Second
Proposal.
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(i) Fees for Connectivity to MEMX
Options
As noted above, the Exchange is
proposing to apply the current fees it
charges to Members and non-Members 3
for physical connectivity to the
Exchange and for application sessions
(otherwise known as ‘‘logical ports’’)
that a Member utilizes in connection
with their participation on the Exchange
(together with physical connectivity,
collectively referred to in this proposal
as ‘‘connectivity services’’, as described
in greater detail below) to both Users of
MEMX Equities and MEMX Options.4
Specifically, the Exchange will continue
to charge $6,000 per month for a
physical connection in the data center
where the Exchange primarily operates
under normal market conditions
(‘‘Primary Data Center’’), and $3,000 per
month for a physical connection at the
geographically diverse data center,
which is operated for backup and
disaster recovery purposes (‘‘Secondary
Data Center’’). These physical
connections can be used to access both
platforms, accordingly, a firm that is a
Member of both MEMX Equities and
MEMX Options may use a single
physical connection to access its
application sessions at both MEMX
Equities and MEMX Options. This
differs from application sessions in that
a firm that is a Member of both MEMX
Equities and MEMX Options would
need to purchase separate application
sessions for each trading platform in
order to access each such trading
platform. These application session fees
will continue to be $450 per month for
an application session used for order
entry (‘‘Order Entry Port’’) and $450 per
month for an application session for
receipt of drop copies (‘‘Drop Copy
Port’’), to the extent such ports are in
the Primary Data Center. As is true
today for MEMX Equities, the Exchange
will not charge for Order Entry Ports or
Drop Copy Ports in the Secondary Data
Center. The Exchange’s proposal to
apply the same fees to Equities and
Options stems from the same cost
analysis it conducted in adopting those
fees to its Equities Members,5 which the
Exchange has reviewed and updated for
3 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 to Members, and thus, may access
application sessions on behalf of one or more
Members. Extranets offer physical connectivity
services to Members and non-Members.
4 MEMX Options launched on September 27,
2023.
5 See Securities Exchange Act Release No. 59846
(September 27, 2022), 87 FR 59845 (October 3,
2022) (SR–MEMX–2022–026).
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2024 as detailed below. Given that the
Exchange has only recently launched
MEMX Options, however, and the fact
that its analysis is based on projections
across all potential revenue streams, the
Exchange is committing to conduct a
one-year review after these fees are
applied. 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, or to
decrease fees in the event that revenue
materially exceeds expectations.
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 services to MEMX Options,
the Exchange has sought to be especially
diligent in assessing those fees in a
transparent way against its own
aggregate costs of providing the related
services, and also 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,6 and Rule 19b–4 thereunder,7
with respect to the types of information
self-regulatory organizations (‘‘SROs’’)
should provide when filing fee changes,
and Section 6(b) of the Act,8 which
requires, among other things, that
exchange fees be reasonable and
equitably allocated,9 not designed to
permit unfair discrimination,10 and that
they not impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.11 This rule change
proposal addresses those requirements,
and the analysis and data in each of the
sections that follow are designed to
6 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
8 15 U.S.C. 78f(b).
9 15 U.S.C. 78f(b)(4).
10 15 U.S.C. 78f(b)(5).
11 15 U.S.C. 78f(b)(8).
7 17
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clearly and comprehensively show how
they are met.12
As detailed below, MEMX calculated
its aggregate annual costs for providing
physical connectivity to both MEMX
Equities and MEMX Options in 2024 at
$14,970,454 and its aggregate annual
costs for providing application sessions
at $7,185,273. In order to cover the
aggregate costs of providing
connectivity to its Options and Equities
Users (both Members and non-Members)
going forward and to make a modest
profit, as described below, the Exchange
is proposing to modify its Fee Schedule,
pursuant to MEMX Rules 15.1(a) and
(c), to charge a fee to Options Users, as
it currently does to Equities Users, of
$6,000 per month for each physical
connection in the Primary Data Center
and of $3,000 per month for each
physical connection in the Secondary
Data Center. The Exchange also
proposes to modify its Fee Schedule,
pursuant to MEMX Rules 15.1(a) and
(c), to charge a fee to Options Users, as
it currently does to Equities Users, of
$450 per month for each Order Entry
Port and Drop Copy Port in the
Exchange’s Primary Data Center, as
further described below.13
Cost Analysis
Background on Cost Analysis
In February 2024, MEMX completed
an updated study of its aggregate
projected costs to produce market data
and connectivity across both its Equities
and Options platforms in 2024 (the
‘‘Cost Analysis’’).14 The Cost Analysis
required a detailed analysis of MEMX’s
aggregate baseline costs, including a
12 In 2019, Commission staff published guidance
suggesting the types of information that SROs may
use to demonstrate that their fee filings comply
with the standards of the Exchange Act (‘‘Fee
Guidance’’). While MEMX understands that the Fee
Guidance does not create new legal obligations on
SROs, the Fee Guidance is consistent with MEMX’s
view about the type and level of transparency that
exchanges should meet to demonstrate compliance
with their existing obligations when they seek to
charge new fees. See Staff Guidance on SRO Rule
Filings Relating to Fees (May 21, 2019) available at
https://www.sec.gov/tm/staff-guidance-sro-rulefilings-fees.
13 As proposed, fees for connectivity services
would be assessed based on each active
connectivity service product at the close of business
on the first day of each month. If a product is
cancelled by a Member’s submission of a written
request or via the MEMX User Portal prior to such
fee being assessed then the Member will not be
obligated to pay the applicable product fee. MEMX
will not return pro-rated fees even if a product is
not used for an entire month.
14 The updated Cost Analysis completed in
February 2024 is based on the same principles
applied to the Cost Analysis completed in
September 2023 that was included in the Initial
Proposal but contains updated figures now that
MEMX Options has been operational for several
months.
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Federal Register / Vol. 89, No. 45 / Wednesday, March 6, 2024 / Notices
core service, resulting in the cost
allocations described below.
By allocating segmented costs to each
core service, MEMX 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 four 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 four 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.
Through the Exchange’s extensive
Cost Analysis, the Exchange analyzed
every expense item in the Exchange’s
general expense ledger to determine
whether each such expense relates to
the provision of connectivity services,
and, if such expense did so relate, what
portion (or percentage) of such expense
COSTS DRIVER
Human Resources
Connectivity
Data Center
Technology (Hardware, Software Licenses, etc.)
Depreciation
External Market Data
Allocated Shared Expenses
TOTAL
Below are additional details regarding
each of the line-item costs considered
by MEMX to be related to offering
physical connectivity, as well as any
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Costs Related To Offering Physical
Connectivity
The following chart details the
individual line-item costs considered by
MEMX to be related to offering physical
connectivity 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 18% of its overall
Human Resources cost to offering
physical connectivity).
COSTS
% of ALL
$ 6,374,100
18%
$ 732,216
75%
$ 2,824,425
80%
$ 1,075,518
25%
$ 2,808,173
39%
0%
$
$ 1,156,022
15%
$14,970,454
23.5%
relevant discussion of how the costs
projected for 2024 differ, if any, from
the Exchange’s previous Cost Analysis
conducted in 2021 in adopting
PO 00000
actually supports the provision of
connectivity services, and thus bears a
relationship that is, ‘‘in nature and
closeness,’’ directly related to network
connectivity services. In turn, the
Exchange allocated certain costs more to
physical connectivity and others to
application sessions, 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,
MEMX estimates that the cost drivers to
provide connectivity services in 2024,
including both physical connections
and application sessions, will result in
an aggregate annual cost of $22,155,727,
as further detailed below. The Exchange
notes that it utilized the same principles
to generate the 2021 Cost Analysis,
applicable to Equities only, and at that
time, the estimated annual aggregate
cost to provide connectivity services
was $13,724,580. The differences
between such estimated costs and the
overall analysis are primarily based on:
(1) the addition of MEMX Options, (ii)
increased, and in some cases decreased,
costs projected by the Exchange, (iii)
and changes made to reallocate certain
costs into categories that more closely
align the Exchange’s audited financial
statements, as further described below.
Connectivity Fees for its Equities
platform, which are the same fees the
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determination and allocation of costs for
core services provided by the
Exchange—transaction execution,
market data, membership services and
trading permits, regulatory services,
physical connectivity, and application
sessions (which provide order entry,
cancellation and modification
functionality, risk functionality, ability
to receive drop copies, and other
functionality). MEMX 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’’). Next, MEMX adopted an
allocation methodology with various
principles to guide how much of a
particular cost should be allocated to
each core service. For instance, fixed
costs that are not driven by client
activity (e.g., message rates), such as
data center costs, were allocated more
heavily to the provision of physical
connectivity (80%), with smaller
allocations to logical ports (11%), and
the remainder to the provision of
transaction execution, regulatory
services, and market data services (9%).
In contrast, costs that are driven largely
by client activity (e.g., message rates),
were not allocated to physical
connectivity at all but were allocated
primarily to the provision of transaction
execution and market data services
(80%) with a smaller allocation to
application sessions (20%). The
allocation methodology was decided
through conversations with senior
management familiar with each area of
the Exchange’s operations. After
adopting this allocation methodology,
the Exchange then applied an estimated
allocation of each cost driver to each
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Exchange is proposing to apply for its
Options platform in this filing.15
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Human Resources
In allocating personnel (Human
Resources) costs, in order to not double
count any allocations, the Exchange first
excluded any employee time allocated
towards options regulation in order to
recoup costs via the Options Regulatory
Fee (‘‘ORF’’).16 Of the remaining
employee time left over, MEMX then
calculated an allocation of employee
time for employees whose functions
include providing and maintaining
physical connectivity and performance
thereof (primarily the MEMX network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity) and for which the
Exchange allocated 80% of each
employee’s time. The Exchange also
allocated Human Resources costs to
provide physical connectivity to a
limited subset of personnel with
ancillary functions related to
establishing and maintaining such
connectivity (such as information
security and finance personnel), for
which the Exchange allocated cost on an
employee-by-employee basis (i.e., only
including those personnel who do
support functions related to providing
physical connectivity) and then applied
a smaller allocation to such employees
(30%).17 The Exchange notes that it has
fewer than 100 employees and each
department leader has direct knowledge
of the time spent by those spent by each
employee with respect to the various
tasks necessary to operate the Exchange.
The estimates of Human Resources cost
were therefore determined by consulting
with such department leaders,
determining which employees are
involved in tasks related to providing
physical connectivity, and confirming
that the proposed allocations were
reasonable based on an understanding
of the percentage of their time such
employees devote to tasks related to
providing physical connectivity. The
Exchange notes that senior level
executives were only allocated Human
Resources costs to the extent the
Exchange believed they are involved in
overseeing tasks related to providing
physical connectivity. The Human
15 See
supra note 5.
Securities Exchange Act Release No. 99259
(January 2, 2024), 89 FR 965 (January 8, 2024) (SR–
MEMX–2023–38).
17 To reiterate, these allocations are applied to the
percentage of employee time left over after the ORF
allocation. As such, if 10% of an employee’s time
was allocated towards options regulation, the
percentage of time allocated to physical
connectivity in this example would apply to the
90% of the employee’s time left over.
16 See
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Resources cost was calculated using a
blended rate of compensation reflecting
salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k)
matching contributions.
In 2021, 13.8% of the Exchange’s
Human Resources costs were allocated
towards the provision of physical
connectivity, which is slightly lower
than the 18% allocation in the current
Cost Analysis. The Exchanges notes that
this increase is due to additional hiring
necessary to support network
infrastructure, and that in advance of
the launch of MEMX Options, this
hiring started at the beginning of 2023.
Connectivity
The Connectivity cost includes
external fees paid to connect to other
exchanges and third parties. 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.
Approximately 75% of the Exchange’s
connectivity costs are allocated towards
the provision of physical connectivity,
which is the same percentage identified
in the 2021 Cost Analysis. Of note, the
2021 Cost Analysis allocated
approximately $162,000 per month of
connectivity costs towards physical
connectivity, which is notably higher
than the $61,018 18 per month allocated
under the current Cost Analysis. The
Exchange notes that this is due to a
substantial redesign in the Exchange’s
connectivity plan which achieved the
cost savings noted. Additionally, in the
2021 Cost Analysis, certain costs were
included in the Connectivity category
that have since been moved into the
broader Technology category.
Data Center
Data Center costs include 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 (80%) to physical
connectivity because the third-party
data centers and the Exchange’s
physical equipment contained therein is
the most direct cost in providing
18 This figure is arrived at by dividing the annual
allocated Connectivity costs in the table on page 12
($732,216) by 12.
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physical access to the Exchange. In
other words, for the Exchange to operate
in a dedicated space with connectivity
of participants to a physical trading
platform, the data centers are a very
tangible cost, and in turn, if the
Exchange did not maintain such a
presence then physical connectivity
would be of no value to market
participants. This slight increase over
the allocation of Data Center costs to
physical connectivity from 2021 (75%)
is due to the Exchange’s determination
that the Data Center is more directly
linked to physical connectivity than any
other core service provided by the
Exchange.
Technology
The Technology category includes the
Exchange’s network infrastructure, other
hardware, software, and software
licenses used to operate and monitor
physical assets necessary to offer
physical connectivity to the Exchange.
Of note, certain of these costs were
included in the Connectivity and a
separate Hardware and Software
Licenses category in the 2021 Cost
Analysis; however, in order to align
more closely with the Exchange’s
audited financial statements these costs
were combined into the broader
Technology category. The Exchange
allocated approximately 25% of its
Technology costs to physical
connectivity in 2024.
Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of Exchange
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which are owned by
the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
As noted above, the Exchange allocated
39% of all depreciation costs to
providing physical connectivity. This is
a higher percentage than was allocated
to providing physical connectivity in
2021 (18.5%), and this increase is due
to a high amount of capital expenditures
required to build the Exchange’s options
platform, none of which began to
depreciate until the launch of options in
September 2023. The Exchange notes,
however, that it did not allocate
depreciation costs for any internally
developed software to build the
Exchange’s trading platforms to physical
connectivity, as such software does not
impact the provision of physical
connectivity.
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Allocated Shared Expenses
Finally, a limited portion of general
shared expenses was allocated to
physical connectivity as without these
general shared costs the Exchange
would not be able to operate in the
manner that it does and provide
physical connectivity. The costs
included in general shared expenses
include general expenses of the
Exchange, including office space and
office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting
and training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange notes that the cost of paying
directors to serve on its Board of
Directors is also included in the
Exchange’s general shared expenses,
and thus a portion of such overall cost
amounting to 7% of the overall cost for
directors was allocated to providing
physical connectivity.
As a final part of the Exchange’s
analysis related to physical
connectivity, the Exchange determined
the total monthly cost of providing
physical connections, (i.e. the annual
cost of $14,970,454 noted in the table
above divided by 12), $1,247,537.83,
and projected average monthly revenue
for physical connections under the
proposed pricing herein of
approximately $1,413,500.19 Thus, the
Exchange calculated an average monthly
profit of $165,962, resulting in a
physical connectivity profit margin of
approximately 11.7%.20 The Exchange
notes that this projected profit margin
represents an increase over the
projected profit margin noted in the
2021 Cost Analysis related to physical
connectivity,21 which is in part due to
certain cost savings noted above
associated with a redesign in the
Exchange’s external connectivity plan.
COSTS DRIVER
Human Resources
Connectivity
Data Center
Technology (Hardware, Software Licenses, etc.)
Depreciation
External Market Data
Allocated Shared Expenses
TOTAL
Costs Related to Offering Application
Sessions
The following chart details the
individual line-item costs considered by
MEMX to be related to offering
application sessions 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 11% of its
overall Human Resources cost to
offering application sessions).
COSTS
% of ALL
$ 3,664,157
11%
$
36,020
4%
$ 380,202
11%
$ 527,533
12%
$ 1,000,287
14%
$ 367,952
20%
$ 1,209,122
15%
$7,185,273
11.3%
With respect to application sessions,
MEMX calculated Human Resources
cost by taking an allocation of employee
time for employees whose functions
include providing application sessions
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). The estimates of Human
Resources cost were again determined
by consulting with department leaders,
determining which employees are
involved in tasks related to providing
application sessions and maintaining
performance thereof, and confirming
that the proposed allocations were
reasonable based on an understanding
of the percentage of their time such
employees devote to tasks related to
providing application sessions and
maintaining performance thereof. The
Exchange notes that senior level
executives were only allocated Human
Resources costs to the extent the
Exchange believed they are involved in
overseeing tasks related to providing
application sessions and maintaining
performance thereof. The Human
Resources cost was again calculated
19 This projection was based off of actuals earned
in January and February 2024 and revenue
projections for the remainder of the year based off
the number of primary and secondary connections
maintained as of February 1, 2024, in both Equities
and Options. The Exchange notes that its previous
method of estimating profit by dividing the cost of
providing physical connectivity by the number of
physical connections maintained as of the date of
proposed pricing is no longer an accurate method.
This is due to the fact that such a calculation
assumes that the Exchange earns revenue on all
physical connections throughout the entire year,
which it will not, given that the Exchange will not
begin charging for options connections until March
1, 2024, and that the Exchange earns revenue of
$6,000 for all physical connections, regardless of
whether such connections are found in the primary
or secondary data center, which is also not the case.
20 The Exchange calculated margin by dividing
the total profit ($165,962) by the total revenue
($1,413,500) and multiplying by 100.
21 The 2021 Cost Analysis projected a profit
margin for physical connections of 8%.
Human Resources
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Nevertheless, the Exchange believes that
the projected profit margin is reasonable
and well within the range of where a
similarly situated company would
expect to be after three years of growth,
especially upon launching a new
trading platform that provides scale.
While the Exchange does not anticipate
a significant change to physical
connectivity during 2024 (i.e., neither a
significant increase nor a significant
decrease), it is possible that participants
will shift the way that they connect to
the Exchange and a reduction occurs or
that additional connectivity is
established, resulting in an increase.
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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 notes that it did not allocate
any External Market Data fees to the
provision of physical connectivity as
market data is not related to such
services.
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using a blended rate of compensation
reflecting salary, equity and bonus
compensation, benefits, payroll taxes,
and 401(k) matching contributions. As
shown in the table above, for 2024, the
Exchange allocated approximately 11%
of its Human Resources costs to
providing application sessions, which is
higher than the 7.7% it allocated in
2021. This increase is again due to
additional hiring needed to support the
addition of MEMX Options.
Connectivity
The Connectivity cost includes
external fees paid to connect to other
exchanges, as described above. The
Exchange allocated approximately 4%
of its Connectivity costs to providing
application sessions.
Data Center
Data Center costs include an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment as well as
related costs (the Exchange does not
own the Primary Data Center or the
Secondary Data Center, but instead,
leases space in data centers operated by
third parties). As shown in the table, the
Exchange allocated 11% of its Data
Center costs to application sessions in
the current Cost Analysis, which
represents an increase over the 2.6% it
allocated in the 2021 Cost Analysis.
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Technology
The Technology category includes the
Exchange’s network infrastructure, other
hardware, software, and software
licenses used to monitor the health of
the order entry services provided by the
Exchange. The Exchange allocated 12%
of its Technology costs to the provision
of application sessions, which
represents a slight increase over the
10.1% it allocated in the 2021 Cost
Analysis.
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 allocated 20% of External
Market Data fees to the provision of
application sessions as such market data
is necessary to offer certain services
related to such sessions, such as
validating orders on entry against the
National Best Bid and National Best
Offer (‘‘NBBO’’) and checking for other
conditions (e.g., whether a symbol is
halted or subject to a short sale circuit
breaker). Thus, as market data from
other exchanges is consumed at the
application session level in order to
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validate orders before additional
processing occurs with respect to such
orders, the Exchange believes it is
reasonable to allocate a small amount of
such costs to application sessions. The
increase in allocation of External Market
Data costs to the provision of
application sessions compared to the
2021 Cost Analysis, in which 7.5% of its
External Market Data costs were
allocated, is due to a restructuring of the
category. Specifically, in 2021, External
Market Data only included those costs
incurred to receive data from other
exchanges, while costs to receive the
SIP feeds and other non-exchange data
feeds were categorized under Hardware
and Software Licenses. These costs are
now all categorized under External
Market Data.
Depreciation
All physical assets and software,
which also includes assets used for
testing and monitoring of order entry
infrastructure, were valued at cost,
depreciated or leased over periods
ranging from three to five years. Thus,
the depreciation cost primarily relates to
servers necessary to operate the
Exchange, some of which is owned by
the Exchange and some of which is
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange allocated 14% of all
depreciation costs to providing
application sessions, which represents
an increase over the 8.3% allocated in
the 2021 Cost Analysis. In contrast to
physical connectivity, described above,
the Exchange did allocate depreciation
costs for depreciated internally
developed software to build the
Exchange’s platforms to application
sessions because such software is
related to the provision of such
connectivity.
Allocated Shared Expenses
Finally, a limited portion of general
shared expenses was allocated to overall
application session 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
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of Allocated Shared Expenses, and thus
a portion of such overall cost amounting
to less than 5% of the overall cost for
directors was allocated to providing
application sessions.
Lastly, the Exchange determined the
total monthly cost of providing
application sessions, (i.e. the annual
cost of $7,185,273 noted in the table
above divided by 12), $598,772.75, and
estimated an average monthly revenue
from application sessions under the
proposed pricing herein of $662,738.
Thus, the Exchange calculated an
average monthly profit of $63,965,
resulting in an application session profit
margin of approximately 9.7%.22 This
profit margin for application sessions is
slightly higher than the projected profit
margin noted in the 2021 Cost
Analysis,23 which the Exchange
believes is reasonable and well within
the range of where the Exchange would
expect it to be at this time.
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
application sessions) 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 filing it recently
submitted proposing the establishment
of an ORF.24 For instance, in calculating
the Human Resources expenses to be
allocated to physical connections, 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 time of such personnel
(80%) given their focus on functions
necessary to provide physical
connections. The time of those same
personnel were allocated only 4% to
application sessions and the remaining
16% was allocated to transactions and
market data. Of note, this allocation
applied only to the network
infrastructure employee’s time that was
left over after allocating for options
regulation support. The Exchange did
not allocate any other Human Resources
expense for providing physical
connections to any other employee
group outside of a smaller allocation
22 The Exchange calculated margin by dividing
the total profit ($63,965) by the total revenue
($662,738) and multiplying by 100.
23 The 2021 Cost Analysis projected an
application session profit margin of approximately
8%.
24 See supra note 16.
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(30%) of the employee time associated
with certain specified personnel who
work closely with and support network
infrastructure personnel. In contrast, the
Exchange allocated much smaller
percentages of employee time (15% or
less) across a wider range of personnel
groups in order to allocate Human
Resources costs to providing application
sessions. This is because a much wider
range of personnel are involved in
functions necessary to offer, monitor
and maintain application sessions but
the tasks necessary to do so are not a
primary or full-time function.
In total, the Exchange allocated 18%
of its Human Resources costs to
providing physical connections and
11% of its Human Resources costs to
providing application sessions, for a
total allocation of 29% of its Human
Resources expense to provide
connectivity services. In turn, the
Exchange allocated the remaining 71%
of its Human Resources expense to
Regulatory Services (21%), membership
(2%) and transactions and market data
(48%). 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 application sessions,
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
allocated approximately 53% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (39% attributed to physical
connections and 14% to application
sessions). The Exchange allocated the
remaining depreciation and
amortization expense (approximately
47%) toward regulatory services
(approximately 6%), and to providing
transaction services and market data
(approximately 41%).
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Looking at the Exchange’s operations
holistically, the estimated total monthly
costs to the Exchange for offering core
services in 2024 is $5,299,754,
compared to the $3,954,537 noted in the
2021 Cost Analysis. Based on its
projections, the Exchange expects to
collect approximately $2,076,238 on a
monthly basis for connectivity services.
Incorporating this amount into the
Exchange’s overall projected revenue,
including projections related to the
ORF, the Exchange anticipates monthly
revenue of approximately $6,080,631
from all sources (i.e., connectivity fees
and membership fees, transaction fees,
ORF, and revenue from market data,
both through the fees adopted in April
2022 25 and through the revenue
received from the SIPs). As such,
applying the Exchange’s holistic Cost
Analysis to a holistic view of
anticipated revenues, the Exchange
would earn approximately 13% margin
on its operations as a whole. The
Exchange believes that this amount is
reasonable.
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. As a new entrant to
the hyper-competitive exchange
environment, and an exchange focused
on driving competition, 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 options clients that
wish to maintain physical connectivity
and/or application sessions 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 was based on the Exchange’s
current operations and projections for
the remainder of 2024. As such, the
Exchange believes that its costs will
remain relatively similar in future years
(as demonstrated by the comparison of
the 2021 Cost Analysis to the 2024 Cost
Analysis). It is possible however that
such costs will either decrease or
increase. To the extent the Exchange
sees growth in use of connectivity
services it will receive additional
revenue to offset future cost increases.
However, if use of connectivity services
25 See Securities Exchange Act Release No. 97130
(March 13, 2013), 88 FR 16491 (March 17, 2023)
(SR–MEMX–2023–04).
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is static or decreases, the Exchange
might not realize the revenue that it
anticipates or needs in order to cover
applicable costs. Accordingly, the
Exchange is committing to conduct a
one-year review after implementation of
these fees. The Exchange expects that it
may propose to adjust fees at that time,
to increase fees in the event that
revenues fail to cover costs and a
reasonable mark-up of such costs.
Similarly, the Exchange would propose
to decrease fees in the event that
revenue materially exceeds our current
projections. In addition, the Exchange
will periodically conduct a review to
inform its decision making on whether
a fee change is appropriate (e.g., to
monitor for costs increasing/decreasing
or subscribers increasing/decreasing in
ways that suggest the then-current fees
are becoming dislocated from the prior
cost-based analysis) and would propose
to increase fees in the event that
revenues fail to cover its costs and a
reasonable mark-up, or decrease fees in
the event that revenue or the mark-up
materially exceeds our current
projections. In the event that the
Exchange determines to propose a fee
change, the results of a timely review,
including an updated cost estimate, will
be included in the rule filing proposing
the fee change. More generally, the
Exchange believes that it is appropriate
for an exchange to refresh and update
information about its relevant costs and
revenues in seeking any future changes
to fees, and the Exchange commits to do
so.
Proposed Fees
Physical Connectivity Fees
MEMX offers its Members the ability
to connect to the Exchange in order to
transmit orders to and receive
information from the Exchange.
Members can also choose to connect to
MEMX indirectly through physical
connectivity maintained by a third-party
extranet. Extranet physical connections
may provide access to one or multiple
Members on a single connection. Users
of MEMX physical connectivity services
(both Members and non-Members 26)
seeking to establish one or more
connections with the Exchange submit a
request to the Exchange via the MEMX
User Portal or directly to Exchange
personnel. Upon receipt of the
completed instructions, MEMX
establishes the physical connections
requested by the User. The number of
physical connections assigned to each
User (for both equities and options) as
of October 1, 2023, ranges from one (1)
26 See
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to 46, depending on the scope and scale
of the Member’s trading activity on the
Exchange as determined by the Member,
including the Member’s determination
of the need for redundant connectivity.
Separate physical connections are not
required to access the Exchange’s
Options and Equities platforms, as such,
a User could use a single connection to
access both platforms. The Exchange
notes that 50% of its Members do not
maintain a physical connection directly
with the Exchange in the Primary Data
Center (though many such Members
have connectivity through a third-party
provider) and 21 members, or 27.6%
have either one or two physical ports to
connect to the Exchange in the Primary
Data Center.27 Thus, only a limited
number of Members, (17 members, or
22%), maintain three or more physical
ports to connect to the Exchange in the
Primary Data Center.28
As described above, the Exchange has
previously justified its pricing with
respect to MEMX Equities and believes
the most fair approach, absent a
significant differentiation between
application costs to Equities and
Options, is to apply the same pricing to
all participants of either platform. As
such, in order to cover the aggregate
costs of providing physical connectivity
to Options and Equities Users and make
a modest profit, as described below, the
Exchange is proposing to charge a fee of
$6,000 per month for each physical
connection in the Primary Data Center
and a fee of $3,000 per month for each
physical connection in the Secondary
Data Center for connections to its
Options platform, as it currently charges
for connections to its Equities platform.
There is no requirement that any
Member maintain a specific number of
physical connections and a Member
may choose to maintain as many or as
few of such connections as each
Member deems appropriate. Further, as
noted above, existing Equities Members
may choose to use their existing
physical connection(s) to access the
Exchange’s Options platform.
The Exchange notes, however, that
pursuant to Rule 2.4 (Mandatory
Participation in Testing of Backup
Systems), the Exchange does require a
small number of Members to connect
and participate in functional and
performance testing as announced by
the Exchange, which occurs at least
once every 12 months. Specifically,
Members that have been determined by
27 Of those 21 members, four (4) have designated
certain of their physical ports will be used to
connect to MEMX Options.
28 Of those 17 members, thirteen (13) have
designated certain of their physical ports will be
used to connect to MEMX Options.
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the Exchange to contribute a meaningful
percentage of the Exchange’s overall
volume must participate in mandatory
testing of the Exchange’s backup
systems (i.e., such Members must
connect to the Secondary Data Center).
The Exchange notes that designated
Members are still able to use third-party
providers of connectivity to access the
Exchange at its Secondary Data Center,
and that for its Equities platform, one of
eight such designated Members does use
a third-party provider instead of
connecting directly to the Secondary
Data Center through connectivity
provided by the Exchange. Nonetheless,
because some Members are required to
connect to the Secondary Data Center
pursuant to Rule 2.4 and to encourage
Exchange Members to connect to the
Secondary Data Center generally, the
Exchange has proposed to charge onehalf of the fee for a physical connection
in the Primary Data Center for its
Options platform, as it currently charges
for Equities. The Exchange notes that its
costs related to operating the Secondary
Data Center were not separately
calculated for purposes of this proposal,
but instead, all costs related to
providing physical connections were
considered in the aggregate. The
Exchange believes this is appropriate
because had the Exchange calculated
such costs separately and then
determined the fee per physical
connection that would be necessary for
the Exchange to cover its costs for
operating the Secondary Data Center,
the costs would likely be much higher
than those proposed for connectivity at
the Primary Data Center because
Members maintain significantly fewer
connections at the Secondary Data
Center. The Exchange believes that
charging a higher fee for physical
connections at the Secondary Data
Center would be inconsistent with its
objective of encouraging Members to
connect at such data center and is
inconsistent with the fees charged by
other exchanges, which also provide
connectivity for disaster recovery
purposes at a discounted rate.29
The proposed fee will not apply
differently based upon the size or type
of the market participant, but rather
based upon the number of physical
connections a User requests, based upon
factors deemed relevant by each User
(either a Member, service bureau or
extranet). The Exchange believes these
factors include the costs to maintain
connectivity, business model and
choices Members make in how to
29 See, e.g., the BZX options fee schedule,
available at https://www.cboe.com/us/options/
membership/fee_schedule/bzx/.
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participate on the Exchange, as further
described below.
The proposed fee of $6,000 per month
for physical connections at the Primary
Data Center is designed to permit the
Exchange to cover the costs allocated to
providing connectivity services with a
modest profit margin (approximately
11.7%), which would also help fund
future expenditures (increased costs,
improvements, etc.). The Exchange
believes it is appropriate to charge fees
that represent a reasonable markup over
cost given the other factors discussed
above and the need for the Exchange to
maintain a highly performant and stable
platform to allow Members to transact
with determinism.
As noted above, the Exchange
proposes a discounted rate of $3,000 per
month for physical connections at its
Secondary Data Center. The Exchange
has proposed this discounted rate for
Secondary Data Center connectivity in
order to encourage Members to establish
and maintain such connections. Also, as
noted above, a small number of
Members are required pursuant to Rule
2.4 to connect and participate in testing
of the Exchange’s backup systems, and
the Exchange believes it is appropriate
to provide a discounted rate for physical
connections at the Secondary Data
Center given this requirement. The
Exchange notes that this rate is well
below the cost of providing such
services and the Exchange will operate
its network and systems at the
Secondary Data Center without
recouping the full amount of such cost
through connectivity services.
The proposed fee for physical
connections is effective on filing and
will become operative immediately,
subject to the proposed waiver
described below.
Application Session Fees
Similar to other exchanges, MEMX
offers its Members application sessions,
also known as logical ports, for order
entry and receipt of trade execution
reports and order messages. Members
can also choose to connect to MEMX
indirectly through a session maintained
by a third-party service bureau. Service
bureau sessions may provide access to
one or multiple Members on a single
session. Users of MEMX connectivity
services (both Members and nonMembers 30) seeking to establish one or
more application sessions with the
Exchange submit a request to the
Exchange via the MEMX User Portal or
directly to Exchange personnel. Upon
receipt of the completed instructions,
MEMX assigns the User the number of
30 See
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sessions requested by the User. The
number of sessions assigned to each
User as of February 1, 2024, ranges from
one (1) to more than 300 depending on
the scope and scale of the Member’s
trading activity on the Exchange (either
through a direct connection or through
a service bureau) as determined by the
Member. For example, by using
multiple sessions, Members can
segregate order flow from different
internal desks, business lines, or
customers. The Exchange does not
impose any minimum or maximum
requirements for how many application
sessions a Member or service bureau can
maintain, and it is not proposing to
impose any minimum or maximum
session requirements for its Members or
their service bureaus. The same
application session cannot be used to
access both MEMX Equities and MEMX
Options, as such, Users will need to
purchase separate application sessions
for MEMX Options, which differs from
physical connections.
As described above, in order to cover
the aggregate costs of providing
application sessions to Options Users
and to make a modest profit, as
described below, the Exchange is
proposing to charge a fee of $450 per
month for each Order Entry Port and
Drop Copy Port in the Primary Data
Center for Options application sessions,
which is the same fee it currently
charges for Equities application
sessions. The Exchange notes that it
does not propose to charge for: (1) Order
Entry Ports or Drop Copy Ports in the
Secondary Data Center, or (2) any Test
Facility Ports or MEMOIR Gap Fill
Ports, again, which it does not charge
for Equities Users. The Exchange has
proposed to continue to provide Order
Entry Ports and Drop Copy Ports in the
Secondary Data Center for Options free
of charge in order to encourage
Members to connect to the Exchange’s
backup trading systems. Similarly,
because the Exchange wishes to
encourage Members to conduct
appropriate testing of their use of the
Exchange, the Exchange has not
proposed to charge for Test Facility
Ports. With respect to MEMOIR Gap Fill
ports, such ports are exclusively used in
order to receive information when a
market data recipient has temporarily
lost its view of MEMX market data. The
Exchange has not proposed charging for
such ports because the costs of
providing and maintaining such ports is
more directly related to producing
market data.
The proposed fee of $450 per month
for each Order Entry Port and Drop
Copy Port in the Primary Data Center is
designed to permit the Exchange to
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cover the costs allocated to providing
application sessions with a modest
profit margin (approximately 9.7%),
which would also help fund future
expenditures (increased costs,
improvements, etc.).
The proposed fee is also designed to
encourage Users to be efficient with
their application session usage, thereby
resulting in a corresponding increase in
the efficiency that the Exchange would
be able to realize in managing its
aggregate costs for providing
connectivity services. There is no
requirement that any Member maintain
a specific number of application
sessions and a Member may choose to
maintain as many or as few of such
ports as each Member deems
appropriate. The Exchange has designed
its platform such that Order Entry Ports
can handle a significant amount of
message traffic (i.e., over 50,000 orders
per second), and has no application
flow control or order throttling. In
contrast, other exchanges maintain
certain thresholds that limit the amount
of message traffic that a single logical
port can handle.31 As such, while
several Members maintain a relatively
high number of ports because that is
consistent with their usage on other
exchanges and is preferable for their
own reasons, the Exchange believes that
it has designed a system capable of
allowing such Members to significantly
reduce the number of application
sessions maintained.
The proposed fee will not apply
differently based upon the size or type
of the market participant, but rather
based upon the number of application
sessions a User requests, based upon
factors deemed relevant by each User
(either a Member or service bureau on
behalf of a Member). The Exchange
believes these factors include the costs
to maintain connectivity and choices
Members make in how to segment or
allocate their order flow.32
31 See, e.g., Cboe US Options BOE Specification,
available at: https://cdn.cboe.com/resources/
membership/US_Options_BOE_Specification.pdf
(describing a 5,000 message per second Port Order
Rate Threshold on Cboe BOE ports).
32 The Exchange understands that some Members
(or service bureaus) may also request more Order
Entry Ports to enable the ability to send a greater
number of simultaneous order messages to the
Exchange by spreading orders over more Order
Entry Ports, thereby increasing throughput (i.e., the
potential for more orders to be processed in the
same amount of time). The degree to which this
usage of Order Entry Ports provides any throughput
advantage is based on how a particular Member
sends order messages to MEMX, however the
Exchange notes that its architecture reduces the
impact or necessity of such a strategy. All Order
Entry Ports on MEMX provide the same throughput,
and as noted above, the throughput is likely
adequate even for a Member sending a significant
amount of volume at a fast pace, and is not
PO 00000
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16057
The proposed fee for application
sessions is effective on filing and will
become operative immediately, subject
to the proposed waiver described below.
Proposed Fees—Additional Discussion
As discussed above, the proposed fees
for connectivity services do not by
design apply differently to different
types or sizes of Members. As discussed
in more detail in the Statutory Basis
section, the Exchange believes that the
likelihood of higher fees for certain
Members subscribing to connectivity
services usage than others is not
unfairly discriminatory because it is
based on objective differences in usage
of connectivity services among different
Members. The Exchange’s incremental
aggregate costs for all connectivity
services are disproportionately related
to Members with higher message traffic
and/or Members with more complicated
connections established with the
Exchange, as such Members: (1)
consume the most bandwidth and
resources of the network; (2) transact the
vast majority of the volume on the
Exchange; and (3) require the hightouch network support services
provided by the Exchange and its staff,
including network monitoring, reporting
and support services, resulting in a
much higher cost to the Exchange to
provide such connectivity services. For
these reasons, MEMX believes it is not
unfairly discriminatory for the Members
with higher message traffic and/or
Members with more complicated
connections to pay a higher share of the
total connectivity services fees. While
Members with a business model that
results in higher relative inbound
message activity or more complicated
connections are projected to pay higher
fees, the level of such fees is based
solely on the number of physical
connections and/or application sessions
deemed necessary by the Member and
not on the Member’s business model or
type of Member. The Exchange notes
that the correlation between message
traffic and usage of connectivity services
is not completely aligned because
Members individually determine how
many physical connections and
application sessions to request, and
Members may make different decisions
on the appropriate ways based on facts
unique to their individual businesses.
Based on the Exchange’s architecture, as
described above, the Exchange believes
that a Member even with high message
traffic would be able to conduct
business on the Exchange with a
artificially throttled or limited in any way by the
Exchange.
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relatively small connectivity services
footprint.
Finally, the fees for connectivity
services will help to encourage
connectivity services usage in a way
that aligns with the Exchange’s
regulatory obligations. As a national
securities exchange, the Exchange is
subject to Regulation Systems
Compliance and Integrity (‘‘Reg SCI’’).33
Reg SCI Rule 1001(a) requires that the
Exchange establish, maintain, and
enforce written policies and procedures
reasonably designed to ensure (among
other things) that its Reg SCI systems
have levels of capacity adequate to
maintain the Exchange’s operational
capability and promote the maintenance
of fair and orderly markets.34 By
encouraging Users to be efficient with
their usage of connectivity services, the
proposed fee will support the
Exchange’s Reg SCI obligations in this
regard by ensuring that unused
application sessions are available to be
allocated based on individual User
needs and as the Exchange’s overall
order and trade volumes increase.
Additionally, because the Exchange will
charge a lower rate for a physical
connection to the Secondary Data
Center and will not charge any fees for
application sessions at the Secondary
Data Center or its Test Facility, the
proposed fee structure will further
support the Exchange’s Reg SCI
compliance by reducing the potential
impact of a disruption should the
Exchange be required to switch to its
Disaster Recovery Facility and
encouraging Members to engage in any
necessary system testing with low or no
cost imposed by the Exchange.35
(ii) Organizational Fee Schedule
Changes
The Exchange is proposing to more
clearly separate Connectivity Fees from
the Exchange’s current fee schedule.
Currently, the Exchange has separate
transaction fee schedules for Equities
and Options, and the current
Connectivity Fees appear solely on the
Equities fee schedule. The Exchange
proposes to remove the Connectivity
33 17
CFR 242.1000–1007.
CFR 242.1001(a).
35 While some Members might directly connect to
the Secondary Data Center and incur the proposed
$3,000 per month fee, there are other ways to
connect to the Exchange, such as through a service
bureau or extranet, and because the Exchange is not
imposing fees for application sessions in the
Secondary Data Center, a Member connecting
through another method would not incur any fees
charged directly by the Exchange. However, the
Exchange notes that a third-party service provider
providing connectivity to the Exchange likely
would charge a fee for providing such connectivity;
such fees are not set by or shared in by the
Exchange.
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Fees section from the Equities fee
schedule, and add hyperlinks at the
bottom of the Equities and Options fee
schedules that direct the User to a single
Connectivity fee schedule. The
Exchange believes this format is
appropriate given that the same
Connectivity Fees apply to both Equities
and Options Users, and separating out
the fee schedule for Connectivity Fees
will reduce potential confusion (e.g., as
to which fees a Member that participates
on both MEMX Equities and MEMX
Options must pay on a monthly basis to
maintain connectivity to the Exchange).
The Exchange also proposes to add
three additional bullet points to the new
Connectivity Fee Schedule related to
MEMX Options. The first will notify
Members that a physical connection can
be used to access MEMX Equities and/
or MEMX Options. The second will
clarify that an application session can
only be used to access one MEMX
platform, i.e., MEMX Equities or MEMX
Options. The third will note that
Connectivity and application session
fees solely related to participation on
MEMX Options are waived until March
1, 2024.36 The Exchange notes that the
existing bullet points related to
Connectivity and application sessions
will be included on the proposed
separate Connectivity Fee Schedule,
(i.e., detailing the Exchange’s billing
practices, and making clear that that the
Exchange does not charge for: (1) Order
Entry Ports or Drop Copy Ports in the
Secondary Data Center, or (2) any Test
Facility Ports or MEMOIR Gap Fill
Ports.
2. Statutory Basis
The Exchange believes that the
proposed fees for connectivity services
to MEMX Options are reasonable,
equitable and not unfairly
discriminatory because, as described
above, the proposed pricing for
connectivity services is directly related
to the relative costs to the Exchange to
provide those respective services and
does not impose a barrier to entry to
smaller participants.
The Exchange recognizes that there
are various business models and varying
sizes of market participants conducting
business on the Exchange. The
Exchange’s incremental aggregate costs
for all connectivity services are
disproportionately related to Members
with higher message traffic and/or
36 On February 8, 2024, the Exchange filed a
proposed rule change to amend the Exchange’s Fee
Schedule to extend the existing Membership Fee
and Options Connectivity Fee Waivers until
February 29, 2024. See SR–MEMX–2024–05,
available at: https://info.memxtrading.com/
category/rule-filings/effective-rule-filings/.
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Members with more complicated
connections established with the
Exchange, as such Members: (1)
consume the most bandwidth and
resources of the network; (2) transact the
vast majority of the volume on the
Exchange; and (3) require the hightouch network support services
provided by the Exchange and its staff,
including network monitoring, reporting
and support services, resulting in a
much higher cost to the Exchange to
provide such connectivity services.
Accordingly, the Exchange believes the
allocation of the proposed fees that
increase based on the number of
physical connections or application
sessions is reasonable based on the
resources consumed by the respective
type of market participant (i.e., lowest
resource consuming Members will pay
the least, and highest resource
consuming Members will pay the most),
particularly since higher resource
consumption translates directly to
higher costs to the Exchange.
With regard to reasonableness, the
Exchange understands that when
appropriate given the context of a
proposal the Commission has taken a
market-based approach to examine
whether the SRO making the proposal
was subject to significant competitive
forces in setting the terms of the
proposal. In looking at this question, the
Commission considers whether the SRO
has demonstrated in its filing that: (i)
there are reasonable substitutes for the
product or service; (ii) ‘‘platform’’
competition constrains the ability to set
the fee; and/or (iii) revenue and cost
analysis shows the fee would not result
in the SRO taking supra-competitive
profits. If the SRO demonstrates that the
fee is subject to significant competitive
forces, the Commission will next
consider whether there is any
substantial countervailing basis to
suggest the fee’s terms fail to meet one
or more standards under the Exchange
Act. If the filing fails to demonstrate that
the fee is constrained by competitive
forces, the SRO must provide a
substantial basis, other than
competition, to show that it is
consistent with the Exchange Act,
which may include production of
relevant revenue and cost data
pertaining to the product or service.
MEMX believes the proposed fees for
connectivity services are fair and
reasonable as a form of cost recovery for
the Exchange’s aggregate costs of
offering connectivity services to
Members and non-Members. The
proposed fees are expected to generate
monthly revenue of $2,076,238
providing cost recovery to the Exchange
for the aggregate costs of offering
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connectivity services, based on a
methodology that narrowly limits the
cost drivers that are allocated cost to
those closely and directly related to the
particular service. In addition, this
revenue will allow the Exchange to
continue to offer, to enhance, and to
continually refresh its infrastructure as
necessary to offer a state-of-the-art
trading platform. The Exchange believes
that, consistent with the Act, it is
appropriate to charge fees that represent
a reasonable markup over cost given the
other factors discussed above. The
Exchange also believes the proposed fee
is a reasonable means of encouraging
Users to be efficient in the connectivity
services they reserve for use, with the
benefits to overall system efficiency to
the extent Members and non-Members
consolidate their usage of connectivity
services or discontinue subscriptions to
unused physical connectivity.
The Exchange further believes that the
proposed fees, as they pertain to
purchasers of each type of connectivity
alternative, constitute an equitable
allocation of reasonable fees charged to
the Exchange’s Members and nonMembers and are allocated fairly
amongst the types of market participants
using the facilities of the Exchange.
As described above, the Exchange
believes the proposed fees are equitably
allocated because the Exchange’s
incremental aggregate costs for all
connectivity services are
disproportionately related to Members
with higher message traffic and/or
Members with more complicated
connections established with the
Exchange, as such Members: (1)
consume the most bandwidth and
resources of the network; (2) transact the
vast majority of the volume on the
Exchange; and (3) require the hightouch network support services
provided by the Exchange and its staff,
including network monitoring, reporting
and support services, resulting in a
much higher cost to the Exchange to
provide such connectivity services.
Commission staff previously noted
that the generation of supra-competitive
profits is one of several potential factors
in considering whether an exchange’s
proposed fees are consistent with the
Act.37 As described in the Fee
Guidance, the term ‘‘supra-competitive
profits’’ refers to profits that exceed the
profits that can be obtained in a
competitive market. The proposed fee
structure would not result in excessive
pricing or supra-competitive profits for
the Exchange. The proposed fee
structure is merely designed to permit
the Exchange to cover the costs
37 See
Fee Guidance, supra note 12.
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allocated to providing connectivity
services with a modest margin
(approximately 11.7% for physical
connectivity and 9.7% for application
sessions), which would also help fund
future expenditures (increased costs,
improvements, etc.). While the Fee
Guidance did not establish a guideline
as to what constitutes supra-competitive
pricing through analyzing margin (nor
does the Exchange believe it should
have), the Exchange does not believe
that it would be reasonable to consider
the aforementioned margins to
constitute supra-competitive pricing. As
noted above, the increase in margin for
connectivity services is primarily driven
by certain cost savings that the
Exchange has been able to achieve as
compared to the 2021 Cost Analysis,
and the Exchange does not believe it
should be penalized, and instead should
be rewarded for identifying and
realizing such savings. Of course,
should the Exchange find opportunities
to dramatically reduce costs or increase
revenues such that it believes the cost
it is charging for physical connections
or applications sessions is inconsistent
with the cost of providing such
connectivity or resulting in
unreasonable margin, the Exchange will
seek to lower its fees in order to pass
savings on to its constituents. Thus, the
Exchange believes that its proposed
pricing for Connectivity Fees is fair,
reasonable, and equitable. Further, the
Exchange notes that certain of its
competitors have connectivity fees that
were approved without the presentation
of a cost-based analysis, but it is
reasonable to assume that certain of
those competitors with significantly
higher fees also operate with
significantly higher profit margins.
Accordingly, the Exchange believes that
its proposal is consistent with Section
6(b)(4) 38 of the Act because the
proposed fees will permit recovery of
the Exchange’s costs and will not result
in excessive pricing or supracompetitive profit.
The proposed fees for Options
connectivity services will allow the
Exchange to cover certain costs incurred
by the Exchange associated with
providing and maintaining necessary
hardware and other network
infrastructure as well as network
monitoring and support services;
without such hardware, infrastructure,
monitoring and support the Exchange
would be unable to provide the
connectivity services. The Exchange
routinely works to improve the
performance of the network’s hardware
and software. The costs associated with
38 15
PO 00000
maintaining and enhancing a state-ofthe-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 adopting fees for connectivity
services. As detailed above, the
Exchange has four 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 four primary sources of revenue.
The Exchange’s Cost Analysis estimates
the monthly costs to provide
connectivity services at $1,846,310.58.
Based on current connectivity services
usage, the Exchange would generate
monthly revenues of approximately
$2,076,238. This represents a modest
profit when compared to the cost of
providing connectivity services and that
profit represents a modest increase over
the profit estimated in the 2021 Cost
Analysis (a reasonable goal for a newly
formed business, i.e., growing from nonprofitable, to break-even to modestly
profitable).39 Even if the Exchange earns
that amount or incrementally more, the
Exchange believes the proposed fees for
connectivity services are fair and
reasonable because they will not result
in excessive pricing or supracompetitive profit, when comparing the
total expense of MEMX associated with
providing connectivity services versus
the total projected revenue of the
Exchange associated with network
connectivity services.
As noted above, when incorporating
the projected revenue from connectivity
services into the Exchange’s overall
projected revenue, including projections
related to recently adopted market data
fees, the Exchange anticipates monthly
revenue of $6,080,631 from all sources.
As such, applying the Exchange’s
holistic Cost Analysis to a holistic view
of anticipated revenues, the Exchange
would earn approximately 13% margin
on its operations as a whole. The
Exchange believes that this amount is
reasonable and is again evidence that
the Exchange will not earn a supracompetitive profit.
The Exchange notes that other
exchanges offer similar connectivity
options to market participants and that
the Exchange’s fees are a discount as
compared to the majority of such fees.40
39 Specifically, in the 2021 Cost Analysis, the
Exchange estimated the total costs to provide
connectivity services at $1,143,715 and estimated
monthly revenues of $1,233,750.
40 One significant differentiation between the
Exchanges is that while it offers different types of
U.S.C. 78f(b)(4).
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With respect to physical connections,
MIAX Options (‘‘MIAX’’), MIAX Pearl,
LLC (‘‘MIAX Pearl’’), MIAX Emerald,
LLC (‘‘MIAX Emerald’’), each of the
Nasdaq Stock Market LLC (‘‘Nasdaq’’)
options exchanges,41 NYSE American
Options (‘‘NYSE American’’), NYSE
Arca Options (‘‘NYSE Arca’’), Cboe
Exchange, Inc. (‘‘Cboe Options’’), Cboe
BZX Options (‘‘BZX Options’’), and
Cboe EDGX Options (‘‘EDGX Options’’)
charge between $7,000-$22,000 per
month for physical connectivity at their
primary data centers that is comparable
to that offered by the Exchange.42
Nasdaq, NYSE American and NYSE
Arca also charge installation fees, which
are not proposed to be charged by the
Exchange. With respect to application
sessions, BX, PHLX, GEMX, MRX, BOX
Options (‘‘BOX’’), Cboe Options, BZX
Options and EDGX charge between
$500-$800 per month for order entry
and drop ports.43 The Exchange further
notes that several of these exchanges
each charge for other logical ports that
physical connections, including 10Gb, 25Gb, 40Gb,
and 100Gb connections, the Exchange does not
propose to charge different prices for such
connections. In contrast, most of the Exchange’s
competitors provide scaled pricing that increases
depending on the size of the physical connection.
The Exchange does not believe that its costs
increase incrementally based on the size of a
physical connection but instead, that individual
connections and the number of such separate and
disparate connections are the primary drivers of
cost for the Exchange.
41 Including Nasdaq PHLX (‘‘PHLX’’), Nasdaq
Options Market (‘‘NOM’’), Nasdaq BX Options
(‘‘BX’’), Nasdaq ISE (‘‘ISE’’), Nasdaq GEMX
(‘‘GEMX’’), and Nasdaq MRX (‘‘MRX’’).
42 See the MIAX fee schedule, available at:
https://www.miaxglobal.com/sites/default/files/fee_
schedule-files/MIAX__Options__Fee__Schedule_
10022023.pdf; the MIAX Pearl fee schedule,
available at: https://www.miaxglobal.com/sites/
default/files/fee_schedule-files/MIAX_Pearl_
Options_Fee_Schedule_09122023.pdf; the MIAX
Emerald fee schedule, available at: https://
www.miaxglobal.com/sites/default/files/fee_
schedule-files/MIAX_Emerald_Fee_Schedule_
10122023_3.pdf; the Nasdaq Options markets fee
schedule, at https://www.nasdaqtrader.com/
trader.aspx?id=pricelisttrading2; the NYSE
Connectivity fee schedule, at: https://
www.nyse.com/publicdocs/Wireless_Connectivity_
Fees_and_Charges.pdf ; the Cboe fee schedule, at:
https://www.cboe.com/us/options/membership/fee_
schedule/cone/; the BZX Options fee schedule,
available at: https://www.cboe.com/us/options/
membership/fee_schedule/bzx/; the EDGX Options
fee schedule, available at: https://www.cboe.com/
us/options/membership/fee_schedule/edgx/, and
the BOX Options fee schedule, available at: https://
boxoptions.com/fee-schedule/. This range is based
on a review of the fees charged for 10–40Gb
connections at each of these exchanges and relates
solely to the physical port fee or connection charge,
excluding co-location fees and other fees assessed
by these exchanges. The Exchange notes that it does
not offer physical connections with lower
bandwidth than 10Gb and that Members and nonMembers with lower bandwidth requirements
typically access the Exchange through third-party
extranets or service bureaus.
43 See id.
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the Exchange will continue to provide
for free, such as application sessions for
testing and disaster recovery
purposes.44 While the Exchange’s
proposed Options Connectivity Fees are
lower than certain of the fees charged by
the Nasdaq options exchanges, MIAX
Options, MIAX Pearl, MIAX Emerald,
NYSE American, NYSE Arca, BOX,
Cboe, BZX and EDGX, MEMX believes
that it offers significant value to
Members over these other exchanges in
terms of bandwidth available over such
connectivity services, which the
Exchange believes is a competitive
advantage, and differentiates its
connectivity versus connectivity to
other exchanges.45 Additionally, the
Exchange’s proposed Connectivity Fees
to its disaster recovery facility are
within the range of the fees charged by
other exchanges for similar connectivity
alternatives.46 The Exchange believes
that its proposal to offer certain
application sessions free of charge is
reasonable, equitably allocated and not
unfairly discriminatory because such
proposal is intended to encourage
Member connections and use of backup
and testing facilities of the Exchange,
and, with respect to MEMOIR Gap Fill
ports, such ports are used exclusively in
connection with the receipt and
processing of market data from the
Exchange.
In conclusion, the Exchange submits
that its proposed fee structure satisfies
the requirements of Sections 6(b)(4) and
6(b)(5) of the Act 47 for the reasons
discussed above in that it provides for
the equitable allocation of reasonable
dues, fees and other charges among its
Members and other persons using its
facilities, does not permit unfair
discrimination between customers,
issuers, brokers, or dealers, and is
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and in
general to protect investors and the
public interest, particularly as the
44 See
id.
noted above, all physical connections
offered by MEMX are at least 10Gb capable and
physical connections provided with larger
bandwidth capabilities will be provided at the same
rate as such connections. In contrast to other
exchanges, MEMX has not proposed different types
of physical connections with higher pricing for
those with greater capacity. See supra note 39. The
Exchange also reiterates that MEMX application
sessions are capable of handling significant amount
of message traffic (i.e., over 50,000 orders per
second), and have no application flow control or
order throttling, in contrast to competitors that have
imposed message rate thresholds. See supra note 32
and accompanying text.
46 See supra note 42.
47 15 U.S.C. 78f(b)(4) and (5).
45 As
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proposal neither targets nor will it have
a disparate impact on any particular
category of market participant.
The Exchange believes that the
proposed reorganization of its fee
schedule to establish a separate fee
schedule for Connectivity Fees is
reasonable and equitable because it is a
non-substantive change and does not
involve changing any existing fees or
rebates that apply to trading activity on
MEMX Equities. Further, the changes
are designed to make the fee schedule
easier to read and for Members to
validate the bills they receive from the
Exchange. The Exchange also believes
this reorganization is nondiscriminatory because it applies
uniformly to all Members. The
Exchange believes the proposed fee
schedule will be clearer and less
confusing for Members of the Exchange
and will eliminate potential Member
confusion, thereby removing
impediments to and perfecting the
mechanism of a free and open market
and a national market, and in general,
protecting investors and the public
interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
In accordance with Section 6(b)(8) of
the Act,48 the Exchange does not believe
that the proposed rule change would
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
Intramarket Competition
The Exchange does not believe that
the proposed rule change to apply the
same Connectivity Fees to Options
Users as it does to Equities Users would
place certain market participants at the
Exchange at a relative disadvantage
compared 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.
As noted above, the Exchange has
previously justified its pricing with
respect to MEMX Equities and believes
the most fair approach, absent a
significant differentiation between
application costs to Equities and
Options, is to apply the same pricing to
all participants of either platform. The
Exchange believes its proposed pricing
is reasonable and lower than what other
options exchanges charge and, when
coupled with the availability of thirdparty providers that also offer
connectivity solutions, that
participation on the Exchange is
48 15
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affordable for all market participants,
including smaller trading firms.
Therefore, the fees may stimulate
intramarket competition by attracting
additional firms to become Members of
MEMX Options. 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.
As it relates to the reorganization of
the fee schedule, as discussed above, the
Exchange does not believe that the
proposed change would impose any
burden on competition because such
change serves to create an easier to read
fee schedule to avoid any Member
confusion.
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Intermarket Competition
The Exchange does not believe the
proposed fees for Options Connectivity
place an undue burden on competition
on other SROs that is not necessary or
appropriate. Additionally, other
exchanges have similar connectivity
alternatives for their participants, but
with higher rates to connect.49 The
Exchange is also unaware of any
assertion that the proposed fees for
connectivity services would somehow
unduly impair its competition with
other exchanges. As a new entrant in an
already highly competitive environment
for equity options trading, MEMX does
not have the market power necessary to
set prices for services that are
unreasonable or unfairly discriminatory
in violation of the Exchange Act. In
sum, MEMX’s proposed Connectivity
Fees for Options Members are
comparable to and generally lower than
fees charged by other options exchanges
for the same or similar services.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
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 50 and Rule
19b–4(f)(2) 51 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
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
MEMX–2024–06 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–MEMX–2024–06. 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
50 15
49 See
supra notes 41–46 and accompanying text.
VerDate Sep<11>2014
16:57 Mar 05, 2024
Jkt 262001
51 17
PO 00000
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
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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–MEMX–2024–06 and should be
submitted on or before March 27, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–04695 Filed 3–5–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–151, OMB Control No.
3235–0291
Proposed Collection; Comment
Request; Extension: Rules 17Ad–6 and
17Ad–7
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the existing collection of information
provided for in Rule 17Ad–6 (17 CFR
240.17Ad–6) and Rule 17Ad–7 (17 CFR
240.17Ad–7) under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.) (‘‘Exchange Act’’). The
Commission plans to submit this
existing collection of information to the
Office of Management and Budget
(‘‘OMB’’) for extension and approval.
Rule 17Ad–6 requires every registered
transfer agent to make and keep current
52 17
E:\FR\FM\06MRN1.SGM
CFR 200.30–3(a)(12).
06MRN1
]]>Agencies
[Federal Register Volume 89, Number 45 (Wednesday, March 6, 2024)]
[Notices]
[Pages 16049-16061]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-04695]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99635; File No. SR-MEMX-2024-06]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend the
Exchange's Fee Schedule To Adopt Connectivity and Application Session
Fees for MEMX Options
February 29, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on February 15, 2024, MEMX LLC (``MEMX'' or the ``Exchange'')
filed with the Securities and Exchange Commission (the ``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.
---------------------------------------------------------------------------
\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 Fee Schedule to: (i)
apply the Exchange's current Connectivity and Application Session fees
to MEMX Options Users, and (ii) make an organizational change to its
existing fee schedule for the Exchange's pre-existing equities market
(``MEMX Equities''), in order to create a separate fee schedule for
Connectivity Fees (for both MEMX Equities and MEMX Options). The
Exchange proposes to implement the changes to the Fee Schedule pursuant
to this proposal immediately. The text of the proposed rule change is
provided in Exhibit 5.
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
Background
The Exchange is filing a proposal to amend the Fee Schedule to: (i)
apply the Exchange's current Connectivity and Application Session fees
to MEMX Options Users, and (ii) make an organizational change to its
existing fee schedule for the Exchange's pre-existing equities market
(``MEMX Equities''), in order to create a separate fee schedule for
Connectivity Fees (for both MEMX Equities and MEMX Options). The
Exchange believes that these changes will provide greater transparency
to Members about how the Exchange assesses fees, as well as allowing
Members to more easily validate their bills on a monthly basis. The
Exchange notes that none of these changes amend any existing fee
applicable to MEMX Equities. The Exchange is proposing to implement the
proposal immediately. The Exchange previously filed the proposal on
October 24, 2023 (SR-MEMX-2023-29) (the ``Initial Proposal''). The
Exchange withdrew the Initial Proposal and replaced the proposal with
SR-MEMX-2023-39 (the ``Second Proposal''). The Exchange recently
withdrew the Second Proposal and is replacing it with the current
filing (SR-MEMX-2024-06).
As set forth below, the Exchange believes that its proposal
provides a great deal of transparency regarding the cost of providing
connectivity services and anticipated revenue and that the proposal is
consistent with the Act and associated guidance. The Exchange is re-
filing this proposal promptly following the withdrawal of the Second
Proposal in order to update the Cost Analysis included in the Second
Proposal.
[[Page 16050]]
(i) Fees for Connectivity to MEMX Options
As noted above, the Exchange is proposing to apply the current fees
it charges to Members and non-Members \3\ for physical connectivity to
the Exchange and for application sessions (otherwise known as ``logical
ports'') that a Member utilizes in connection with their participation
on the Exchange (together with physical connectivity, collectively
referred to in this proposal as ``connectivity services'', as described
in greater detail below) to both Users of MEMX Equities and MEMX
Options.\4\ Specifically, the Exchange will continue to charge $6,000
per month for a physical connection in the data center where the
Exchange primarily operates under normal market conditions (``Primary
Data Center''), and $3,000 per month for a physical connection at the
geographically diverse data center, which is operated for backup and
disaster recovery purposes (``Secondary Data Center''). These physical
connections can be used to access both platforms, accordingly, a firm
that is a Member of both MEMX Equities and MEMX Options may use a
single physical connection to access its application sessions at both
MEMX Equities and MEMX Options. This differs from application sessions
in that a firm that is a Member of both MEMX Equities and MEMX Options
would need to purchase separate application sessions for each trading
platform in order to access each such trading platform. These
application session fees will continue to be $450 per month for an
application session used for order entry (``Order Entry Port'') and
$450 per month for an application session for receipt of drop copies
(``Drop Copy Port''), to the extent such ports are in the Primary Data
Center. As is true today for MEMX Equities, the Exchange will not
charge for Order Entry Ports or Drop Copy Ports in the Secondary Data
Center. The Exchange's proposal to apply the same fees to Equities and
Options stems from the same cost analysis it conducted in adopting
those fees to its Equities Members,\5\ which the Exchange has reviewed
and updated for 2024 as detailed below. Given that the Exchange has
only recently launched MEMX Options, however, and the fact that its
analysis is based on projections across all potential revenue streams,
the Exchange is committing to conduct a one-year review after these
fees are applied. 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, or to decrease fees in the event that revenue materially
exceeds expectations.
---------------------------------------------------------------------------
\3\ 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 to Members, and thus, may access application sessions on
behalf of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
\4\ MEMX Options launched on September 27, 2023.
\5\ See Securities Exchange Act Release No. 59846 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-026).
---------------------------------------------------------------------------
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 services to MEMX
Options, the Exchange has sought to be especially diligent in assessing
those fees in a transparent way against its own aggregate costs of
providing the related services, and also 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,\6\
and Rule 19b-4 thereunder,\7\ with respect to the types of information
self-regulatory organizations (``SROs'') should provide when filing fee
changes, and Section 6(b) of the Act,\8\ which requires, among other
things, that exchange fees be reasonable and equitably allocated,\9\
not designed to permit unfair discrimination,\10\ and that they not
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\11\ 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.\12\
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\6\ 15 U.S.C. 78s(b)(1).
\7\ 17 CFR 240.19b-4.
\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(4).
\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78f(b)(8).
\12\ In 2019, Commission staff published guidance suggesting the
types of information that SROs may use to demonstrate that their fee
filings comply with the standards of the Exchange Act (``Fee
Guidance''). While MEMX understands that the Fee Guidance does not
create new legal obligations on SROs, the Fee Guidance is consistent
with MEMX's view about the type and level of transparency that
exchanges should meet to demonstrate compliance with their existing
obligations when they seek to charge new fees. 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.
---------------------------------------------------------------------------
As detailed below, MEMX calculated its aggregate annual costs for
providing physical connectivity to both MEMX Equities and MEMX Options
in 2024 at $14,970,454 and its aggregate annual costs for providing
application sessions at $7,185,273. In order to cover the aggregate
costs of providing connectivity to its Options and Equities Users (both
Members and non-Members) going forward and to make a modest profit, as
described below, the Exchange is proposing to modify its Fee Schedule,
pursuant to MEMX Rules 15.1(a) and (c), to charge a fee to Options
Users, as it currently does to Equities Users, of $6,000 per month for
each physical connection in the Primary Data Center and of $3,000 per
month for each physical connection in the Secondary Data Center. The
Exchange also proposes to modify its Fee Schedule, pursuant to MEMX
Rules 15.1(a) and (c), to charge a fee to Options Users, as it
currently does to Equities Users, of $450 per month for each Order
Entry Port and Drop Copy Port in the Exchange's Primary Data Center, as
further described below.\13\
---------------------------------------------------------------------------
\13\ As proposed, fees for connectivity services would be
assessed based on each active connectivity service product at the
close of business on the first day of each month. If a product is
cancelled by a Member's submission of a written request or via the
MEMX User Portal prior to such fee being assessed then the Member
will not be obligated to pay the applicable product fee. MEMX will
not return pro-rated fees even if a product is not used for an
entire month.
---------------------------------------------------------------------------
Cost Analysis
Background on Cost Analysis
In February 2024, MEMX completed an updated study of its aggregate
projected costs to produce market data and connectivity across both its
Equities and Options platforms in 2024 (the ``Cost Analysis'').\14\ The
Cost Analysis required a detailed analysis of MEMX's aggregate baseline
costs, including a
[[Page 16051]]
determination and allocation of costs for core services provided by the
Exchange--transaction execution, market data, membership services and
trading permits, regulatory services, physical connectivity, and
application sessions (which provide order entry, cancellation and
modification functionality, risk functionality, ability to receive drop
copies, and other functionality). MEMX 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'').
Next, MEMX adopted an allocation methodology with various principles to
guide how much of a particular cost should be allocated to each core
service. For instance, fixed costs that are not driven by client
activity (e.g., message rates), such as data center costs, were
allocated more heavily to the provision of physical connectivity (80%),
with smaller allocations to logical ports (11%), and the remainder to
the provision of transaction execution, regulatory services, and market
data services (9%). In contrast, costs that are driven largely by
client activity (e.g., message rates), were not allocated to physical
connectivity at all but were allocated primarily to the provision of
transaction execution and market data services (80%) with a smaller
allocation to application sessions (20%). The allocation methodology
was decided through conversations with senior management familiar with
each area of the Exchange's operations. After adopting this allocation
methodology, the Exchange then applied an estimated allocation of each
cost driver to each core service, resulting in the cost allocations
described below.
---------------------------------------------------------------------------
\14\ The updated Cost Analysis completed in February 2024 is
based on the same principles applied to the Cost Analysis completed
in September 2023 that was included in the Initial Proposal but
contains updated figures now that MEMX Options has been operational
for several months.
---------------------------------------------------------------------------
By allocating segmented costs to each core service, MEMX 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 four 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 four 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.
Through the Exchange's extensive Cost Analysis, the Exchange
analyzed every expense item in the Exchange's general expense ledger to
determine whether each such expense relates to the provision of
connectivity services, and, if such expense did so relate, what portion
(or percentage) of such expense actually supports the provision of
connectivity services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to network connectivity
services. In turn, the Exchange allocated certain costs more to
physical connectivity and others to application sessions, 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, MEMX estimates that the cost drivers to
provide connectivity services in 2024, including both physical
connections and application sessions, will result in an aggregate
annual cost of $22,155,727, as further detailed below. The Exchange
notes that it utilized the same principles to generate the 2021 Cost
Analysis, applicable to Equities only, and at that time, the estimated
annual aggregate cost to provide connectivity services was $13,724,580.
The differences between such estimated costs and the overall analysis
are primarily based on: (1) the addition of MEMX Options, (ii)
increased, and in some cases decreased, costs projected by the
Exchange, (iii) and changes made to reallocate certain costs into
categories that more closely align the Exchange's audited financial
statements, as further described below.
Costs Related To Offering Physical Connectivity
The following chart details the individual line-item costs
considered by MEMX to be related to offering physical connectivity 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 18% of its overall Human Resources cost to
offering physical connectivity).
[GRAPHIC] [TIFF OMITTED] TN06MR24.056
Below are additional details regarding each of the line-item costs
considered by MEMX to be related to offering physical connectivity, as
well as any relevant discussion of how the costs projected for 2024
differ, if any, from the Exchange's previous Cost Analysis conducted in
2021 in adopting Connectivity Fees for its Equities platform, which are
the same fees the
[[Page 16052]]
Exchange is proposing to apply for its Options platform in this
filing.\15\
---------------------------------------------------------------------------
\15\ See supra note 5.
---------------------------------------------------------------------------
Human Resources
In allocating personnel (Human Resources) costs, in order to not
double count any allocations, the Exchange first excluded any employee
time allocated towards options regulation in order to recoup costs via
the Options Regulatory Fee (``ORF'').\16\ Of the remaining employee
time left over, MEMX then calculated an allocation of employee time for
employees whose functions include providing and maintaining physical
connectivity and performance thereof (primarily the MEMX network
infrastructure team, which spends most of their time performing
functions necessary to provide physical connectivity) and for which the
Exchange allocated 80% of each employee's time. The Exchange also
allocated Human Resources costs to provide physical connectivity to a
limited subset of personnel with ancillary functions related to
establishing and maintaining such connectivity (such as information
security and finance personnel), for which the Exchange allocated cost
on an employee-by-employee basis (i.e., only including those personnel
who do support functions related to providing physical connectivity)
and then applied a smaller allocation to such employees (30%).\17\ The
Exchange notes that it has fewer than 100 employees and each department
leader has direct knowledge of the time spent by those spent by each
employee with respect to the various tasks necessary to operate the
Exchange. The estimates of Human Resources cost were therefore
determined by consulting with such department leaders, determining
which employees are involved in tasks related to providing physical
connectivity, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing physical
connectivity. The Exchange notes that senior level executives were only
allocated Human Resources costs to the extent the Exchange believed
they are involved in overseeing tasks related to providing physical
connectivity. The Human Resources cost was calculated using a blended
rate of compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 99259 (January 2,
2024), 89 FR 965 (January 8, 2024) (SR-MEMX-2023-38).
\17\ To reiterate, these allocations are applied to the
percentage of employee time left over after the ORF allocation. As
such, if 10% of an employee's time was allocated towards options
regulation, the percentage of time allocated to physical
connectivity in this example would apply to the 90% of the
employee's time left over.
---------------------------------------------------------------------------
In 2021, 13.8% of the Exchange's Human Resources costs were
allocated towards the provision of physical connectivity, which is
slightly lower than the 18% allocation in the current Cost Analysis.
The Exchanges notes that this increase is due to additional hiring
necessary to support network infrastructure, and that in advance of the
launch of MEMX Options, this hiring started at the beginning of 2023.
Connectivity
The Connectivity cost includes external fees paid to connect to
other exchanges and third parties. 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.
Approximately 75% of the Exchange's connectivity costs are allocated
towards the provision of physical connectivity, which is the same
percentage identified in the 2021 Cost Analysis. Of note, the 2021 Cost
Analysis allocated approximately $162,000 per month of connectivity
costs towards physical connectivity, which is notably higher than the
$61,018 \18\ per month allocated under the current Cost Analysis. The
Exchange notes that this is due to a substantial redesign in the
Exchange's connectivity plan which achieved the cost savings noted.
Additionally, in the 2021 Cost Analysis, certain costs were included in
the Connectivity category that have since been moved into the broader
Technology category.
---------------------------------------------------------------------------
\18\ This figure is arrived at by dividing the annual allocated
Connectivity costs in the table on page 12 ($732,216) by 12.
---------------------------------------------------------------------------
Data Center
Data Center costs include 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 (80%) to
physical connectivity because the third-party data centers and the
Exchange's physical equipment contained therein is the most direct cost
in providing physical access to the Exchange. In other words, for the
Exchange to operate in a dedicated space with connectivity of
participants to a physical trading platform, the data centers are a
very tangible cost, and in turn, if the Exchange did not maintain such
a presence then physical connectivity would be of no value to market
participants. This slight increase over the allocation of Data Center
costs to physical connectivity from 2021 (75%) is due to the Exchange's
determination that the Data Center is more directly linked to physical
connectivity than any other core service provided by the Exchange.
Technology
The Technology category includes the Exchange's network
infrastructure, other hardware, software, and software licenses used to
operate and monitor physical assets necessary to offer physical
connectivity to the Exchange. Of note, certain of these costs were
included in the Connectivity and a separate Hardware and Software
Licenses category in the 2021 Cost Analysis; however, in order to align
more closely with the Exchange's audited financial statements these
costs were combined into the broader Technology category. The Exchange
allocated approximately 25% of its Technology costs to physical
connectivity in 2024.
Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of Exchange infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 39% of all depreciation costs to providing physical
connectivity. This is a higher percentage than was allocated to
providing physical connectivity in 2021 (18.5%), and this increase is
due to a high amount of capital expenditures required to build the
Exchange's options platform, none of which began to depreciate until
the launch of options in September 2023. The Exchange notes, however,
that it did not allocate depreciation costs for any internally
developed software to build the Exchange's trading platforms to
physical connectivity, as such software does not impact the provision
of physical connectivity.
[[Page 16053]]
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 notes that it did not allocate any External Market Data
fees to the provision of physical connectivity as market data is not
related to such services.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to physical connectivity as without these general shared costs the
Exchange would not be able to operate in the manner that it does and
provide physical connectivity. The costs included in general shared
expenses include general expenses of the Exchange, including office
space and office expenses (e.g., occupancy and overhead expenses),
utilities, recruiting and training, marketing and advertising costs,
professional fees for legal, tax and accounting services (including
external and internal audit expenses), and telecommunications costs.
The Exchange notes that the cost of paying directors to serve on its
Board of Directors is also included in the Exchange's general shared
expenses, and thus a portion of such overall cost amounting to 7% of
the overall cost for directors was allocated to providing physical
connectivity.
As a final part of the Exchange's analysis related to physical
connectivity, the Exchange determined the total monthly cost of
providing physical connections, (i.e. the annual cost of $14,970,454
noted in the table above divided by 12), $1,247,537.83, and projected
average monthly revenue for physical connections under the proposed
pricing herein of approximately $1,413,500.\19\ Thus, the Exchange
calculated an average monthly profit of $165,962, resulting in a
physical connectivity profit margin of approximately 11.7%.\20\ The
Exchange notes that this projected profit margin represents an increase
over the projected profit margin noted in the 2021 Cost Analysis
related to physical connectivity,\21\ which is in part due to certain
cost savings noted above associated with a redesign in the Exchange's
external connectivity plan. Nevertheless, the Exchange believes that
the projected profit margin is reasonable and well within the range of
where a similarly situated company would expect to be after three years
of growth, especially upon launching a new trading platform that
provides scale. While the Exchange does not anticipate a significant
change to physical connectivity during 2024 (i.e., neither a
significant increase nor a significant decrease), it is possible that
participants will shift the way that they connect to the Exchange and a
reduction occurs or that additional connectivity is established,
resulting in an increase.
---------------------------------------------------------------------------
\19\ This projection was based off of actuals earned in January
and February 2024 and revenue projections for the remainder of the
year based off the number of primary and secondary connections
maintained as of February 1, 2024, in both Equities and Options. The
Exchange notes that its previous method of estimating profit by
dividing the cost of providing physical connectivity by the number
of physical connections maintained as of the date of proposed
pricing is no longer an accurate method. This is due to the fact
that such a calculation assumes that the Exchange earns revenue on
all physical connections throughout the entire year, which it will
not, given that the Exchange will not begin charging for options
connections until March 1, 2024, and that the Exchange earns revenue
of $6,000 for all physical connections, regardless of whether such
connections are found in the primary or secondary data center, which
is also not the case.
\20\ The Exchange calculated margin by dividing the total profit
($165,962) by the total revenue ($1,413,500) and multiplying by 100.
\21\ The 2021 Cost Analysis projected a profit margin for
physical connections of 8%.
---------------------------------------------------------------------------
Costs Related to Offering Application Sessions
The following chart details the individual line-item costs
considered by MEMX to be related to offering application sessions 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 11% of its overall Human Resources cost to
offering application sessions).
[GRAPHIC] [TIFF OMITTED] TN06MR24.057
Human Resources
With respect to application sessions, MEMX calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing application sessions 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). The
estimates of Human Resources cost were again determined by consulting
with department leaders, determining which employees are involved in
tasks related to providing application sessions and maintaining
performance thereof, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing application
sessions and maintaining performance thereof. The Exchange notes that
senior level executives were only allocated Human Resources costs to
the extent the Exchange believed they are involved in overseeing tasks
related to providing application sessions and maintaining performance
thereof. The Human Resources cost was again calculated
[[Page 16054]]
using a blended rate of compensation reflecting salary, equity and
bonus compensation, benefits, payroll taxes, and 401(k) matching
contributions. As shown in the table above, for 2024, the Exchange
allocated approximately 11% of its Human Resources costs to providing
application sessions, which is higher than the 7.7% it allocated in
2021. This increase is again due to additional hiring needed to support
the addition of MEMX Options.
Connectivity
The Connectivity cost includes external fees paid to connect to
other exchanges, as described above. The Exchange allocated
approximately 4% of its Connectivity costs to providing application
sessions.
Data Center
Data Center costs include an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs (the Exchange
does not own the Primary Data Center or the Secondary Data Center, but
instead, leases space in data centers operated by third parties). As
shown in the table, the Exchange allocated 11% of its Data Center costs
to application sessions in the current Cost Analysis, which represents
an increase over the 2.6% it allocated in the 2021 Cost Analysis.
Technology
The Technology category includes the Exchange's network
infrastructure, other hardware, software, and software licenses used to
monitor the health of the order entry services provided by the
Exchange. The Exchange allocated 12% of its Technology costs to the
provision of application sessions, which represents a slight increase
over the 10.1% it allocated in the 2021 Cost Analysis.
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 allocated 20% of External Market Data fees to the
provision of application sessions as such market data is necessary to
offer certain services related to such sessions, such as validating
orders on entry against the National Best Bid and National Best Offer
(``NBBO'') and checking for other conditions (e.g., whether a symbol is
halted or subject to a short sale circuit breaker). Thus, as market
data from other exchanges is consumed at the application session level
in order to validate orders before additional processing occurs with
respect to such orders, the Exchange believes it is reasonable to
allocate a small amount of such costs to application sessions. The
increase in allocation of External Market Data costs to the provision
of application sessions compared to the 2021 Cost Analysis, in which
7.5% of its External Market Data costs were allocated, is due to a
restructuring of the category. Specifically, in 2021, External Market
Data only included those costs incurred to receive data from other
exchanges, while costs to receive the SIP feeds and other non-exchange
data feeds were categorized under Hardware and Software Licenses. These
costs are now all categorized under External Market Data.
Depreciation
All physical assets and software, which also includes assets used
for testing and monitoring of order entry infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 14% of
all depreciation costs to providing application sessions, which
represents an increase over the 8.3% allocated in the 2021 Cost
Analysis. In contrast to physical connectivity, described above, the
Exchange did allocate depreciation costs for depreciated internally
developed software to build the Exchange's platforms to application
sessions because such software is related to the provision of such
connectivity.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall application session 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 5% of the overall cost for
directors was allocated to providing application sessions.
Lastly, the Exchange determined the total monthly cost of providing
application sessions, (i.e. the annual cost of $7,185,273 noted in the
table above divided by 12), $598,772.75, and estimated an average
monthly revenue from application sessions under the proposed pricing
herein of $662,738. Thus, the Exchange calculated an average monthly
profit of $63,965, resulting in an application session profit margin of
approximately 9.7%.\22\ This profit margin for application sessions is
slightly higher than the projected profit margin noted in the 2021 Cost
Analysis,\23\ which the Exchange believes is reasonable and well within
the range of where the Exchange would expect it to be at this time.
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\22\ The Exchange calculated margin by dividing the total profit
($63,965) by the total revenue ($662,738) and multiplying by 100.
\23\ The 2021 Cost Analysis projected an application session
profit margin of approximately 8%.
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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 application sessions) 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 filing it recently
submitted proposing the establishment of an ORF.\24\ For instance, in
calculating the Human Resources expenses to be allocated to physical
connections, 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 time of such personnel (80%) given their focus on functions
necessary to provide physical connections. The time of those same
personnel were allocated only 4% to application sessions and the
remaining 16% was allocated to transactions and market data. Of note,
this allocation applied only to the network infrastructure employee's
time that was left over after allocating for options regulation
support. The Exchange did not allocate any other Human Resources
expense for providing physical connections to any other employee group
outside of a smaller allocation
[[Page 16055]]
(30%) of the employee time associated with certain specified personnel
who work closely with and support network infrastructure personnel. In
contrast, the Exchange allocated much smaller percentages of employee
time (15% or less) across a wider range of personnel groups in order to
allocate Human Resources costs to providing application sessions. This
is because a much wider range of personnel are involved in functions
necessary to offer, monitor and maintain application sessions but the
tasks necessary to do so are not a primary or full-time function.
---------------------------------------------------------------------------
\24\ See supra note 16.
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In total, the Exchange allocated 18% of its Human Resources costs
to providing physical connections and 11% of its Human Resources costs
to providing application sessions, for a total allocation of 29% of its
Human Resources expense to provide connectivity services. In turn, the
Exchange allocated the remaining 71% of its Human Resources expense to
Regulatory Services (21%), membership (2%) and transactions and market
data (48%). 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 application
sessions, 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 53% of the Exchange's overall depreciation and
amortization expense to connectivity services (39% attributed to
physical connections and 14% to application sessions). The Exchange
allocated the remaining depreciation and amortization expense
(approximately 47%) toward regulatory services (approximately 6%), and
to providing transaction services and market data (approximately 41%).
Looking at the Exchange's operations holistically, the estimated
total monthly costs to the Exchange for offering core services in 2024
is $5,299,754, compared to the $3,954,537 noted in the 2021 Cost
Analysis. Based on its projections, the Exchange expects to collect
approximately $2,076,238 on a monthly basis for connectivity services.
Incorporating this amount into the Exchange's overall projected
revenue, including projections related to the ORF, the Exchange
anticipates monthly revenue of approximately $6,080,631 from all
sources (i.e., connectivity fees and membership fees, transaction fees,
ORF, and revenue from market data, both through the fees adopted in
April 2022 \25\ and through the revenue received from the SIPs). As
such, applying the Exchange's holistic Cost Analysis to a holistic view
of anticipated revenues, the Exchange would earn approximately 13%
margin on its operations as a whole. The Exchange believes that this
amount is reasonable.
---------------------------------------------------------------------------
\25\ See Securities Exchange Act Release No. 97130 (March 13,
2013), 88 FR 16491 (March 17, 2023) (SR-MEMX-2023-04).
---------------------------------------------------------------------------
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. As a new entrant to the hyper-competitive exchange
environment, and an exchange focused on driving competition, 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 options clients that wish to maintain physical connectivity
and/or application sessions 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 was based on the
Exchange's current operations and projections for the remainder of
2024. As such, the Exchange believes that its costs will remain
relatively similar in future years (as demonstrated by the comparison
of the 2021 Cost Analysis to the 2024 Cost Analysis). It is possible
however that such costs will either decrease or increase. To the extent
the Exchange sees growth in use of connectivity services it will
receive additional revenue to offset future cost increases. However, if
use of connectivity services is static or decreases, the Exchange might
not realize the revenue that it anticipates or needs in order to cover
applicable costs. Accordingly, the Exchange is committing to conduct a
one-year review after implementation of these fees. The Exchange
expects that it may propose to adjust fees at that time, to increase
fees in the event that revenues fail to cover costs and a reasonable
mark-up of such costs. Similarly, the Exchange would propose to
decrease fees in the event that revenue materially exceeds our current
projections. In addition, the Exchange will periodically conduct a
review to inform its decision making on whether a fee change is
appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing in ways that suggest the then-current
fees are becoming dislocated from the prior cost-based analysis) and
would propose to increase fees in the event that revenues fail to cover
its costs and a reasonable mark-up, or decrease fees in the event that
revenue or the mark-up materially exceeds our current projections. In
the event that the Exchange determines to propose a fee change, the
results of a timely review, including an updated cost estimate, will be
included in the rule filing proposing the fee change. More generally,
the Exchange believes that it is appropriate for an exchange to refresh
and update information about its relevant costs and revenues in seeking
any future changes to fees, and the Exchange commits to do so.
Proposed Fees
Physical Connectivity Fees
MEMX offers its Members the ability to connect to the Exchange in
order to transmit orders to and receive information from the Exchange.
Members can also choose to connect to MEMX indirectly through physical
connectivity maintained by a third-party extranet. Extranet physical
connections may provide access to one or multiple Members on a single
connection. Users of MEMX physical connectivity services (both Members
and non-Members \26\) seeking to establish one or more connections with
the Exchange submit a request to the Exchange via the MEMX User Portal
or directly to Exchange personnel. Upon receipt of the completed
instructions, MEMX establishes the physical connections requested by
the User. The number of physical connections assigned to each User (for
both equities and options) as of October 1, 2023, ranges from one (1)
[[Page 16056]]
to 46, depending on the scope and scale of the Member's trading
activity on the Exchange as determined by the Member, including the
Member's determination of the need for redundant connectivity. Separate
physical connections are not required to access the Exchange's Options
and Equities platforms, as such, a User could use a single connection
to access both platforms. The Exchange notes that 50% of its Members do
not maintain a physical connection directly with the Exchange in the
Primary Data Center (though many such Members have connectivity through
a third-party provider) and 21 members, or 27.6% have either one or two
physical ports to connect to the Exchange in the Primary Data
Center.\27\ Thus, only a limited number of Members, (17 members, or
22%), maintain three or more physical ports to connect to the Exchange
in the Primary Data Center.\28\
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\26\ See supra note 3.
\27\ Of those 21 members, four (4) have designated certain of
their physical ports will be used to connect to MEMX Options.
\28\ Of those 17 members, thirteen (13) have designated certain
of their physical ports will be used to connect to MEMX Options.
---------------------------------------------------------------------------
As described above, the Exchange has previously justified its
pricing with respect to MEMX Equities and believes the most fair
approach, absent a significant differentiation between application
costs to Equities and Options, is to apply the same pricing to all
participants of either platform. As such, in order to cover the
aggregate costs of providing physical connectivity to Options and
Equities Users and make a modest profit, as described below, the
Exchange is proposing to charge a fee of $6,000 per month for each
physical connection in the Primary Data Center and a fee of $3,000 per
month for each physical connection in the Secondary Data Center for
connections to its Options platform, as it currently charges for
connections to its Equities platform. There is no requirement that any
Member maintain a specific number of physical connections and a Member
may choose to maintain as many or as few of such connections as each
Member deems appropriate. Further, as noted above, existing Equities
Members may choose to use their existing physical connection(s) to
access the Exchange's Options platform.
The Exchange notes, however, that pursuant to Rule 2.4 (Mandatory
Participation in Testing of Backup Systems), the Exchange does require
a small number of Members to connect and participate in functional and
performance testing as announced by the Exchange, which occurs at least
once every 12 months. Specifically, Members that have been determined
by the Exchange to contribute a meaningful percentage of the Exchange's
overall volume must participate in mandatory testing of the Exchange's
backup systems (i.e., such Members must connect to the Secondary Data
Center). The Exchange notes that designated Members are still able to
use third-party providers of connectivity to access the Exchange at its
Secondary Data Center, and that for its Equities platform, one of eight
such designated Members does use a third-party provider instead of
connecting directly to the Secondary Data Center through connectivity
provided by the Exchange. Nonetheless, because some Members are
required to connect to the Secondary Data Center pursuant to Rule 2.4
and to encourage Exchange Members to connect to the Secondary Data
Center generally, the Exchange has proposed to charge one-half of the
fee for a physical connection in the Primary Data Center for its
Options platform, as it currently charges for Equities. The Exchange
notes that its costs related to operating the Secondary Data Center
were not separately calculated for purposes of this proposal, but
instead, all costs related to providing physical connections were
considered in the aggregate. The Exchange believes this is appropriate
because had the Exchange calculated such costs separately and then
determined the fee per physical connection that would be necessary for
the Exchange to cover its costs for operating the Secondary Data
Center, the costs would likely be much higher than those proposed for
connectivity at the Primary Data Center because Members maintain
significantly fewer connections at the Secondary Data Center. The
Exchange believes that charging a higher fee for physical connections
at the Secondary Data Center would be inconsistent with its objective
of encouraging Members to connect at such data center and is
inconsistent with the fees charged by other exchanges, which also
provide connectivity for disaster recovery purposes at a discounted
rate.\29\
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\29\ See, e.g., the BZX options fee schedule, available at
https://www.cboe.com/us/options/membership/fee_schedule/bzx/.
---------------------------------------------------------------------------
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
physical connections a User requests, based upon factors deemed
relevant by each User (either a Member, service bureau or extranet).
The Exchange believes these factors include the costs to maintain
connectivity, business model and choices Members make in how to
participate on the Exchange, as further described below.
The proposed fee of $6,000 per month for physical connections at
the Primary Data Center is designed to permit the Exchange to cover the
costs allocated to providing connectivity services with a modest profit
margin (approximately 11.7%), which would also help fund future
expenditures (increased costs, improvements, etc.). The Exchange
believes it is appropriate to charge fees that represent a reasonable
markup over cost given the other factors discussed above and the need
for the Exchange to maintain a highly performant and stable platform to
allow Members to transact with determinism.
As noted above, the Exchange proposes a discounted rate of $3,000
per month for physical connections at its Secondary Data Center. The
Exchange has proposed this discounted rate for Secondary Data Center
connectivity in order to encourage Members to establish and maintain
such connections. Also, as noted above, a small number of Members are
required pursuant to Rule 2.4 to connect and participate in testing of
the Exchange's backup systems, and the Exchange believes it is
appropriate to provide a discounted rate for physical connections at
the Secondary Data Center given this requirement. The Exchange notes
that this rate is well below the cost of providing such services and
the Exchange will operate its network and systems at the Secondary Data
Center without recouping the full amount of such cost through
connectivity services.
The proposed fee for physical connections is effective on filing
and will become operative immediately, subject to the proposed waiver
described below.
Application Session Fees
Similar to other exchanges, MEMX offers its Members application
sessions, also known as logical ports, for order entry and receipt of
trade execution reports and order messages. Members can also choose to
connect to MEMX indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one
or multiple Members on a single session. Users of MEMX connectivity
services (both Members and non-Members \30\) seeking to establish one
or more application sessions with the Exchange submit a request to the
Exchange via the MEMX User Portal or directly to Exchange personnel.
Upon receipt of the completed instructions, MEMX assigns the User the
number of
[[Page 16057]]
sessions requested by the User. The number of sessions assigned to each
User as of February 1, 2024, ranges from one (1) to more than 300
depending on the scope and scale of the Member's trading activity on
the Exchange (either through a direct connection or through a service
bureau) as determined by the Member. For example, by using multiple
sessions, Members can segregate order flow from different internal
desks, business lines, or customers. The Exchange does not impose any
minimum or maximum requirements for how many application sessions a
Member or service bureau can maintain, and it is not proposing to
impose any minimum or maximum session requirements for its Members or
their service bureaus. The same application session cannot be used to
access both MEMX Equities and MEMX Options, as such, Users will need to
purchase separate application sessions for MEMX Options, which differs
from physical connections.
---------------------------------------------------------------------------
\30\ See supra note 3.
---------------------------------------------------------------------------
As described above, in order to cover the aggregate costs of
providing application sessions to Options Users and to make a modest
profit, as described below, the Exchange is proposing to charge a fee
of $450 per month for each Order Entry Port and Drop Copy Port in the
Primary Data Center for Options application sessions, which is the same
fee it currently charges for Equities application sessions. The
Exchange notes that it does not propose to charge for: (1) Order Entry
Ports or Drop Copy Ports in the Secondary Data Center, or (2) any Test
Facility Ports or MEMOIR Gap Fill Ports, again, which it does not
charge for Equities Users. The Exchange has proposed to continue to
provide Order Entry Ports and Drop Copy Ports in the Secondary Data
Center for Options free of charge in order to encourage Members to
connect to the Exchange's backup trading systems. Similarly, because
the Exchange wishes to encourage Members to conduct appropriate testing
of their use of the Exchange, the Exchange has not proposed to charge
for Test Facility Ports. With respect to MEMOIR Gap Fill ports, such
ports are exclusively used in order to receive information when a
market data recipient has temporarily lost its view of MEMX market
data. The Exchange has not proposed charging for such ports because the
costs of providing and maintaining such ports is more directly related
to producing market data.
The proposed fee of $450 per month for each Order Entry Port and
Drop Copy Port in the Primary Data Center is designed to permit the
Exchange to cover the costs allocated to providing application sessions
with a modest profit margin (approximately 9.7%), which would also help
fund future expenditures (increased costs, improvements, etc.).
The proposed fee is also designed to encourage Users to be
efficient with their application session usage, thereby resulting in a
corresponding increase in the efficiency that the Exchange would be
able to realize in managing its aggregate costs for providing
connectivity services. There is no requirement that any Member maintain
a specific number of application sessions and a Member may choose to
maintain as many or as few of such ports as each Member deems
appropriate. The Exchange has designed its platform such that Order
Entry Ports can handle a significant amount of message traffic (i.e.,
over 50,000 orders per second), and has no application flow control or
order throttling. In contrast, other exchanges maintain certain
thresholds that limit the amount of message traffic that a single
logical port can handle.\31\ As such, while several Members maintain a
relatively high number of ports because that is consistent with their
usage on other exchanges and is preferable for their own reasons, the
Exchange believes that it has designed a system capable of allowing
such Members to significantly reduce the number of application sessions
maintained.
---------------------------------------------------------------------------
\31\ See, e.g., Cboe US Options BOE Specification, available at:
https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf (describing a 5,000 message per
second Port Order Rate Threshold on Cboe BOE ports).
---------------------------------------------------------------------------
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
application sessions a User requests, based upon factors deemed
relevant by each User (either a Member or service bureau on behalf of a
Member). The Exchange believes these factors include the costs to
maintain connectivity and choices Members make in how to segment or
allocate their order flow.\32\
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\32\ The Exchange understands that some Members (or service
bureaus) may also request more Order Entry Ports to enable the
ability to send a greater number of simultaneous order messages to
the Exchange by spreading orders over more Order Entry Ports,
thereby increasing throughput (i.e., the potential for more orders
to be processed in the same amount of time). The degree to which
this usage of Order Entry Ports provides any throughput advantage is
based on how a particular Member sends order messages to MEMX,
however the Exchange notes that its architecture reduces the impact
or necessity of such a strategy. All Order Entry Ports on MEMX
provide the same throughput, and as noted above, the throughput is
likely adequate even for a Member sending a significant amount of
volume at a fast pace, and is not artificially throttled or limited
in any way by the Exchange.
---------------------------------------------------------------------------
The proposed fee for application sessions is effective on filing
and will become operative immediately, subject to the proposed waiver
described below.
Proposed Fees--Additional Discussion
As discussed above, the proposed fees for connectivity services do
not by design apply differently to different types or sizes of Members.
As discussed in more detail in the Statutory Basis section, the
Exchange believes that the likelihood of higher fees for certain
Members subscribing to connectivity services usage than others is not
unfairly discriminatory because it is based on objective differences in
usage of connectivity services among different Members. The Exchange's
incremental aggregate costs for all connectivity services are
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the
Exchange, as such Members: (1) consume the most bandwidth and resources
of the network; (2) transact the vast majority of the volume on the
Exchange; and (3) require the high-touch network support services
provided by the Exchange and its staff, including network monitoring,
reporting and support services, resulting in a much higher cost to the
Exchange to provide such connectivity services. For these reasons, MEMX
believes it is not unfairly discriminatory for the Members with higher
message traffic and/or Members with more complicated connections to pay
a higher share of the total connectivity services fees. While Members
with a business model that results in higher relative inbound message
activity or more complicated connections are projected to pay higher
fees, the level of such fees is based solely on the number of physical
connections and/or application sessions deemed necessary by the Member
and not on the Member's business model or type of Member. The Exchange
notes that the correlation between message traffic and usage of
connectivity services is not completely aligned because Members
individually determine how many physical connections and application
sessions to request, and Members may make different decisions on the
appropriate ways based on facts unique to their individual businesses.
Based on the Exchange's architecture, as described above, the Exchange
believes that a Member even with high message traffic would be able to
conduct business on the Exchange with a
[[Page 16058]]
relatively small connectivity services footprint.
Finally, the fees for connectivity services will help to encourage
connectivity services usage in a way that aligns with the Exchange's
regulatory obligations. As a national securities exchange, the Exchange
is subject to Regulation Systems Compliance and Integrity (``Reg
SCI'').\33\ Reg SCI Rule 1001(a) requires that the Exchange establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure (among other things) that its Reg SCI systems have
levels of capacity adequate to maintain the Exchange's operational
capability and promote the maintenance of fair and orderly markets.\34\
By encouraging Users to be efficient with their usage of connectivity
services, the proposed fee will support the Exchange's Reg SCI
obligations in this regard by ensuring that unused application sessions
are available to be allocated based on individual User needs and as the
Exchange's overall order and trade volumes increase. Additionally,
because the Exchange will charge a lower rate for a physical connection
to the Secondary Data Center and will not charge any fees for
application sessions at the Secondary Data Center or its Test Facility,
the proposed fee structure will further support the Exchange's Reg SCI
compliance by reducing the potential impact of a disruption should the
Exchange be required to switch to its Disaster Recovery Facility and
encouraging Members to engage in any necessary system testing with low
or no cost imposed by the Exchange.\35\
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\33\ 17 CFR 242.1000-1007.
\34\ 17 CFR 242.1001(a).
\35\ While some Members might directly connect to the Secondary
Data Center and incur the proposed $3,000 per month fee, there are
other ways to connect to the Exchange, such as through a service
bureau or extranet, and because the Exchange is not imposing fees
for application sessions in the Secondary Data Center, a Member
connecting through another method would not incur any fees charged
directly by the Exchange. However, the Exchange notes that a third-
party service provider providing connectivity to the Exchange likely
would charge a fee for providing such connectivity; such fees are
not set by or shared in by the Exchange.
---------------------------------------------------------------------------
(ii) Organizational Fee Schedule Changes
The Exchange is proposing to more clearly separate Connectivity
Fees from the Exchange's current fee schedule. Currently, the Exchange
has separate transaction fee schedules for Equities and Options, and
the current Connectivity Fees appear solely on the Equities fee
schedule. The Exchange proposes to remove the Connectivity Fees section
from the Equities fee schedule, and add hyperlinks at the bottom of the
Equities and Options fee schedules that direct the User to a single
Connectivity fee schedule. The Exchange believes this format is
appropriate given that the same Connectivity Fees apply to both
Equities and Options Users, and separating out the fee schedule for
Connectivity Fees will reduce potential confusion (e.g., as to which
fees a Member that participates on both MEMX Equities and MEMX Options
must pay on a monthly basis to maintain connectivity to the Exchange).
The Exchange also proposes to add three additional bullet points to
the new Connectivity Fee Schedule related to MEMX Options. The first
will notify Members that a physical connection can be used to access
MEMX Equities and/or MEMX Options. The second will clarify that an
application session can only be used to access one MEMX platform, i.e.,
MEMX Equities or MEMX Options. The third will note that Connectivity
and application session fees solely related to participation on MEMX
Options are waived until March 1, 2024.\36\ The Exchange notes that the
existing bullet points related to Connectivity and application sessions
will be included on the proposed separate Connectivity Fee Schedule,
(i.e., detailing the Exchange's billing practices, and making clear
that that the Exchange does not charge for: (1) Order Entry Ports or
Drop Copy Ports in the Secondary Data Center, or (2) any Test Facility
Ports or MEMOIR Gap Fill Ports.
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\36\ On February 8, 2024, the Exchange filed a proposed rule
change to amend the Exchange's Fee Schedule to extend the existing
Membership Fee and Options Connectivity Fee Waivers until February
29, 2024. See SR-MEMX-2024-05, available at: https://info.memxtrading.com/category/rule-filings/effective-rule-filings/.
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2. Statutory Basis
The Exchange believes that the proposed fees for connectivity
services to MEMX Options are reasonable, equitable and not unfairly
discriminatory because, as described above, the proposed pricing for
connectivity services is directly related to the relative costs to the
Exchange to provide those respective services and does not impose a
barrier to entry to smaller participants.
The Exchange recognizes that there are various business models and
varying sizes of market participants conducting business on the
Exchange. The Exchange's incremental aggregate costs for all
connectivity services are disproportionately related to Members with
higher message traffic and/or Members with more complicated connections
established with the Exchange, as such Members: (1) consume the most
bandwidth and resources of the network; (2) transact the vast majority
of the volume on the Exchange; and (3) require the high-touch network
support services provided by the Exchange and its staff, including
network monitoring, reporting and support services, resulting in a much
higher cost to the Exchange to provide such connectivity services.
Accordingly, the Exchange believes the allocation of the proposed fees
that increase based on the number of physical connections or
application sessions is reasonable based on the resources consumed by
the respective type of market participant (i.e., lowest resource
consuming Members will pay the least, and highest resource consuming
Members will pay the most), particularly since higher resource
consumption translates directly to higher costs to the Exchange.
With regard to reasonableness, the Exchange understands that when
appropriate given the context of a proposal the Commission has taken a
market-based approach to examine whether the SRO making the proposal
was subject to significant competitive forces in setting the terms of
the proposal. In looking at this question, the Commission considers
whether the SRO has demonstrated in its filing that: (i) there are
reasonable substitutes for the product or service; (ii) ``platform''
competition constrains the ability to set the fee; and/or (iii) revenue
and cost analysis shows the fee would not result in the SRO taking
supra-competitive profits. If the SRO demonstrates that the fee is
subject to significant competitive forces, the Commission will next
consider whether there is any substantial countervailing basis to
suggest the fee's terms fail to meet one or more standards under the
Exchange Act. If the filing fails to demonstrate that the fee is
constrained by competitive forces, the SRO must provide a substantial
basis, other than competition, to show that it is consistent with the
Exchange Act, which may include production of relevant revenue and cost
data pertaining to the product or service.
MEMX believes the proposed fees for connectivity services are fair
and reasonable as a form of cost recovery for the Exchange's aggregate
costs of offering connectivity services to Members and non-Members. The
proposed fees are expected to generate monthly revenue of $2,076,238
providing cost recovery to the Exchange for the aggregate costs of
offering
[[Page 16059]]
connectivity services, based on a methodology that narrowly limits the
cost drivers that are allocated cost to those closely and directly
related to the particular service. In addition, this revenue will allow
the Exchange to continue to offer, to enhance, and to continually
refresh its infrastructure as necessary to offer a state-of-the-art
trading platform. The Exchange believes that, consistent with the Act,
it is appropriate to charge fees that represent a reasonable markup
over cost given the other factors discussed above. The Exchange also
believes the proposed fee is a reasonable means of encouraging Users to
be efficient in the connectivity services they reserve for use, with
the benefits to overall system efficiency to the extent Members and
non-Members consolidate their usage of connectivity services or
discontinue subscriptions to unused physical connectivity.
The Exchange further believes that the proposed fees, as they
pertain to purchasers of each type of connectivity alternative,
constitute an equitable allocation of reasonable fees charged to the
Exchange's Members and non-Members and are allocated fairly amongst the
types of market participants using the facilities of the Exchange.
As described above, the Exchange believes the proposed fees are
equitably allocated because the Exchange's incremental aggregate costs
for all connectivity services are disproportionately related to Members
with higher message traffic and/or Members with more complicated
connections established with the Exchange, as such Members: (1) consume
the most bandwidth and resources of the network; (2) transact the vast
majority of the volume on the Exchange; and (3) require the high-touch
network support services provided by the Exchange and its staff,
including network monitoring, reporting and support services, resulting
in a much higher cost to the Exchange to provide such connectivity
services.
Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering
whether an exchange's proposed fees are consistent with the Act.\37\ As
described in the Fee Guidance, the term ``supra-competitive profits''
refers to profits that exceed the profits that can be obtained in a
competitive market. The proposed fee structure would not result in
excessive pricing or supra-competitive profits for the Exchange. The
proposed fee structure is merely designed to permit the Exchange to
cover the costs allocated to providing connectivity services with a
modest margin (approximately 11.7% for physical connectivity and 9.7%
for application sessions), which would also help fund future
expenditures (increased costs, improvements, etc.). While the Fee
Guidance did not establish a guideline as to what constitutes supra-
competitive pricing through analyzing margin (nor does the Exchange
believe it should have), the Exchange does not believe that it would be
reasonable to consider the aforementioned margins to constitute supra-
competitive pricing. As noted above, the increase in margin for
connectivity services is primarily driven by certain cost savings that
the Exchange has been able to achieve as compared to the 2021 Cost
Analysis, and the Exchange does not believe it should be penalized, and
instead should be rewarded for identifying and realizing such savings.
Of course, should the Exchange find opportunities to dramatically
reduce costs or increase revenues such that it believes the cost it is
charging for physical connections or applications sessions is
inconsistent with the cost of providing such connectivity or resulting
in unreasonable margin, the Exchange will seek to lower its fees in
order to pass savings on to its constituents. Thus, the Exchange
believes that its proposed pricing for Connectivity Fees is fair,
reasonable, and equitable. Further, the Exchange notes that certain of
its competitors have connectivity fees that were approved without the
presentation of a cost-based analysis, but it is reasonable to assume
that certain of those competitors with significantly higher fees also
operate with significantly higher profit margins. Accordingly, the
Exchange believes that its proposal is consistent with Section 6(b)(4)
\38\ of the Act because the proposed fees will permit recovery of the
Exchange's costs and will not result in excessive pricing or supra-
competitive profit.
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\37\ See Fee Guidance, supra note 12.
\38\ 15 U.S.C. 78f(b)(4).
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The proposed fees for Options connectivity services will allow the
Exchange to cover certain costs incurred by the Exchange associated
with providing and maintaining necessary hardware and other network
infrastructure as well as network monitoring and support services;
without such hardware, infrastructure, monitoring and support the
Exchange would be unable to provide the connectivity services. 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 adopting fees for
connectivity services. As detailed above, the Exchange has four 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 four primary sources of revenue. The
Exchange's Cost Analysis estimates the monthly costs to provide
connectivity services at $1,846,310.58. Based on current connectivity
services usage, the Exchange would generate monthly revenues of
approximately $2,076,238. This represents a modest profit when compared
to the cost of providing connectivity services and that profit
represents a modest increase over the profit estimated in the 2021 Cost
Analysis (a reasonable goal for a newly formed business, i.e., growing
from non-profitable, to break-even to modestly profitable).\39\ Even if
the Exchange earns that amount or incrementally more, the Exchange
believes the proposed fees for connectivity services are fair and
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total expense of MEMX associated
with providing connectivity services versus the total projected revenue
of the Exchange associated with network connectivity services.
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\39\ Specifically, in the 2021 Cost Analysis, the Exchange
estimated the total costs to provide connectivity services at
$1,143,715 and estimated monthly revenues of $1,233,750.
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As noted above, when incorporating the projected revenue from
connectivity services into the Exchange's overall projected revenue,
including projections related to recently adopted market data fees, the
Exchange anticipates monthly revenue of $6,080,631 from all sources. As
such, applying the Exchange's holistic Cost Analysis to a holistic view
of anticipated revenues, the Exchange would earn approximately 13%
margin on its operations as a whole. The Exchange believes that this
amount is reasonable and is again evidence that the Exchange will not
earn a supra-competitive profit.
The Exchange notes that other exchanges offer similar connectivity
options to market participants and that the Exchange's fees are a
discount as compared to the majority of such fees.\40\
[[Page 16060]]
With respect to physical connections, MIAX Options (``MIAX''), MIAX
Pearl, LLC (``MIAX Pearl''), MIAX Emerald, LLC (``MIAX Emerald''), each
of the Nasdaq Stock Market LLC (``Nasdaq'') options exchanges,\41\ NYSE
American Options (``NYSE American''), NYSE Arca Options (``NYSE
Arca''), Cboe Exchange, Inc. (``Cboe Options''), Cboe BZX Options
(``BZX Options''), and Cboe EDGX Options (``EDGX Options'') charge
between $7,000-$22,000 per month for physical connectivity at their
primary data centers that is comparable to that offered by the
Exchange.\42\ Nasdaq, NYSE American and NYSE Arca also charge
installation fees, which are not proposed to be charged by the
Exchange. With respect to application sessions, BX, PHLX, GEMX, MRX,
BOX Options (``BOX''), Cboe Options, BZX Options and EDGX charge
between $500-$800 per month for order entry and drop ports.\43\ The
Exchange further notes that several of these exchanges each charge for
other logical ports that the Exchange will continue to provide for
free, such as application sessions for testing and disaster recovery
purposes.\44\ While the Exchange's proposed Options Connectivity Fees
are lower than certain of the fees charged by the Nasdaq options
exchanges, MIAX Options, MIAX Pearl, MIAX Emerald, NYSE American, NYSE
Arca, BOX, Cboe, BZX and EDGX, MEMX believes that it offers significant
value to Members over these other exchanges in terms of bandwidth
available over such connectivity services, which the Exchange believes
is a competitive advantage, and differentiates its connectivity versus
connectivity to other exchanges.\45\ Additionally, the Exchange's
proposed Connectivity Fees to its disaster recovery facility are within
the range of the fees charged by other exchanges for similar
connectivity alternatives.\46\ The Exchange believes that its proposal
to offer certain application sessions free of charge is reasonable,
equitably allocated and not unfairly discriminatory because such
proposal is intended to encourage Member connections and use of backup
and testing facilities of the Exchange, and, with respect to MEMOIR Gap
Fill ports, such ports are used exclusively in connection with the
receipt and processing of market data from the Exchange.
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\40\ One significant differentiation between the Exchanges is
that while it offers different types of physical connections,
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does
not propose to charge different prices for such connections. In
contrast, most of the Exchange's competitors provide scaled pricing
that increases depending on the size of the physical connection. The
Exchange does not believe that its costs increase incrementally
based on the size of a physical connection but instead, that
individual connections and the number of such separate and disparate
connections are the primary drivers of cost for the Exchange.
\41\ Including Nasdaq PHLX (``PHLX''), Nasdaq Options Market
(``NOM''), Nasdaq BX Options (``BX''), Nasdaq ISE (``ISE''), Nasdaq
GEMX (``GEMX''), and Nasdaq MRX (``MRX'').
\42\ See the MIAX fee schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX__Options__Fee__Schedule_10022023.pdf; the MIAX Pearl fee
schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Fee_Schedule_09122023.pdf; the MIAX Emerald fee
schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Emerald_Fee_Schedule_10122023_3.pdf;
the Nasdaq Options markets fee schedule, at https://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2; the NYSE
Connectivity fee schedule, at: https://www.nyse.com/publicdocs/Wireless_Connectivity_Fees_and_Charges.pdf ; the Cboe fee schedule,
at: https://www.cboe.com/us/options/membership/fee_schedule/cone/;
the BZX Options fee schedule, available at: https://www.cboe.com/us/options/membership/fee_schedule/bzx/; the EDGX Options fee schedule,
available at: https://www.cboe.com/us/options/membership/fee_schedule/edgx/, and the BOX Options fee schedule, available at:
https://boxoptions.com/fee-schedule/. This range is based on a
review of the fees charged for 10-40Gb connections at each of these
exchanges and relates solely to the physical port fee or connection
charge, excluding co-location fees and other fees assessed by these
exchanges. The Exchange notes that it does not offer physical
connections with lower bandwidth than 10Gb and that Members and non-
Members with lower bandwidth requirements typically access the
Exchange through third-party extranets or service bureaus.
\43\ See id.
\44\ See id.
\45\ As noted above, all physical connections offered by MEMX
are at least 10Gb capable and physical connections provided with
larger bandwidth capabilities will be provided at the same rate as
such connections. In contrast to other exchanges, MEMX has not
proposed different types of physical connections with higher pricing
for those with greater capacity. See supra note 39. The Exchange
also reiterates that MEMX application sessions are capable of
handling significant amount of message traffic (i.e., over 50,000
orders per second), and have no application flow control or order
throttling, in contrast to competitors that have imposed message
rate thresholds. See supra note 32 and accompanying text.
\46\ See supra note 42.
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In conclusion, the Exchange submits that its proposed fee structure
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act
\47\ for the reasons discussed above in that it provides for the
equitable allocation of reasonable dues, fees and other charges among
its Members and other persons using its facilities, does not permit
unfair discrimination between customers, issuers, brokers, or dealers,
and is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system and in general to protect investors
and the public interest, particularly as the proposal neither targets
nor will it have a disparate impact on any particular category of
market participant.
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\47\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange believes that the proposed reorganization of its fee
schedule to establish a separate fee schedule for Connectivity Fees is
reasonable and equitable because it is a non-substantive change and
does not involve changing any existing fees or rebates that apply to
trading activity on MEMX Equities. Further, the changes are designed to
make the fee schedule easier to read and for Members to validate the
bills they receive from the Exchange. The Exchange also believes this
reorganization is non-discriminatory because it applies uniformly to
all Members. The Exchange believes the proposed fee schedule will be
clearer and less confusing for Members of the Exchange and will
eliminate potential Member confusion, thereby removing impediments to
and perfecting the mechanism of a free and open market and a national
market, and in general, protecting investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\48\ the Exchange
does not believe that the proposed rule change would impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.
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\48\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition
The Exchange does not believe that the proposed rule change to
apply the same Connectivity Fees to Options Users as it does to
Equities Users would place certain market participants at the Exchange
at a relative disadvantage compared 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. As noted above, the Exchange
has previously justified its pricing with respect to MEMX Equities and
believes the most fair approach, absent a significant differentiation
between application costs to Equities and Options, is to apply the same
pricing to all participants of either platform. The Exchange believes
its proposed pricing is reasonable and lower than what other options
exchanges charge and, when coupled with the availability of third-party
providers that also offer connectivity solutions, that participation on
the Exchange is
[[Page 16061]]
affordable for all market participants, including smaller trading
firms. Therefore, the fees may stimulate intramarket competition by
attracting additional firms to become Members of MEMX Options. 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.
As it relates to the reorganization of the fee schedule, as
discussed above, the Exchange does not believe that the proposed change
would impose any burden on competition because such change serves to
create an easier to read fee schedule to avoid any Member confusion.
Intermarket Competition
The Exchange does not believe the proposed fees for Options
Connectivity place an undue burden on competition on other SROs that is
not necessary or appropriate. Additionally, other exchanges have
similar connectivity alternatives for their participants, but with
higher rates to connect.\49\ The Exchange is also unaware of any
assertion that the proposed fees for connectivity services would
somehow unduly impair its competition with other exchanges. As a new
entrant in an already highly competitive environment for equity options
trading, MEMX does not have the market power necessary to set prices
for services that are unreasonable or unfairly discriminatory in
violation of the Exchange Act. In sum, MEMX's proposed Connectivity
Fees for Options Members are comparable to and generally lower than
fees charged by other options exchanges for the same or similar
services.
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\49\ See supra notes 41-46 and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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 \50\ and Rule 19b-4(f)(2) \51\ thereunder.
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\50\ 15 U.S.C. 78s(b)(3)(A)(ii).
\51\ 17 CFR 240.19b-4(f)(2).
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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 change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-MEMX-2024-06 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-MEMX-2024-06. 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-MEMX-2024-06 and should be
submitted on or before March 27, 2024.
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\52\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-04695 Filed 3-5-24; 8:45 am]
BILLING CODE 8011-01-P
