Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Modify Certain Connectivity and Port Fees, 21379-21401 [2024-06451]
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Federal Register / Vol. 89, No. 60 / Wednesday, March 27, 2024 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99824; File No. SR–
EMERALD–2024–12]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Its Fee
Schedule To Modify Certain
Connectivity and Port Fees
March 21, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 11,
2024, MIAX Emerald, LLC (‘‘MIAX
Emerald’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
MIAX Emerald Options Exchange Fee
Schedule (the ‘‘Fee Schedule’’) to
amend certain connectivity and port
fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxglobal.com/markets/
us-options/emerald-options/rule-filings,
at MIAX Emerald’s principal office, and
at the Commission’s Public Reference
Room.
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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
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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The Exchange proposes to amend the
Fee Schedule as follows: (1) increase the
fees for a 10 gigabit (‘‘Gb’’) ultra-low
latency (‘‘ULL’’) fiber connection for
Members 3 and non-Members; and (2)
amend the monthly port fee for
additional Limited Service MIAX
Emerald Express Interface (‘‘MEI’’)
Ports 4 available to Market Makers.5 The
Exchange has experienced ongoing
increases in expenses in recent years. As
discussed more fully below, the
Exchange recently calculated annual
aggregate costs of $15,469,330 for
providing 10Gb ULL connectivity and
$2,506,232 for providing Limited
Service MEI Ports.
Much of the cost relates to monitoring
and analysis of data and performance of
the network via the subscriber’s
connection with nanosecond
granularity, and continuous
improvements in network performance
with the goal of improving the
subscriber’s experience. The costs
associated with maintaining and
enhancing a state-of-the-art network is a
significant expense for the Exchange,
and thus the Exchange believes that it
is reasonable and appropriate to help
offset those increased costs by amending
fees for connectivity services.
Subscribers expect the Exchange to
provide this level of support so they
continue to receive the performance
they expect. This differentiates the
Exchange from its competitors.
The Exchange now proposes to amend
the Fee Schedule to amend the fees for
10Gb ULL connectivity and Limited
Service MEI Ports in order to recoup
ongoing costs and increase in expenses
set forth below in the Exchange’s cost
analysis. While the proposed fee
changes are immediately effective, the
Exchange notes that a version of the
proposed fee changes has been effective
since January 1, 2023 pursuant to the
Exchange’s initially filed this proposal
on December 30, 2022 as SR–
EMERALD–2022–38. On January 9,
2023, the Exchange withdrew SR–
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 The MIAX Emerald Express Interface (‘‘MEI’’) is
a connection to the MIAX Emerald System that
enables Market Makers to submit simple and
complex electronic quotes to MIAX Emerald. See
the Definitions Section of the Fee Schedule.
5 The term ‘‘Market Makers’’ refers to Lead Market
Makers (‘‘LMMs’’), Primary Lead Market Makers
(‘‘PLMMs’’), and Registered Market Makers
(‘‘RMMs’’) collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100. For
purposes of Limit Service MEI Ports, Market Makers
also include firms that engage in other types of
liquidity activity, such as seeking to remove resting
liquidity from the Exchange’s Book.
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EMERALD–2022–38 to make a minor
technical correction and resubmitted the
proposal (the ‘‘Initial Proposal’’).6 On
February 23, 2023, the Exchange
withdrew the Initial Proposal and
replaced it with a revised proposal (the
‘‘Second Proposal’’).7 On April 20, 2023,
the Exchange withdrew the Second
Proposal and replaced it with a revised
proposal (the ‘‘Third Proposal’’).8 On
June 16, 2023, the Exchange withdrew
the Third Proposal and replaced it with
a revised proposal (the ‘‘Fourth
Proposal’’).9 On August 8, 2023, the
Exchange withdrew the Fourth Proposal
and replaced it with a revised proposal
(the ‘‘Fifth Proposal’’).10 Since a U.S.
government shutdown was avoided, on
October 2, 2023, the Exchange withdrew
the Fifth Proposal and replaced it with
a further revised proposal (the ‘‘Sixth
Proposal’’).11 On November 27, 2023,
the Exchange withdrew the Sixth
Proposal and replaced it with this
further revised proposal (the ‘‘Seventh
Proposal’’).12 On January 25, 2024, the
Exchange withdrew the Seventh
Proposal and replaced it with a further
revised proposal (the ‘‘Eighth
6 See Securities Exchange Act Release No. 96628
(January 10, 2023), 88 FR 2651 (January 17, 2023)
(SR–EMERALD–2023–01).
7 See Securities Exchange Act Release No. 97079
(March 8, 2023), 88 FR 15764 (March 14, 2023) (SR–
EMERALD–2023–05).
8 See Securities Exchange Act Release No. 97422
(May 2, 2023), 88 FR 29750 (May 8, 2023) (SR–
EMERALD–2023–12).
9 The Exchange met with Commission Staff to
discuss the Third Proposal during which the
Commission Staff provided feedback and requested
additional information, including, most recently,
information about total costs related to certain third
party vendors. Such vendor cost information is
subject to confidentiality restrictions. The Exchange
provided this information to Commission Staff
under separate cover with a request for
confidentiality. While the Exchange will continue
to be responsive to Commission Staff’s information
requests, the Exchange believes that the
Commission should, at this point, issue
substantially more detailed guidance for exchanges
to follow in the process of pursuing a cost-based
approach to fee filings, and that, for the purposes
of fair competition, detailed disclosures by
exchanges, such as those that the Exchange is
providing now, should be consistent across all
exchanges, including for those that have resisted a
cost-based approach to fee filings, in the interests
of fair and even disclosure and fair competition. See
Securities Exchange Act Release No. 97813 (June
27, 2023), 88 FR 42785 (July 3, 2023) (SR–
EMERALD–2023–14).
10 See Securities Exchange Act Release No. 98176
(August 21, 2023), 88 FR 58341 (August 25, 2023)
(SR–EMERALD–2023–19). Due to the prospect of a
U.S. government shutdown, the Commission
suspended the Fifth Proposal on September 29,
2023. See Securities Exchange Act Release No.
98656 (September 29, 2023) (SR–EMERALD–2023–
19).
11 See Securities Exchange Act Release No. 98751
(October 13, 2023), 88 FR 72174 (October 19, 2023)
(SR–EMERALD–2023–27).
12 See Securities Exchange Act Release No. 99138
(December 11, 2023), 88 FR 87020 (December 15,
2023) (SR–EMERALD–2023–30).
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Proposal’’).13 On March 11, 2024, the
Exchange withdrew the Eighth Proposal
and replaced it with this further revised
proposal (the ‘‘Ninth Proposal’’).
The Exchange previously included a
cost analysis in the Initial, Second,
Third, Fourth, Fifth, Sixth, Seventh and
Eighth Proposals. As described more
fully below, the Exchange provides an
updated cost analysis that includes,
among other things, additional
descriptions of how the Exchange
allocated costs among it and its
affiliated exchanges (MIAX PEARL, LLC
(‘‘MIAX Pearl’’) (separately among
MIAX Pearl Options and MIAX Pearl
Equities) and MIAX 14 (together with
MIAX Pearl Options and MIAX Pearl
Equities, the ‘‘affiliated markets’’)) to
ensure no cost was allocated more than
once, as well as additional detail
supporting its cost allocation processes
and explanations as to why a cost
allocation in this proposal may differ
from the same cost allocation in a
similar proposal submitted by one of its
affiliated markets. The Exchange
continues to propose fees that are
intended to cover the Exchange’s cost of
providing 10Gb ULL connectivity and
Limited Service MEI Ports with a
reasonable mark-up over those costs.
The cost analysis included in prior
filings was based on the Exchange’s
2023 fiscal year of operations and
projected expenses. In its Initial
Proposal filed on December 30, 2022,
the Exchange committed to conduct an
annual review after implementation of
these fees. The Exchange recently
completed its 2024 fiscal year budget
process, which included its annual
review of these fees and the projected
costs to provide these services, based on
its approved 2024 expense budget.
Therefore, the Cost Analysis included in
this proposal is based on the Exchange’s
2024 fiscal year of operations and
projected expenses. The Exchange
believes it reasonable to now use costs
from its 2024 fiscal year budget because
they reflect the Exchange’s current cost
base. The Exchange also notes that
expenses included in its 2024 fiscal year
budget and this proposal are generally
higher than its 2023 fiscal year budget
and Cost Analysis included in prior
filings. As more fully described below
and throughout this filing, this is due to
a number of factors, such as, critical
vendors and suppliers increasing costs
they charge the Exchange, significant
exchange staff headcount increases,
13 See Securities Exchange Act Release No. 99475
(February 5, 2024), 89 FR 9223 (February 9, 2024)
(SR–EMERALD–2024–03).
14 The term ‘‘MIAX’’ means Miami International
Securities Exchange, LLC. See Exchange Rule 100.
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increased data center costs from the
Exchange’s data center providers in
multiple locations and facilities, higher
technology and communications costs,
planned hardware refreshes, and system
capacity upgrades that increase
depreciation expense. Specifically, with
regard to employee compensation, the
2024 fiscal year budget includes
additional expenses related to increased
headcount and new hires that are
needed to support the Exchange as it
continues to grow (the Exchange and its
affiliated companies are projected to
hire over 60 additional staff in 2024).
Hardware and software expenses have
also increased primarily due to price
increases from critical vendors and
equipment suppliers. Further, the
Exchange budgeted for additional
hardware and software needs to support
the Exchange’s continued growth and
expansion. Depreciation and
amortization have likewise increased
due to recent and planned refreshes in
Exchange hardware and software. This
new equipment and software then
becomes depreciable, as described
below. Data center costs have also
increased due the following: the
Exchange expanding its footprint within
its data center; and the data center
vendor increasing the costs it charges
the Exchange. Lastly, allocated shared
expenses have increased due to the
overall budgeted increase in costs from
2023 to 2024 necessary to operate and
support the Exchange as described
below.
Consequently, these increased costs
included in the 2024 budget result in a
lower projected profit margin for 10Gb
ULL connectivity and Limited Service
MEI Ports than the profit margins
included in prior filings that proposed
the same fee levels for 10Gb ULL
connectivity and Limited Service MEI
Ports. The Exchange believes it is
reasonable and appropriate to now use
expenses from its 2024 budget because
those expenses are more recent and
more accurately reflect the Exchange’s
current expenses and projected
revenues for the 2024 fiscal year.
Continuing to use 2023 budget numbers
would result in the Exchange’s Cost
Analysis to be based on stale data which
would not reflect the Exchanges most
recent cost estimates and projected
margins.
*
*
*
*
*
Starting in 2017, following the United
States Court of Appeals for the District
of Columbia’s Susquehanna Decision 15
and various other developments, the
15 See Susquehanna International Group, LLP v.
Securities & Exchange Commission, 866 F.3d 442
(D.C. Circuit 2017) (the ‘‘Susquehanna Decision’’).
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Commission began to undertake a
heightened review of exchange filings,
including non-transaction fee filings
that was substantially and materially
different from it prior review process
(hereinafter referred to as the ‘‘Revised
Review Process’’). In the Susquehanna
Decision, the D.C. Circuit Court stated
that the Commission could not maintain
a practice of ‘‘unquestioning reliance’’
on claims made by a self-regulatory
organization (‘‘SRO’’) in the course of
filing a rule or fee change with the
Commission.16 Then, on October 16,
2018, the Commission issued an
opinion in Securities Industry and
Financial Markets Association finding
that exchanges failed both to establish
that the challenged fees were
constrained by significant competitive
forces and that these fees were
consistent with the Act.17 On that same
day, the Commission issued an order
remanding to various exchanges and
national market system (‘‘NMS’’) plans
challenges to over 400 rule changes and
plan amendments that were asserted in
57 applications for review (the ‘‘Remand
Order’’).18 The Remand Order directed
the exchanges to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based
on that record, in a written decision that
is sufficient to enable us to perform our
review.’’ 19 The Commission denied
requests by various exchanges and plan
participants for reconsideration of the
Remand Order.20 However, the
Commission did extend the deadlines in
the Remand Order ‘‘so that they d[id]
not begin to run until the resolution of
the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the
court’s mandate.’’ 21 Both the Remand
Order and the Order Denying
Reconsideration were appealed to the
D.C. Circuit.
While the above appeal to the D.C.
Circuit was pending, on March 29, 2019,
the Commission issued an order
disapproving a proposed fee change by
BOX Exchange LLC (‘‘BOX’’) to
establish connectivity fees (the ‘‘BOX
Order’’), which significantly increased
16 Id.
17 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84432, 2018 WL 5023228
(October 16, 2018) (the ‘‘SIFMA Decision’’).
18 See Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84433, 2018 WL 5023230
(Oct. 16, 2018). See 15 U.S.C. 78k–1, 78s; see also
Rule 608(d) of Regulation NMS, 17 CFR 242.608(d)
(asserted as an alternative basis of jurisdiction in
some applications).
19 Id. at page 2.
20 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 85802, 2019 WL 2022819
(May 7, 2019) (the ‘‘Order Denying
Reconsideration’’).
21 Order Denying Reconsideration, 2019 WL
2022819, at *13.
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the level of information needed for the
Commission to believe that an
exchange’s filing satisfied its obligations
under the Act with respect to changing
a fee.22 Despite approving hundreds of
access fee filings in the years prior to
the BOX Order (described further
below) utilizing a ‘‘market-based’’ test,
the Commission changed course and
disapproved BOX’s proposal to begin
charging connectivity at one-fourth the
rate of competing exchanges’ pricing.
Also while the above appeal was
pending, on May 21, 2019, the
Commission Staff issued guidance ‘‘to
assist the national securities exchanges
and FINRA . . . in preparing Fee Filings
that meet their burden to demonstrate
that proposed fees are consistent with
the requirements of the Securities
Exchange Act.’’ 23 In the Staff Guidance,
the Commission Staff states that, ‘‘[a]s
an initial step in assessing the
reasonableness of a fee, staff considers
whether the fee is constrained by
significant competitive forces.’’ 24 The
Staff Guidance also states that, ‘‘. . .
even where an SRO cannot demonstrate,
or does not assert, that significant
competitive forces constrain the fee at
issue, a cost-based discussion may be an
alternative basis upon which to show
consistency with the Exchange Act.’’ 25
Following the BOX Order and Staff
Guidance, on August 6, 2020, the D.C.
Circuit vacated the Commission’s
SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC 26 and remanded for
further proceedings consistent with its
opinion.27 That same day, the D.C.
22 See Securities Exchange Act Release No. 85459
(March 29, 2019), 84 FR 13363 (April 4, 2019) (SR–
BOX–2018–24, SR–BOX–2018–37, and SR–BOX–
2019–04) (Order Disapproving Proposed Rule
Changes to Amend the Fee Schedule on the BOX
Market LLC Options Facility to Establish BOX
Connectivity Fees for Participants and NonParticipants Who Connect to the BOX Network) (the
‘‘BOX Order’’). The Commission noted in the BOX
Order that it ‘‘historically applied a ‘market-based’
test in its assessment of market data fees, which [the
Commission] believe[s] present similar issues as the
connectivity fees proposed herein.’’ Id. at page 16.
Despite this admission, the Commission
disapproved BOX’s proposal to begin charging
$5,000 per month for 10Gb connections (while
allowing legacy exchanges to charge rates equal to
3–4 times that amount utilizing ‘‘market-based’’ fee
filings from years prior).
23 See Staff Guidance on SRO Rule Filings
Relating to Fees (May 21, 2019), available at https://
www.sec.gov/tm/staff-guidance-sro-rule-filings-fees
(the ‘‘Staff Guidance’’).
24 Id.
25 Id.
26 NASDAQ Stock Mkt., LLC v. SEC, No 18–1324,
--- Fed. App’x ---- 2020 WL 3406123 (D.C. Cir. June
5, 2020). The court’s mandate was issued on August
6, 2020.
27 Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C.
Cir. 2020). The court’s mandate issued on August
6, 2020. The D.C. Circuit held that Exchange Act
‘‘Section 19(d) is not available as a means to
challenge the reasonableness of generally-
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Circuit issued an order remanding the
Remand Order to the Commission for
reconsideration in light of NASDAQ.
The court noted that the Remand Order
required the exchanges and NMS plan
participants to consider the challenges
that the Commission had remanded in
light of the SIFMA Decision. The D.C.
Circuit concluded that because the
SIFMA Decision ‘‘has now been
vacated, the basis for the [Remand
Order] has evaporated.’’ 28 Accordingly,
on August 7, 2020, the Commission
vacated the Remand Order and ordered
the parties to file briefs addressing
whether the holding in NASDAQ v. SEC
that Exchange Act Section 19(d) does
not permit challenges to generally
applicable fee rules requiring dismissal
of the challenges the Commission
previously remanded.29 The
Commission further invited ‘‘the parties
to submit briefing stating whether the
challenges asserted in the applications
for review . . . should be dismissed,
and specifically identifying any
challenge that they contend should not
be dismissed pursuant to the holding of
NASDAQ v. SEC.’’ 30 Without resolving
the above issues, on October 5, 2020, the
Commission issued an order granting
SIFMA and Bloomberg’s request to
withdraw their applications for review
and dismissed the proceedings.31
As a result of the Commission’s loss
of the NASDAQ vs. SEC case noted
above, the Commission never followed
through with its intention to subject the
over 400 fee filings to ‘‘develop a
record,’’ and to ‘‘explain their
conclusions, based on that record, in a
written decision that is sufficient to
enable us to perform our review.’’ 32 As
such, all of those fees remained in place
and amounted to a baseline set of fees
for those exchanges that had the benefit
of getting their fees in place before the
Commission Staff’s fee review process
materially changed. The net result of
this history and lack of resolution in the
D.C. Circuit Court resulted in an uneven
competitive landscape where the
Commission subjects all new nonapplicable fee rules.’’ Id. The court held that ‘‘for
a fee rule to be challengeable under Section 19(d),
it must, at a minimum, be targeted at specific
individuals or entities.’’ Id. Thus, the court held
that ‘‘Section 19(d) is not an available means to
challenge the fees at issue’’ in the SIFMA Decision.
Id.
28 Id. at *2; see also id. (‘‘[T]he sole purpose of
the challenged remand has disappeared.’’).
29 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 89504, 2020 WL 4569089
(August 7, 2020) (the ‘‘Order Vacating Prior Order
and Requesting Additional Briefs’’).
30 Id.
31 Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 90087 (October 5, 2020).
32 See supra note 27, at page 2.
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transaction fee filings to the new
Revised Review Process, while allowing
the previously challenged fee filings,
mostly submitted by incumbent
exchanges prior to 2019, to remain in
effect and not subject to the ‘‘record’’ or
‘‘review’’ earlier intended by the
Commission.
While the Exchange appreciates that
the Staff Guidance articulates an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable,
the practical effect of the Revised
Review Process, Staff Guidance, and the
Commission’s related practice of
continuous suspension of new fee
filings, is anti-competitive,
discriminatory, and has put in place an
un-level playing field, which has
negatively impacted smaller, nascent,
non-legacy exchanges (‘‘non-legacy
exchanges’’), while favoring larger,
incumbent, entrenched, legacy
exchanges (‘‘legacy exchanges’’).33 The
legacy exchanges all established a
significantly higher baseline for access
and market data fees prior to the
Revised Review Process. From 2011
until the issuance of the Staff Guidance
in 2019, national securities exchanges
filed, and the Commission Staff did not
abrogate or suspend (allowing such fees
to become effective), at least 92 filings 34
to amend exchange connectivity or port
fees (or similar access fees). The support
for each of those filings was a simple
statement by the relevant exchange that
the fees were constrained by
33 Commission Chair Gary Gensler recently
reiterated the Commission’s mandate to ensure
competition in the equities markets. See ‘‘Statement
on Minimum Price Increments, Access Fee Caps,
Round Lots, and Odd-Lots’’, by Chair Gary Gensler,
dated December 14, 2022 (stating ‘‘[i]n 1975,
Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the
establishment of the national market system and
enhance competition in the securities markets,
including the equity markets’’ (emphasis added)).
In that same statement, Chair Gary Gensler cited the
five objectives laid out by Congress in 11A of the
Exchange Act (15 U.S.C. 78k–1), including ensuring
‘‘fair competition among brokers and dealers,
among exchange markets, and between exchange
markets and markets other than exchange markets
. . .’’ (emphasis added). Id. at note 1. See also
Securities Acts Amendments of 1975, available at
https://www.govtrack.us/congress/bills/94/s249.
34 This timeframe also includes challenges to over
400 rule filings by SIFMA and Bloomberg discussed
above. Sec. Indus. & Fin. Mkts. Ass’n, Securities
Exchange Act Release No. 84433, 2018 WL 5023230
(Oct. 16, 2018). Those filings were left to stand,
while at the same time, blocking newer exchanges
from the ability to establish competitive access and
market data fees. See The Nasdaq Stock Market,
LLC v. SEC, Case No. 18–1292 (D.C. Cir. June 5,
2020). The expectation at the time of the litigation
was that the 400 rule flings challenged by SIFMA
and Bloomberg would need to be justified under
revised review standards.
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competitive forces.35 These fees remain
in effect today.
The net result is that the non-legacy
exchanges are effectively now blocked
by the Commission Staff from adopting
or increasing fees to amounts
comparable to the legacy exchanges
(which were not subject to the Revised
Review Process and Staff Guidance),
despite providing enhanced disclosures
and rationale to support their proposed
fee changes that far exceed any such
support provided by legacy exchanges.
Simply put, legacy exchanges were able
to increase their non-transaction fees
during an extended period in which the
Commission applied a ‘‘market-based’’
test that only relied upon the assumed
presence of significant competitive
forces, while exchanges today are
subject to a cost-based test requiring
extensive cost and revenue disclosures,
a process that is complex, inconsistently
applied, and rarely results in a
successful outcome, i.e., nonsuspension. The Revised Review
Process and Staff Guidance changed
decades-long Commission Staff
standards for review, resulting in unfair
discrimination and placing an undue
burden on inter-market competition
between legacy exchanges and nonlegacy exchanges.
Commission Staff now require
exchange filings, including from nonlegacy exchanges such as the Exchange,
to provide detailed cost-based analysis
in place of competition-based arguments
to support such changes. However, even
with the added detailed cost and
expense disclosures, the Commission
Staff continues to either suspend such
filings and institute disapproval
proceedings, or put the exchanges in the
unenviable position of having to
repeatedly withdraw and re-file with
additional detail in order to continue to
charge those fees.36 By impeding any
path forward for non-legacy exchanges
to establish commensurate nontransaction fees, or by failing to provide
any alternative means for smaller
markets to establish ‘‘fee parity’’ with
legacy exchanges, the Commission is
35 See, e.g., Securities Exchange Act Release Nos.
74417 (March 3, 2015), 80 FR 12534 (March 9,
2015) (SR–ISE–2015–06); 83016 (April 9, 2018), 83
FR 16157 (April 13, 2018) (SR–PHLX–2018–26);
70285 (August 29, 2013), 78 FR 54697 (September
5, 2013) (SR–NYSEMKT–2013–71); 76373
(November 5, 2015), 80 FR 70024 (November 12,
2015) (SR–NYSEMKT–2015–90); 79729 (January 4,
2017), 82 FR 3061 (January 10, 2017) (SR–
NYSEARCA–2016–172).
36 The Exchange has filed, and subsequently
withdrawn, various forms of this proposed fee
numerous times since August 2021 with each
proposal containing hundreds of cost and revenue
disclosures never previously disclosed by legacy
exchanges in their access and market data fee filings
prior to 2019.
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stifling competition: non-legacy
exchanges are, in effect, being deprived
of the revenue necessary to compete on
a level playing field with legacy
exchanges. This is particularly harmful,
given that the costs to maintain
exchange systems and operations
continue to increase. The Commission
Staff’s change in position impedes the
ability of non-legacy exchanges to raise
revenue to invest in their systems to
compete with the legacy exchanges who
already enjoy disproportionate nontransaction fee based revenue. For
example, the Cboe Exchange, Inc.
(‘‘Cboe’’) reported ‘‘access and capacity
fee’’ revenue of $70,893,000 for 2020 37
and $80,383,000 for 2021.38 Cboe C2
Exchange, Inc. (‘‘C2’’) reported ‘‘access
and capacity fee’’ revenue of
$19,016,000 for 2020 39 and $22,843,000
for 2021.40 Cboe BZX Exchange, Inc.
(‘‘BZX’’) reported ‘‘access and capacity
fee’’ revenue of $38,387,000 for 2020 41
and $44,800,000 for 2021.42 Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) reported
‘‘access and capacity fee’’ revenue of
$26,126,000 for 2020 43 and $30,687,000
for 2021.44 For 2021, the affiliated Cboe,
C2, BZX, and EDGX (the four largest
exchanges of the Cboe exchange group)
reported $178,712,000 in ‘‘access and
capacity fees’’ in 2021. NASDAQ Phlx,
LLC (‘‘NASDAQ Phlx’’) reported ‘‘Trade
Management Services’’ revenue of
$20,817,000 for 2019.45 The Exchange
notes it is unable to compare ‘‘access
fee’’ revenues with NASDAQ Phlx (or
37 According to Cboe’s 2021 Form 1 Amendment,
access and capacity fees represent fees assessed for
the opportunity to trade, including fees for tradingrelated functionality. See Cboe 2021 Form 1
Amendment, available at https://www.sec.gov/
Archives/edgar/vprr/2100/21000465.pdf.
38 See Cboe 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001155.pdf.
39 See C2 2021 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2100/
21000469.pdf.
40 See C2 2022 Form 1 Amendment, available at
https://www.sec.gov/Archives/edgar/vprr/2200/
22001156.pdf.
41 See BZX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000465.pdf.
42 See BZX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001152.pdf.
43 See EDGX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000467.pdf.
44 See EDGX 2022 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2200/
22001154.pdf.
45 According to PHLX, ‘‘Trade Management
Services’’ includes ‘‘a wide variety of alternatives
for connectivity to and accessing [the PHLX]
markets for a fee. These participants are charged
monthly fees for connectivity and support in
accordance with [PHLX’s] published fee
schedules.’’ See PHLX 2020 Form 1 Amendment,
available at https://www.sec.gov/Archives/edgar/
vprr/2001/20012246.pdf.
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other affiliated NASDAQ exchanges)
because after 2019, the ‘‘Trade
Management Services’’ line item was
bundled into a much larger line item in
PHLX’s Form 1, simply titled ‘‘Market
services.’’ 46
The much higher non-transaction fees
charged by the legacy exchanges
provides them with two significant
competitive advantages. First, legacy
exchanges are able to use their
additional non-transaction revenue for
investments in infrastructure, vast
marketing and advertising on major
media outlets,47 new products and other
innovations. Second, higher nontransaction fees provide the legacy
exchanges with greater flexibility to
lower their transaction fees (or use the
revenue from the higher non-transaction
fees to subsidize transaction fee rates),48
which are more immediately impactful
in competition for order flow and
market share, given the variable nature
of this cost on member firms. The
prohibition of a reasonable path forward
denies the Exchange (and other nonlegacy exchanges) this flexibility,
eliminates the ability to remain
competitive on transaction fees, and
hinders the ability to compete for order
flow and market share with legacy
exchanges. There is little doubt that
subjecting one exchange to a materially
different standard than that historically
applied to legacy exchanges for nontransaction fees leaves that exchange at
a disadvantage in its ability to compete
with its pricing of transaction fees.
While the Commission has clearly
noted that the Staff Guidance is merely
guidance and ‘‘is not a rule, regulation
or statement of the . . . Commission
. . . the Commission has neither
approved nor disapproved its content
46 See PHLX 2021 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2100/
21000475.pdf. The Exchange notes that this type of
Form 1 accounting appears to be designed to
obfuscate the true financials of such exchanges and
has the effect of perpetuating fee and revenue
advantages of legacy exchanges.
47 See, e.g., CNBC Debuts New Set on NYSE Floor,
available at https://www.cnbc.com/id/46517876.
48 See, e.g., Cboe Fee Schedule, Page 4, Affiliate
Volume Plan, available at https://cdn.cboe.com/
resources/membership/Cboe_FeeSchedule.pdf
(providing that if a market maker or its affiliate
receives a credit under Cboe’s Volume Incentive
Program (‘‘VIP’’), the market maker will receive an
access credit on their BOE Bulk Ports corresponding
to the VIP tier reached and the market maker will
receive a transaction fee credit on their sliding scale
market maker transaction fees) and NYSE American
Options Fee Schedule, Section III, E, Floor Broker
Incentive and Rebate Programs, available at https://
www.nyse.com/publicdocs/nyse/markets/americanoptions/NYSE_American_Options_Fee_
Schedule.pdf (providing floor brokers the
opportunity to prepay certain non-transaction fees
for the following calendar year by achieving certain
amounts of volume executed on NYSE American).
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. . .’’,49 this is not the reality
experienced by exchanges such as
MIAX Emerald. As such, non-legacy
exchanges are forced to rely on an
opaque cost-based justification
standard. However, because the Staff
Guidance is devoid of detail on what
must be contained in cost-based
justification, this standard is nearly
impossible to meet despite repeated
good-faith efforts by the Exchange to
provide substantial amount of costrelated details. For example, the
Exchange has attempted to increase fees
using a cost-based justification
numerous times, having submitted over
six filings.50 However, despite
providing 100+ page filings describing
in extensive detail its costs associated
with providing the services described in
the filings, Commission Staff continues
to suspend such filings, with the
rationale that the Exchange has not
provided sufficient detail of its costs
and without ever being precise about
what additional data points are
required. The Commission Staff appears
to be interpreting the reasonableness
standard set forth in Section 6(b)(4) of
the Act 51 in a manner that is not
possible to achieve. This essentially
nullifies the cost-based approach for
exchanges as a legitimate alternative as
laid out in the Staff Guidance. By
refusing to accept a reasonable costbased argument to justify nontransaction fees (in addition to refusing
to accept a competition-based argument
as described above), or by failing to
provide the detail required to achieve
that standard, the Commission Staff is
effectively preventing non-legacy
exchanges from making any nontransaction fee changes, which benefits
the legacy exchanges and is
anticompetitive to the non-legacy
exchanges. This does not meet the
49 See
supra note 23, at note 1.
Securities Exchange Act Release Nos.
94889 (May 11, 2022), 87 FR 29928 (May 17, 2022)
(SR–EMERALD–2022–19); 94718 (April 14, 2022),
87 FR 23633 (April 20, 2022) (SR–EMERALD–2022–
15); 94717 (April 14, 2022), 87 FR 23648 (April 20,
2022) (SR–EMERALD–2022–13); 94260 (February
15, 2022), 87 FR 9695 (February 22, 2022) (SR–
EMERALD–2022–05); 94257 (February 15, 2022), 87
FR 9678 (February 22, 2022) (SR–EMERALD–2022–
04); 93772 (December 14, 2021), 86 FR 71965
(December 20, 2021) (SR–EMERALD–2021–43);
93776 (December 14, 2021), 86 FR 71983 (December
20, 2021) (SR–EMERALD–2021–42); 93188
(September 29, 2021), 86 FR 55052 (October 5,
2021) (SR–EMERALD–2021–31); (SR–EMERALD–
2021–30) (withdrawn without being noticed by the
Commission); 93166 (September 28, 2021), 86 FR
54760 (October 4, 2021) (SR–EMERALD–2021–29);
92662 (August 13, 2021), 86 FR 46726 (August 19,
2021) (SR–EMERALD–2021–25); 92645 (August 11,
2021), 86 FR 46048 (August 17, 2021) (SR–
EMERALD–2021–23).
51 15 U.S.C. 78f(b)(4).
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50 See
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fairness standard under the Act and is
discriminatory.
Because of the un-level playing field
created by the Revised Review Process
and Staff Guidance, the Exchange
believes that the Commission Staff, at
this point, should either (a) provide
sufficient clarity on how its cost-based
standard can be met, including a clear
and exhaustive articulation of required
data and its views on acceptable
margins,52 to the extent that this is
pertinent; (b) establish a framework to
provide for commensurate nontransaction based fees among competing
exchanges to ensure fee parity; 53 or (c)
accept that certain competition-based
arguments are applicable given the
linkage between non-transaction fees
and transaction fees, especially where
non-transaction fees among exchanges
are based upon disparate standards of
review, lack parity, and impede fair
competition. Considering the absence of
any such framework or clarity, the
Exchange believes that the Commission
does not have a reasonable basis to deny
the Exchange this change in fees, where
the proposed change would result in
fees meaningfully lower than
comparable fees at competing exchanges
and where the associated nontransaction revenue is meaningfully
lower than competing exchanges.
In light of the above, disapproval of
this would not meet the fairness
standard under the Act, would be
discriminatory and places a substantial
burden on competition. The Exchange
would be uniquely disadvantaged by
not being able to increase its access fees
to comparable levels (or lower levels
than current market rates) to those of
other options exchanges for
connectivity. If the Commission Staff
were to disapprove this proposal, that
action, and not market forces, would
substantially affect whether the
Exchange can be successful in its
competition with other options
exchanges. Disapproval of this filing
could also be viewed as an arbitrary and
capricious decision should the
52 To the extent that the cost-based standard
includes Commission Staff making determinations
as to the appropriateness of certain profit margins,
the Exchange believes that Staff should be clear as
to what they determine is an appropriate profit
margin.
53 In light of the arguments above regarding
disparate standards of review for historical legacy
non-transaction fees and current non-transaction
fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the
current unfair and discriminatory effect of the Staff
Guidance and Revised Review Process. See, e.g.,
CSA Staff Consultation Paper 21–401, Real-Time
Market Data Fees, available at https://
www.bcsc.bc.ca/-/media/PWS/Resources/
Securities_Law/Policies/Policy2/21401_Market_
Data_Fee_CSA_Staff_Consulation_Paper.pdf.
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21383
Commission Staff continue to ignore its
past treatment of non-transaction fee
filings before implementation of the
Revised Review Process and Staff
Guidance and refuse to allow such
filings to be approved despite
significantly enhanced arguments and
cost disclosures.54
*
*
*
*
*
10Gb ULL Connectivity Fee Change
The Exchange proposes to amend the
Fee Schedule to increase the fees for
Members and non-Members to access
the Exchange’s system networks 55 via a
10Gb ULL fiber connection.
Specifically, the Exchange proposes to
amend Sections 5)a)–b) of the Fee
Schedule to increase the 10Gb ULL
connectivity fee for Members and nonMembers from $10,000 per month to
$13,500 per month (‘‘10Gb ULL Fee’’).56
The Exchange will continue to assess
monthly Member and non-Member
network connectivity fees for
connectivity to the primary and
secondary facilities in any month the
Member or non-Member is credentialed
to use any of the Exchange APIs or
market data feeds in the production
environment. The Exchange will
continue to pro-rate the fees when a
Member or non-Member makes a change
to the connectivity (by adding or
deleting connections) with such prorated fees based on the number of
trading days that the Member or nonMember has been credentialed to utilize
any of the Exchange APIs or market data
54 The Exchange’s costs have clearly increased
and continue to increase, particularly regarding
capital expenditures, as well as employee benefits
provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed
by the Exchange to cover its ever-increasing costs
has been acceptable to the Commission Staff since
2021. The only other fair and reasonable alternative
would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance
and Revised Review Process to ‘‘develop a record,’’
and to ‘‘explain their conclusions, based on that
record, in a written decision that is sufficient to
enable us to perform our review,’’ and to ensure a
comparable review process with the Exchange’s
filing.
55 The Exchange’s system networks consist of the
Exchange’s extranet, internal network, and external
network.
56 Market participants that purchase additional
10Gb ULL connections as a result of this change
will not be subject to the Exchange’s Member
Network Connectivity Testing and Certification Fee
under Section 4)c) of the Fee Schedule. See Fee
Schedule, Section 4)c), available at https://
www.miaxglobal.com/markets/us-options/miaxoptions/fees (providing that ‘‘Network Connectivity
Testing and Certification Fees will not be assessed
in situations where the Exchange initiates a
mandatory change to the Exchange’s system that
requires testing and certification. Member Network
Connectivity Testing and Certification Fees will not
be assessed for testing and certification of
connectivity to the Exchange’s Disaster Recovery
Facility.’’).
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feeds in the production environment
through such connection, divided by the
total number of trading days in such
month multiplied by the applicable
monthly rate.
Limited Service MEI Ports
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Background
The Exchange also proposes to amend
Section 5)d) of the Fee Schedule to
amend the monthly port fee for Limited
Service MEI Ports available to Market
Makers.57 The Exchange currently
allocates two (2) Full Service MEI
Ports 58 and two (2) Limited Service MEI
Ports 59 per matching engine 60 to which
each Market Maker connects. Market
Makers may also request additional
Limited Service MEI Ports for each
matching engine to which they connect.
The Full Service MEI Ports and Limited
Service MEI Ports all include access to
the Exchange’s primary and secondary
data centers and its disaster recovery
center. Market Makers may request
additional Limited Service MEI Ports.
Market Makers were previously assessed
a $100 monthly fee for each Limited
Service MEI Port for each matching
engine above the first two Limited
Service MEI Ports that are included for
free (before the proposals to adopt a
tiered fee structure).61
57 The Exchange notes that in its prior filings (the
Initial, Second, Third, Fourth and Fifth Proposals),
the Exchange proposed to adopt a tiered-pricing
structure for Limited Service MEI Ports.
58 The term ‘‘Full Service MEI Ports’’ means a
port which provides Market Makers with the ability
to send Market Maker simple and complex quotes,
eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also
capable of receiving administrative information.
Market Makers are limited to two Full Service MEI
Ports per Matching Engine. See the Definitions
Section of the Fee Schedule.
59 The term ‘‘Limited Service MEI Ports’’ means
a port which provides Market Makers with the
ability to send simple and complex eQuotes and
quote purge messages only, but not Market Maker
Quotes, to the MIAX Emerald System. Limited
Service MEI Ports are also capable of receiving
administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching
Engine. See the Definitions Section of the Fee
Schedule.
60 The term ‘‘Matching Engine’’ means a part of
the MIAX Emerald electronic system that processes
options orders and trades on a symbol-by-symbol
basis. Some Matching Engines will process option
classes with multiple root symbols, and other
Matching Engines may be dedicated to one single
option root symbol (for example, options on SPY
may be processed by one single Matching Engine
that is dedicated only to SPY). A particular root
symbol may only be assigned to a single designated
Matching Engine. A particular root symbol may not
be assigned to multiple Matching Engines. See the
Definitions Section of the Fee Schedule.
61 Prior to the Initial Proposal, the Exchange
increased the fees for both 10Gb ULL fiber
connections and Limited Service MEI Ports
beginning with a series of filings on October 1, 2020
(with the final filing made on March 24, 2021). See
Securities Exchange Act Release Nos. 91460 (April
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Limited Service MEI Port Fee Changes
The Exchange now proposes to amend
the monthly fee per Limited Service
MEI Port and increase the number of
free Limited Service MEI Ports per
matching engine from two (2) to four (4).
Specifically, the Exchange will now
provide the first, second, third and
fourth Limited Service MEI Ports for
each matching engine free of charge. For
additional Limited Service MEI Ports
after the first four ports per matching
engine that are provided for free (i.e.,
beginning with the fifth Limited Service
MEI Port), the Exchange proposes to
increase the monthly fee from $100 to
$420 per Limited Service MEI Port per
matching engine.62
Market Makers that elect to purchase
more than the number of Limited
Service Ports that are provide for free do
so due to the nature of their business
and their perceived need for numerous
ports to access the Exchange.
Meanwhile, Market Makers who utilize
the free Limited Service MEI Ports do so
based on their business needs.
The Exchange notes that it last
proposed to increase its monthly
Limited Service MEI Port fees in 2020
(other than the prior proposals to adopt
a tiered fee structure for Limited Service
MEI Ports),63 and such increase
proposed herein is designed to recover
a portion of the ever increasing costs
associated with directly accessing the
Exchange.
The Exchange also proposes to make
corresponding changes to the
Definitions section of the Fee Schedule
and the paragraph describing the cap on
the number of Limited Service MEI
Ports each Market Maker may receive in
Section 5)d)ii) of the Fee Schedule to
account for the proposed change to now
1, 2021), 86 FR 18349 (April 8, 2021) (SR–
EMERALD–2021–11); 90184 (October 14, 2020), 85
FR 66636 (October 20, 2020) (SR–EMERALD–2020–
12); 90600 (December 8, 2020), 85 FR 80831
(December 14, 2020) (SR–EMERALD–2020–17);
91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR–EMERALD–2021–02); and 91200
(February 24, 2021), 86 FR 12221 (March 2, 2021)
(SR–EMERALD–2021–07). Prior to that fee change,
the Exchange provided Limited Service MEI Ports
for $50 per port, after the first two Limited Service
MEI Ports that are provided free of charge, and the
Exchange incurred all the costs associated to
provide those first two Limited Service MEI Ports
since it commenced operations in March 2019. The
Exchange then increased the fee to $100 per
Limited Service MEI Port.
62 As noted in the Fee Schedule, Market Makers
will continue to be limited to fourteen Limited
Service MEI Ports per Matching Engine. The
Exchange also proposes to make a ministerial
clarifying change to remove the defined term
‘‘Additional Limited Service MEI Ports’’. The
Exchange proposes to make a related change to add
the term ‘‘Limited Service MEI Ports’’ after the word
‘‘fourteen’’ in the Fee Schedule.
63 See supra note 61.
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provide the first four (4) Limited Service
MEI Ports for free per matching engine.
Accordingly, the Exchange proposes to
amend the last sentence of the
paragraph describing the fees for
Limited Service MEI Ports in Section
5)d)ii) of the Fee Schedule to now state
that Market Makers are limited to ten
additional Limited Service MEI Ports
per matching engine, for a total of
fourteen Limited Service MEI Ports per
matching engine.
Implementation
The proposed fee changes are
immediately effective.
2. Statutory Basis
The Exchange believes that the
proposed fees are consistent with
Section 6(b) of the Act 64 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 65 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among Members and other persons
using any facility or system which the
Exchange operates or controls. The
Exchange also believes the proposed
fees further the objectives of Section
6(b)(5) of the Act 66 in that they are
designed to promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general protect investors and the public
interest and are not designed to permit
unfair discrimination between
customers, issuers, brokers and dealers.
The Exchange believes that the
information provided to justify the
proposed fees meets or exceeds the
amount of detail required in respect of
proposed fee changes under the Revised
Review Process and as set forth in
recent Staff Guidance. Based on both the
BOX Order 67 and the Staff Guidance,68
the Exchange believes that the proposed
fees are consistent with the Act because
they are: (i) reasonable, equitably
allocated, not unfairly discriminatory,
and not an undue burden on
competition; (ii) comply with the BOX
Order and the Staff Guidance; and (iii)
supported by evidence (including
comprehensive revenue and cost data
and analysis) that they are fair and
reasonable and will not result in
excessive pricing or supra-competitive
profit.
The Exchange believes that
exchanges, in setting fees of all types,
64 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
66 15 U.S.C. 78f(b)(5).
67 See supra note 22.
68 See supra note 23.
65 15
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should meet high standards of
transparency to demonstrate why each
new fee or fee amendment meets the
requirements of the Act that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
market participants. The Exchange
believes this high standard is especially
important when an exchange imposes
various fees for market participants to
access an exchange’s marketplace.
In the Staff Guidance, the
Commission Staff states that, ‘‘[a]s an
initial step in assessing the
reasonableness of a fee, staff considers
whether the fee is constrained by
significant competitive forces.’’ 69 The
Staff Guidance further states that, ‘‘. . .
even where an SRO cannot demonstrate,
or does not assert, that significant
competitive forces constrain the fee at
issue, a cost-based discussion may be an
alternative basis upon which to show
consistency with the Exchange Act.’’ 70
In the Staff Guidance, the Commission
Staff further states that, ‘‘[i]f an SRO
seeks to support its claims that a
proposed fee is fair and reasonable
because it will permit recovery of the
SRO’s costs, . . . , specific information,
including quantitative information,
should be provided to support that
argument.’’ 71
The proposed fees are reasonable
because they promote parity among
exchange pricing for access, which
promotes competition, including in the
Exchanges’ ability to competitively
price transaction fees, invest in
infrastructure, new products and other
innovations, all while allowing the
Exchange to recover its costs to provide
dedicated access via 10Gb ULL
connectivity and Limited Service MEI
Ports. As discussed above, the Revised
Review Process and Staff Guidance have
created an uneven playing field between
legacy and non-legacy exchanges by
severely restricting non-legacy
exchanges from being able to increase
non-transaction related fees to provide
them with additional necessary revenue
to better compete with legacy
exchanges, which largely set fees prior
to the Revised Review Process. The
much higher non-transaction fees
charged by the legacy exchanges
provides them with two significant
competitive advantages: (i) additional
non-transaction revenue that may be
used to fund areas other than the nontransaction service related to the fee,
such as investments in infrastructure,
advertising, new products and other
innovations; and (ii) greater flexibility to
lower their transaction fees by using the
revenue from the higher non-transaction
fees to subsidize transaction fee rates.
The latter is more immediately
impactful in competition for order flow
and market share, given the variable
nature of this cost on Member firms.
The absence of a reasonable path
forward to increase non-transaction fees
to comparable (or lower rates) limits the
Exchange’s flexibility to, among other
things, make additional investments in
infrastructure and advertising,
diminishes the ability to remain
competitive on transaction fees, and
hinders the ability to compete for order
flow and market share. Again, there is
little doubt that subjecting one exchange
to a materially different standard than
that applied to other exchanges for nontransaction fees leaves that exchange at
a disadvantage in its ability to compete
with its pricing of transaction fees.
Cost Analysis
In general, the Exchange believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
Exchange Act requirements that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
members and markets. In particular, the
Exchange believes that each exchange
should take extra care to be able to
demonstrate that these fees are based on
its costs and reasonable business needs.
In proposing to charge fees for
connectivity and port services, the
Exchange is especially diligent in
assessing those fees in a transparent way
against its own aggregate costs of
providing the related service, and in
carefully and transparently assessing the
impact on Members—both generally and
in relation to other Members, i.e., to
assure the fee will not create a financial
burden on any participant and will not
have an undue impact in particular on
smaller Members and competition
among Members in general. The
Exchange believes that this level of
diligence and transparency is called for
by the requirements of Section 19(b)(1)
under the Act,72 and Rule 19b–4
thereunder,73 with respect to the types
of information exchanges should
provide when filing fee changes, and
Section 6(b) of the Act,74 which
requires, among other things, that
exchange fees be reasonable and
69 Id.
72 15
70 Id.
73 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
74 15 U.S.C. 78f(b).
71 Id.
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21385
equitably allocated,75 not designed to
permit unfair discrimination,76 and that
they not impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.77 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.78 The Exchange reiterates
that the legacy exchanges with whom
the Exchange vigorously competes for
order flow and market share, were not
subject to any such diligence or
transparency in setting their baseline
non-transaction fees, most of which
were put in place before the Revised
Review Process and Staff Guidance.
As detailed below, the Exchange
recently calculated its aggregate annual
costs for providing physical 10Gb ULL
connectivity to the Exchange at
$15,469,330 (or approximately
$1,289,111 per month, rounded to the
nearest dollar when dividing the annual
cost by 12 months) and its aggregate
annual costs for providing Limited
Service MEI Ports at $2,506,232 (or
approximately $208,853 per month,
rounded to the nearest dollar when
dividing the annual cost by 12 months).
In order to cover the aggregate costs of
providing connectivity to its users (both
Members and non-Members 79) going
forward and to make a modest profit, as
described below, the Exchange proposes
to modify its Fee Schedule to charge a
fee of $13,500 per month for each
physical 10Gb ULL connection. The
Exchange also proposes to modify its
Fee Schedule to amend the monthly fee
for additional Limited Service MEI Ports
and provide two additional ports free of
charge for a total of four free Limited
Service MEI Ports per matching engine
to which each Member connects.
In 2020, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).80 The Cost Analysis
75 15
U.S.C. 78f(b)(4).
U.S.C. 78f(b)(5).
77 15 U.S.C. 78f(b)(8).
78 See supra note 23.
79 Types of market participants that obtain
connectivity services from the Exchange but are not
Members include service bureaus and extranets.
Service bureaus offer technology-based services to
other companies for a fee, including order entry
services, and thus, may access Limited Service MEI
Ports on behalf of one or more Members. Extranets
offer physical connectivity services to Members and
non-Members.
80 The Exchange frequently updates it Cost
Analysis as strategic initiatives change, costs
increase or decrease, and market participant needs
and trading activity changes. The Exchange’s most
recent Cost Analysis was conducted ahead of this
filing.
76 15
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required a detailed analysis of the
Exchange’s aggregate baseline costs,
including a determination and
allocation of costs for core services
provided by the Exchange—transaction
execution, market data, membership
services, physical connectivity, and port
access (which provide order entry,
cancellation and modification
functionality, risk functionality, the
ability to receive drop copies, and other
functionality). The Exchange separately
divided its costs between those costs
necessary to deliver each of these core
services, including infrastructure,
software, human resources (i.e.,
personnel), and certain general and
administrative expenses (‘‘cost
drivers’’).
As an initial step, the Exchange
determined the total cost for the
Exchange and the affiliated markets for
each cost driver as part of its 2024
budget review process. The 2024 budget
review is a company-wide process that
occurs over the course of many months,
includes meetings among senior
management, department heads, and the
Finance Team. Each department head is
required to send a ‘‘bottom up’’ budget
to the Finance Team allocating costs at
the profit and loss account and vendor
levels for the Exchange and its affiliated
markets based on a number of factors,
including server counts, additional
hardware and software utilization,
current or anticipated functional or nonfunctional development projects,
capacity needs, end-of-life or end-ofservice intervals, number of members,
market model (e.g., price time or prorata, simple only or simple and complex
markets, auction functionality, etc.),
which may impact message traffic,
individual system architectures that
impact platform size,81 storage needs,
dedicated infrastructure versus shared
infrastructure allocated per platform
based on the resources required to
support each platform, number of
available connections, and employees
allocated time.
All of these factors result in different
allocation percentages among the
Exchange and its affiliated markets, i.e.,
the different percentages of the overall
cost driver allocated to the Exchange
and its affiliated markets will cause the
dollar amount of the overall cost
allocated among the Exchange and its
affiliated markets to also differ. Because
the Exchange’s parent company
currently owns and operates four
separate and distinct marketplaces, the
81 For example, MIAX Emerald maintains 12
matching engines, MIAX Pearl Options maintains
12 matching engines, MIAX Pearl Equities
maintains 24 matching engines, and MIAX
maintains 24 matching engines.
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Exchange must determine the costs
associated with each actual market—as
opposed to the Exchange’s parent
company simply concluding that all
costs drivers are the same at each
individual marketplace and dividing
total cost by four (4) (evenly for each
marketplace). Rather, the Exchange’s
parent company determines an accurate
cost for each marketplace, which results
in different allocations and amounts
across exchanges for the same cost
drivers, due to the unique factors of
each marketplace as described above.
This allocation methodology also
ensures that no cost would be allocated
twice or double-counted between the
Exchange and its affiliated markets. The
Finance Team then consolidates the
budget and sends it to senior
management, including the Chief
Financial Officer and Chief Executive
Officer, for review and approval. Next,
the budget is presented to the Board of
Directors and the Finance and Audit
Committees for each exchange for their
approval. The above steps encompass
the first step of the cost allocation
process.
The next step involves determining
what portion of the cost allocated to the
Exchange pursuant to the above
methodology is to be allocated to each
core service, e.g., connectivity and
ports, market data, and transaction
services. The Exchange and its affiliated
markets adopted an allocation
methodology with thoughtful and
consistently applied principles to guide
how much of a particular cost amount
allocated to the Exchange should be
allocated within the Exchange to each
core service. This is the final step in the
cost allocation process and is applied to
each of the cost drivers set forth below.
For instance, fixed costs that are not
driven by client activity (e.g., message
rates), such as data center costs, were
allocated more heavily to the provision
of physical connectivity (61.9% of total
expense amount allocated to 10Gb ULL
connectivity), with smaller allocations
to additional Limited Service MEI Ports
(4.0%), and the remainder to the
provision of other connectivity, other
ports, transaction execution,
membership services and market data
services (34.1%). This next level of the
allocation methodology at the
individual exchange level also took into
account factors similar to those set forth
under the first step of the allocation
methodology process described above,
to determine the appropriate allocation
to connectivity or market data versus
allocations for other services. This
allocation methodology was developed
through an assessment of costs with
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senior management intimately familiar
with each area of the Exchange’s
operations. After adopting this
allocation methodology, the Exchange
then applied an allocation of each cost
driver to each core service, resulting in
the cost allocations described below.
Each of the below cost allocations is
unique to the Exchange and represents
a percentage of overall cost that was
allocated to the Exchange pursuant to
the initial allocation described above.
By allocating segmented costs to each
core service, the Exchange was able to
estimate by core service the potential
margin it might earn based on different
fee models. The Exchange notes that as
a non-listing venue it has five primary
sources of revenue that it can
potentially use to fund its operations:
transaction fees, fees for connectivity
and port services, membership fees,
regulatory fees, and market data fees.
Accordingly, the Exchange must cover
its expenses from these five primary
sources of revenue. The Exchange also
notes that as a general matter each of
these sources of revenue is based on
services that are interdependent. For
instance, the Exchange’s system for
executing transactions is dependent on
physical hardware and connectivity;
only Members and parties that they
sponsor to participate directly on the
Exchange may submit orders to the
Exchange; many Members (but not all)
consume market data from the Exchange
in order to trade on the Exchange; and
the Exchange consumes market data
from external sources in order to
comply with regulatory obligations.
Accordingly, given this
interdependence, the allocation of costs
to each service or revenue source
required judgment of the Exchange and
was weighted based on estimates of the
Exchange that the Exchange believes are
reasonable, as set forth below. While
there is no standardized and generally
accepted methodology for the allocation
of an exchange’s costs, the Exchange’s
methodology is the result of an
extensive review and analysis and will
be consistently applied going forward
for any other potential fee proposals. In
the absence of the Commission
attempting to specify a methodology for
the allocation of exchanges’
interdependent costs, the Exchange will
continue to be left with its best efforts
to attempt to conduct such an allocation
in a thoughtful and reasonable manner.
Through the Exchange’s extensive
updated Cost Analysis, which was again
recently further refined, the Exchange
analyzed every expense item in the
Exchange’s general expense ledger to
determine whether each such expense
relates to the provision of connectivity
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and port services, and, if such expense
did so relate, what portion (or
percentage) of such expense actually
supports the provision of connectivity
and port services, and thus bears a
relationship that is, ‘‘in nature and
closeness,’’ directly related to network
connectivity and port services. In turn,
the Exchange allocated certain costs
more to physical connectivity and
others to ports, while certain costs were
only allocated to such services at a very
low percentage or not at all, using
consistent allocation methodologies as
described above. Based on this analysis,
the Exchange estimates that the
aggregate monthly cost to provide 10Gb
ULL connectivity and Limited Service
MEI Port services, including both
physical 10Gb connections and Limited
Service MEI Ports, is $1,497,964
(utilizing the rounded numbers when
dividing the annual cost for 10Gb ULL
connectivity and annual cost for
Limited Service MEI Ports by 12
months, then adding both numbers
together), as further detailed below.
Costs Related to Offering Physical 10Gb
ULL Connectivity
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
physical dedicated 10Gb ULL
connectivity via an unshared network as
well as the percentage of the Exchange’s
overall costs that such costs represent
for each cost driver (e.g., as set forth
below, the Exchange allocated
approximately 28.9% of its overall
Human Resources cost to offering 10Gb
ULL physical connectivity).
Allocated
annual cost a
Cost drivers
Allocated
monthly cost b
% Of all
Human Resources .........................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .....................................................................
Internet Services and External Market Data .................................................................................
Data Center ...................................................................................................................................
Hardware and Software Maintenance and Licenses ....................................................................
Depreciation ...................................................................................................................................
Allocated Shared Expenses ..........................................................................................................
$6,440,638
57,736
448,208
949,073
890,310
2,147,438
4,535,927
$536,720
4,811
37,351
79,089
74,193
178,953
377,994
28.9
61.9
84.8
61.9
50.9
61.0
51.5
Total ........................................................................................................................................
15,469,330
1,289,111
40.2
a The
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Annual Cost includes figures rounded to the nearest dollar.
b The Monthly Cost was determined by dividing the Annual Cost for each line item by twelve (12) months and rounding up or down to the nearest dollar.
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
physical 10Gb ULL connectivity. While
some costs were attempted to be
allocated as equally as possible among
the Exchange and its affiliated markets,
the Exchange notes that some of its cost
allocation percentages for certain cost
drivers differ when compared to the
same cost drivers for the Exchange’s
affiliated markets in their similar
proposed fee changes for connectivity
and ports. This is because the
Exchange’s cost allocation methodology
utilizes the actual projected costs of the
Exchange (which are specific to the
Exchange, and are independent of the
costs projected and utilized by the
Exchange’s affiliated markets) to
determine its actual costs, which may
vary across the Exchange and its
affiliated markets based on factors that
are unique to each marketplace. The
Exchange provides additional
explanation below (including the reason
for the deviation) for the significant
differences.
The Exchange also notes that
expenses included in its 2024 fiscal year
budget and this proposal are generally
higher than its 2023 fiscal year budget
and Cost Analysis included in prior
filings. As more fully described below
and throughout this filing, this is due to
a number of factors, such as, critical
vendors and suppliers increasing costs
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they charge the Exchange, significant
exchange staff headcount increases,
increased data center costs from the
Exchange’s data center providers in
multiple locations and facilities, higher
technology and communications costs,
planned hardware refreshes, and system
capacity upgrades that increase
depreciation expense. Specifically, with
regard to employee compensation, the
2024 fiscal year budget includes
additional expenses related to increased
headcount and new hires that are
needed to support the Exchange as it
continues to grow (the Exchange and its
affiliated companies are projected to
hire over 60 additional staff in 2024).
Hardware and software expenses have
also increased primarily due to price
increases from critical vendors and
equipment suppliers. Further, the
Exchange budgeted for additional
hardware and software needs to support
the Exchange’s continued growth and
expansion. Depreciation and
amortization have likewise increased
due to recent and planned refreshes in
Exchange hardware and software. This
new equipment and software then
becomes depreciable, as described
below. Data center costs have also
increased due the following: the
Exchange expanding its footprint within
its data center; and the data center
vendor increasing the costs it charges
the Exchange. Lastly, allocated shared
expenses have increased due to the
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overall budgeted increase in costs from
2023 to 2024 necessary to operate and
support the Exchange as described
below.
The updated Cost Analysis using
projected 2024 expenses caused some
allocation percentages in this filing to
differ slightly (≤2.8%) from past filings
that relied on projected 2023 expenses.
This is due to various reasons. For
example, the slight differences in
allocation percentage for the Human
Resources cost driver is due to both
changes in headcount in 2024 and also
changes to the percentage of employee
time allocated to these services based on
changing projects and initiatives in 2024
versus 2023. For example, the Exchange
recently hired a Head of Data Services
whose time is entirely allocated to the
market data cost driver. These types of
changes in the Human Resources cost
driver impact the final percentage
amount of total cost allocated towards
overall connectivity, including 10Gb
ULL connectivity. There are no changes
to the overall percentage allocation
amounts applied to the product groups
(e.g., network connectivity) for each of
the non-Human Resources cost drivers
in the current filing based on 2024
expense versus the prior 2023 filings.
However, within each of those product
groups, slight changes to the amount of
usage of the individual products within
that group (in 2024 versus 2023) will
have an impact on the individual
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product’s percentage allocation within
that entire product group. For example,
a decrease in 1Gb connectivity lines in
2024 versus 2023 will have an impact
on the percentage allocation of costs to
1Gb lines in 2024 versus 2023, which
will also impact the individual
percentage allocation of costs to 10Gb
ULL lines, within the entire product
group. Despite these minor shifts in
product usage and changes in
headcount and employee mix which
resulted in non-material changes in
percentage allocation amounts, the
Exchange applied the same rules and
principles to its 2024 Cost Analysis
versus its 2023 Cost Analysis.
Human Resources
The Exchange notes that it and its
affiliated markets anticipate that by
year-end 2024, there will be 289
employees (excluding employees at
non-options/equities exchange
subsidiaries of Miami International
Holdings, Inc. (‘‘MIH’’), the holding
company of the Exchange and its
affiliated markets), and each department
leader has direct knowledge of the time
spent by each employee with respect to
the various tasks necessary to operate
the Exchange. Specifically, twice a year,
and as needed with additional new
hires and new project initiatives, in
consultation with employees as needed,
managers and department heads assign
a percentage of time to every employee
and then allocate that time amongst the
Exchange and its affiliated markets to
determine each market’s individual
Human Resources expense. Then,
managers and department heads assign
a percentage of each employee’s time
allocated to the Exchange into buckets
including network connectivity, ports,
market data, and other exchange
services. This process ensures that every
employee is 100% allocated, ensuring
there is no double counting between the
Exchange and its affiliated markets.
For personnel costs (Human
Resources), the Exchange calculated an
allocation of employee time for
employees whose functions include
providing and maintaining physical
connectivity and performance thereof
(primarily the Exchange’s network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity). As described more fully
above, the Exchange’s parent company
allocates costs to the Exchange and its
affiliated markets and then a portion of
the Human Resources costs allocated to
the Exchange is then allocated to
connectivity. From that portion
allocated to the Exchange that applied
to connectivity, the Exchange then
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allocated a weighted average of 48% of
each employee’s time from the above
group to 10Gb ULL connectivity.
The Exchange also allocated Human
Resources costs to provide physical
connectivity to a limited subset of
personnel with ancillary functions
related to establishing and maintaining
such connectivity (such as information
security, sales, membership, and finance
personnel). The Exchange allocated cost
on an employee-by-employee basis (i.e.,
only including those personnel who
support functions related to providing
physical connectivity) and then applied
a smaller allocation to such employees’
time to 10Gb ULL connectivity (less
than 18%). This other group of
personnel with a smaller allocation of
Human Resources costs also have a
direct nexus to 10Gb ULL connectivity,
whether it is a sales person selling a
connection, finance personnel billing
for connectivity or providing budget
analysis, or information security
ensuring that such connectivity is
secure and adequately defended from an
outside intrusion.
The estimates of Human Resources
cost were therefore determined by
consulting with such department
leaders, determining which employees
are involved in tasks related to
providing physical connectivity, and
confirming that the proposed allocations
were reasonable based on an
understanding of the percentage of time
such employees devote to those tasks.
This includes personnel from the
Exchange departments that are
predominately involved in providing
1Gb and 10Gb ULL connectivity:
Business Systems Development, Trading
Systems Development, Systems
Operations and Network Monitoring,
Network and Data Center Operations,
Listings, Trading Operations, and
Project Management. Again, the
Exchange allocated 48% of each of their
employee’s time assigned to the
Exchange for 10Gb ULL connectivity, as
stated above. Employees from these
departments perform numerous
functions to support 10Gb ULL
connectivity, such as the installation, relocation, configuration, and
maintenance of 10Gb ULL connections
and the hardware they access. This
hardware includes servers, routers,
switches, firewalls, and monitoring
devices. These employees also perform
software upgrades, vulnerability
assessments, remediation and patch
installs, equipment configuration and
hardening, as well as performance and
capacity management. These employees
also engage in research and
development analysis for equipment
and software supporting 10Gb ULL
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connectivity and design, and support
the development and on-going
maintenance of internally-developed
applications as well as data capture and
analysis, and Member and internal
Exchange reports related to network and
system performance. The above list of
employee functions is not exhaustive of
all the functions performed by Exchange
employees to support 10Gb ULL
connectivity, but illustrates the breath of
functions those employees perform in
support of the above cost and time
allocations.
Lastly, the Exchange notes that senior
level executives’ time was only
allocated to the 10Gb ULL connectivity
related Human Resources costs to the
extent that they are involved in
overseeing tasks related to providing
physical connectivity. The Human
Resources cost was calculated using a
blended rate of compensation reflecting
salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity (External Fees, Cabling,
Switches, etc.)
The Connectivity cost driver includes
external fees paid to connect to other
exchanges and third parties, cabling and
switches required to operate the
Exchange. The Connectivity cost driver
is more narrowly focused on technology
used to complete connections to the
Exchange and to connect to external
markets. The Exchange notes that its
connectivity to external markets is
required in order to receive market data
to run the Exchange’s matching engine
and basic operations compliant with
existing regulations, primarily
Regulation NMS.
The Exchange relies on various
connectivity providers for connectivity
to the entire U.S. options industry, and
infrastructure services for critical
components of the network that are
necessary to provide and maintain its
System Networks and access to its
System Networks via 10Gb ULL
connectivity. Specifically, the Exchange
utilizes connectivity providers to
connect to other national securities
exchanges and the Options Price
Reporting Authority (‘‘OPRA’’). The
Exchange understands that these service
providers provide services to most, if
not all, of the other U.S. exchanges and
other market participants. Connectivity
provided by these service providers is
critical to the Exchanges daily
operations and performance of its
System Networks to which market
participants connect to via 10Gb ULL
connectivity. Without these services
providers, the Exchange would not be
able to connect to other national
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securities exchanges, market data
providers or OPRA and, therefore,
would not be able to operate and
support its System Networks. The
Exchange does not employ a separate
fee to cover its connectivity provider
expense and recoups that expense, in
part, by charging for 10Gb ULL
connectivity.
Internet Services and External Market
Data
The next cost driver consists of
internet Services and external market
data. The internet services cost driver
includes third-party service providers
that provide the internet, fiber and
bandwidth connections between the
Exchange’s networks, primary and
secondary data centers, and office
locations in Princeton and Miami.
External market data includes fees
paid to third parties, including other
exchanges, to receive market data. The
Exchange includes external market data
fee costs towards the provision of 10Gb
ULL connectivity because such market
data is necessary for certain services
related to connectivity, including pretrade risk checks and checks for other
conditions (e.g., re-pricing of orders to
avoid locked or crossed markets and
trading collars). Since external market
data from other exchanges is consumed
at the Exchange’s matching engine level,
(to which 10Gb ULL connectivity
provides access) in order to validate
orders before additional orders enter the
matching engine or are executed, the
Exchange believes it is reasonable to
allocate an amount of such costs to
10Gb ULL connectivity.
The Exchange relies on various
content service providers for data feeds
for the entire U.S. options industry, as
well as content for critical components
of the network that are necessary to
provide and maintain its System
Networks and access to its System
Networks via 10Gb ULL connectivity.
Specifically, the Exchange utilizes
content service providers to receive
market data from OPRA, other
exchanges and market data providers.
The Exchange understands that these
service providers provide services to
most, if not all, of the other U.S.
exchanges and other market
participants. Market data provided these
service providers is critical to the
Exchanges daily operations and
performance of its System Networks to
which market participants connect to
via 10Gb ULL connectivity. Without
these services providers, the Exchange
would not be able to receive market data
and, therefore, would not be able to
operate and support its System
Networks. The Exchange does not
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employ a separate fee to cover its
content service provider expense and
recoups that expense, in part, by
charging for 10Gb ULL connectivity.
Lastly, the Exchange notes that the
actual dollar amounts allocated as part
of the second step of the 2024 budget
process differ among the Exchange and
its affiliated markets for the internet
Services and External Market Data cost
driver, even though, but for the
Exchange, the allocation percentages are
generally consistent across markets (e.g.,
MIAX Emerald, MIAX, and MIAX Pearl
Options allocated 84.8%, 71.3%, and
74.8, respectively, to the same cost
driver). This is because: (i) a different
percentage of the overall internet
Services and External Market Data cost
driver was allocated to the Exchange
and its affiliated markets due to the
factors set forth under the first step of
the 2024 budget review process
described above (unique technical
architecture, market structure, and
business requirements of each
marketplace); and (ii) the Exchange
itself allocated a larger portion of this
cost driver to 10Gb ULL connectivity
because of recent initiatives to improve
the latency and determinism of its
systems. The Exchange notes while the
percentage it allocated to the internet
Services and External Market Data cost
driver is greater than its affiliated
markets, the overall dollar amount
allocated to the Exchange under the
initial step of the 2024 budget process
is lower than its affiliated markets.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment (such as
dedicated space, security services,
cooling and power). The Exchange notes
that it does not own the Primary Data
Center or the Secondary Data Center,
but instead, leases space in data centers
operated by third parties. The Exchange
has allocated a high percentage of the
Data Center cost (61.9%) to physical
10Gb ULL connectivity because the
third-party data centers and the
Exchange’s physical equipment
contained therein is the most direct cost
in providing physical access to the
Exchange. In other words, for the
Exchange to operate in a dedicated
space with connectivity by market
participants to a physical trading
platform, the data centers are a very
tangible cost, and in turn, if the
Exchange did not maintain such a
presence then physical connectivity
would be of no value to market
participants.
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21389
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to operate and monitor physical
assets necessary to offer physical
connectivity to the Exchange.82 The
Exchange notes that this allocation is
less than MIAX Pearl Options by a
significant amount, but slightly more
than MIAX, as MIAX Pearl Options
allocated 59.8% of its Hardware and
Software Maintenance and License
expense towards 10Gb ULL
connectivity, while MIAX and MIAX
Emerald allocated 48.5% and 50.9%,
respectively, to the same category of
expense. This is because MIAX Pearl
Options is in the process of replacing
and upgrading various hardware and
software used to operate its options
trading platform in order to maintain
premium network performance. At the
time of this filing, MIAX Pearl Options
is undergoing a major hardware refresh,
replacing older hardware with new
hardware. This hardware includes
servers, network switches, cables,
optics, protocol data units, and cabinets,
to maintain a state-of-the-art technology
platform. Because of the timing of the
hardware refresh with the timing of this
filing, the Exchange has materially
higher expense than its affiliates.
Depreciation
All physical assets, software, and
hardware used to provide 10Gb ULL
connectivity, which also includes assets
used for testing and monitoring of
Exchange infrastructure, were valued at
cost, and depreciated or leased over
periods ranging from three to five years.
Thus, the depreciation cost primarily
relates to servers necessary to operate
the Exchange, some of which are owned
by the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange also included in the
Depreciation cost driver certain
budgeted improvements that the
Exchange intends to capitalize and
depreciate with respect to 10Gb ULL
82 This expense may be less than the Exchange’s
affiliated markets, specifically MIAX Pearl Options
because, unlike the Exchange, MIAX Pearl Options
maintains an additional gateway to accommodate
its member’s access and connectivity needs. This
added gateway contributes to the difference in
allocations between the Exchange and MIAX Pearl
Options. This expense also differs in dollar amount
among the Exchange, MIAX Pearl Options, and
MIAX because each market may maintain and
utilize a different amount of hardware and software
based on its market model and infrastructure needs.
The Exchange allocated a percentage of the overall
cost based on actual amounts of hardware and
software utilized by that market, which resulted in
different cost allocations and dollar amounts.
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connectivity in the near-term. As with
the other allocated costs in the
Exchange’s updated Cost Analysis, the
Depreciation cost was therefore
narrowly tailored to depreciation related
to 10Gb ULL connectivity. As noted
above, the Exchange allocated 61.0% of
its allocated depreciation costs to
providing physical 10Gb ULL
connectivity.
The Exchange also notes that this
allocation differs from its affiliated
markets due to a number of factors, such
as the age of physical assets and
software (e.g., older physical assets and
software were previously depreciated
and removed from the allocation), or
certain system enhancements that
required new physical assets and
software, thus providing a higher
contribution to the depreciated cost. For
example, the percentages the Exchange
and its affiliate, MIAX, allocated to the
depreciation of hardware and software
used to provide 10Gb ULL connectivity
are similar. However, the Exchange’s
dollar amount is lower than that of
MIAX by approximately $35,508 per
month due to two factors: first, MIAX
has undergone a technology refresh
since the time MIAX Emerald launched
in February 2019, leading MIAX to have
more hardware than software that is
subject to depreciation. Second, MIAX
maintains 24 matching engines while
MIAX Emerald maintains only 12
matching engines. This also results in
more of MIAX’s hardware and software
being subject to depreciation than MIAX
Emerald’s hardware and software due to
the greater amount of equipment and
software necessary to support the
greater number of matching engines on
MIAX.
Allocated Shared Expenses
Finally, as with other exchange
products and services, a portion of
general shared expenses was allocated
to overall physical connectivity costs.
These general shared costs are integral
to exchange operations, including its
ability to provide physical connectivity.
Costs included in general shared
expenses include office space and office
expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and
training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications. Similarly, the cost
of paying directors to serve on the
Exchange’s Board of Directors is also
included in the Exchange’s general
shared expense cost driver.83 These
83 The Exchange notes that MEMX allocated a
precise amount of 10% of the overall cost for
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general shared expenses are incurred by
the Exchange’s parent company, MIH, as
a direct result of operating the Exchange
and its affiliated markets.
The Exchange employed a process to
determine a reasonable percentage to
allocate general shared expenses to
10Gb ULL connectivity pursuant to its
multi-layered allocation process. First,
general expenses were allocated among
the Exchange and affiliated markets as
described above. Then, the general
shared expense assigned to the
Exchange was allocated across core
services of the Exchange, including
connectivity. Then, these costs were
further allocated to sub-categories
within the final categories, i.e., 10Gb
ULL connectivity as a sub-category of
connectivity. In determining the
percentage of general shared expenses
allocated to connectivity that ultimately
apply to 10Gb ULL connectivity, the
Exchange looked at the percentage
allocations of each of the cost drivers
and determined a reasonable allocation
percentage. The Exchange also held
meetings with senior management,
department heads, and the Finance
Team to determine the proper amount of
the shared general expense to allocate to
10GBb ULL connectivity. The Exchange,
therefore, believes it is reasonable to
assign an allocation, in the range of
allocations for other cost drivers, while
continuing to ensure that this expense is
only allocated once. Again, the general
shared expenses are incurred by the
Exchange’s parent company as a result
of operating the Exchange and its
affiliated markets and it is therefore
reasonable to allocate a percentage of
those expenses to the Exchange and
ultimately to specific product offerings
such as 10Gb ULL connectivity.
Again, a portion of all shared
expenses were allocated to the Exchange
(and its affiliated markets) which, in
turn, allocated a portion of that overall
allocation to all physical connectivity
on the Exchange. The Exchange then
allocated 51.5% of the portion allocated
to physical connectivity to 10Gb ULL
connectivity. The Exchange believes
this allocation percentage is reasonable
because, while the overall dollar
amount may be higher than other cost
drivers, the 51.5% is based on and in
line with the percentage allocations of
each of the Exchange’s other cost
drivers. The percentage allocated to
10Gb ULL connectivity also reflects its
directors to providing physical connectivity. See
Securities Exchange Act Release No. 95936
(September 27, 2022), 87 FR 59845 (October 3,
2022) (SR–MEMX–2022–26). The Exchange does
not calculate is expenses at that granular a level.
Instead, director costs are included as part of the
overall general allocation.
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importance to the Exchange’s strategy
and necessity towards the nature of the
Exchange’s overall operations, which is
to provide a resilient, highly
deterministic trading system that relies
on faster 10Gb ULL connectivity than
the Exchange’s competitors to maintain
premium performance. This allocation
reflects the Exchange’s focus on
providing and maintaining high
performance network connectivity, of
which 10Gb ULL connectivity is a main
contributor. The Exchange differentiates
itself by offering a ‘‘premium-product’’
network experience, as an operator of a
high performance, ultra-low latency
network with unparalleled system
throughput, which system networks can
support access to three distinct options
markets and multiple competing
market-makers having affirmative
obligations to continuously quote over
1,100,000 distinct trading products (per
exchange), and the capacity to handle
approximately 18 million quote
messages per second. The ‘‘premiumproduct’’ network experience enables
users of 10Gb ULL connections to
receive the network monitoring and
reporting services for those
approximately 1,100,000 distinct
trading products. These value add
services are part of the Exchange’s
strategy for offering a high performance
trading system, which utilizes 10Gb
ULL connectivity.
The Exchange notes that the 51.5%
allocation of general shared expenses for
physical 10Gb ULL connectivity is
higher than that allocated to general
shared expenses for Limited Service
MEI Ports. This is based on its
allocation methodology that weighted
costs attributable to each core service.
While physical connectivity has several
areas where certain tangible costs are
heavily weighted towards providing
such service (e.g., Data Center, as
described above), Limited Service MEI
Ports do not require as many broad or
indirect resources as other core services.
*
*
*
*
*
Approximate Cost per 10Gb ULL
Connection per Month
After determining the approximate
allocated monthly cost related to 10Gb
connectivity, the total monthly cost for
10Gb ULL connectivity of $1,289,111
was divided by the number of physical
10Gb ULL connections the Exchange
maintained in December 2023 (102), to
arrive at a cost of approximately $12,638
per month, per physical 10Gb ULL
connection. Due to the nature of this
particular cost, this allocation
methodology results in an allocation
among the Exchange and its affiliated
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markets based on set quantifiable
criteria, i.e., actual number of 10Gb ULL
connections.
*
*
*
*
*
Costs Related to Offering Limited
Service MEI Ports
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
Limited Service MEI Ports as well as the
percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 6.7% of its
overall Human Resources cost to
offering Limited Service MEI Ports).
Allocated
annual cost c
Cost drivers
Allocated
monthly cost d
% Of all
Human Resources .........................................................................................................................
Connectivity (external fees, cabling, switches, etc.) .....................................................................
Internet Services and External Market Data .................................................................................
Data Center ...................................................................................................................................
Hardware and Software Maintenance and Licenses ....................................................................
Depreciation ...................................................................................................................................
Allocated Shared Expenses ..........................................................................................................
$1,495,643
2,643
14,965
62,061
49,543
112,425
768,952
$124,637
220
1,247
5,172
4,129
9,369
64,079
6.7
2.8
2.8
4.0
2.8
3.2
8.7
Total ........................................................................................................................................
2,506,232
208,853
6.5
cSee
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supra note a (describing rounding of Annual Costs).
d See supra note b (describing rounding of Monthly Costs based on Annual Costs).
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
Limited Service MEI Ports. While some
costs were attempted to be allocated as
equally as possible among the Exchange
and its affiliated markets, the Exchange
notes that some of its cost allocation
percentages for certain cost drivers
differ when compared to the same cost
drivers described by the Exchange’s
affiliated markets in their similar
proposed fee changes for connectivity
and ports. This is because the
Exchange’s cost allocation methodology
utilizes the actual projected costs of the
Exchange (which are specific to the
Exchange, and are independent of the
costs projected and utilized by the
Exchange’s affiliated markets) to
determine its actual costs, which may
vary across the Exchange and its
affiliated markets based on factors that
are unique to each marketplace. The
Exchange provides additional
explanation below (including the reason
for the deviation) for the significant
differences.
The Exchange also notes that
expenses included in its 2024 fiscal year
budget and this proposal are generally
higher than its 2023 fiscal year budget
and Cost Analysis included in prior
filings. As more fully described below
and throughout this filing, this is due to
a number of factors, such as, critical
vendors and suppliers increasing costs
they charge the Exchange, significant
exchange staff headcount increases,
increased data center costs from the
Exchange’s data center providers in
multiple locations and facilities, higher
technology and communications costs,
planned hardware refreshes, and system
capacity upgrades that increase
depreciation expense. Specifically, with
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regard to employee compensation, the
2024 fiscal year budget includes
additional expenses related to increased
headcount and new hires that are
needed to support the Exchange as it
continues to grow (the Exchange and its
affiliated companies are projected to
hire over 60 additional staff in 2024).
Hardware and software expenses have
also increased primarily due to price
increases from critical vendors and
equipment suppliers. Further, the
Exchange budgeted for additional
hardware and software needs to support
the Exchange’s continued growth and
expansion. Depreciation and
amortization have likewise increased
due to recent and planned refreshes in
Exchange hardware and software. This
new equipment and software then
becomes depreciable, as described
below. Data center costs have also
increased due the following: the
Exchange expanding its footprint within
its data center; and the data center
vendor increasing the costs it charges
the Exchange. Lastly, allocated shared
expenses have increased due to the
overall budgeted increase in costs from
2023 to 2024 necessary to operate and
support the Exchange as described
below.
The updated Cost Analysis using
projected 2024 expenses caused some
allocation percentages in this filing to
differ slightly (≤1.6%) from past filings
that relied on projected 2023 expenses.
This is due to various reasons. For
example, the slight differences in
allocation percentage for the Human
Resources cost driver is due to both
changes in headcount in 2024 and also
changes to the percentage of employee
time allocated to these services based on
changing projects and initiatives in 2024
versus 2023. For example, the Exchange
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recently hired a Head of Data Services
whose time is entirely allocated to the
market data cost driver. These types of
changes in the Human Resources cost
driver impact the final percentage
amount of total cost allocated towards
overall connectivity, including Limited
Service MEI Ports. There are no changes
to the overall percentage allocation
amounts applied to the product groups
(e.g., network connectivity) for each of
the non-Human Resources cost drivers
in the current filing based on 2024
expense versus the prior 2023 filings.
However, within each of those product
groups, slight changes to the amount of
usage of the individual products within
that group (in 2024 versus 2023) will
have an impact on the individual
product’s percentage allocation within
that entire product group. For example,
a decrease in Limited Service MEI Port
usage in 2024 versus 2023 will have an
impact on the percentage allocation of
costs to those same Limited Service MEI
Ports in 2024 versus 2023, which will
also impact the individual percentage
allocation of costs to other ports offered
by the Exchange, within the entire
product group (e.g., FIX Ports, Full
Service MEI Ports, Purge Ports, Clearing
Trade Drop Ports, and FIX Drop Copy
Ports). Despite these minor shifts in
product usage and changes in
headcount and employee mix which
resulted in non-material changes in
percentage allocation amounts, the
Exchange applied the same rules and
principles to its 2024 Cost Analysis
versus its 2023 Cost Analysis.
Human Resources
With respect to Limited Service MEI
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
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functions include providing Limited
Service MEI Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). Just as described above for
10Gb ULL connectivity, the estimates of
Human Resources cost were again
determined by consulting with
department leaders, determining which
employees are involved in tasks related
to providing Limited Service MEI Ports
and maintaining performance thereof,
and confirming that the proposed
allocations were reasonable based on an
understanding of the percentage of their
time such employees devote to tasks
related to providing Limited Service
MEI Ports and maintaining performance
thereof. This includes personnel from
the following Exchange departments
that are predominately involved in
providing Limited Service MEI Ports:
Business Systems Development, Trading
Systems Development, Systems
Operations and Network Monitoring,
Network and Data Center Operations,
Listings, Trading Operations, and
Project Management. The Exchange
notes that senior level executives were
allocated Human Resources costs to the
extent they are involved in overseeing
tasks specifically related to providing
Limited Service MEI Ports. Senior level
executives were only allocated Human
Resources costs to the extent that they
are involved in managing personnel
responsible for tasks integral to
providing and maintaining Limited
Service MEI Ports. The Human
Resources cost was again calculated
using a blended rate of compensation
reflecting salary, equity and bonus
compensation, benefits, payroll taxes,
and 401(k) matching contributions.
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Connectivity (External Fees, Cabling,
Switches, etc.)
The Connectivity cost includes
external fees paid to connect to other
exchanges and cabling and switches, as
described above.
Internet Services and External Market
Data
The next cost driver consists of
internet services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
networks, primary and secondary data
centers, and office locations in
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Princeton and Miami. For purposes of
Limited Service MEI Ports, the
Exchange also includes a portion of its
costs related to external market data.
External market data includes fees paid
to third parties, including other
exchanges, to receive and consume
market data from other markets. The
Exchange includes external market data
costs towards the provision of Limited
Service MEI Ports because such market
data is necessary (in addition to
physical connectivity) to offer certain
services related to such ports, such as
validating orders on entry against the
NBBO and checking for other conditions
(e.g., halted securities).84 Thus, since
market data from other exchanges is
consumed at the Exchange’s Limited
Service MEI Port level in order to
validate orders, before additional
processing occurs with respect to such
orders, the Exchange believes it is
reasonable to allocate a small amount of
such costs to Limited Service MEI Ports.
The Exchange notes that the
allocation for the internet Services and
External Market Data cost driver is
greater than that of its affiliate, MIAX
Pearl Options, as MIAX Emerald
allocated 2.8% of its internet Services
and External Market Data expense
towards Limited Service MEI Ports,
while MIAX Pearl Options allocated
1.1% to its Full Service MEO Ports for
the same cost driver. The allocation
percentages set forth above differ
because they directly correspond with
the number of applicable ports utilized
on each exchange. For December 2023,
MIAX Emerald Market Makers utilized
1,070 Limited Service MEI ports and
MIAX Market Makers utilized 1,785
Limited Service MEI ports. When
compared to Full Service Port (Bulk and
Single) usage, for December 2023, MIAX
Pearl Options Members utilized only
360 Full Service MEO Ports (Bulk and
Single), far fewer than number of
Limited Service MEI Ports utilized by
Market Makers on MIAX and MIAX
Emerald, thus resulting in a smaller cost
allocation. There is increased cost
associated with supporting a higher
number of ports (requiring more
hardware and other technical
infrastructure and internet Service),
thus the Exchange allocates a higher
percentage of expense than MIAX Pearl
Options, which has a lower port count.
84 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
providing physical connectivity. See Securities
Exchange Act Release No. 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–
2022–26).
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Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide Limited Service MEI
Ports in the third-party data centers
where it maintains its equipment as
well as related costs for market data to
then enter the Exchange’s system via
Limited Service MEI Ports (the
Exchange does not own the Primary
Data Center or the Secondary Data
Center, but instead, leases space in data
centers operated by third parties).
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
The Exchange notes that this
allocation is greater than its affiliate,
MIAX Pearl Options, as MIAX Emerald
allocated 2.8% of its Hardware and
Software Maintenance and License
expense towards Limited Service MEI
Ports, while MIAX Pearl Options
allocated 1.1% to its Full Service MEO
Ports (Bulk and Single) for the same
category of expense. The allocation
percentages set forth above differ
because they correspond with the
number of applicable ports utilized on
each exchange. For December 2023,
MIAX Market Makers utilized 1,785
Limited Service MEI ports and MIAX
Emerald Market Makers utilized 1,070
Limited Service MEI Ports. When
compared to Full Service Port (Bulk and
Single) usage, for December 2023, MIAX
Pearl Options Members utilized only
260 Full Service MEO Ports (Bulk and
Single), far fewer than number of
Limited Service MEI Ports utilized by
Market Makers on MIAX and MIAX
Emerald, thus resulting in a smaller cost
allocation. There is increased cost
associated with supporting a higher
number of ports (requiring more
hardware and other technical
infrastructure), thus the Exchange
allocates a higher percentage of expense
than MIAX Pearl Options, which has a
lower port count.
Depreciation
The vast majority of the software the
Exchange uses to provide Limited
Service MEI Ports has been developed
in-house and the cost of such
development, which takes place over an
extended period of time and includes
not just development work, but also
quality assurance and testing to ensure
the software works as intended, is
depreciated over time once the software
is activated in the production
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environment. Hardware used to provide
Limited Service MEI Ports includes
equipment used for testing and
monitoring of order entry infrastructure
and other physical equipment the
Exchange purchased and is also
depreciated over time.
All hardware and software, which
also includes assets used for testing and
monitoring of order entry infrastructure,
were valued at cost, depreciated or
leased over periods ranging from three
to five years. Thus, the depreciation cost
primarily relates to servers necessary to
operate the Exchange, some of which is
owned by the Exchange and some of
which is leased by the Exchange in
order to allow efficient periodic
technology refreshes. The Exchange
allocated 3.2% of all depreciation costs
to providing Limited Service MEI Ports.
The Exchange allocated depreciation
costs for depreciated software necessary
to operate the Exchange because such
software is related to the provision of
Limited Service MEI Ports. As with the
other allocated costs in the Exchange’s
updated Cost Analysis, the Depreciation
cost driver was therefore narrowly
tailored to depreciation related to
Limited Service MEI Ports.
The Exchange notes that this
allocation differs from its affiliated
markets due to a number of factors, such
as the age of physical assets and
software (e.g., older physical assets and
software were previously depreciated
and removed from the allocation), or
certain system enhancements that
required new physical assets and
software, thus providing a higher
contribution to the depreciated cost. For
example, the Exchange notes that the
percentages it and its affiliate, MIAX,
allocated to the depreciation cost driver
for Limited Service MEI Ports differ by
only 1.7%. However, MIAX’s
approximate dollar amount is greater
than that of MIAX Emerald by
approximately $8,773er month. This is
due to two primary factors. First, MIAX
has under gone a technology refresh
since the time MIAX Emerald launched
in February 2019, leading to it having
more hardware that software that is
subject to depreciation. Second, MIAX
maintains 24 matching engines while
MIAX Emerald maintains only 12
matching engines. This also results in
more of MIAX’s hardware and software
being subject to depreciation than MIAX
Emerald’s hardware and software due to
the greater amount of equipment and
software necessary to support the
greater number of matching engines on
the Exchange.
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Allocated Shared Expenses
Finally, a portion of general shared
expenses was allocated to overall
Limited Service MEI Ports costs as
without these general shared costs the
Exchange would not be able to operate
in the manner that it does and provide
Limited Service MEI Ports. The costs
included in general shared expenses
include general expenses of the
Exchange, including office space and
office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting
and training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange again notes that the cost of
paying directors to serve on its Board of
Directors is included in the calculation
of Allocated Shared Expenses, and thus
a portion of such overall cost amounting
to less than 9% of the overall cost for
directors was allocated to providing
Limited Service MEI Ports. The
Exchange notes that the 8.7% allocation
of general shared expenses for Limited
Service MEI Ports is lower than that
allocated to general shared expenses for
physical connectivity based on its
allocation methodology that weighted
costs attributable to each Core Service
based on an understanding of each area.
While Limited Service MEI Ports have
several areas where certain tangible
costs are heavily weighted towards
providing such service (e.g., Data
Center, as described above), 10Gb ULL
connectivity requires a broader level of
support from Exchange personnel in
different areas, which in turn leads to a
broader general level of cost to the
Exchange.
Lastly, the Exchange notes that this
allocation is greater than its affiliate,
MIAX Pearl Options, as MIAX Emerald
allocated 8.7% of its Allocated Shared
Expense towards Limited Service MEI
Ports, while MIAX Pearl Options
allocated 3.0% to its Full Service MEO
Ports (Bulk and Single) for the same
category of expense. The allocation
percentages set forth above differ
because they correspond with the
number of applicable ports utilized on
each exchange. For December 2023,
MIAX Market Makers utilized 1,785
Limited Service MEI ports and MIAX
Emerald Market Makers utilized 1,070
Limited Service MEI Ports. When
compared to Full Service Port (Bulk and
Single) usage, for December 2023, MIAX
Pearl Options Members utilized only
360 Full Service MEO Ports (Bulk and
Single), far fewer than number of
Limited Service MEI Ports utilized by
Market Makers on MIAX Emerald, thus
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21393
resulting in a smaller cost allocation.
There is increased cost associated with
supporting a higher number of ports
(requiring more hardware and other
technical infrastructure), thus the
Exchange allocates a higher percentage
of expense than MIAX Pearl Options
which has a lower port count.85
*
*
*
*
*
Approximate Cost per Limited Service
MEI Port per Month
Based on projected 2024 data, the
total monthly cost allocated to Limited
Service MEI Ports of $208,853 was
divided by the total number of Limited
Service MEI Ports utilized by Members
in December, which was 1,070 (and
includes free and charged ports),
resulting in an approximate cost of $195
per port per month (when rounding to
the nearest dollar). The Exchange used
the total number of Limited Service MEI
Ports it maintained in December for all
Members and included free and charged
ports. However, in prior filings, the
Exchange did not include the expense of
maintaining the two free Limited
Service MEI Ports per matching engine
that each Member receives when the
Exchange discussed the approximate
cost per port per month, but did include
the two free Limited Service MEI Ports
in the total expense amounts. As
described herein, the Exchange changed
its proposed fee structure since past
filings to now offer four free Limited
Service MEI Ports per matching engine
to which each Member connects. After
the first four free Limited Service MEI
Ports, the Exchange proposes to charge
$420 per Limited Service MEI Port per
matching engine, up to a total of
fourteen (14) Limited Service MEI Ports
per matching engine.
For the sake of clarity, if a Member
wanted to connect to all 12 of the
Exchange’s matching engines and utilize
the maximum number of Limited
Service MEI Ports on each matching
engine (i.e., 14), that Member would
have a total of 168 Limited Service MEI
Ports (12 matching engines multiplied
by 14 Limited Service MEI Ports per
matching engine). With the proposed
increase to now provide four Limited
Service MEI Ports for free on each
matching engine, that particular
85 MIAX allocated a slightly lower amount (7.3%)
of this cost as compared to MIAX Emerald (8.7%).
This is not a significant difference. However, both
allocations resulted in a similar cost amount
(approximately $0.6 million for MIAX and $0.8
million for MIAX Emerald), despite MIAX having
a higher number of Limited Service MEI Ports.
MIAX Emerald was allocated a higher cost per
Limited Service MEI Port due to the additional
resources and expenditures associated with
maintaining its recently enhanced low latency
network.
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Member would receive 48 free Limited
Service MEI Ports (4 free Limited
Service MEI Ports multiplied by 12
matching engines), and be charged for
the remaining 120 Limited Service MEI
Ports (168 total Limited Service MEI
Ports across all matching engines minus
48 free Limited Service MEI Ports across
all matching engines).
As mentioned above, Members
utilized a total of 1,070 Limited Service
MEI Ports in the month of December
2023 (free and charged ports combined).
Using December 2023 data to
extrapolate out after the proposed
changes herein go into effect, the total
number of Limited Service MEI Ports
that the Exchange would not charge for
as a result of this increase in free ports
is 494 (meaning the Exchange would
charge for only 576 ports) and amounts
to a total expense of $96,330 per month
to the Exchange ($195 per port
multiplied by 494 free Limited Service
MEI Ports).
*
*
*
*
*
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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
Limited Service MEI Ports) and did not
double-count any expenses. Instead, as
described above, the Exchange allocated
applicable cost drivers across its core
services and used the same Cost
Analysis to form the basis of this
proposal and the filings the Exchange
submitted proposing fees for proprietary
data feeds offered by the Exchange. For
instance, in calculating the Human
Resources expenses to be allocated to
physical connections based upon the
above described methodology, the
Exchange has a team of employees
dedicated to network infrastructure and
with respect to such employees the
Exchange allocated network
infrastructure personnel with a high
percentage of the cost of such personnel
(48.1%) given their focus on functions
necessary to provide 10Gb ULL physical
connections. The salaries of those same
personnel were allocated only 7.8% to
Limited Service MEI Ports and the
remaining 44.1% was allocated to 1Gb
connectivity, other port services,
transaction services, membership
services and market data. The Exchange
did not allocate any other Human
Resources expense for providing
physical connections to any other
employee group, outside of a smaller
allocation of 17.7% for 10Gb ULL
connectivity or 17.7% for the entire
network, of the cost associated with
certain specified personnel who work
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closely with and support network
infrastructure personnel. In contrast, the
Exchange allocated much smaller
percentages of costs (4% or less) across
a wider range of personnel groups in
order to allocate Human Resources costs
to providing Limited Service MEI Ports.
This is because a much wider range of
personnel are involved in functions
necessary to offer, monitor and maintain
Limited Service MEI Ports but the tasks
necessary to do so are not a primary or
full-time function.
In total, the Exchange allocated 29%
of its personnel costs to providing 10Gb
ULL and 1Gb connectivity and 6.7% of
its personnel costs to providing Limited
Service MEI Ports, for a total allocation
of 35.7% Human Resources expense to
provide these specific connectivity and
port services. In turn, the Exchange
allocated the remaining 64.3% of its
Human Resources expense to
membership services, transaction
services, other port services and market
data. Thus, again, the Exchange’s
allocations of cost across core services
were based on real costs of operating the
Exchange and were not double-counted
across the core services or their
associated revenue streams.
As another example, the Exchange
allocated depreciation expense to all
core services, including physical
connections and Limited Service MEI
Ports, but in different amounts. The
Exchange believes it is reasonable to
allocate the identified portion of such
expense because such expense includes
the actual cost of the computer
equipment, such as dedicated servers,
computers, laptops, monitors,
information security appliances and
storage, and network switching
infrastructure equipment, including
switches and taps that were purchased
to operate and support the network.
Without this equipment, the Exchange
would not be able to operate the
network and provide connectivity
services to its Members and nonMembers and their customers. However,
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing
connectivity services, but instead
allocated approximately 64.2% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (61% attributed to 10Gb ULL
physical connections and 3.2% to
Limited Service MEI Ports). The
Exchange allocated the remaining
depreciation and amortization expense
(approximately 35.8%) toward the cost
of providing transaction services,
membership services, other port
services, 1Gb connectivity, and market
data.
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The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated. The Exchange does
not yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
connectivity, the Exchange will have to
be successful in retaining existing
clients that wish to maintain physical
connectivity and/or Limited Service
MEI Ports or in obtaining new clients
that will purchase such services.
Similarly, the Exchange will have to be
successful in retaining a positive net
capture on transaction fees in order to
realize the anticipated revenue from
transaction pricing.
The Exchange notes that the Cost
Analysis is based on the Exchange’s
2024 fiscal year of operations and
projections. It is possible, however, that
actual costs may be higher or lower. To
the extent the Exchange sees growth in
use of connectivity services it will
receive additional revenue to offset
future cost increases.
However, if use of connectivity
services is static or decreases, the
Exchange might not realize the revenue
that it anticipates or needs in order to
cover applicable costs. Accordingly, the
Exchange is committing to conduct a
one-year review after implementation of
these fees. The Exchange expects that it
may propose to adjust fees at that time,
to increase fees in the event that
revenues fail to cover costs and a
reasonable mark-up of such costs.
Similarly, the Exchange may propose to
decrease fees in the event that revenue
materially exceeds our current
projections. In addition, the Exchange
will periodically conduct a review to
inform its decision making on whether
a fee change is appropriate (e.g., to
monitor for costs increasing/decreasing
or subscribers increasing/decreasing,
etc. in ways that suggest the thencurrent fees are becoming dislocated
from the prior cost-based analysis) and
would propose to increase fees in the
event that revenues fail to cover its costs
and a reasonable mark-up, or decrease
fees in the event that revenue or the
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
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to fees, and the Exchange commits to do
so.
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Projected Revenue 86
The proposed fees will allow the
Exchange to cover certain costs incurred
by the Exchange associated with
providing and maintaining necessary
hardware and other network
infrastructure as well as network
monitoring and support services;
without such hardware, infrastructure,
monitoring and support the Exchange
would be unable to provide the
connectivity and port services. Much of
the cost relates to monitoring and
analysis of data and performance of the
network via the subscriber’s
connection(s). The above cost, namely
those associated with hardware,
software, and human capital, enable the
Exchange to measure network
performance with nanosecond
granularity. These same costs are also
associated with time and money spent
seeking to continuously improve the
network performance, improving the
subscriber’s experience, based on
monitoring and analysis activity. The
Exchange routinely works to improve
the performance of the network’s
hardware and software. The costs
associated with maintaining and
enhancing a state-of-the-art exchange
network is a significant expense for the
Exchange, and thus the Exchange
believes that it is reasonable and
appropriate to help offset those costs by
amending fees for connectivity services.
Subscribers, particularly those of 10Gb
ULL connectivity, expect the Exchange
to provide this level of support to
connectivity so they continue to receive
the performance they expect. This
differentiates the Exchange from its
competitors. As detailed above, the
Exchange has five primary sources of
revenue that it can potentially use to
fund its operations: transaction fees,
fees for connectivity services,
membership and regulatory fees, and
market data fees. Accordingly, the
Exchange must cover its expenses from
these five primary sources of revenue.
The Exchange’s Cost Analysis
estimates the annual cost to provide
10Gb ULL connectivity services will
equal $15,469,330. Based on current
10Gb ULL connectivity services usage,
the Exchange would generate annual
revenue of approximately $18,020,568.
The Exchange believes this represents a
modest profit of 14.2% when compared
86 For purposes of calculating projected 2024
revenue for 10Gb ULL connectivity, the Exchange
used revenues for the most recently completed full
month.
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to the cost of providing 10Gb ULL
connectivity services.
The Exchange’s Cost Analysis
estimates the annual cost to provide
Limited Service MEI Port services will
equal $2,506,232. Based on December
2023 data for Limited Service MEI Port
usage and counting for the proposed
increase in free Limited Service MEI
Ports and proposed increase in the
monthly fee from $100 to $420 per port,
the Exchange would generate annual
revenue of approximately $2,903,040.
The Exchange believes this would result
in an estimated profit margin of 13.7%
after calculating the cost of providing
Limited Service MEI Port services. The
Exchange notes that the cost to provide
Limited Service MEI Ports is higher than
the cost for the Exchange’s affiliate,
MIAX Pearl Options, to provide Full
Service MEO Ports due to the
substantially higher number of Limited
Service MEI Ports used by Exchange
Members. For example, utilizing
December 2023 data, MIAX Emerald
Market Makers utilized 1,070 Limited
Service MEI Ports compared to only 360
Full Service MEO Ports (Bulk and
Single combined) allocated to MIAX
Pearl Options members.
Based on the above discussion, the
Exchange believes that even if the
Exchange earns the above revenue or
incrementally more or less, the
proposed fees are fair and reasonable
because they will not result in pricing
that deviates from that of other
exchanges or a supra-competitive profit,
when comparing the total expense of the
Exchange associated with providing
10Gb ULL connectivity and Limited
Service MEI Port services versus the
total projected revenue of the Exchange
associated with network 10Gb ULL
connectivity and Limited Service MEI
Port services.
The Exchange also notes that this the
resultant profit margin differs slightly
from the profit margins set forth in
similar fee filings by its affiliated
markets. This is not atypical among
exchanges and is due to a number of
factors that differ between these four
markets, including: different market
models, market structures, and product
offerings (equities, options, price-time,
pro-rata, simple, and complex); different
pricing models; different number of
market participants and connectivity
subscribers; different maintenance and
operations costs, as described in the cost
allocation methodology above; different
technical architecture (e.g., the number
of matching engines per exchange, i.e.,
the Exchange maintains only 12
matching engines while MIAX
maintains 24 matching engines); and
different maturity phase of the Exchange
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21395
and its affiliated markets (i.e., start-up
versus growth versus more mature). All
of these factors contribute to a unique
and differing level of profit margin per
exchange.
Further, the Exchange proposes to
charge rates that are comparable to, or
lower than, similar fees for similar
products charged by competing
exchanges. For example, for 10Gb ULL
connectivity, the Exchange proposes a
lower fee than the fee charged by
Nasdaq for its comparable 10Gb Ultra
fiber connection ($13,500 per month for
the Exchange vs. $15,000 per month for
Nasdaq).87 NYSE American charges
even higher fees for its comparable
10GB LX LCN connection than the
Exchange’s proposed fees ($13,500 per
month for the Exchange vs. $22,000 per
month for NYSE American).88
Accordingly, the Exchange believes that
comparable and competitive pricing are
key factors in determining whether a
proposed fee meets the requirements of
the Act, regardless of whether that same
fee across the Exchange’s affiliated
markets leads to slightly different profit
margins due to factors outside of the
Exchange’s control (i.e., more
subscribers to 10Gb ULL connectivity
on the Exchange than its affiliated
markets or vice versa).
*
*
*
*
*
The Exchange operated at a
cumulative net annual loss from the
time it launched operations in 2019
through fiscal year 2021.89 This was due
to a number of factors, one of which was
choosing to forgo revenue by offering
certain products, such as low latency
connectivity, at lower rates than other
options exchanges to attract order flow
and encourage market participants to
experience the high determinism, low
latency, and resiliency of the Exchange’s
trading systems. The Exchange does not
believe that it should now be penalized
for seeking to raise its fees as it now
needs to upgrade its technology and
absorb increased costs. Therefore, the
Exchange believes the proposed fees are
reasonable because they are based on
both relative costs to the Exchange to
provide dedicated 10Gb ULL
connectivity and Limited Service MEI
87 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services.
88 See NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. CoLocation Fees.
89 Beginning with fiscal year 2022, the Exchange
incurred a net gain of approximately $14 million.
See Exchange’s Form 1/A, Application for
Registration or Exemption from Registration as a
National Securities Exchange, filed June 26, 2023,
available at https://www.sec.gov/Archives/edgar/
vprr/2300/23007742.pdf.
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Ports, the extent to which the product
drives the Exchange’s overall costs and
the relative value of the product, as well
as the Exchange’s objective to make
access to its Systems broadly available
to market participants. The Exchange
also believes the proposed fees are
reasonable because they are designed to
generate annual revenue to recoup the
Exchange’s costs of providing dedicated
10Gb ULL connectivity and Limited
Service MEI Ports.
The Exchange notes that its revenue
estimate is based on projections and
will only be realized to the extent
customer activity produces the revenue
estimated. As a competitor in the hypercompetitive exchange environment, and
an exchange focused on driving
competition, the Exchange does not yet
know whether such projections will be
realized. For instance, in order to
generate the revenue expected from
10Gb ULL connectivity and Limited
Service MEI Ports, the Exchange will
have to be successful in retaining
existing clients that wish to utilize 10Gb
ULL connectivity and Limited Service
MEI Ports and/or obtaining new clients
that will purchase such access. To the
extent the Exchange is successful in
encouraging new clients to utilize 10Gb
ULL connectivity and Limited Service
MEI Ports, the Exchange does not
believe it should be penalized for such
success. To the extent the Exchange has
mispriced and experiences a net loss in
connectivity clients or in transaction
activity, the Exchange could experience
a net reduction in revenue. While the
Exchange is supportive of transparency
around costs and potential margins
(applied across all exchanges), as well
as periodic review of revenues and
applicable costs (as discussed below),
the Exchange does not believe that these
estimates should form the sole basis of
whether or not a proposed fee is
reasonable or can be adopted. Instead,
the Exchange believes that the
information should be used solely to
confirm that an Exchange is not
earning—or seeking to earn—supracompetitive profits. The Exchange
believes the Cost Analysis and related
projections in this filing demonstrate
this fact.
The Exchange is owned by a holding
company that is the parent company of
four exchange markets and, therefore,
the Exchange and its affiliated markets
must allocate shared costs across all of
those markets accordingly, pursuant to
the above-described allocation
methodology. In contrast, the Investors
Exchange LLC (‘‘IEX’’) and MEMX,
which are currently each operating only
one exchange, in their recent nontransaction fee filings allocate the entire
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amount of that same cost to a single
exchange. This can result in lower profit
margins for the non-transaction fees
proposed by IEX and MEMX because
the single allocated cost does not
experience the efficiencies and
synergies that result from sharing costs
across multiple exchanges. The
Exchange and its affiliated markets often
share a single cost, which results in cost
efficiencies that can cause a broader gap
between the allocated cost amount and
projected revenue, even though the fee
levels being proposed are lower or
competitive with competing markets (as
described above). To the extent that the
application of a cost-based standard
results in Commission Staff making
determinations as to the appropriateness
of certain profit margins, the Exchange
believes that Commission Staff should
also consider whether the proposed fee
level is comparable to, or competitive
with, the same fee charged by
competing exchanges and how different
cost allocation methodologies (such as
across multiple markets) may result in
different profit margins for comparable
fee levels. Further, if Commission Staff
is making determinations as to
appropriate profit margins in their
approval of exchange fees, the Exchange
believes that the Commission should be
clear to all market participants as to
what they have determined is an
appropriate profit margin and should
apply such determinations consistently
and, in the case of certain legacy
exchanges, retroactively, if such
standards are to avoid having a
discriminatory effect.
Further, as is reflected in the
proposal, the Exchange continuously
and aggressively works to control its
costs as a matter of good business
practice. A potential profit margin
should not be evaluated solely on its
size; that assessment should also
consider cost management and whether
the ultimate fee reflects the value of the
services provided. For example, a profit
margin on one exchange should not be
deemed excessive where that exchange
has been successful in controlling its
costs, but not excessive on another
exchange where that exchange is
charging comparable fees but has a
lower profit margin due to higher costs.
Doing so could have the perverse effect
of not incentivizing cost control where
higher costs alone could be used to
justify fees increases.
The Proposed Pricing Is Not Unfairly
Discriminatory and Provides for the
Equitable Allocation of Fees, Dues, and
Other Charges
The Exchange believes that the
proposed fees are reasonable, fair,
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equitable, and not unfairly
discriminatory because they are
designed to align fees with services
provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the
proposed fees are equitably allocated
among users of the network connectivity
and port alternatives, as the users of
10Gb ULL connections consume
substantially more bandwidth and
network resources than users of 1Gb
ULL connection. Specifically, the
Exchange notes that 10Gb ULL
connection users account for more than
99% of message traffic over the network,
driving other costs that are linked to
capacity utilization, as described above,
while the users of the 1Gb ULL
connections account for less than 1% of
message traffic over the network. In the
Exchange’s experience, users of the 1Gb
connections do not have the same
business needs for the high-performance
network as 10Gb ULL users.
The Exchange’s high-performance
network and supporting infrastructure
(including employee support), provides
unparalleled system throughput with
the network ability to support access to
several distinct options markets. To
achieve a consistent, premium network
performance, the Exchange must build
out and maintain a network that has the
capacity to handle the message rate
requirements of its most heavy network
consumers. These billions of messages
per day consume the Exchange’s
resources and significantly contribute to
the overall network connectivity
expense for storage and network
transport capabilities. The Exchange
must also purchase additional storage
capacity on an ongoing basis to ensure
it has sufficient capacity to store these
messages to satisfy its record keeping
requirements under the Exchange Act.90
Thus, as the number of messages an
entity increases, certain other costs
incurred by the Exchange that are
correlated to, though not directly
affected by, connection costs (e.g.,
storage costs, surveillance costs, service
expenses) also increase. Given this
difference in network utilization rate,
the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users
pay for the vast majority of the shared
network resources from which all
market participants’ benefit.
90 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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Limited Service MEI Ports
The proposed changes to the monthly
fee for Limited Service MEI Ports is not
unfairly discriminatory because it
would apply to all Market Makers
equally. All Market Makers would now
be eligible to receive four (4) free
Limited Service MEI Ports and those
that elect to purchase more would be
subject to the same monthly rate
regardless of the number of additional
Limited Service MEI Ports they
purchase. Certain market participants
choose to purchase additional Limited
Service MEI Ports based on their own
particular trading/quoting strategies and
feel they need a certain number of
connections to the Exchange to execute
on those strategies. Other market
participants may continue to choose to
only utilize the free Limited Service
MEI Ports to accommodate their own
trading or quoting strategies, or other
business models. All market
participants elect to receive or purchase
the amount of Limited Service MEI
Ports they require based on their own
business decisions and all market
participants would be subject to the
same fee structure and flat fee. Every
market participant may receive up to
four (4) free Limited Service MEI Ports
and those that choose to purchase
additional Limited Service MEI Ports
may elect to do so based on their own
business decisions and would continue
to be subject to the same flat fee. The
Exchange notes that it filed to amend
this fee in 2020 and that filing contained
the same fee structure, i.e., a certain
number of free Limited Service MEI
Ports coupled with a flat fee for
additional Limited Service MEI Ports.91
At that time, the Commission did not
find the structure to be unfairly
discriminatory by virtue of that proposal
surviving the 60-day suspension period.
Therefore, the proposed changes to the
fees for Limited Service MEI Ports is not
unfairly discriminatory because it
would continue to apply to all market
participants equally and provides a fee
structure that includes four free Limited
Service MEI Ports for one monthly rate
that was previously in place and filed
with the Commission.
The Exchange believes that its
proposed fee for Limited Service MEI
Ports is reasonable, fair and equitable,
and not unfairly discriminatory because
it is designed to align fees with services
provided, will apply equally to all
Members that are assigned Limited
Service MEI Ports (either directly or
through a Service Bureau), and will
minimize barriers to entry by now
91 See
supra note 61.
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providing all Members with four,
instead of the prior two, free Limited
Service MEI Ports.92 As a result of the
proposed fee structure, a significant
majority of Members will not be subject
to any fee, and only seven Members will
potentially be subject to a fee for
Limited Service MEI Ports in excess of
four per month, based on current usage.
In contrast, other exchanges generally
charge in excess of $450 per port
without providing any free ports.93 Even
for Members that choose to maintain
more than four Limited Service MEI
Ports, the Exchange believes that the
cost-based fee proposed herein is low
enough that it will not operate to
restrain any Member’s ability to
maintain the number of Limited Service
MEI Ports that it determines are
consistent with its business objectives.
The small number of Members projected
to be subject to the highest fees will still
pay considerably less than competing
exchanges charge.94 Further, the
number of assigned Limited Service MEI
Ports will continue to be based on
decisions by each Member, including
the ability to reduce fees by
discontinuing unused Limited Service
MEI Ports.
The Exchange believes that providing
four free Limited Service MEI Ports is
fair and equitable, and not unfairly
discriminatory because it will enable
Members (and more Members than
when the Exchange previously provided
two free Limited Service MEI Ports) to
92 The following rationale to support providing a
certain number of Limited Service MEI Ports for
free prior to applying a fee is similar to that used
by IEX in 2020 proposal to do the same as proposed
herein. See Securities Exchange Act Release No.
86626 (August 9, 2019), 84 FR 41793 (August 15,
2019) (SR–IEX–2019–07).
93 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services (similar to the Exchange’s MEI
Ports, SQF ports are primarily utilized by Market
Makers); ISE Pricing Schedule, Options 7, Section
7, Connectivity Fees and ISE Rules, General 8:
Connectivity; NYSE American Options Fee
Schedule, Section V.A. Port Fees and Section V.B.
Co-Location Fees; GEMX Pricing Schedule, Options
7, Section 6, Connectivity Fees and GEMX Rules,
General 8: Connectivity.
94 Assuming a Member selects five Limited
Service MEI Ports based on their business needs,
that Member on MIAX Emerald would be charged
only for the fifth Limited Service MEI Port and pay
only the $420 monthly fee, as the first four Limited
Service Ports would be free. Meanwhile, a Member
that purchases five ports on NYSE Arca Options
would pay $450 per port per month, resulting in a
total charge of $2,250 per month. On Cboe BZX
Options, that same member would pay $750 per
port per month, resulting in a total charge of $3,750
per months for five ports. See NYSE Arca Options
Fees and Charges, dated March 1, 2024, available
at https://www.nyse.com/publicdocs/nyse/markets/
arca-options/NYSE_Arca_Options_Fee_
Schedule.pdf and Cboe BZX Options Fee Schedule
available at https://www.cboe.com/us/options/
membership/fee_schedule/.
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access the Exchange on this basis
without having to pay for Limited
Service MEI Ports, thereby encouraging
order flow and liquidity from a diverse
set of market participants, facilitating
price discovery and the interaction of
orders. The Exchange believes that four
Limited Service MEI Ports is an
appropriate number to provide for free
because it aligns with the maximum
number of such ports currently
maintained by a substantial majority of
Members. Based on a review of Limited
Service MEI Port usage, 28 of 35
connected Members are not projected to
be subject to any Limited Service MEI
Port fees under the proposed fee. In
determining the appropriate number of
Limited Service MEI Ports to provide for
free, the Exchange considered several
factors. First, the Exchange believes
that, with respect to Limited Service
MEI Port usage, Members prefer at least
two Limited Service MEI Ports, for
redundancy purposes. Second, from a
review of the number of Limited Service
MEI Ports currently requested and
assigned to each Member, the median
number of ports per Member that
utilizes Limited Service MEI Ports is
four. Thus, the Exchange believes that
having four ports appears to be
reasonably sufficient for the majority of
Members to access the Exchange. On
that basis, the Exchange chose four
Limited Service MEI Ports as the
maximum number of ports for which it
will not charge to access the Exchange.
The Exchange notes that some Members
use more Limited Service MEI Ports
than other Members (and the four
provided for free), which is driven by
the nature and volume of the business
they conduct on the Exchange, and the
choices they make in segmenting that
business across different Limited
Service MEI Ports. Allowing for this
expansive use of Exchange capacity
represents an aggregate cost that the
Exchange seeks to recover through
charging for ports five and higher.
The proposed change is also designed
to encourage Members to be efficient
with their Limited Service MEI Port
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 Limited Service MEI Ports.
There is no requirement that any
Member maintain a specific number of
Limited Service MEI Ports and a
Member may choose to maintain as
many or as few of such ports as each
Member deems appropriate.
The Exchange assessed the proposed
fee change’s impact on all Members.
The Exchange believes that the
proposed fee change is fair and
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equitably allocated across all Members.
As a threshold matter, the fee does not
by design apply differently to different
types or sizes of Members. Nonetheless,
the Exchange assessed whether there
would be any differences in the amount
of the projected fee that correlates to the
type and/or size of different Members.
This assessment revealed that the
number of assigned Limited Service MEI
Ports, and thus projected fees, correlates
closely to a Member’s inbound message
volume to the Exchange. Specifically, as
inbound message volume increases per
Member, the number of requested and
assigned Limited Service MEI Ports
Average daily
message traffic
Number of ports
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1–4 ...............................................................................................................
5 or more .....................................................................................................
Members with relatively higher
inbound message volume are projected
to pay higher fees because they have
requested more Limited Service MEI
Ports. For example, the seven Members
that subscribe to five or more Limited
Service MEI Ports and are subject to the
proposed monthly fee on average
account for 80.33% of December 2023
inbound messages over Limited Service
MEI Ports. The 28 Members that, based
on their December 2023 Limited Service
MEI Port usage are not projected to be
subject to any Limited Service MEI Port
fees, on average account for only
19.67% of December 2023 inbound
messages over Limited Service MEI Port.
Overall, no Member experienced a fee
increase as a result of the proposed fee
change and increase in the number of
free ports. Three Members experienced
a modest and proportionate fee
decrease. All other Members saw no
change in fees as a result of the
proposed changes. On balance, based on
the above data, the Exchange believes
that the proposed fee structure changes
(including moving from two free ports
to four free ports) is fair and equitably
allocated across all Members, and the
impact of such proposed fee structure
changes is consistent among Members
based on Exchange access and usage.
The Exchange believes that the
variance between projected fees and
Limited Service MEI Ports usage is not
unfairly discriminatory because it is
based on objective differences in
Limited Service MEI Port usage among
different Members. The Exchange notes
that the distribution of total inbound
message volume is concentrated in
relatively few Members, which consume
a much larger proportionate share of the
Exchange’s resources (compared to the
majority of Members that send
substantially fewer inbound order
messages). This distribution of inbound
message volume requires the Exchange
to maintain sufficient Limited Service
MEI Port capacity to accommodate the
higher existing and anticipated message
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2,096,585,967
8,559,796,282
volume of higher volume Members.
Thus, the Exchange’s incremental
aggregate costs for all Limited Service
MEI Ports are disproportionately related
to volume from the highest inbound
message volume Members. For these
reasons, the Exchange believes it is not
unfairly discriminatory for the Members
with the highest inbound message
volume to pay a higher share of the total
Limited Service MEI Ports fees.
While Limited Service MEI Port usage
is concentrated in a few relatively larger
Members, the number of such ports
requested is not based on the size or
type of Member but rather correlates to
a Member’s inbound message volume to
the Exchange. Further, Members with
relatively higher inbound message
volume also request (and are assigned)
more Limited Service MEI Ports than
other Members, which in turn means
they account for a disproportionate
share of the Exchange’s aggregate costs
for providing Limited Service MEI
Ports.95 Therefore, the Exchange
believes it is not unfairly discriminatory
for the Members with higher inbound
message volume to pay a modestly
higher proportionate share of the
Limited Service MEI Port fees.
To achieve consistent, premium
network performance, the Exchange
must build and maintain a network that
has the capacity to handle the message
rate requirements of its heaviest
network consumers during anticipated
peak market conditions. The resultant
need to support billions of messages per
day consume the Exchange’s resources
and significantly contribute to the
overall network connectivity expense
for storage and network transport
capabilities. This need also requires the
Exchange to purchase additional storage
capacity on an ongoing basis to ensure
95 See Securities Exchange Act Release No. 86626
(August 9, 2019), 84 FR 41793 (August 15, 2019)
(SR–IEX–2019–07) (justifying providing 5 ports for
free and charging a fee for every port purchased in
excess of 5 ports based on the higher message traffic
of subscribers with increased number of ports).
PO 00000
Frm 00166
Fmt 4703
Sfmt 4703
increases. The following table presents
data from December 2023 evidencing
the correlation between a Member’s
inbound message volume and the
number of Limited Service MEI Port
assigned to the Member as of December
31, 2023.
Total
message traffic
41,931,719,332
171,195,925,646
Overall percentage
of all message traffic
for month
19.67
80.33
it has sufficient capacity to store these
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.96 Thus, as the number of
connections per Market Maker
increases, other costs incurred by the
Exchange also increase, e.g., storage
costs, surveillance costs, service
expenses.
Accordingly, the Exchange believes
that the fee will be applied consistently
with its specific purpose—to partially
recover the Exchange’s aggregate costs,
encourage the efficient use of Limited
Service MEI Ports, and align fees with
Members’ Limited Service MEI Port and
system usage.
The Exchange further believes that the
proposed fees are reasonable, fair and
equitable, and non-discriminatory
because they will apply to all Members
in the same manner and are not targeted
at a specific type or category of market
participant engaged in any particular
trading strategy. All Members will
receive four free Limited Service MEI
Ports and pay the same proposed fee per
Limited Service MEI Ports for each
additional Limited Service MEI Port.
Each Limited Service MEI Port is
identical, providing connectivity to the
Exchange on identical terms. While the
proposed fee will result in a different
effective ‘‘per unit’’ rate for different
Members after factoring in the four free
Limited Service MEI Ports, the
Exchange does not believe that this
difference is material given the overall
low proposed fee per Limited Service
MEI Port. Because the first four Limited
Service MEI Ports are free of charge,
each entity will have a ‘‘per unit’’ rate
of less than the proposed fee. Further,
the fee is not connected to volume based
tiers. All Members will be subject to the
same fee schedule, regardless of the
volume sent to or executed on the
96 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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Exchange. The fee also does not depend
on any distinctions between Members,
customers, broker-dealers, or any other
entity. The fee will be assessed solely
based on the number of Limited Service
MEI Ports an entity selects and not on
any other distinction applied by the
Exchange. While entities that send
relatively more inbound messages to the
Exchange may select more Limited
Service MEI Ports, thereby resulting in
higher fees, that distinction is based on
decisions made by each Member and the
extent and nature of the Member’s
business on the Exchange rather than
application of the fee by the Exchange.
Members can determine how many
Limited Service MEI Ports they need to
implement their trading strategies
effectively. The Exchange proposes to
offer additional Limited Service MEI
Ports at a low fee to enable all Members
to purchase as many Limited Service
MEI Ports as their business needs
dictate in order to optimize throughput
and manage latency across the
Exchange.
Notwithstanding that Members with
the highest number of Limited Service
MEI Ports will pay a greater percentage
of the total projected fees than is
represented by their Limited Service
MEI Port usage, the Exchange does not
believe that the proposed fee is unfairly
discriminatory. It is not possible to fully
synchronize the Exchange’s objective to
provide four free Limited Service MEI
Ports to all Members, thereby
minimizing barriers to entry and
incentivizing liquidity on the Exchange,
with an approach that exactly aligns the
projected per Member fee with each
Member’s number of requested Limited
Service MEI Ports. As proposed, the
Exchange is providing a reasonable
increased number of Limited Service
MEI Ports to each Member without
charge. In fact, the Exchange proposes to
provide more Limited Service MEI Ports
for free by increasing the number of
available Limited Service MEI Ports that
are provided for free from two to four.
Any variance between projected fees
and Limited Service MEI Port usage is
attributable to objective differences
among Members in terms of the number
of Limited Service MEI Ports they
determine are appropriate based on
their trading on the Exchange. Further,
the Exchange believes that the low
amount of the proposed fee (which in
the aggregate is projected to only
partially recover the Exchange’s
directly-related costs as described
herein) mitigates any disparate impact.
Further, the fee will help to encourage
Limited Service MEI Port usage in a way
that aligns with the Exchange’s
regulatory obligations. As a national
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securities exchange, the Exchange is
subject to Regulation Systems
Compliance and Integrity (‘‘Reg SCI’’).97
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.98 By
encouraging Members to be efficient
with their Limited Service MEI Ports
usage, the proposed fee will support the
Exchange’s Reg SCI obligations in this
regard by ensuring that unused Limited
Service MEI Ports are available to be
allocated based on individual Members
needs and as the Exchange’s overall
order and trade volumes increase.
Additionally, because the Exchange will
continue not to charge connectivity
testing and certification fees to its
Disaster Recovery Facility or where the
Exchange requires testing and
certification, 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 without
incurring any port fee costs.99
Finally, the Exchange believes that
the proposed fee is consistent with
Section 11A of the Exchange Act in that
it is designed to facilitate the
economically efficient execution of
securities transactions, fair competition
among brokers and dealers, exchange
markets and markets other than
exchange markets, and the practicability
of brokers executing investors’ orders in
the best market. Specifically, the
proposed low, cost-based fee will enable
a broad range of the Exchange Members
to continue to connect to the Exchange,
thereby facilitating the economically
efficient execution of securities
transactions on the Exchange, fair
competition between and among such
Members, and the practicability of
Members that are brokers executing
investors’ orders on the Exchange when
it is the best market.
97 17
CFR 242.1000–1007.
CFR 242.1001(a).
99 By comparison, some other exchanges charge
less to connect to their disaster recovery facilities,
but still charge an amount that could both recoup
costs and potentially be a source of profits. See, e.g.,
Nasdaq Stock Market LLC Equity 7, Section 115
(Ports and other Services).
98 17
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Fmt 4703
Sfmt 4703
21399
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed
fees will not result in any burden on
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
proposed fees will allow the Exchange
to recoup some of its costs in providing
10Gb ULL connectivity and Limited
Service MEI Ports at below market rates
to market participants since the
Exchange launched operations. As
described above, the Exchange operated
at a cumulative net annual loss since its
launch in 2019 through 2021 100 due to
providing a low-cost alternative to
attract order flow and encourage market
participants to experience the high
determinism and resiliency of the
Exchange’s trading Systems. To do so,
the Exchange chose to waive the fees for
some non-transaction related services
and Exchange products or provide them
at a very lower fee, which was not
profitable to the Exchange. This resulted
in the Exchange forgoing revenue it
could have generated from assessing any
fees or higher fees. The Exchange could
have sought to charge higher fees at the
outset, but that could have served to
discourage participation on the
Exchange. Instead, the Exchange chose
to provide a low-cost exchange
alternative to the options industry,
which resulted in lower initial
revenues. Examples of this are 10Gb
ULL connectivity and Limited Service
MEI Ports, for which the Exchange only
now seeks to adopt fees at a level
similar to or lower than those of other
options exchanges.
Further, the Exchange does not
believe that the proposed fee increase
for the 10Gb ULL connection change
would place certain market participants
at the Exchange at a relative
disadvantage compared to other market
participants or affect the ability of such
market participants to compete. As is
the case with the current proposed flat
fee, the proposed fee would apply
uniformly to all market participants
regardless of the number of connections
they choose to purchase. The proposed
fee does not favor certain categories of
market participants in a manner that
would impose an undue burden on
competition.
100 See
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supra note 89.
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The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. In particular,
Exchange personnel has been informally
discussing potential fees for
connectivity services with a diverse
group of market participants that are
connected to the Exchange (including
large and small firms, firms with large
connectivity service footprints and
small connectivity service footprints, as
well as extranets and service bureaus)
for several months leading up to that
time. The Exchange does not believe the
proposed fees for connectivity services
would negatively impact the ability of
Members, non-Members (extranets or
service bureaus), third-parties that
purchase the Exchange’s connectivity
and resell it, and customers of those
resellers to compete with other market
participants or that they are placed at a
disadvantage.
The Exchange does anticipate,
however, that some market participants
may reduce or discontinue use of
connectivity services provided directly
by the Exchange in response to the
proposed fees. In fact, as mentioned
above, one MIAX Pearl Options Market
Maker terminated their MIAX Pearl
Options membership on January 1, 2023
as a direct result of the similar proposed
fee changes by MIAX Pearl Options.101
The Exchange does not believe that the
proposed fees for connectivity services
place certain market participants at a
relative disadvantage to other market
participants because the proposed
connectivity pricing is associated with
relative usage of the Exchange by each
market participant and does not impose
a barrier to entry to smaller participants.
The Exchange believes its proposed
pricing is reasonable and, when coupled
with the availability of third-party
providers that also offer connectivity
solutions, that participation on the
Exchange is affordable for all market
participants, including smaller trading
101 The Exchange acknowledges that IEX included
in its proposal to adopt market data fees after
offering market data for free an analysis of what its
projected revenue would be if all of its existing
customers continued to subscribe versus what its
projected revenue would be if a limited number of
customers subscribed due to the new fees. See
Securities Exchange Act Release No. 94630 (April
7, 2022), 87 FR 21945 (April 13, 2022) (SR–IEX–
2022–02). MEMX did not include a similar analysis
in either of its recent non-transaction fee proposals.
See supra notes 83–84. The Exchange does not
believe a similar analysis would be useful here
because it is amending existing fees, not proposing
to charge a new fee where existing subscribers may
terminate connections because they are no longer
enjoying the service at no cost.
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firms. As described above, the
connectivity services purchased by
market participants typically increase
based on their additional message traffic
and/or the complexity of their
operations. The market participants that
utilize more connectivity services
typically utilize the most bandwidth,
and those are the participants that
consume the most resources from the
network. Accordingly, the proposed fees
for connectivity services do not favor
certain categories of market participants
in a manner that would impose a
burden on competition; rather, the
allocation of the proposed connectivity
fees reflects the network resources
consumed by the various size of market
participants and the costs to the
Exchange of providing such
connectivity services.
Lastly, the Exchange does not believe
its proposed changes to the monthly rate
for Limited Service MEI Ports will place
certain market participants at a relative
disadvantage to other market
participants. All market participants
would be eligible to receive four (4) free
Limited Service MEI Ports and those
that elect to purchase more would be
subject to the same flat fee regardless of
the number of additional Limited
Service MEI Ports they purchase. All
firms purchase the amount of Limited
Service MEI Ports they require based on
their own business decisions and
similarly situated firms are subject to
the same fees.
Inter-Market Competition
The Exchange also does not believe
that the proposed rule change and price
increase will result in any burden on
inter-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. As this is a
fee increase, arguably if set too high,
this fee would make it easier for other
exchanges to compete with the
Exchange. Only if this were a
substantial fee decrease could this be
considered a form of predatory pricing.
In contrast, the Exchange believes that,
without this fee increase, we are
potentially at a competitive
disadvantage to certain other exchanges
that have in place higher fees for similar
services. As we have noted, the
Exchange believes that connectivity fees
can be used to foster more competitive
transaction pricing and additional
infrastructure investment and there are
other options markets of which market
participants may connect to trade
options at higher rates than the
Exchange’s. Accordingly, the Exchange
does not believe its proposed fee
changes impose any burden on
competition that is not necessary or
PO 00000
Frm 00168
Fmt 4703
Sfmt 4703
appropriate in furtherance of the
purposes of the Act.
*
*
*
*
*
In conclusion, as discussed
thoroughly above, the Exchange
regrettably believes that the application
of the Revised Review Process and Staff
Guidance has adversely affected intermarket competition among legacy and
non-legacy exchanges by impeding the
ability of non-legacy exchanges to adopt
or increase fees for their market data
and access services (including
connectivity and port products and
services) that are on parity or
commensurate with fee levels
previously established by legacy
exchanges. Since the adoption of the
Revised Review Process and Staff
Guidance, and even more so recently, it
has become extraordinarily difficult to
adopt or increase fees to generate
revenue necessary to invest in systems,
provide innovative trading products and
solutions, and improve competitive
standing to the benefit of non-legacy
exchanges’ market participants.
Although the Staff Guidance served an
important policy goal of improving
disclosures and requiring exchanges to
justify that their market data and access
fee proposals are fair and reasonable, it
has also negatively impacted non-legacy
exchanges in particular in their efforts
to adopt or increase fees that would
enable them to more fairly compete with
legacy exchanges, despite providing
enhanced disclosures and rationale
under both competitive and cost basis
approaches provided for by the Revised
Review Process and Staff Guidance to
support their proposed fee changes.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange received one comment
letter on the Initial Proposal, one
comment letter on the Second Proposal,
one comment letter on the Third
Proposal, one comment letter on the
Fourth Proposal, one comment letter on
the Fifth Proposal, one comment letter
on the Sixth Proposal, one comment
letter on the Seventh Proposal, and one
comment letter on the Eighth Proposal
all from the same commenter.102 In their
letters, the commenters from SIG seek to
102 See letter from Brian Sopinsky, General
Counsel, Susquehanna International Group, LLP
(‘‘SIG’’), to Vanessa Countryman, Secretary,
Commission, dated February 7, 2023, letters from
Gerald D. O’Connell, SIG, to Vanessa Countryman,
Secretary, Commission, dated March 21, 2023, May
24, 2023, July 24, 2023 and September 18, 2023,
and letters from John C. Pickford, SIG, to Vanessa
Countryman, Secretary, Commission, dated January
4, 2024, and March 1, 2024.
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Federal Register / Vol. 89, No. 60 / Wednesday, March 27, 2024 / Notices
incorporate comments submitted on
previous Exchange proposals to which
the Exchange has previously responded.
In addition, one commenter states in
their latest letter that ‘‘the Exchanges are
misleading in stating that their last
increase in the 10Gb ULL connection
was in 2021 while fully aware that the
Exchanges have been charging members
this increased rate since January
2023.’’ 103 The Exchange has clarified
the references to the 2021 fee increase,
and acknowledges that a version of this
proposed fee change has been in effect
since January 2023, all legally pursuant
to the currently effective process set
forth in Section 19(b) of the Exchange
Act. The Exchange also received
comment letters from a separate
commenter on the Sixth and Seventh
Proposals.104 The Exchange believes
issues raised by each commenter are not
germane to this proposal in particular,
but rather raise larger issues with the
current environment surrounding
exchange non-transaction fee proposals
that should be addressed by the
Commission through rule making, or
Congress, more holistically and not
through an individual exchange fee
filings. Among other things, the
commenters are requesting additional
data and information that is both
opaque and a moving target and would
constitute a level of disclosure
materially over and above that provided
by any competitor exchanges.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
khammond on DSKJM1Z7X2PROD with NOTICES
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,105 and Rule
19b–4(f)(2) 106 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
103 See letter from John C. Pickford, SIG, to
Vanessa Countryman, Secretary, Commission, dated
March 1, 2024.
104 See letters from Thomas M. Merritt, Deputy
General Counsel, Virtu Financial, Inc. (‘‘Virtu’’), to
Vanessa Countryman, Secretary, Commission, dated
November 8, 2023 and January 2, 2024.
105 15 U.S.C. 78s(b)(3)(A)(ii).
106 17 CFR 240.19b–4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
21401
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.107
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–06451 Filed 3–26–24; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments:
SMALL BUSINESS ADMINISTRATION
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
EMERALD–2024–12 on the subject line.
[Disaster Declaration #20232; LOUISIANA
Disaster Number LA–20001 Declaration of
Economic Injury]
ACTION:
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–EMERALD–2024–12. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–EMERALD–2024–12 and should be
submitted on or before April 17, 2024.
This is a notice of an
Economic Injury Disaster Loan (EIDL)
declaration for the State of Louisiana
dated 03/21/2024.
Incident: Severe or Extreme Drought.
Incident Period: 09/19/2023 through
12/05/2023.
DATES: Issued on 03/21/2024.
Economic Injury (EIDL) Loan
Application Deadline Date: 12/23/2024.
ADDRESSES: Visit the MySBA Loan
Portal at https://lending.sba.gov to
apply for a disaster assistance loan.
FOR FURTHER INFORMATION CONTACT:
Alan Escobar, Office of Disaster
Recovery & Resilience, U.S. Small
Business Administration, 409 3rd Street
SW, Suite 6050, Washington, DC 20416,
(202) 205–6734.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
Administrator’s EIDL declaration,
applications for disaster loans may be
submitted online using the MySBA
Loan Portal https://lending.sba.gov or
other locally announced locations.
Please contact the SBA disaster
assistance customer service center by
email at disastercustomerservice@
sba.gov or by phone at 1–800–659–2955
for further assistance.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Parishes: Acadia, Allen,
Ascension, Assumption, Avoyelles,
Beauregard, Bienville, Bossier,
Caddo, Calcasieu, Caldwell,
Cameron, Catahoula, Claiborne,
Concordia, De Soto, East Baton
Rouge, East Carroll, East Feliciana,
Evangeline, Franklin, Grant, Iberia,
Iberville, Jackson, Jefferson,
Jefferson Davis, Lasalle, Lafayette,
Lafourche, Lincoln, Livingston,
SUMMARY:
107 17
Frm 00169
Fmt 4703
Small Business Administration.
Notice.
AGENCY:
Paper Comments
PO 00000
Administrative Declaration of an
Economic Injury Disaster for the State
of Louisiana
Sfmt 4703
E:\FR\FM\27MRN1.SGM
CFR 200.30–3(a)(12).
27MRN1
]]>Agencies
[Federal Register Volume 89, Number 60 (Wednesday, March 27, 2024)]
[Notices]
[Pages 21379-21401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06451]
[[Page 21379]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99824; File No. SR-EMERALD-2024-12]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fee Schedule To Modify Certain Connectivity and Port Fees
March 21, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 11, 2024, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\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 proposes to amend the MIAX Emerald Options Exchange
Fee Schedule (the ``Fee Schedule'') to amend certain connectivity and
port fees.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxglobal.com/markets/us-options/emerald-options/rule-filings, at MIAX Emerald's principal office, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the Fee Schedule as follows: (1)
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'')
fiber connection for Members \3\ and non-Members; and (2) amend the
monthly port fee for additional Limited Service MIAX Emerald Express
Interface (``MEI'') Ports \4\ available to Market Makers.\5\ The
Exchange has experienced ongoing increases in expenses in recent years.
As discussed more fully below, the Exchange recently calculated annual
aggregate costs of $15,469,330 for providing 10Gb ULL connectivity and
$2,506,232 for providing Limited Service MEI Ports.
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\3\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\4\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule.
\5\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100. For purposes of Limit
Service MEI Ports, Market Makers also include firms that engage in
other types of liquidity activity, such as seeking to remove resting
liquidity from the Exchange's Book.
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Much of the cost relates to monitoring and analysis of data and
performance of the network via the subscriber's connection with
nanosecond granularity, and continuous improvements in network
performance with the goal of improving the subscriber's experience. The
costs associated with maintaining and enhancing a state-of-the-art
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those increased costs by amending fees for connectivity services.
Subscribers expect the Exchange to provide this level of support so
they continue to receive the performance they expect. This
differentiates the Exchange from its competitors.
The Exchange now proposes to amend the Fee Schedule to amend the
fees for 10Gb ULL connectivity and Limited Service MEI Ports in order
to recoup ongoing costs and increase in expenses set forth below in the
Exchange's cost analysis. While the proposed fee changes are
immediately effective, the Exchange notes that a version of the
proposed fee changes has been effective since January 1, 2023 pursuant
to the Exchange's initially filed this proposal on December 30, 2022 as
SR-EMERALD-2022-38. On January 9, 2023, the Exchange withdrew SR-
EMERALD-2022-38 to make a minor technical correction and resubmitted
the proposal (the ``Initial Proposal'').\6\ On February 23, 2023, the
Exchange withdrew the Initial Proposal and replaced it with a revised
proposal (the ``Second Proposal'').\7\ On April 20, 2023, the Exchange
withdrew the Second Proposal and replaced it with a revised proposal
(the ``Third Proposal'').\8\ On June 16, 2023, the Exchange withdrew
the Third Proposal and replaced it with a revised proposal (the
``Fourth Proposal'').\9\ On August 8, 2023, the Exchange withdrew the
Fourth Proposal and replaced it with a revised proposal (the ``Fifth
Proposal'').\10\ Since a U.S. government shutdown was avoided, on
October 2, 2023, the Exchange withdrew the Fifth Proposal and replaced
it with a further revised proposal (the ``Sixth Proposal'').\11\ On
November 27, 2023, the Exchange withdrew the Sixth Proposal and
replaced it with this further revised proposal (the ``Seventh
Proposal'').\12\ On January 25, 2024, the Exchange withdrew the Seventh
Proposal and replaced it with a further revised proposal (the ``Eighth
[[Page 21380]]
Proposal'').\13\ On March 11, 2024, the Exchange withdrew the Eighth
Proposal and replaced it with this further revised proposal (the
``Ninth Proposal'').
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\6\ See Securities Exchange Act Release No. 96628 (January 10,
2023), 88 FR 2651 (January 17, 2023) (SR-EMERALD-2023-01).
\7\ See Securities Exchange Act Release No. 97079 (March 8,
2023), 88 FR 15764 (March 14, 2023) (SR-EMERALD-2023-05).
\8\ See Securities Exchange Act Release No. 97422 (May 2, 2023),
88 FR 29750 (May 8, 2023) (SR-EMERALD-2023-12).
\9\ The Exchange met with Commission Staff to discuss the Third
Proposal during which the Commission Staff provided feedback and
requested additional information, including, most recently,
information about total costs related to certain third party
vendors. Such vendor cost information is subject to confidentiality
restrictions. The Exchange provided this information to Commission
Staff under separate cover with a request for confidentiality. While
the Exchange will continue to be responsive to Commission Staff's
information requests, the Exchange believes that the Commission
should, at this point, issue substantially more detailed guidance
for exchanges to follow in the process of pursuing a cost-based
approach to fee filings, and that, for the purposes of fair
competition, detailed disclosures by exchanges, such as those that
the Exchange is providing now, should be consistent across all
exchanges, including for those that have resisted a cost-based
approach to fee filings, in the interests of fair and even
disclosure and fair competition. See Securities Exchange Act Release
No. 97813 (June 27, 2023), 88 FR 42785 (July 3, 2023) (SR-EMERALD-
2023-14).
\10\ See Securities Exchange Act Release No. 98176 (August 21,
2023), 88 FR 58341 (August 25, 2023) (SR-EMERALD-2023-19). Due to
the prospect of a U.S. government shutdown, the Commission suspended
the Fifth Proposal on September 29, 2023. See Securities Exchange
Act Release No. 98656 (September 29, 2023) (SR-EMERALD-2023-19).
\11\ See Securities Exchange Act Release No. 98751 (October 13,
2023), 88 FR 72174 (October 19, 2023) (SR-EMERALD-2023-27).
\12\ See Securities Exchange Act Release No. 99138 (December 11,
2023), 88 FR 87020 (December 15, 2023) (SR-EMERALD-2023-30).
\13\ See Securities Exchange Act Release No. 99475 (February 5,
2024), 89 FR 9223 (February 9, 2024) (SR-EMERALD-2024-03).
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The Exchange previously included a cost analysis in the Initial,
Second, Third, Fourth, Fifth, Sixth, Seventh and Eighth Proposals. As
described more fully below, the Exchange provides an updated cost
analysis that includes, among other things, additional descriptions of
how the Exchange allocated costs among it and its affiliated exchanges
(MIAX PEARL, LLC (``MIAX Pearl'') (separately among MIAX Pearl Options
and MIAX Pearl Equities) and MIAX \14\ (together with MIAX Pearl
Options and MIAX Pearl Equities, the ``affiliated markets'')) to ensure
no cost was allocated more than once, as well as additional detail
supporting its cost allocation processes and explanations as to why a
cost allocation in this proposal may differ from the same cost
allocation in a similar proposal submitted by one of its affiliated
markets. The Exchange continues to propose fees that are intended to
cover the Exchange's cost of providing 10Gb ULL connectivity and
Limited Service MEI Ports with a reasonable mark-up over those costs.
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\14\ The term ``MIAX'' means Miami International Securities
Exchange, LLC. See Exchange Rule 100.
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The cost analysis included in prior filings was based on the
Exchange's 2023 fiscal year of operations and projected expenses. In
its Initial Proposal filed on December 30, 2022, the Exchange committed
to conduct an annual review after implementation of these fees. The
Exchange recently completed its 2024 fiscal year budget process, which
included its annual review of these fees and the projected costs to
provide these services, based on its approved 2024 expense budget.
Therefore, the Cost Analysis included in this proposal is based on the
Exchange's 2024 fiscal year of operations and projected expenses. The
Exchange believes it reasonable to now use costs from its 2024 fiscal
year budget because they reflect the Exchange's current cost base. The
Exchange also notes that expenses included in its 2024 fiscal year
budget and this proposal are generally higher than its 2023 fiscal year
budget and Cost Analysis included in prior filings. As more fully
described below and throughout this filing, this is due to a number of
factors, such as, critical vendors and suppliers increasing costs they
charge the Exchange, significant exchange staff headcount increases,
increased data center costs from the Exchange's data center providers
in multiple locations and facilities, higher technology and
communications costs, planned hardware refreshes, and system capacity
upgrades that increase depreciation expense. Specifically, with regard
to employee compensation, the 2024 fiscal year budget includes
additional expenses related to increased headcount and new hires that
are needed to support the Exchange as it continues to grow (the
Exchange and its affiliated companies are projected to hire over 60
additional staff in 2024). Hardware and software expenses have also
increased primarily due to price increases from critical vendors and
equipment suppliers. Further, the Exchange budgeted for additional
hardware and software needs to support the Exchange's continued growth
and expansion. Depreciation and amortization have likewise increased
due to recent and planned refreshes in Exchange hardware and software.
This new equipment and software then becomes depreciable, as described
below. Data center costs have also increased due the following: the
Exchange expanding its footprint within its data center; and the data
center vendor increasing the costs it charges the Exchange. Lastly,
allocated shared expenses have increased due to the overall budgeted
increase in costs from 2023 to 2024 necessary to operate and support
the Exchange as described below.
Consequently, these increased costs included in the 2024 budget
result in a lower projected profit margin for 10Gb ULL connectivity and
Limited Service MEI Ports than the profit margins included in prior
filings that proposed the same fee levels for 10Gb ULL connectivity and
Limited Service MEI Ports. The Exchange believes it is reasonable and
appropriate to now use expenses from its 2024 budget because those
expenses are more recent and more accurately reflect the Exchange's
current expenses and projected revenues for the 2024 fiscal year.
Continuing to use 2023 budget numbers would result in the Exchange's
Cost Analysis to be based on stale data which would not reflect the
Exchanges most recent cost estimates and projected margins.
* * * * *
Starting in 2017, following the United States Court of Appeals for
the District of Columbia's Susquehanna Decision \15\ and various other
developments, the Commission began to undertake a heightened review of
exchange filings, including non-transaction fee filings that was
substantially and materially different from it prior review process
(hereinafter referred to as the ``Revised Review Process''). In the
Susquehanna Decision, the D.C. Circuit Court stated that the Commission
could not maintain a practice of ``unquestioning reliance'' on claims
made by a self-regulatory organization (``SRO'') in the course of
filing a rule or fee change with the Commission.\16\ Then, on October
16, 2018, the Commission issued an opinion in Securities Industry and
Financial Markets Association finding that exchanges failed both to
establish that the challenged fees were constrained by significant
competitive forces and that these fees were consistent with the
Act.\17\ On that same day, the Commission issued an order remanding to
various exchanges and national market system (``NMS'') plans challenges
to over 400 rule changes and plan amendments that were asserted in 57
applications for review (the ``Remand Order'').\18\ The Remand Order
directed the exchanges to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review.'' \19\ The Commission
denied requests by various exchanges and plan participants for
reconsideration of the Remand Order.\20\ However, the Commission did
extend the deadlines in the Remand Order ``so that they d[id] not begin
to run until the resolution of the appeal of the SIFMA Decision in the
D.C. Circuit and the issuance of the court's mandate.'' \21\ Both the
Remand Order and the Order Denying Reconsideration were appealed to the
D.C. Circuit.
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\15\ See Susquehanna International Group, LLP v. Securities &
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the
``Susquehanna Decision'').
\16\ Id.
\17\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA
Decision'').
\18\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 84433, 2018 WL 5023230 (Oct. 16, 2018). See 15 U.S.C.
78k-1, 78s; see also Rule 608(d) of Regulation NMS, 17 CFR
242.608(d) (asserted as an alternative basis of jurisdiction in some
applications).
\19\ Id. at page 2.
\20\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order
Denying Reconsideration'').
\21\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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While the above appeal to the D.C. Circuit was pending, on March
29, 2019, the Commission issued an order disapproving a proposed fee
change by BOX Exchange LLC (``BOX'') to establish connectivity fees
(the ``BOX Order''), which significantly increased
[[Page 21381]]
the level of information needed for the Commission to believe that an
exchange's filing satisfied its obligations under the Act with respect
to changing a fee.\22\ Despite approving hundreds of access fee filings
in the years prior to the BOX Order (described further below) utilizing
a ``market-based'' test, the Commission changed course and disapproved
BOX's proposal to begin charging connectivity at one-fourth the rate of
competing exchanges' pricing.
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\22\ See Securities Exchange Act Release No. 85459 (March 29,
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37,
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to
Amend the Fee Schedule on the BOX Market LLC Options Facility to
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network) (the ``BOX Order'').
The Commission noted in the BOX Order that it ``historically applied
a `market-based' test in its assessment of market data fees, which
[the Commission] believe[s] present similar issues as the
connectivity fees proposed herein.'' Id. at page 16. Despite this
admission, the Commission disapproved BOX's proposal to begin
charging $5,000 per month for 10Gb connections (while allowing
legacy exchanges to charge rates equal to 3-4 times that amount
utilizing ``market-based'' fee filings from years prior).
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Also while the above appeal was pending, on May 21, 2019, the
Commission Staff issued guidance ``to assist the national securities
exchanges and FINRA . . . in preparing Fee Filings that meet their
burden to demonstrate that proposed fees are consistent with the
requirements of the Securities Exchange Act.'' \23\ In the Staff
Guidance, the Commission Staff states that, ``[a]s an initial step in
assessing the reasonableness of a fee, staff considers whether the fee
is constrained by significant competitive forces.'' \24\ The Staff
Guidance also states that, ``. . . even where an SRO cannot
demonstrate, or does not assert, that significant competitive forces
constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \25\
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\23\ See Staff Guidance on SRO Rule Filings Relating to Fees
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Staff Guidance'').
\24\ Id.
\25\ Id.
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Following the BOX Order and Staff Guidance, on August 6, 2020, the
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock
Market, LLC v. SEC \26\ and remanded for further proceedings consistent
with its opinion.\27\ That same day, the D.C. Circuit issued an order
remanding the Remand Order to the Commission for reconsideration in
light of NASDAQ. The court noted that the Remand Order required the
exchanges and NMS plan participants to consider the challenges that the
Commission had remanded in light of the SIFMA Decision. The D.C.
Circuit concluded that because the SIFMA Decision ``has now been
vacated, the basis for the [Remand Order] has evaporated.'' \28\
Accordingly, on August 7, 2020, the Commission vacated the Remand Order
and ordered the parties to file briefs addressing whether the holding
in NASDAQ v. SEC that Exchange Act Section 19(d) does not permit
challenges to generally applicable fee rules requiring dismissal of the
challenges the Commission previously remanded.\29\ The Commission
further invited ``the parties to submit briefing stating whether the
challenges asserted in the applications for review . . . should be
dismissed, and specifically identifying any challenge that they contend
should not be dismissed pursuant to the holding of NASDAQ v. SEC.''
\30\ Without resolving the above issues, on October 5, 2020, the
Commission issued an order granting SIFMA and Bloomberg's request to
withdraw their applications for review and dismissed the
proceedings.\31\
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\26\ NASDAQ Stock Mkt., LLC v. SEC, No 18-1324, --- Fed. App'x -
--- 2020 WL 3406123 (D.C. Cir. June 5, 2020). The court's mandate
was issued on August 6, 2020.
\27\ Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020).
The court's mandate issued on August 6, 2020. The D.C. Circuit held
that Exchange Act ``Section 19(d) is not available as a means to
challenge the reasonableness of generally-applicable fee rules.''
Id. The court held that ``for a fee rule to be challengeable under
Section 19(d), it must, at a minimum, be targeted at specific
individuals or entities.'' Id. Thus, the court held that ``Section
19(d) is not an available means to challenge the fees at issue'' in
the SIFMA Decision. Id.
\28\ Id. at *2; see also id. (``[T]he sole purpose of the
challenged remand has disappeared.'').
\29\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 89504, 2020 WL 4569089 (August 7, 2020) (the ``Order
Vacating Prior Order and Requesting Additional Briefs'').
\30\ Id.
\31\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act
Release No. 90087 (October 5, 2020).
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As a result of the Commission's loss of the NASDAQ vs. SEC case
noted above, the Commission never followed through with its intention
to subject the over 400 fee filings to ``develop a record,'' and to
``explain their conclusions, based on that record, in a written
decision that is sufficient to enable us to perform our review.'' \32\
As such, all of those fees remained in place and amounted to a baseline
set of fees for those exchanges that had the benefit of getting their
fees in place before the Commission Staff's fee review process
materially changed. The net result of this history and lack of
resolution in the D.C. Circuit Court resulted in an uneven competitive
landscape where the Commission subjects all new non-transaction fee
filings to the new Revised Review Process, while allowing the
previously challenged fee filings, mostly submitted by incumbent
exchanges prior to 2019, to remain in effect and not subject to the
``record'' or ``review'' earlier intended by the Commission.
---------------------------------------------------------------------------
\32\ See supra note 27, at page 2.
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While the Exchange appreciates that the Staff Guidance articulates
an important policy goal of improving disclosures and requiring
exchanges to justify that their market data and access fee proposals
are fair and reasonable, the practical effect of the Revised Review
Process, Staff Guidance, and the Commission's related practice of
continuous suspension of new fee filings, is anti-competitive,
discriminatory, and has put in place an un-level playing field, which
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched,
legacy exchanges (``legacy exchanges'').\33\ The legacy exchanges all
established a significantly higher baseline for access and market data
fees prior to the Revised Review Process. From 2011 until the issuance
of the Staff Guidance in 2019, national securities exchanges filed, and
the Commission Staff did not abrogate or suspend (allowing such fees to
become effective), at least 92 filings \34\ to amend exchange
connectivity or port fees (or similar access fees). The support for
each of those filings was a simple statement by the relevant exchange
that the fees were constrained by
[[Page 21382]]
competitive forces.\35\ These fees remain in effect today.
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\33\ Commission Chair Gary Gensler recently reiterated the
Commission's mandate to ensure competition in the equities markets.
See ``Statement on Minimum Price Increments, Access Fee Caps, Round
Lots, and Odd-Lots'', by Chair Gary Gensler, dated December 14, 2022
(stating ``[i]n 1975, Congress tasked the Securities and Exchange
Commission with responsibility to facilitate the establishment of
the national market system and enhance competition in the securities
markets, including the equity markets'' (emphasis added)). In that
same statement, Chair Gary Gensler cited the five objectives laid
out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1),
including ensuring ``fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets
other than exchange markets . . .'' (emphasis added). Id. at note 1.
See also Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249.
\34\ This timeframe also includes challenges to over 400 rule
filings by SIFMA and Bloomberg discussed above. Sec. Indus. & Fin.
Mkts. Ass'n, Securities Exchange Act Release No. 84433, 2018 WL
5023230 (Oct. 16, 2018). Those filings were left to stand, while at
the same time, blocking newer exchanges from the ability to
establish competitive access and market data fees. See The Nasdaq
Stock Market, LLC v. SEC, Case No. 18-1292 (D.C. Cir. June 5, 2020).
The expectation at the time of the litigation was that the 400 rule
flings challenged by SIFMA and Bloomberg would need to be justified
under revised review standards.
\35\ See, e.g., Securities Exchange Act Release Nos. 74417
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26);
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061
(January 10, 2017) (SR-NYSEARCA-2016-172).
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The net result is that the non-legacy exchanges are effectively now
blocked by the Commission Staff from adopting or increasing fees to
amounts comparable to the legacy exchanges (which were not subject to
the Revised Review Process and Staff Guidance), despite providing
enhanced disclosures and rationale to support their proposed fee
changes that far exceed any such support provided by legacy exchanges.
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission
applied a ``market-based'' test that only relied upon the assumed
presence of significant competitive forces, while exchanges today are
subject to a cost-based test requiring extensive cost and revenue
disclosures, a process that is complex, inconsistently applied, and
rarely results in a successful outcome, i.e., non-suspension. The
Revised Review Process and Staff Guidance changed decades-long
Commission Staff standards for review, resulting in unfair
discrimination and placing an undue burden on inter-market competition
between legacy exchanges and non-legacy exchanges.
Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based
analysis in place of competition-based arguments to support such
changes. However, even with the added detailed cost and expense
disclosures, the Commission Staff continues to either suspend such
filings and institute disapproval proceedings, or put the exchanges in
the unenviable position of having to repeatedly withdraw and re-file
with additional detail in order to continue to charge those fees.\36\
By impeding any path forward for non-legacy exchanges to establish
commensurate non-transaction fees, or by failing to provide any
alternative means for smaller markets to establish ``fee parity'' with
legacy exchanges, the Commission is stifling competition: non-legacy
exchanges are, in effect, being deprived of the revenue necessary to
compete on a level playing field with legacy exchanges. This is
particularly harmful, given that the costs to maintain exchange systems
and operations continue to increase. The Commission Staff's change in
position impedes the ability of non-legacy exchanges to raise revenue
to invest in their systems to compete with the legacy exchanges who
already enjoy disproportionate non-transaction fee based revenue. For
example, the Cboe Exchange, Inc. (``Cboe'') reported ``access and
capacity fee'' revenue of $70,893,000 for 2020 \37\ and $80,383,000 for
2021.\38\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and
capacity fee'' revenue of $19,016,000 for 2020 \39\ and $22,843,000 for
2021.\40\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and
capacity fee'' revenue of $38,387,000 for 2020 \41\ and $44,800,000 for
2021.\42\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and
capacity fee'' revenue of $26,126,000 for 2020 \43\ and $30,687,000 for
2021.\44\ For 2021, the affiliated Cboe, C2, BZX, and EDGX (the four
largest exchanges of the Cboe exchange group) reported $178,712,000 in
``access and capacity fees'' in 2021. NASDAQ Phlx, LLC (``NASDAQ
Phlx'') reported ``Trade Management Services'' revenue of $20,817,000
for 2019.\45\ The Exchange notes it is unable to compare ``access fee''
revenues with NASDAQ Phlx (or other affiliated NASDAQ exchanges)
because after 2019, the ``Trade Management Services'' line item was
bundled into a much larger line item in PHLX's Form 1, simply titled
``Market services.'' \46\
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\36\ The Exchange has filed, and subsequently withdrawn, various
forms of this proposed fee numerous times since August 2021 with
each proposal containing hundreds of cost and revenue disclosures
never previously disclosed by legacy exchanges in their access and
market data fee filings prior to 2019.
\37\ According to Cboe's 2021 Form 1 Amendment, access and
capacity fees represent fees assessed for the opportunity to trade,
including fees for trading-related functionality. See Cboe 2021 Form
1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\38\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
\39\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
\40\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
\41\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
\42\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
\43\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
\44\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
\45\ According to PHLX, ``Trade Management Services'' includes
``a wide variety of alternatives for connectivity to and accessing
[the PHLX] markets for a fee. These participants are charged monthly
fees for connectivity and support in accordance with [PHLX's]
published fee schedules.'' See PHLX 2020 Form 1 Amendment, available
at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
\46\ See PHLX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf. The Exchange
notes that this type of Form 1 accounting appears to be designed to
obfuscate the true financials of such exchanges and has the effect
of perpetuating fee and revenue advantages of legacy exchanges.
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The much higher non-transaction fees charged by the legacy
exchanges provides them with two significant competitive advantages.
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing
and advertising on major media outlets,\47\ new products and other
innovations. Second, higher non-transaction fees provide the legacy
exchanges with greater flexibility to lower their transaction fees (or
use the revenue from the higher non-transaction fees to subsidize
transaction fee rates),\48\ which are more immediately impactful in
competition for order flow and market share, given the variable nature
of this cost on member firms. The prohibition of a reasonable path
forward denies the Exchange (and other non-legacy exchanges) this
flexibility, eliminates the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share with legacy exchanges. There is little doubt that
subjecting one exchange to a materially different standard than that
historically applied to legacy exchanges for non-transaction fees
leaves that exchange at a disadvantage in its ability to compete with
its pricing of transaction fees.
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\47\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at
https://www.cnbc.com/id/46517876.
\48\ See, e.g., Cboe Fee Schedule, Page 4, Affiliate Volume
Plan, available at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf (providing that if a market maker or its
affiliate receives a credit under Cboe's Volume Incentive Program
(``VIP''), the market maker will receive an access credit on their
BOE Bulk Ports corresponding to the VIP tier reached and the market
maker will receive a transaction fee credit on their sliding scale
market maker transaction fees) and NYSE American Options Fee
Schedule, Section III, E, Floor Broker Incentive and Rebate
Programs, available at https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf (providing
floor brokers the opportunity to prepay certain non-transaction fees
for the following calendar year by achieving certain amounts of
volume executed on NYSE American).
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While the Commission has clearly noted that the Staff Guidance is
merely guidance and ``is not a rule, regulation or statement of the . .
. Commission . . . the Commission has neither approved nor disapproved
its content
[[Page 21383]]
. . .'',\49\ this is not the reality experienced by exchanges such as
MIAX Emerald. As such, non-legacy exchanges are forced to rely on an
opaque cost-based justification standard. However, because the Staff
Guidance is devoid of detail on what must be contained in cost-based
justification, this standard is nearly impossible to meet despite
repeated good-faith efforts by the Exchange to provide substantial
amount of cost-related details. For example, the Exchange has attempted
to increase fees using a cost-based justification numerous times,
having submitted over six filings.\50\ However, despite providing 100+
page filings describing in extensive detail its costs associated with
providing the services described in the filings, Commission Staff
continues to suspend such filings, with the rationale that the Exchange
has not provided sufficient detail of its costs and without ever being
precise about what additional data points are required. The Commission
Staff appears to be interpreting the reasonableness standard set forth
in Section 6(b)(4) of the Act \51\ in a manner that is not possible to
achieve. This essentially nullifies the cost-based approach for
exchanges as a legitimate alternative as laid out in the Staff
Guidance. By refusing to accept a reasonable cost-based argument to
justify non-transaction fees (in addition to refusing to accept a
competition-based argument as described above), or by failing to
provide the detail required to achieve that standard, the Commission
Staff is effectively preventing non-legacy exchanges from making any
non-transaction fee changes, which benefits the legacy exchanges and is
anticompetitive to the non-legacy exchanges. This does not meet the
fairness standard under the Act and is discriminatory.
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\49\ See supra note 23, at note 1.
\50\ See Securities Exchange Act Release Nos. 94889 (May 11,
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15); 94717
(April 14, 2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13);
94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-
EMERALD-2022-05); 94257 (February 15, 2022), 87 FR 9678 (February
22, 2022) (SR-EMERALD-2022-04); 93772 (December 14, 2021), 86 FR
71965 (December 20, 2021) (SR-EMERALD-2021-43); 93776 (December 14,
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42); 93188
(September 29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-
2021-31); (SR-EMERALD-2021-30) (withdrawn without being noticed by
the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4,
2021) (SR-EMERALD-2021-29); 92662 (August 13, 2021), 86 FR 46726
(August 19, 2021) (SR-EMERALD-2021-25); 92645 (August 11, 2021), 86
FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
\51\ 15 U.S.C. 78f(b)(4).
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Because of the un-level playing field created by the Revised Review
Process and Staff Guidance, the Exchange believes that the Commission
Staff, at this point, should either (a) provide sufficient clarity on
how its cost-based standard can be met, including a clear and
exhaustive articulation of required data and its views on acceptable
margins,\52\ to the extent that this is pertinent; (b) establish a
framework to provide for commensurate non-transaction based fees among
competing exchanges to ensure fee parity; \53\ or (c) accept that
certain competition-based arguments are applicable given the linkage
between non-transaction fees and transaction fees, especially where
non-transaction fees among exchanges are based upon disparate standards
of review, lack parity, and impede fair competition. Considering the
absence of any such framework or clarity, the Exchange believes that
the Commission does not have a reasonable basis to deny the Exchange
this change in fees, where the proposed change would result in fees
meaningfully lower than comparable fees at competing exchanges and
where the associated non-transaction revenue is meaningfully lower than
competing exchanges.
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\52\ To the extent that the cost-based standard includes
Commission Staff making determinations as to the appropriateness of
certain profit margins, the Exchange believes that Staff should be
clear as to what they determine is an appropriate profit margin.
\53\ In light of the arguments above regarding disparate
standards of review for historical legacy non-transaction fees and
current non-transaction fees for non-legacy exchanges, a fee parity
alternative would be one possible way to avoid the current unfair
and discriminatory effect of the Staff Guidance and Revised Review
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
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In light of the above, disapproval of this would not meet the
fairness standard under the Act, would be discriminatory and places a
substantial burden on competition. The Exchange would be uniquely
disadvantaged by not being able to increase its access fees to
comparable levels (or lower levels than current market rates) to those
of other options exchanges for connectivity. If the Commission Staff
were to disapprove this proposal, that action, and not market forces,
would substantially affect whether the Exchange can be successful in
its competition with other options exchanges. Disapproval of this
filing could also be viewed as an arbitrary and capricious decision
should the Commission Staff continue to ignore its past treatment of
non-transaction fee filings before implementation of the Revised Review
Process and Staff Guidance and refuse to allow such filings to be
approved despite significantly enhanced arguments and cost
disclosures.\54\
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\54\ The Exchange's costs have clearly increased and continue to
increase, particularly regarding capital expenditures, as well as
employee benefits provided by third parties (e.g., healthcare and
insurance). Yet, practically no fee change proposed by the Exchange
to cover its ever-increasing costs has been acceptable to the
Commission Staff since 2021. The only other fair and reasonable
alternative would be to require the numerous fee filings
unquestioningly approved before the Staff Guidance and Revised
Review Process to ``develop a record,'' and to ``explain their
conclusions, based on that record, in a written decision that is
sufficient to enable us to perform our review,'' and to ensure a
comparable review process with the Exchange's filing.
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* * * * *
10Gb ULL Connectivity Fee Change
The Exchange proposes to amend the Fee Schedule to increase the
fees for Members and non-Members to access the Exchange's system
networks \55\ via a 10Gb ULL fiber connection. Specifically, the
Exchange proposes to amend Sections 5)a)-b) of the Fee Schedule to
increase the 10Gb ULL connectivity fee for Members and non-Members from
$10,000 per month to $13,500 per month (``10Gb ULL Fee'').\56\
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\55\ The Exchange's system networks consist of the Exchange's
extranet, internal network, and external network.
\56\ Market participants that purchase additional 10Gb ULL
connections as a result of this change will not be subject to the
Exchange's Member Network Connectivity Testing and Certification Fee
under Section 4)c) of the Fee Schedule. See Fee Schedule, Section
4)c), available at https://www.miaxglobal.com/markets/us-options/miax-options/fees (providing that ``Network Connectivity Testing and
Certification Fees will not be assessed in situations where the
Exchange initiates a mandatory change to the Exchange's system that
requires testing and certification. Member Network Connectivity
Testing and Certification Fees will not be assessed for testing and
certification of connectivity to the Exchange's Disaster Recovery
Facility.'').
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The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange will continue to pro-rate the fees when a
Member or non-Member makes a change to the connectivity (by adding or
deleting connections) with such pro-rated fees based on the number of
trading days that the Member or non-Member has been credentialed to
utilize any of the Exchange APIs or market data
[[Page 21384]]
feeds in the production environment through such connection, divided by
the total number of trading days in such month multiplied by the
applicable monthly rate.
Limited Service MEI Ports
Background
The Exchange also proposes to amend Section 5)d) of the Fee
Schedule to amend the monthly port fee for Limited Service MEI Ports
available to Market Makers.\57\ The Exchange currently allocates two
(2) Full Service MEI Ports \58\ and two (2) Limited Service MEI Ports
\59\ per matching engine \60\ to which each Market Maker connects.
Market Makers may also request additional Limited Service MEI Ports for
each matching engine to which they connect. The Full Service MEI Ports
and Limited Service MEI Ports all include access to the Exchange's
primary and secondary data centers and its disaster recovery center.
Market Makers may request additional Limited Service MEI Ports. Market
Makers were previously assessed a $100 monthly fee for each Limited
Service MEI Port for each matching engine above the first two Limited
Service MEI Ports that are included for free (before the proposals to
adopt a tiered fee structure).\61\
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\57\ The Exchange notes that in its prior filings (the Initial,
Second, Third, Fourth and Fifth Proposals), the Exchange proposed to
adopt a tiered-pricing structure for Limited Service MEI Ports.
\58\ The term ``Full Service MEI Ports'' means a port which
provides Market Makers with the ability to send Market Maker simple
and complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\59\ The term ``Limited Service MEI Ports'' means a port which
provides Market Makers with the ability to send simple and complex
eQuotes and quote purge messages only, but not Market Maker Quotes,
to the MIAX Emerald System. Limited Service MEI Ports are also
capable of receiving administrative information. Market Makers
initially receive two Limited Service MEI Ports per Matching Engine.
See the Definitions Section of the Fee Schedule.
\60\ The term ``Matching Engine'' means a part of the MIAX
Emerald electronic system that processes options orders and trades
on a symbol-by-symbol basis. Some Matching Engines will process
option classes with multiple root symbols, and other Matching
Engines may be dedicated to one single option root symbol (for
example, options on SPY may be processed by one single Matching
Engine that is dedicated only to SPY). A particular root symbol may
only be assigned to a single designated Matching Engine. A
particular root symbol may not be assigned to multiple Matching
Engines. See the Definitions Section of the Fee Schedule.
\61\ Prior to the Initial Proposal, the Exchange increased the
fees for both 10Gb ULL fiber connections and Limited Service MEI
Ports beginning with a series of filings on October 1, 2020 (with
the final filing made on March 24, 2021). See Securities Exchange
Act Release Nos. 91460 (April 1, 2021), 86 FR 18349 (April 8, 2021)
(SR-EMERALD-2021-11); 90184 (October 14, 2020), 85 FR 66636 (October
20, 2020) (SR-EMERALD-2020-12); 90600 (December 8, 2020), 85 FR
80831 (December 14, 2020) (SR-EMERALD-2020-17); 91032 (February 1,
2021), 86 FR 8428 (February 5, 2021) (SR-EMERALD-2021-02); and 91200
(February 24, 2021), 86 FR 12221 (March 2, 2021) (SR-EMERALD-2021-
07). Prior to that fee change, the Exchange provided Limited Service
MEI Ports for $50 per port, after the first two Limited Service MEI
Ports that are provided free of charge, and the Exchange incurred
all the costs associated to provide those first two Limited Service
MEI Ports since it commenced operations in March 2019. The Exchange
then increased the fee to $100 per Limited Service MEI Port.
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Limited Service MEI Port Fee Changes
The Exchange now proposes to amend the monthly fee per Limited
Service MEI Port and increase the number of free Limited Service MEI
Ports per matching engine from two (2) to four (4). Specifically, the
Exchange will now provide the first, second, third and fourth Limited
Service MEI Ports for each matching engine free of charge. For
additional Limited Service MEI Ports after the first four ports per
matching engine that are provided for free (i.e., beginning with the
fifth Limited Service MEI Port), the Exchange proposes to increase the
monthly fee from $100 to $420 per Limited Service MEI Port per matching
engine.\62\
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\62\ As noted in the Fee Schedule, Market Makers will continue
to be limited to fourteen Limited Service MEI Ports per Matching
Engine. The Exchange also proposes to make a ministerial clarifying
change to remove the defined term ``Additional Limited Service MEI
Ports''. The Exchange proposes to make a related change to add the
term ``Limited Service MEI Ports'' after the word ``fourteen'' in
the Fee Schedule.
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Market Makers that elect to purchase more than the number of
Limited Service Ports that are provide for free do so due to the nature
of their business and their perceived need for numerous ports to access
the Exchange. Meanwhile, Market Makers who utilize the free Limited
Service MEI Ports do so based on their business needs.
The Exchange notes that it last proposed to increase its monthly
Limited Service MEI Port fees in 2020 (other than the prior proposals
to adopt a tiered fee structure for Limited Service MEI Ports),\63\ and
such increase proposed herein is designed to recover a portion of the
ever increasing costs associated with directly accessing the Exchange.
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\63\ See supra note 61.
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The Exchange also proposes to make corresponding changes to the
Definitions section of the Fee Schedule and the paragraph describing
the cap on the number of Limited Service MEI Ports each Market Maker
may receive in Section 5)d)ii) of the Fee Schedule to account for the
proposed change to now provide the first four (4) Limited Service MEI
Ports for free per matching engine. Accordingly, the Exchange proposes
to amend the last sentence of the paragraph describing the fees for
Limited Service MEI Ports in Section 5)d)ii) of the Fee Schedule to now
state that Market Makers are limited to ten additional Limited Service
MEI Ports per matching engine, for a total of fourteen Limited Service
MEI Ports per matching engine.
Implementation
The proposed fee changes are immediately effective.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \64\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \65\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of Section 6(b)(5) of the Act \66\ in that
they are designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general protect investors
and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
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\64\ 15 U.S.C. 78f(b).
\65\ 15 U.S.C. 78f(b)(4).
\66\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes under the Revised Review Process and as set
forth in recent Staff Guidance. Based on both the BOX Order \67\ and
the Staff Guidance,\68\ the Exchange believes that the proposed fees
are consistent with the Act because they are: (i) reasonable, equitably
allocated, not unfairly discriminatory, and not an undue burden on
competition; (ii) comply with the BOX Order and the Staff Guidance; and
(iii) supported by evidence (including comprehensive revenue and cost
data and analysis) that they are fair and reasonable and will not
result in excessive pricing or supra-competitive profit.
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\67\ See supra note 22.
\68\ See supra note 23.
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The Exchange believes that exchanges, in setting fees of all types,
[[Page 21385]]
should meet high standards of transparency to demonstrate why each new
fee or fee amendment meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various fees for market participants to access an
exchange's marketplace.
In the Staff Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\69\ The Staff Guidance further states that, ``. . . even where an SRO
cannot demonstrate, or does not assert, that significant competitive
forces constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \70\ In the Staff Guidance, the Commission Staff further states
that, ``[i]f an SRO seeks to support its claims that a proposed fee is
fair and reasonable because it will permit recovery of the SRO's costs,
. . . , specific information, including quantitative information,
should be provided to support that argument.'' \71\
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\69\ Id.
\70\ Id.
\71\ Id.
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The proposed fees are reasonable because they promote parity among
exchange pricing for access, which promotes competition, including in
the Exchanges' ability to competitively price transaction fees, invest
in infrastructure, new products and other innovations, all while
allowing the Exchange to recover its costs to provide dedicated access
via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed
above, the Revised Review Process and Staff Guidance have created an
uneven playing field between legacy and non-legacy exchanges by
severely restricting non-legacy exchanges from being able to increase
non-transaction related fees to provide them with additional necessary
revenue to better compete with legacy exchanges, which largely set fees
prior to the Revised Review Process. The much higher non-transaction
fees charged by the legacy exchanges provides them with two significant
competitive advantages: (i) additional non-transaction revenue that may
be used to fund areas other than the non-transaction service related to
the fee, such as investments in infrastructure, advertising, new
products and other innovations; and (ii) greater flexibility to lower
their transaction fees by using the revenue from the higher non-
transaction fees to subsidize transaction fee rates. The latter is more
immediately impactful in competition for order flow and market share,
given the variable nature of this cost on Member firms. The absence of
a reasonable path forward to increase non-transaction fees to
comparable (or lower rates) limits the Exchange's flexibility to, among
other things, make additional investments in infrastructure and
advertising, diminishes the ability to remain competitive on
transaction fees, and hinders the ability to compete for order flow and
market share. Again, there is little doubt that subjecting one exchange
to a materially different standard than that applied to other exchanges
for non-transaction fees leaves that exchange at a disadvantage in its
ability to compete with its pricing of transaction fees.
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity and port services, the
Exchange is especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and in carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level of diligence and transparency is called for by the
requirements of Section 19(b)(1) under the Act,\72\ and Rule 19b-4
thereunder,\73\ with respect to the types of information exchanges
should provide when filing fee changes, and Section 6(b) of the
Act,\74\ which requires, among other things, that exchange fees be
reasonable and equitably allocated,\75\ not designed to permit unfair
discrimination,\76\ and that they not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\77\ 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.\78\ The Exchange
reiterates that the legacy exchanges with whom the Exchange vigorously
competes for order flow and market share, were not subject to any such
diligence or transparency in setting their baseline non-transaction
fees, most of which were put in place before the Revised Review Process
and Staff Guidance.
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\72\ 15 U.S.C. 78s(b)(1).
\73\ 17 CFR 240.19b-4.
\74\ 15 U.S.C. 78f(b).
\75\ 15 U.S.C. 78f(b)(4).
\76\ 15 U.S.C. 78f(b)(5).
\77\ 15 U.S.C. 78f(b)(8).
\78\ See supra note 23.
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As detailed below, the Exchange recently calculated its aggregate
annual costs for providing physical 10Gb ULL connectivity to the
Exchange at $15,469,330 (or approximately $1,289,111 per month, rounded
to the nearest dollar when dividing the annual cost by 12 months) and
its aggregate annual costs for providing Limited Service MEI Ports at
$2,506,232 (or approximately $208,853 per month, rounded to the nearest
dollar when dividing the annual cost by 12 months). In order to cover
the aggregate costs of providing connectivity to its users (both
Members and non-Members \79\) going forward and to make a modest
profit, as described below, the Exchange proposes to modify its Fee
Schedule to charge a fee of $13,500 per month for each physical 10Gb
ULL connection. The Exchange also proposes to modify its Fee Schedule
to amend the monthly fee for additional Limited Service MEI Ports and
provide two additional ports free of charge for a total of four free
Limited Service MEI Ports per matching engine to which each Member
connects.
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\79\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services, and thus, may access Limited Service MEI Ports on behalf
of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
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In 2020, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\80\ The
Cost Analysis
[[Page 21386]]
required a detailed analysis of the Exchange's aggregate baseline
costs, including a determination and allocation of costs for core
services provided by the Exchange--transaction execution, market data,
membership services, physical connectivity, and port access (which
provide order entry, cancellation and modification functionality, risk
functionality, the ability to receive drop copies, and other
functionality). The Exchange separately divided its costs between those
costs necessary to deliver each of these core services, including
infrastructure, software, human resources (i.e., personnel), and
certain general and administrative expenses (``cost drivers'').
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\80\ The Exchange frequently updates it Cost Analysis as
strategic initiatives change, costs increase or decrease, and market
participant needs and trading activity changes. The Exchange's most
recent Cost Analysis was conducted ahead of this filing.
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As an initial step, the Exchange determined the total cost for the
Exchange and the affiliated markets for each cost driver as part of its
2024 budget review process. The 2024 budget review is a company-wide
process that occurs over the course of many months, includes meetings
among senior management, department heads, and the Finance Team. Each
department head is required to send a ``bottom up'' budget to the
Finance Team allocating costs at the profit and loss account and vendor
levels for the Exchange and its affiliated markets based on a number of
factors, including server counts, additional hardware and software
utilization, current or anticipated functional or non-functional
development projects, capacity needs, end-of-life or end-of-service
intervals, number of members, market model (e.g., price time or pro-
rata, simple only or simple and complex markets, auction functionality,
etc.), which may impact message traffic, individual system
architectures that impact platform size,\81\ storage needs, dedicated
infrastructure versus shared infrastructure allocated per platform
based on the resources required to support each platform, number of
available connections, and employees allocated time.
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\81\ For example, MIAX Emerald maintains 12 matching engines,
MIAX Pearl Options maintains 12 matching engines, MIAX Pearl
Equities maintains 24 matching engines, and MIAX maintains 24
matching engines.
---------------------------------------------------------------------------
All of these factors result in different allocation percentages
among the Exchange and its affiliated markets, i.e., the different
percentages of the overall cost driver allocated to the Exchange and
its affiliated markets will cause the dollar amount of the overall cost
allocated among the Exchange and its affiliated markets to also differ.
Because the Exchange's parent company currently owns and operates four
separate and distinct marketplaces, the Exchange must determine the
costs associated with each actual market--as opposed to the Exchange's
parent company simply concluding that all costs drivers are the same at
each individual marketplace and dividing total cost by four (4) (evenly
for each marketplace). Rather, the Exchange's parent company determines
an accurate cost for each marketplace, which results in different
allocations and amounts across exchanges for the same cost drivers, due
to the unique factors of each marketplace as described above. This
allocation methodology also ensures that no cost would be allocated
twice or double-counted between the Exchange and its affiliated
markets. The Finance Team then consolidates the budget and sends it to
senior management, including the Chief Financial Officer and Chief
Executive Officer, for review and approval. Next, the budget is
presented to the Board of Directors and the Finance and Audit
Committees for each exchange for their approval. The above steps
encompass the first step of the cost allocation process.
The next step involves determining what portion of the cost
allocated to the Exchange pursuant to the above methodology is to be
allocated to each core service, e.g., connectivity and ports, market
data, and transaction services. The Exchange and its affiliated markets
adopted an allocation methodology with thoughtful and consistently
applied principles to guide how much of a particular cost amount
allocated to the Exchange should be allocated within the Exchange to
each core service. This is the final step in the cost allocation
process and is applied to each of the cost drivers set forth below. For
instance, fixed costs that are not driven by client activity (e.g.,
message rates), such as data center costs, were allocated more heavily
to the provision of physical connectivity (61.9% of total expense
amount allocated to 10Gb ULL connectivity), with smaller allocations to
additional Limited Service MEI Ports (4.0%), and the remainder to the
provision of other connectivity, other ports, transaction execution,
membership services and market data services (34.1%). This next level
of the allocation methodology at the individual exchange level also
took into account factors similar to those set forth under the first
step of the allocation methodology process described above, to
determine the appropriate allocation to connectivity or market data
versus allocations for other services. This allocation methodology was
developed through an assessment of costs with senior management
intimately familiar with each area of the Exchange's operations. After
adopting this allocation methodology, the Exchange then applied an
allocation of each cost driver to each core service, resulting in the
cost allocations described below. Each of the below cost allocations is
unique to the Exchange and represents a percentage of overall cost that
was allocated to the Exchange pursuant to the initial allocation
described above.
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity and
port services, membership fees, regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue. The Exchange also notes that as a general
matter each of these sources of revenue is based on services that are
interdependent. For instance, the Exchange's system for executing
transactions is dependent on physical hardware and connectivity; only
Members and parties that they sponsor to participate directly on the
Exchange may submit orders to the Exchange; many Members (but not all)
consume market data from the Exchange in order to trade on the
Exchange; and the Exchange consumes market data from external sources
in order to comply with regulatory obligations. Accordingly, given this
interdependence, the allocation of costs to each service or revenue
source required judgment of the Exchange and was weighted based on
estimates of the Exchange that the Exchange believes are reasonable, as
set forth below. While there is no standardized and generally accepted
methodology for the allocation of an exchange's costs, the Exchange's
methodology is the result of an extensive review and analysis and will
be consistently applied going forward for any other potential fee
proposals. In the absence of the Commission attempting to specify a
methodology for the allocation of exchanges' interdependent costs, the
Exchange will continue to be left with its best efforts to attempt to
conduct such an allocation in a thoughtful and reasonable manner.
Through the Exchange's extensive updated Cost Analysis, which was
again recently further refined, the Exchange analyzed every expense
item in the Exchange's general expense ledger to determine whether each
such expense relates to the provision of connectivity
[[Page 21387]]
and port services, and, if such expense did so relate, what portion (or
percentage) of such expense actually supports the provision of
connectivity and port services, and thus bears a relationship that is,
``in nature and closeness,'' directly related to network connectivity
and port services. In turn, the Exchange allocated certain costs more
to physical connectivity and others to ports, while certain costs were
only allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the aggregate monthly cost
to provide 10Gb ULL connectivity and Limited Service MEI Port services,
including both physical 10Gb connections and Limited Service MEI Ports,
is $1,497,964 (utilizing the rounded numbers when dividing the annual
cost for 10Gb ULL connectivity and annual cost for Limited Service MEI
Ports by 12 months, then adding both numbers together), as further
detailed below.
Costs Related to Offering Physical 10Gb ULL Connectivity
The following chart details the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
10Gb ULL connectivity via an unshared network as well as the percentage
of the Exchange's overall costs that such costs represent for each cost
driver (e.g., as set forth below, the Exchange allocated approximately
28.9% of its overall Human Resources cost to offering 10Gb ULL physical
connectivity).
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost \a\ monthly cost \b\ % Of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................... $6,440,638 $536,720 28.9
Connectivity (external fees, cabling, switches, etc.)............. 57,736 4,811 61.9
Internet Services and External Market Data........................ 448,208 37,351 84.8
Data Center....................................................... 949,073 79,089 61.9
Hardware and Software Maintenance and Licenses.................... 890,310 74,193 50.9
Depreciation...................................................... 2,147,438 178,953 61.0
Allocated Shared Expenses......................................... 4,535,927 377,994 51.5
---------------------------------------------
Total......................................................... 15,469,330 1,289,111 40.2
----------------------------------------------------------------------------------------------------------------
\a\ The Annual Cost includes figures rounded to the nearest dollar.
\b\ The Monthly Cost was determined by dividing the Annual Cost for each line item by twelve (12) months and
rounding up or down to the nearest dollar.
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering physical 10Gb ULL
connectivity. While some costs were attempted to be allocated as
equally as possible among the Exchange and its affiliated markets, the
Exchange notes that some of its cost allocation percentages for certain
cost drivers differ when compared to the same cost drivers for the
Exchange's affiliated markets in their similar proposed fee changes for
connectivity and ports. This is because the Exchange's cost allocation
methodology utilizes the actual projected costs of the Exchange (which
are specific to the Exchange, and are independent of the costs
projected and utilized by the Exchange's affiliated markets) to
determine its actual costs, which may vary across the Exchange and its
affiliated markets based on factors that are unique to each
marketplace. The Exchange provides additional explanation below
(including the reason for the deviation) for the significant
differences.
The Exchange also notes that expenses included in its 2024 fiscal
year budget and this proposal are generally higher than its 2023 fiscal
year budget and Cost Analysis included in prior filings. As more fully
described below and throughout this filing, this is due to a number of
factors, such as, critical vendors and suppliers increasing costs they
charge the Exchange, significant exchange staff headcount increases,
increased data center costs from the Exchange's data center providers
in multiple locations and facilities, higher technology and
communications costs, planned hardware refreshes, and system capacity
upgrades that increase depreciation expense. Specifically, with regard
to employee compensation, the 2024 fiscal year budget includes
additional expenses related to increased headcount and new hires that
are needed to support the Exchange as it continues to grow (the
Exchange and its affiliated companies are projected to hire over 60
additional staff in 2024). Hardware and software expenses have also
increased primarily due to price increases from critical vendors and
equipment suppliers. Further, the Exchange budgeted for additional
hardware and software needs to support the Exchange's continued growth
and expansion. Depreciation and amortization have likewise increased
due to recent and planned refreshes in Exchange hardware and software.
This new equipment and software then becomes depreciable, as described
below. Data center costs have also increased due the following: the
Exchange expanding its footprint within its data center; and the data
center vendor increasing the costs it charges the Exchange. Lastly,
allocated shared expenses have increased due to the overall budgeted
increase in costs from 2023 to 2024 necessary to operate and support
the Exchange as described below.
The updated Cost Analysis using projected 2024 expenses caused some
allocation percentages in this filing to differ slightly (<=2.8%) from
past filings that relied on projected 2023 expenses. This is due to
various reasons. For example, the slight differences in allocation
percentage for the Human Resources cost driver is due to both changes
in headcount in 2024 and also changes to the percentage of employee
time allocated to these services based on changing projects and
initiatives in 2024 versus 2023. For example, the Exchange recently
hired a Head of Data Services whose time is entirely allocated to the
market data cost driver. These types of changes in the Human Resources
cost driver impact the final percentage amount of total cost allocated
towards overall connectivity, including 10Gb ULL connectivity. There
are no changes to the overall percentage allocation amounts applied to
the product groups (e.g., network connectivity) for each of the non-
Human Resources cost drivers in the current filing based on 2024
expense versus the prior 2023 filings. However, within each of those
product groups, slight changes to the amount of usage of the individual
products within that group (in 2024 versus 2023) will have an impact on
the individual
[[Page 21388]]
product's percentage allocation within that entire product group. For
example, a decrease in 1Gb connectivity lines in 2024 versus 2023 will
have an impact on the percentage allocation of costs to 1Gb lines in
2024 versus 2023, which will also impact the individual percentage
allocation of costs to 10Gb ULL lines, within the entire product group.
Despite these minor shifts in product usage and changes in headcount
and employee mix which resulted in non-material changes in percentage
allocation amounts, the Exchange applied the same rules and principles
to its 2024 Cost Analysis versus its 2023 Cost Analysis.
Human Resources
The Exchange notes that it and its affiliated markets anticipate
that by year-end 2024, there will be 289 employees (excluding employees
at non-options/equities exchange subsidiaries of Miami International
Holdings, Inc. (``MIH''), the holding company of the Exchange and its
affiliated markets), and each department leader has direct knowledge of
the time spent by each employee with respect to the various tasks
necessary to operate the Exchange. Specifically, twice a year, and as
needed with additional new hires and new project initiatives, in
consultation with employees as needed, managers and department heads
assign a percentage of time to every employee and then allocate that
time amongst the Exchange and its affiliated markets to determine each
market's individual Human Resources expense. Then, managers and
department heads assign a percentage of each employee's time allocated
to the Exchange into buckets including network connectivity, ports,
market data, and other exchange services. This process ensures that
every employee is 100% allocated, ensuring there is no double counting
between the Exchange and its affiliated markets.
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity). As described more fully above, the Exchange's parent
company allocates costs to the Exchange and its affiliated markets and
then a portion of the Human Resources costs allocated to the Exchange
is then allocated to connectivity. From that portion allocated to the
Exchange that applied to connectivity, the Exchange then allocated a
weighted average of 48% of each employee's time from the above group to
10Gb ULL connectivity.
The Exchange also allocated Human Resources costs to provide
physical connectivity to a limited subset of personnel with ancillary
functions related to establishing and maintaining such connectivity
(such as information security, sales, membership, and finance
personnel). The Exchange allocated cost on an employee-by-employee
basis (i.e., only including those personnel who support functions
related to providing physical connectivity) and then applied a smaller
allocation to such employees' time to 10Gb ULL connectivity (less than
18%). This other group of personnel with a smaller allocation of Human
Resources costs also have a direct nexus to 10Gb ULL connectivity,
whether it is a sales person selling a connection, finance personnel
billing for connectivity or providing budget analysis, or information
security ensuring that such connectivity is secure and adequately
defended from an outside intrusion.
The estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing physical connectivity, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of time such employees devote to those
tasks. This includes personnel from the Exchange departments that are
predominately involved in providing 1Gb and 10Gb ULL connectivity:
Business Systems Development, Trading Systems Development, Systems
Operations and Network Monitoring, Network and Data Center Operations,
Listings, Trading Operations, and Project Management. Again, the
Exchange allocated 48% of each of their employee's time assigned to the
Exchange for 10Gb ULL connectivity, as stated above. Employees from
these departments perform numerous functions to support 10Gb ULL
connectivity, such as the installation, re-location, configuration, and
maintenance of 10Gb ULL connections and the hardware they access. This
hardware includes servers, routers, switches, firewalls, and monitoring
devices. These employees also perform software upgrades, vulnerability
assessments, remediation and patch installs, equipment configuration
and hardening, as well as performance and capacity management. These
employees also engage in research and development analysis for
equipment and software supporting 10Gb ULL connectivity and design, and
support the development and on-going maintenance of internally-
developed applications as well as data capture and analysis, and Member
and internal Exchange reports related to network and system
performance. The above list of employee functions is not exhaustive of
all the functions performed by Exchange employees to support 10Gb ULL
connectivity, but illustrates the breath of functions those employees
perform in support of the above cost and time allocations.
Lastly, the Exchange notes that senior level executives' time was
only allocated to the 10Gb ULL connectivity related Human Resources
costs to the extent that they are involved in overseeing tasks related
to providing physical connectivity. The Human Resources cost was
calculated using a blended rate of compensation reflecting salary,
equity and bonus compensation, benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost driver includes external fees paid to connect
to other exchanges and third parties, cabling and switches required to
operate the Exchange. The Connectivity cost driver is more narrowly
focused on technology used to complete connections to the Exchange and
to connect to external markets. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity providers for
connectivity to the entire U.S. options industry, and infrastructure
services for critical components of the network that are necessary to
provide and maintain its System Networks and access to its System
Networks via 10Gb ULL connectivity. Specifically, the Exchange utilizes
connectivity providers to connect to other national securities
exchanges and the Options Price Reporting Authority (``OPRA''). The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity provided by these service providers is
critical to the Exchanges daily operations and performance of its
System Networks to which market participants connect to via 10Gb ULL
connectivity. Without these services providers, the Exchange would not
be able to connect to other national
[[Page 21389]]
securities exchanges, market data providers or OPRA and, therefore,
would not be able to operate and support its System Networks. The
Exchange does not employ a separate fee to cover its connectivity
provider expense and recoups that expense, in part, by charging for
10Gb ULL connectivity.
Internet Services and External Market Data
The next cost driver consists of internet Services and external
market data. The internet services cost driver includes third-party
service providers that provide the internet, fiber and bandwidth
connections between the Exchange's networks, primary and secondary data
centers, and office locations in Princeton and Miami.
External market data includes fees paid to third parties, including
other exchanges, to receive market data. The Exchange includes external
market data fee costs towards the provision of 10Gb ULL connectivity
because such market data is necessary for certain services related to
connectivity, including pre-trade risk checks and checks for other
conditions (e.g., re-pricing of orders to avoid locked or crossed
markets and trading collars). Since external market data from other
exchanges is consumed at the Exchange's matching engine level, (to
which 10Gb ULL connectivity provides access) in order to validate
orders before additional orders enter the matching engine or are
executed, the Exchange believes it is reasonable to allocate an amount
of such costs to 10Gb ULL connectivity.
The Exchange relies on various content service providers for data
feeds for the entire U.S. options industry, as well as content for
critical components of the network that are necessary to provide and
maintain its System Networks and access to its System Networks via 10Gb
ULL connectivity. Specifically, the Exchange utilizes content service
providers to receive market data from OPRA, other exchanges and market
data providers. The Exchange understands that these service providers
provide services to most, if not all, of the other U.S. exchanges and
other market participants. Market data provided these service providers
is critical to the Exchanges daily operations and performance of its
System Networks to which market participants connect to via 10Gb ULL
connectivity. Without these services providers, the Exchange would not
be able to receive market data and, therefore, would not be able to
operate and support its System Networks. The Exchange does not employ a
separate fee to cover its content service provider expense and recoups
that expense, in part, by charging for 10Gb ULL connectivity.
Lastly, the Exchange notes that the actual dollar amounts allocated
as part of the second step of the 2024 budget process differ among the
Exchange and its affiliated markets for the internet Services and
External Market Data cost driver, even though, but for the Exchange,
the allocation percentages are generally consistent across markets
(e.g., MIAX Emerald, MIAX, and MIAX Pearl Options allocated 84.8%,
71.3%, and 74.8, respectively, to the same cost driver). This is
because: (i) a different percentage of the overall internet Services
and External Market Data cost driver was allocated to the Exchange and
its affiliated markets due to the factors set forth under the first
step of the 2024 budget review process described above (unique
technical architecture, market structure, and business requirements of
each marketplace); and (ii) the Exchange itself allocated a larger
portion of this cost driver to 10Gb ULL connectivity because of recent
initiatives to improve the latency and determinism of its systems. The
Exchange notes while the percentage it allocated to the internet
Services and External Market Data cost driver is greater than its
affiliated markets, the overall dollar amount allocated to the Exchange
under the initial step of the 2024 budget process is lower than its
affiliated markets.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (61.9%) to
physical 10Gb ULL connectivity because the third-party data centers and
the Exchange's physical equipment contained therein is the most direct
cost in providing physical access to the Exchange. In other words, for
the Exchange to operate in a dedicated space with connectivity by
market participants to a physical trading platform, the data centers
are a very tangible cost, and in turn, if the Exchange did not maintain
such a presence then physical connectivity would be of no value to
market participants.
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange.\82\ The Exchange notes that this
allocation is less than MIAX Pearl Options by a significant amount, but
slightly more than MIAX, as MIAX Pearl Options allocated 59.8% of its
Hardware and Software Maintenance and License expense towards 10Gb ULL
connectivity, while MIAX and MIAX Emerald allocated 48.5% and 50.9%,
respectively, to the same category of expense. This is because MIAX
Pearl Options is in the process of replacing and upgrading various
hardware and software used to operate its options trading platform in
order to maintain premium network performance. At the time of this
filing, MIAX Pearl Options is undergoing a major hardware refresh,
replacing older hardware with new hardware. This hardware includes
servers, network switches, cables, optics, protocol data units, and
cabinets, to maintain a state-of-the-art technology platform. Because
of the timing of the hardware refresh with the timing of this filing,
the Exchange has materially higher expense than its affiliates.
---------------------------------------------------------------------------
\82\ This expense may be less than the Exchange's affiliated
markets, specifically MIAX Pearl Options because, unlike the
Exchange, MIAX Pearl Options maintains an additional gateway to
accommodate its member's access and connectivity needs. This added
gateway contributes to the difference in allocations between the
Exchange and MIAX Pearl Options. This expense also differs in dollar
amount among the Exchange, MIAX Pearl Options, and MIAX because each
market may maintain and utilize a different amount of hardware and
software based on its market model and infrastructure needs. The
Exchange allocated a percentage of the overall cost based on actual
amounts of hardware and software utilized by that market, which
resulted in different cost allocations and dollar amounts.
---------------------------------------------------------------------------
Depreciation
All physical assets, software, and hardware used to provide 10Gb
ULL connectivity, which also includes assets used for testing and
monitoring of Exchange infrastructure, were valued at cost, and
depreciated or leased over periods ranging from three to five years.
Thus, the depreciation cost primarily relates to servers necessary to
operate the Exchange, some of which are owned by the Exchange and some
of which are leased by the Exchange in order to allow efficient
periodic technology refreshes. The Exchange also included in the
Depreciation cost driver certain budgeted improvements that the
Exchange intends to capitalize and depreciate with respect to 10Gb ULL
[[Page 21390]]
connectivity in the near-term. As with the other allocated costs in the
Exchange's updated Cost Analysis, the Depreciation cost was therefore
narrowly tailored to depreciation related to 10Gb ULL connectivity. As
noted above, the Exchange allocated 61.0% of its allocated depreciation
costs to providing physical 10Gb ULL connectivity.
The Exchange also notes that this allocation differs from its
affiliated markets due to a number of factors, such as the age of
physical assets and software (e.g., older physical assets and software
were previously depreciated and removed from the allocation), or
certain system enhancements that required new physical assets and
software, thus providing a higher contribution to the depreciated cost.
For example, the percentages the Exchange and its affiliate, MIAX,
allocated to the depreciation of hardware and software used to provide
10Gb ULL connectivity are similar. However, the Exchange's dollar
amount is lower than that of MIAX by approximately $35,508 per month
due to two factors: first, MIAX has undergone a technology refresh
since the time MIAX Emerald launched in February 2019, leading MIAX to
have more hardware than software that is subject to depreciation.
Second, MIAX maintains 24 matching engines while MIAX Emerald maintains
only 12 matching engines. This also results in more of MIAX's hardware
and software being subject to depreciation than MIAX Emerald's hardware
and software due to the greater amount of equipment and software
necessary to support the greater number of matching engines on MIAX.
Allocated Shared Expenses
Finally, as with other exchange products and services, a portion of
general shared expenses was allocated to overall physical connectivity
costs. These general shared costs are integral to exchange operations,
including its ability to provide physical connectivity. Costs included
in general shared expenses include office space and office expenses
(e.g., occupancy and overhead expenses), utilities, recruiting and
training, marketing and advertising costs, professional fees for legal,
tax and accounting services (including external and internal audit
expenses), and telecommunications. Similarly, the cost of paying
directors to serve on the Exchange's Board of Directors is also
included in the Exchange's general shared expense cost driver.\83\
These general shared expenses are incurred by the Exchange's parent
company, MIH, as a direct result of operating the Exchange and its
affiliated markets.
---------------------------------------------------------------------------
\83\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors to providing physical
connectivity. See Securities Exchange Act Release No. 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26). The Exchange does not calculate is expenses at that granular a
level. Instead, director costs are included as part of the overall
general allocation.
---------------------------------------------------------------------------
The Exchange employed a process to determine a reasonable
percentage to allocate general shared expenses to 10Gb ULL connectivity
pursuant to its multi-layered allocation process. First, general
expenses were allocated among the Exchange and affiliated markets as
described above. Then, the general shared expense assigned to the
Exchange was allocated across core services of the Exchange, including
connectivity. Then, these costs were further allocated to sub-
categories within the final categories, i.e., 10Gb ULL connectivity as
a sub-category of connectivity. In determining the percentage of
general shared expenses allocated to connectivity that ultimately apply
to 10Gb ULL connectivity, the Exchange looked at the percentage
allocations of each of the cost drivers and determined a reasonable
allocation percentage. The Exchange also held meetings with senior
management, department heads, and the Finance Team to determine the
proper amount of the shared general expense to allocate to 10GBb ULL
connectivity. The Exchange, therefore, believes it is reasonable to
assign an allocation, in the range of allocations for other cost
drivers, while continuing to ensure that this expense is only allocated
once. Again, the general shared expenses are incurred by the Exchange's
parent company as a result of operating the Exchange and its affiliated
markets and it is therefore reasonable to allocate a percentage of
those expenses to the Exchange and ultimately to specific product
offerings such as 10Gb ULL connectivity.
Again, a portion of all shared expenses were allocated to the
Exchange (and its affiliated markets) which, in turn, allocated a
portion of that overall allocation to all physical connectivity on the
Exchange. The Exchange then allocated 51.5% of the portion allocated to
physical connectivity to 10Gb ULL connectivity. The Exchange believes
this allocation percentage is reasonable because, while the overall
dollar amount may be higher than other cost drivers, the 51.5% is based
on and in line with the percentage allocations of each of the
Exchange's other cost drivers. The percentage allocated to 10Gb ULL
connectivity also reflects its importance to the Exchange's strategy
and necessity towards the nature of the Exchange's overall operations,
which is to provide a resilient, highly deterministic trading system
that relies on faster 10Gb ULL connectivity than the Exchange's
competitors to maintain premium performance. This allocation reflects
the Exchange's focus on providing and maintaining high performance
network connectivity, of which 10Gb ULL connectivity is a main
contributor. The Exchange differentiates itself by offering a
``premium-product'' network experience, as an operator of a high
performance, ultra-low latency network with unparalleled system
throughput, which system networks can support access to three distinct
options markets and multiple competing market-makers having affirmative
obligations to continuously quote over 1,100,000 distinct trading
products (per exchange), and the capacity to handle approximately 18
million quote messages per second. The ``premium-product'' network
experience enables users of 10Gb ULL connections to receive the network
monitoring and reporting services for those approximately 1,100,000
distinct trading products. These value add services are part of the
Exchange's strategy for offering a high performance trading system,
which utilizes 10Gb ULL connectivity.
The Exchange notes that the 51.5% allocation of general shared
expenses for physical 10Gb ULL connectivity is higher than that
allocated to general shared expenses for Limited Service MEI Ports.
This is based on its allocation methodology that weighted costs
attributable to each core service. While physical connectivity has
several areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Center, as described above), Limited
Service MEI Ports do not require as many broad or indirect resources as
other core services.
* * * * *
Approximate Cost per 10Gb ULL Connection per Month
After determining the approximate allocated monthly cost related to
10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of
$1,289,111 was divided by the number of physical 10Gb ULL connections
the Exchange maintained in December 2023 (102), to arrive at a cost of
approximately $12,638 per month, per physical 10Gb ULL connection. Due
to the nature of this particular cost, this allocation methodology
results in an allocation among the Exchange and its affiliated
[[Page 21391]]
markets based on set quantifiable criteria, i.e., actual number of 10Gb
ULL connections.
* * * * *
Costs Related to Offering Limited Service MEI Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Limited Service
MEI Ports as well as the percentage of the Exchange's overall costs
such costs represent for such area (e.g., as set forth below, the
Exchange allocated approximately 6.7% of its overall Human Resources
cost to offering Limited Service MEI Ports).
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost \c\ monthly cost \d\ % Of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................... $1,495,643 $124,637 6.7
Connectivity (external fees, cabling, switches, etc.)............. 2,643 220 2.8
Internet Services and External Market Data........................ 14,965 1,247 2.8
Data Center....................................................... 62,061 5,172 4.0
Hardware and Software Maintenance and Licenses.................... 49,543 4,129 2.8
Depreciation...................................................... 112,425 9,369 3.2
Allocated Shared Expenses......................................... 768,952 64,079 8.7
---------------------------------------------
Total......................................................... 2,506,232 208,853 6.5
----------------------------------------------------------------------------------------------------------------
\c\See supra note a (describing rounding of Annual Costs).
\d\ See supra note b (describing rounding of Monthly Costs based on Annual Costs).
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering Limited Service
MEI Ports. While some costs were attempted to be allocated as equally
as possible among the Exchange and its affiliated markets, the Exchange
notes that some of its cost allocation percentages for certain cost
drivers differ when compared to the same cost drivers described by the
Exchange's affiliated markets in their similar proposed fee changes for
connectivity and ports. This is because the Exchange's cost allocation
methodology utilizes the actual projected costs of the Exchange (which
are specific to the Exchange, and are independent of the costs
projected and utilized by the Exchange's affiliated markets) to
determine its actual costs, which may vary across the Exchange and its
affiliated markets based on factors that are unique to each
marketplace. The Exchange provides additional explanation below
(including the reason for the deviation) for the significant
differences.
The Exchange also notes that expenses included in its 2024 fiscal
year budget and this proposal are generally higher than its 2023 fiscal
year budget and Cost Analysis included in prior filings. As more fully
described below and throughout this filing, this is due to a number of
factors, such as, critical vendors and suppliers increasing costs they
charge the Exchange, significant exchange staff headcount increases,
increased data center costs from the Exchange's data center providers
in multiple locations and facilities, higher technology and
communications costs, planned hardware refreshes, and system capacity
upgrades that increase depreciation expense. Specifically, with regard
to employee compensation, the 2024 fiscal year budget includes
additional expenses related to increased headcount and new hires that
are needed to support the Exchange as it continues to grow (the
Exchange and its affiliated companies are projected to hire over 60
additional staff in 2024). Hardware and software expenses have also
increased primarily due to price increases from critical vendors and
equipment suppliers. Further, the Exchange budgeted for additional
hardware and software needs to support the Exchange's continued growth
and expansion. Depreciation and amortization have likewise increased
due to recent and planned refreshes in Exchange hardware and software.
This new equipment and software then becomes depreciable, as described
below. Data center costs have also increased due the following: the
Exchange expanding its footprint within its data center; and the data
center vendor increasing the costs it charges the Exchange. Lastly,
allocated shared expenses have increased due to the overall budgeted
increase in costs from 2023 to 2024 necessary to operate and support
the Exchange as described below.
The updated Cost Analysis using projected 2024 expenses caused some
allocation percentages in this filing to differ slightly (<=1.6%) from
past filings that relied on projected 2023 expenses. This is due to
various reasons. For example, the slight differences in allocation
percentage for the Human Resources cost driver is due to both changes
in headcount in 2024 and also changes to the percentage of employee
time allocated to these services based on changing projects and
initiatives in 2024 versus 2023. For example, the Exchange recently
hired a Head of Data Services whose time is entirely allocated to the
market data cost driver. These types of changes in the Human Resources
cost driver impact the final percentage amount of total cost allocated
towards overall connectivity, including Limited Service MEI Ports.
There are no changes to the overall percentage allocation amounts
applied to the product groups (e.g., network connectivity) for each of
the non-Human Resources cost drivers in the current filing based on
2024 expense versus the prior 2023 filings. However, within each of
those product groups, slight changes to the amount of usage of the
individual products within that group (in 2024 versus 2023) will have
an impact on the individual product's percentage allocation within that
entire product group. For example, a decrease in Limited Service MEI
Port usage in 2024 versus 2023 will have an impact on the percentage
allocation of costs to those same Limited Service MEI Ports in 2024
versus 2023, which will also impact the individual percentage
allocation of costs to other ports offered by the Exchange, within the
entire product group (e.g., FIX Ports, Full Service MEI Ports, Purge
Ports, Clearing Trade Drop Ports, and FIX Drop Copy Ports). Despite
these minor shifts in product usage and changes in headcount and
employee mix which resulted in non-material changes in percentage
allocation amounts, the Exchange applied the same rules and principles
to its 2024 Cost Analysis versus its 2023 Cost Analysis.
Human Resources
With respect to Limited Service MEI Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose
[[Page 21392]]
functions include providing Limited Service MEI Ports and maintaining
performance thereof (including a broader range of employees such as
technical operations personnel, market operations personnel, and
software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). Just
as described above for 10Gb ULL connectivity, the estimates of Human
Resources cost were again determined by consulting with department
leaders, determining which employees are involved in tasks related to
providing Limited Service MEI Ports and maintaining performance
thereof, and confirming that the proposed allocations were reasonable
based on an understanding of the percentage of their time such
employees devote to tasks related to providing Limited Service MEI
Ports and maintaining performance thereof. This includes personnel from
the following Exchange departments that are predominately involved in
providing Limited Service MEI Ports: Business Systems Development,
Trading Systems Development, Systems Operations and Network Monitoring,
Network and Data Center Operations, Listings, Trading Operations, and
Project Management. The Exchange notes that senior level executives
were allocated Human Resources costs to the extent they are involved in
overseeing tasks specifically related to providing Limited Service MEI
Ports. Senior level executives were only allocated Human Resources
costs to the extent that they are involved in managing personnel
responsible for tasks integral to providing and maintaining Limited
Service MEI Ports. The Human Resources cost was again calculated using
a blended rate of compensation reflecting salary, equity and bonus
compensation, benefits, payroll taxes, and 401(k) matching
contributions.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost includes external fees paid to connect to
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. For purposes of Limited Service MEI
Ports, the Exchange also includes a portion of its costs related to
external market data. External market data includes fees paid to third
parties, including other exchanges, to receive and consume market data
from other markets. The Exchange includes external market data costs
towards the provision of Limited Service MEI Ports because such market
data is necessary (in addition to physical connectivity) to offer
certain services related to such ports, such as validating orders on
entry against the NBBO and checking for other conditions (e.g., halted
securities).\84\ Thus, since market data from other exchanges is
consumed at the Exchange's Limited Service MEI Port level in order to
validate orders, before additional processing occurs with respect to
such orders, the Exchange believes it is reasonable to allocate a small
amount of such costs to Limited Service MEI Ports.
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\84\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
See Securities Exchange Act Release No. 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26).
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The Exchange notes that the allocation for the internet Services
and External Market Data cost driver is greater than that of its
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 2.8% of its
internet Services and External Market Data expense towards Limited
Service MEI Ports, while MIAX Pearl Options allocated 1.1% to its Full
Service MEO Ports for the same cost driver. The allocation percentages
set forth above differ because they directly correspond with the number
of applicable ports utilized on each exchange. For December 2023, MIAX
Emerald Market Makers utilized 1,070 Limited Service MEI ports and MIAX
Market Makers utilized 1,785 Limited Service MEI ports. When compared
to Full Service Port (Bulk and Single) usage, for December 2023, MIAX
Pearl Options Members utilized only 360 Full Service MEO Ports (Bulk
and Single), far fewer than number of Limited Service MEI Ports
utilized by Market Makers on MIAX and MIAX Emerald, thus resulting in a
smaller cost allocation. There is increased cost associated with
supporting a higher number of ports (requiring more hardware and other
technical infrastructure and internet Service), thus the Exchange
allocates a higher percentage of expense than MIAX Pearl Options, which
has a lower port count.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide Limited Service MEI Ports in the third-party data
centers where it maintains its equipment as well as related costs for
market data to then enter the Exchange's system via Limited Service MEI
Ports (the Exchange does not own the Primary Data Center or the
Secondary Data Center, but instead, leases space in data centers
operated by third parties).
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
The Exchange notes that this allocation is greater than its
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 2.8% of its
Hardware and Software Maintenance and License expense towards Limited
Service MEI Ports, while MIAX Pearl Options allocated 1.1% to its Full
Service MEO Ports (Bulk and Single) for the same category of expense.
The allocation percentages set forth above differ because they
correspond with the number of applicable ports utilized on each
exchange. For December 2023, MIAX Market Makers utilized 1,785 Limited
Service MEI ports and MIAX Emerald Market Makers utilized 1,070 Limited
Service MEI Ports. When compared to Full Service Port (Bulk and Single)
usage, for December 2023, MIAX Pearl Options Members utilized only 260
Full Service MEO Ports (Bulk and Single), far fewer than number of
Limited Service MEI Ports utilized by Market Makers on MIAX and MIAX
Emerald, thus resulting in a smaller cost allocation. There is
increased cost associated with supporting a higher number of ports
(requiring more hardware and other technical infrastructure), thus the
Exchange allocates a higher percentage of expense than MIAX Pearl
Options, which has a lower port count.
Depreciation
The vast majority of the software the Exchange uses to provide
Limited Service MEI Ports has been developed in-house and the cost of
such development, which takes place over an extended period of time and
includes not just development work, but also quality assurance and
testing to ensure the software works as intended, is depreciated over
time once the software is activated in the production
[[Page 21393]]
environment. Hardware used to provide Limited Service MEI Ports
includes equipment used for testing and monitoring of order entry
infrastructure and other physical equipment the Exchange purchased and
is also depreciated over time.
All hardware and software, which also includes assets used for
testing and monitoring of order entry infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 3.2% of
all depreciation costs to providing Limited Service MEI Ports. The
Exchange allocated depreciation costs for depreciated software
necessary to operate the Exchange because such software is related to
the provision of Limited Service MEI Ports. As with the other allocated
costs in the Exchange's updated Cost Analysis, the Depreciation cost
driver was therefore narrowly tailored to depreciation related to
Limited Service MEI Ports.
The Exchange notes that this allocation differs from its affiliated
markets due to a number of factors, such as the age of physical assets
and software (e.g., older physical assets and software were previously
depreciated and removed from the allocation), or certain system
enhancements that required new physical assets and software, thus
providing a higher contribution to the depreciated cost. For example,
the Exchange notes that the percentages it and its affiliate, MIAX,
allocated to the depreciation cost driver for Limited Service MEI Ports
differ by only 1.7%. However, MIAX's approximate dollar amount is
greater than that of MIAX Emerald by approximately $8,773er month. This
is due to two primary factors. First, MIAX has under gone a technology
refresh since the time MIAX Emerald launched in February 2019, leading
to it having more hardware that software that is subject to
depreciation. Second, MIAX maintains 24 matching engines while MIAX
Emerald maintains only 12 matching engines. This also results in more
of MIAX's hardware and software being subject to depreciation than MIAX
Emerald's hardware and software due to the greater amount of equipment
and software necessary to support the greater number of matching
engines on the Exchange.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall Limited Service MEI Ports costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide Limited Service MEI Ports. The costs included in
general shared expenses include general expenses of the Exchange,
including office space and office expenses (e.g., occupancy and
overhead expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 9% of the overall cost for
directors was allocated to providing Limited Service MEI Ports. The
Exchange notes that the 8.7% allocation of general shared expenses for
Limited Service MEI Ports is lower than that allocated to general
shared expenses for physical connectivity based on its allocation
methodology that weighted costs attributable to each Core Service based
on an understanding of each area. While Limited Service MEI Ports have
several areas where certain tangible costs are heavily weighted towards
providing such service (e.g., Data Center, as described above), 10Gb
ULL connectivity requires a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange.
Lastly, the Exchange notes that this allocation is greater than its
affiliate, MIAX Pearl Options, as MIAX Emerald allocated 8.7% of its
Allocated Shared Expense towards Limited Service MEI Ports, while MIAX
Pearl Options allocated 3.0% to its Full Service MEO Ports (Bulk and
Single) for the same category of expense. The allocation percentages
set forth above differ because they correspond with the number of
applicable ports utilized on each exchange. For December 2023, MIAX
Market Makers utilized 1,785 Limited Service MEI ports and MIAX Emerald
Market Makers utilized 1,070 Limited Service MEI Ports. When compared
to Full Service Port (Bulk and Single) usage, for December 2023, MIAX
Pearl Options Members utilized only 360 Full Service MEO Ports (Bulk
and Single), far fewer than number of Limited Service MEI Ports
utilized by Market Makers on MIAX Emerald, thus resulting in a smaller
cost allocation. There is increased cost associated with supporting a
higher number of ports (requiring more hardware and other technical
infrastructure), thus the Exchange allocates a higher percentage of
expense than MIAX Pearl Options which has a lower port count.\85\
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\85\ MIAX allocated a slightly lower amount (7.3%) of this cost
as compared to MIAX Emerald (8.7%). This is not a significant
difference. However, both allocations resulted in a similar cost
amount (approximately $0.6 million for MIAX and $0.8 million for
MIAX Emerald), despite MIAX having a higher number of Limited
Service MEI Ports. MIAX Emerald was allocated a higher cost per
Limited Service MEI Port due to the additional resources and
expenditures associated with maintaining its recently enhanced low
latency network.
---------------------------------------------------------------------------
* * * * *
Approximate Cost per Limited Service MEI Port per Month
Based on projected 2024 data, the total monthly cost allocated to
Limited Service MEI Ports of $208,853 was divided by the total number
of Limited Service MEI Ports utilized by Members in December, which was
1,070 (and includes free and charged ports), resulting in an
approximate cost of $195 per port per month (when rounding to the
nearest dollar). The Exchange used the total number of Limited Service
MEI Ports it maintained in December for all Members and included free
and charged ports. However, in prior filings, the Exchange did not
include the expense of maintaining the two free Limited Service MEI
Ports per matching engine that each Member receives when the Exchange
discussed the approximate cost per port per month, but did include the
two free Limited Service MEI Ports in the total expense amounts. As
described herein, the Exchange changed its proposed fee structure since
past filings to now offer four free Limited Service MEI Ports per
matching engine to which each Member connects. After the first four
free Limited Service MEI Ports, the Exchange proposes to charge $420
per Limited Service MEI Port per matching engine, up to a total of
fourteen (14) Limited Service MEI Ports per matching engine.
For the sake of clarity, if a Member wanted to connect to all 12 of
the Exchange's matching engines and utilize the maximum number of
Limited Service MEI Ports on each matching engine (i.e., 14), that
Member would have a total of 168 Limited Service MEI Ports (12 matching
engines multiplied by 14 Limited Service MEI Ports per matching
engine). With the proposed increase to now provide four Limited Service
MEI Ports for free on each matching engine, that particular
[[Page 21394]]
Member would receive 48 free Limited Service MEI Ports (4 free Limited
Service MEI Ports multiplied by 12 matching engines), and be charged
for the remaining 120 Limited Service MEI Ports (168 total Limited
Service MEI Ports across all matching engines minus 48 free Limited
Service MEI Ports across all matching engines).
As mentioned above, Members utilized a total of 1,070 Limited
Service MEI Ports in the month of December 2023 (free and charged ports
combined). Using December 2023 data to extrapolate out after the
proposed changes herein go into effect, the total number of Limited
Service MEI Ports that the Exchange would not charge for as a result of
this increase in free ports is 494 (meaning the Exchange would charge
for only 576 ports) and amounts to a total expense of $96,330 per month
to the Exchange ($195 per port multiplied by 494 free Limited Service
MEI Ports).
* * * * *
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or Limited Service MEI Ports) and did not double-count any
expenses. Instead, as described above, the Exchange allocated
applicable cost drivers across its core services and used the same Cost
Analysis to form the basis of this proposal and the filings the
Exchange submitted proposing fees for proprietary data feeds offered by
the Exchange. For instance, in calculating the Human Resources expenses
to be allocated to physical connections based upon the above described
methodology, the Exchange has a team of employees dedicated to network
infrastructure and with respect to such employees the Exchange
allocated network infrastructure personnel with a high percentage of
the cost of such personnel (48.1%) given their focus on functions
necessary to provide 10Gb ULL physical connections. The salaries of
those same personnel were allocated only 7.8% to Limited Service MEI
Ports and the remaining 44.1% was allocated to 1Gb connectivity, other
port services, transaction services, membership services and market
data. The Exchange did not allocate any other Human Resources expense
for providing physical connections to any other employee group, outside
of a smaller allocation of 17.7% for 10Gb ULL connectivity or 17.7% for
the entire network, of the cost associated with certain specified
personnel who work closely with and support network infrastructure
personnel. In contrast, the Exchange allocated much smaller percentages
of costs (4% or less) across a wider range of personnel groups in order
to allocate Human Resources costs to providing Limited Service MEI
Ports. This is because a much wider range of personnel are involved in
functions necessary to offer, monitor and maintain Limited Service MEI
Ports but the tasks necessary to do so are not a primary or full-time
function.
In total, the Exchange allocated 29% of its personnel costs to
providing 10Gb ULL and 1Gb connectivity and 6.7% of its personnel costs
to providing Limited Service MEI Ports, for a total allocation of 35.7%
Human Resources expense to provide these specific connectivity and port
services. In turn, the Exchange allocated the remaining 64.3% of its
Human Resources expense to membership services, transaction services,
other port services and market data. Thus, again, the Exchange's
allocations of cost across core services were based on real costs of
operating the Exchange and were not double-counted across the core
services or their associated revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and Limited Service
MEI Ports, but in different amounts. The Exchange believes it is
reasonable to allocate the identified portion of such expense because
such expense includes the actual cost of the computer equipment, such
as dedicated servers, computers, laptops, monitors, information
security appliances and storage, and network switching infrastructure
equipment, including switches and taps that were purchased to operate
and support the network. Without this equipment, the Exchange would not
be able to operate the network and provide connectivity services to its
Members and non-Members and their customers. However, the Exchange did
not allocate all of the depreciation and amortization expense toward
the cost of providing connectivity services, but instead allocated
approximately 64.2% of the Exchange's overall depreciation and
amortization expense to connectivity services (61% attributed to 10Gb
ULL physical connections and 3.2% to Limited Service MEI Ports). The
Exchange allocated the remaining depreciation and amortization expense
(approximately 35.8%) toward the cost of providing transaction
services, membership services, other port services, 1Gb connectivity,
and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from connectivity, the Exchange will have to be
successful in retaining existing clients that wish to maintain physical
connectivity and/or Limited Service MEI Ports or in obtaining new
clients that will purchase such services. Similarly, the Exchange will
have to be successful in retaining a positive net capture on
transaction fees in order to realize the anticipated revenue from
transaction pricing.
The Exchange notes that the Cost Analysis is based on the
Exchange's 2024 fiscal year of operations and projections. It is
possible, however, that actual costs may be higher or lower. To the
extent the Exchange sees growth in use of connectivity services it will
receive additional revenue to offset future cost increases.
However, if use of connectivity services is static or decreases,
the Exchange might not realize the revenue that it anticipates or needs
in order to cover applicable costs. Accordingly, the Exchange is
committing to conduct a one-year review after implementation of these
fees. The Exchange expects that it may propose to adjust fees at that
time, to increase fees in the event that revenues fail to cover costs
and a reasonable mark-up of such costs. Similarly, the Exchange may
propose to decrease fees in the event that revenue materially exceeds
our current projections. In addition, the Exchange will periodically
conduct a review to inform its decision making on whether a fee change
is appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, the Exchange believes that it is appropriate for an
exchange to refresh and update information about its relevant costs and
revenues in seeking any future changes
[[Page 21395]]
to fees, and the Exchange commits to do so.
Projected Revenue \86\
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\86\ For purposes of calculating projected 2024 revenue for 10Gb
ULL connectivity, the Exchange used revenues for the most recently
completed full month.
---------------------------------------------------------------------------
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity and port services. Much of the cost relates to monitoring
and analysis of data and performance of the network via the
subscriber's connection(s). The above cost, namely those associated
with hardware, software, and human capital, enable the Exchange to
measure network performance with nanosecond granularity. These same
costs are also associated with time and money spent seeking to
continuously improve the network performance, improving the
subscriber's experience, based on monitoring and analysis activity. The
Exchange routinely works to improve the performance of the network's
hardware and software. The costs associated with maintaining and
enhancing a state-of-the-art exchange network is a significant expense
for the Exchange, and thus the Exchange believes that it is reasonable
and appropriate to help offset those costs by amending fees for
connectivity services. Subscribers, particularly those of 10Gb ULL
connectivity, expect the Exchange to provide this level of support to
connectivity so they continue to receive the performance they expect.
This differentiates the Exchange from its competitors. As detailed
above, the Exchange has five primary sources of revenue that it can
potentially use to fund its operations: transaction fees, fees for
connectivity services, membership and regulatory fees, and market data
fees. Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue.
The Exchange's Cost Analysis estimates the annual cost to provide
10Gb ULL connectivity services will equal $15,469,330. Based on current
10Gb ULL connectivity services usage, the Exchange would generate
annual revenue of approximately $18,020,568. The Exchange believes this
represents a modest profit of 14.2% when compared to the cost of
providing 10Gb ULL connectivity services.
The Exchange's Cost Analysis estimates the annual cost to provide
Limited Service MEI Port services will equal $2,506,232. Based on
December 2023 data for Limited Service MEI Port usage and counting for
the proposed increase in free Limited Service MEI Ports and proposed
increase in the monthly fee from $100 to $420 per port, the Exchange
would generate annual revenue of approximately $2,903,040. The Exchange
believes this would result in an estimated profit margin of 13.7% after
calculating the cost of providing Limited Service MEI Port services.
The Exchange notes that the cost to provide Limited Service MEI Ports
is higher than the cost for the Exchange's affiliate, MIAX Pearl
Options, to provide Full Service MEO Ports due to the substantially
higher number of Limited Service MEI Ports used by Exchange Members.
For example, utilizing December 2023 data, MIAX Emerald Market Makers
utilized 1,070 Limited Service MEI Ports compared to only 360 Full
Service MEO Ports (Bulk and Single combined) allocated to MIAX Pearl
Options members.
Based on the above discussion, the Exchange believes that even if
the Exchange earns the above revenue or incrementally more or less, the
proposed fees are fair and reasonable because they will not result in
pricing that deviates from that of other exchanges or a supra-
competitive profit, when comparing the total expense of the Exchange
associated with providing 10Gb ULL connectivity and Limited Service MEI
Port services versus the total projected revenue of the Exchange
associated with network 10Gb ULL connectivity and Limited Service MEI
Port services.
The Exchange also notes that this the resultant profit margin
differs slightly from the profit margins set forth in similar fee
filings by its affiliated markets. This is not atypical among exchanges
and is due to a number of factors that differ between these four
markets, including: different market models, market structures, and
product offerings (equities, options, price-time, pro-rata, simple, and
complex); different pricing models; different number of market
participants and connectivity subscribers; different maintenance and
operations costs, as described in the cost allocation methodology
above; different technical architecture (e.g., the number of matching
engines per exchange, i.e., the Exchange maintains only 12 matching
engines while MIAX maintains 24 matching engines); and different
maturity phase of the Exchange and its affiliated markets (i.e., start-
up versus growth versus more mature). All of these factors contribute
to a unique and differing level of profit margin per exchange.
Further, the Exchange proposes to charge rates that are comparable
to, or lower than, similar fees for similar products charged by
competing exchanges. For example, for 10Gb ULL connectivity, the
Exchange proposes a lower fee than the fee charged by Nasdaq for its
comparable 10Gb Ultra fiber connection ($13,500 per month for the
Exchange vs. $15,000 per month for Nasdaq).\87\ NYSE American charges
even higher fees for its comparable 10GB LX LCN connection than the
Exchange's proposed fees ($13,500 per month for the Exchange vs.
$22,000 per month for NYSE American).\88\ Accordingly, the Exchange
believes that comparable and competitive pricing are key factors in
determining whether a proposed fee meets the requirements of the Act,
regardless of whether that same fee across the Exchange's affiliated
markets leads to slightly different profit margins due to factors
outside of the Exchange's control (i.e., more subscribers to 10Gb ULL
connectivity on the Exchange than its affiliated markets or vice
versa).
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\87\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
\88\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
---------------------------------------------------------------------------
* * * * *
The Exchange operated at a cumulative net annual loss from the time
it launched operations in 2019 through fiscal year 2021.\89\ This was
due to a number of factors, one of which was choosing to forgo revenue
by offering certain products, such as low latency connectivity, at
lower rates than other options exchanges to attract order flow and
encourage market participants to experience the high determinism, low
latency, and resiliency of the Exchange's trading systems. The Exchange
does not believe that it should now be penalized for seeking to raise
its fees as it now needs to upgrade its technology and absorb increased
costs. Therefore, the Exchange believes the proposed fees are
reasonable because they are based on both relative costs to the
Exchange to provide dedicated 10Gb ULL connectivity and Limited Service
MEI
[[Page 21396]]
Ports, the extent to which the product drives the Exchange's overall
costs and the relative value of the product, as well as the Exchange's
objective to make access to its Systems broadly available to market
participants. The Exchange also believes the proposed fees are
reasonable because they are designed to generate annual revenue to
recoup the Exchange's costs of providing dedicated 10Gb ULL
connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------
\89\ Beginning with fiscal year 2022, the Exchange incurred a
net gain of approximately $14 million. See Exchange's Form 1/A,
Application for Registration or Exemption from Registration as a
National Securities Exchange, filed June 26, 2023, available at
https://www.sec.gov/Archives/edgar/vprr/2300/23007742.pdf.
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The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 10Gb ULL connectivity and Limited Service MEI Ports, the
Exchange will have to be successful in retaining existing clients that
wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports
and/or obtaining new clients that will purchase such access. To the
extent the Exchange is successful in encouraging new clients to utilize
10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does
not believe it should be penalized for such success. To the extent the
Exchange has mispriced and experiences a net loss in connectivity
clients or in transaction activity, the Exchange could experience a net
reduction in revenue. While the Exchange is supportive of transparency
around costs and potential margins (applied across all exchanges), as
well as periodic review of revenues and applicable costs (as discussed
below), the Exchange does not believe that these estimates should form
the sole basis of whether or not a proposed fee is reasonable or can be
adopted. Instead, the Exchange believes that the information should be
used solely to confirm that an Exchange is not earning--or seeking to
earn--supra-competitive profits. The Exchange believes the Cost
Analysis and related projections in this filing demonstrate this fact.
The Exchange is owned by a holding company that is the parent
company of four exchange markets and, therefore, the Exchange and its
affiliated markets must allocate shared costs across all of those
markets accordingly, pursuant to the above-described allocation
methodology. In contrast, the Investors Exchange LLC (``IEX'') and
MEMX, which are currently each operating only one exchange, in their
recent non-transaction fee filings allocate the entire amount of that
same cost to a single exchange. This can result in lower profit margins
for the non-transaction fees proposed by IEX and MEMX because the
single allocated cost does not experience the efficiencies and
synergies that result from sharing costs across multiple exchanges. The
Exchange and its affiliated markets often share a single cost, which
results in cost efficiencies that can cause a broader gap between the
allocated cost amount and projected revenue, even though the fee levels
being proposed are lower or competitive with competing markets (as
described above). To the extent that the application of a cost-based
standard results in Commission Staff making determinations as to the
appropriateness of certain profit margins, the Exchange believes that
Commission Staff should also consider whether the proposed fee level is
comparable to, or competitive with, the same fee charged by competing
exchanges and how different cost allocation methodologies (such as
across multiple markets) may result in different profit margins for
comparable fee levels. Further, if Commission Staff is making
determinations as to appropriate profit margins in their approval of
exchange fees, the Exchange believes that the Commission should be
clear to all market participants as to what they have determined is an
appropriate profit margin and should apply such determinations
consistently and, in the case of certain legacy exchanges,
retroactively, if such standards are to avoid having a discriminatory
effect.
Further, as is reflected in the proposal, the Exchange continuously
and aggressively works to control its costs as a matter of good
business practice. A potential profit margin should not be evaluated
solely on its size; that assessment should also consider cost
management and whether the ultimate fee reflects the value of the
services provided. For example, a profit margin on one exchange should
not be deemed excessive where that exchange has been successful in
controlling its costs, but not excessive on another exchange where that
exchange is charging comparable fees but has a lower profit margin due
to higher costs. Doing so could have the perverse effect of not
incentivizing cost control where higher costs alone could be used to
justify fees increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume
substantially more bandwidth and network resources than users of 1Gb
ULL connection. Specifically, the Exchange notes that 10Gb ULL
connection users account for more than 99% of message traffic over the
network, driving other costs that are linked to capacity utilization,
as described above, while the users of the 1Gb ULL connections account
for less than 1% of message traffic over the network. In the Exchange's
experience, users of the 1Gb connections do not have the same business
needs for the high-performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), provides unparalleled
system throughput with the network ability to support access to several
distinct options markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages to satisfy its record keeping requirements under
the Exchange Act.\90\ Thus, as the number of messages an entity
increases, certain other costs incurred by the Exchange that are
correlated to, though not directly affected by, connection costs (e.g.,
storage costs, surveillance costs, service expenses) also increase.
Given this difference in network utilization rate, the Exchange
believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all market participants' benefit.
---------------------------------------------------------------------------
\90\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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[[Page 21397]]
Limited Service MEI Ports
The proposed changes to the monthly fee for Limited Service MEI
Ports is not unfairly discriminatory because it would apply to all
Market Makers equally. All Market Makers would now be eligible to
receive four (4) free Limited Service MEI Ports and those that elect to
purchase more would be subject to the same monthly rate regardless of
the number of additional Limited Service MEI Ports they purchase.
Certain market participants choose to purchase additional Limited
Service MEI Ports based on their own particular trading/quoting
strategies and feel they need a certain number of connections to the
Exchange to execute on those strategies. Other market participants may
continue to choose to only utilize the free Limited Service MEI Ports
to accommodate their own trading or quoting strategies, or other
business models. All market participants elect to receive or purchase
the amount of Limited Service MEI Ports they require based on their own
business decisions and all market participants would be subject to the
same fee structure and flat fee. Every market participant may receive
up to four (4) free Limited Service MEI Ports and those that choose to
purchase additional Limited Service MEI Ports may elect to do so based
on their own business decisions and would continue to be subject to the
same flat fee. The Exchange notes that it filed to amend this fee in
2020 and that filing contained the same fee structure, i.e., a certain
number of free Limited Service MEI Ports coupled with a flat fee for
additional Limited Service MEI Ports.\91\ At that time, the Commission
did not find the structure to be unfairly discriminatory by virtue of
that proposal surviving the 60-day suspension period. Therefore, the
proposed changes to the fees for Limited Service MEI Ports is not
unfairly discriminatory because it would continue to apply to all
market participants equally and provides a fee structure that includes
four free Limited Service MEI Ports for one monthly rate that was
previously in place and filed with the Commission.
---------------------------------------------------------------------------
\91\ See supra note 61.
---------------------------------------------------------------------------
The Exchange believes that its proposed fee for Limited Service MEI
Ports is reasonable, fair and equitable, and not unfairly
discriminatory because it is designed to align fees with services
provided, will apply equally to all Members that are assigned Limited
Service MEI Ports (either directly or through a Service Bureau), and
will minimize barriers to entry by now providing all Members with four,
instead of the prior two, free Limited Service MEI Ports.\92\ As a
result of the proposed fee structure, a significant majority of Members
will not be subject to any fee, and only seven Members will potentially
be subject to a fee for Limited Service MEI Ports in excess of four per
month, based on current usage. In contrast, other exchanges generally
charge in excess of $450 per port without providing any free ports.\93\
Even for Members that choose to maintain more than four Limited Service
MEI Ports, the Exchange believes that the cost-based fee proposed
herein is low enough that it will not operate to restrain any Member's
ability to maintain the number of Limited Service MEI Ports that it
determines are consistent with its business objectives. The small
number of Members projected to be subject to the highest fees will
still pay considerably less than competing exchanges charge.\94\
Further, the number of assigned Limited Service MEI Ports will continue
to be based on decisions by each Member, including the ability to
reduce fees by discontinuing unused Limited Service MEI Ports.
---------------------------------------------------------------------------
\92\ The following rationale to support providing a certain
number of Limited Service MEI Ports for free prior to applying a fee
is similar to that used by IEX in 2020 proposal to do the same as
proposed herein. See Securities Exchange Act Release No. 86626
(August 9, 2019), 84 FR 41793 (August 15, 2019) (SR-IEX-2019-07).
\93\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services (similar to the Exchange's MEI
Ports, SQF ports are primarily utilized by Market Makers); ISE
Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE
Rules, General 8: Connectivity; NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. Co-Location Fees; GEMX
Pricing Schedule, Options 7, Section 6, Connectivity Fees and GEMX
Rules, General 8: Connectivity.
\94\ Assuming a Member selects five Limited Service MEI Ports
based on their business needs, that Member on MIAX Emerald would be
charged only for the fifth Limited Service MEI Port and pay only the
$420 monthly fee, as the first four Limited Service Ports would be
free. Meanwhile, a Member that purchases five ports on NYSE Arca
Options would pay $450 per port per month, resulting in a total
charge of $2,250 per month. On Cboe BZX Options, that same member
would pay $750 per port per month, resulting in a total charge of
$3,750 per months for five ports. See NYSE Arca Options Fees and
Charges, dated March 1, 2024, available at https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf and Cboe BZX Options Fee Schedule
available at https://www.cboe.com/us/options/membership/fee_schedule/.
---------------------------------------------------------------------------
The Exchange believes that providing four free Limited Service MEI
Ports is fair and equitable, and not unfairly discriminatory because it
will enable Members (and more Members than when the Exchange previously
provided two free Limited Service MEI Ports) to access the Exchange on
this basis without having to pay for Limited Service MEI Ports, thereby
encouraging order flow and liquidity from a diverse set of market
participants, facilitating price discovery and the interaction of
orders. The Exchange believes that four Limited Service MEI Ports is an
appropriate number to provide for free because it aligns with the
maximum number of such ports currently maintained by a substantial
majority of Members. Based on a review of Limited Service MEI Port
usage, 28 of 35 connected Members are not projected to be subject to
any Limited Service MEI Port fees under the proposed fee. In
determining the appropriate number of Limited Service MEI Ports to
provide for free, the Exchange considered several factors. First, the
Exchange believes that, with respect to Limited Service MEI Port usage,
Members prefer at least two Limited Service MEI Ports, for redundancy
purposes. Second, from a review of the number of Limited Service MEI
Ports currently requested and assigned to each Member, the median
number of ports per Member that utilizes Limited Service MEI Ports is
four. Thus, the Exchange believes that having four ports appears to be
reasonably sufficient for the majority of Members to access the
Exchange. On that basis, the Exchange chose four Limited Service MEI
Ports as the maximum number of ports for which it will not charge to
access the Exchange. The Exchange notes that some Members use more
Limited Service MEI Ports than other Members (and the four provided for
free), which is driven by the nature and volume of the business they
conduct on the Exchange, and the choices they make in segmenting that
business across different Limited Service MEI Ports. Allowing for this
expansive use of Exchange capacity represents an aggregate cost that
the Exchange seeks to recover through charging for ports five and
higher.
The proposed change is also designed to encourage Members to be
efficient with their Limited Service MEI Port 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
Limited Service MEI Ports. There is no requirement that any Member
maintain a specific number of Limited Service MEI Ports and a Member
may choose to maintain as many or as few of such ports as each Member
deems appropriate.
The Exchange assessed the proposed fee change's impact on all
Members. The Exchange believes that the proposed fee change is fair and
[[Page 21398]]
equitably allocated across all Members. As a threshold matter, the fee
does not by design apply differently to different types or sizes of
Members. Nonetheless, the Exchange assessed whether there would be any
differences in the amount of the projected fee that correlates to the
type and/or size of different Members. This assessment revealed that
the number of assigned Limited Service MEI Ports, and thus projected
fees, correlates closely to a Member's inbound message volume to the
Exchange. Specifically, as inbound message volume increases per Member,
the number of requested and assigned Limited Service MEI Ports
increases. The following table presents data from December 2023
evidencing the correlation between a Member's inbound message volume
and the number of Limited Service MEI Port assigned to the Member as of
December 31, 2023.
----------------------------------------------------------------------------------------------------------------
Average daily Total message Overall percentage of all
Number of ports message traffic traffic message traffic for month
----------------------------------------------------------------------------------------------------------------
1-4............................................ 2,096,585,967 41,931,719,332 19.67
5 or more...................................... 8,559,796,282 171,195,925,646 80.33
----------------------------------------------------------------------------------------------------------------
Members with relatively higher inbound message volume are projected
to pay higher fees because they have requested more Limited Service MEI
Ports. For example, the seven Members that subscribe to five or more
Limited Service MEI Ports and are subject to the proposed monthly fee
on average account for 80.33% of December 2023 inbound messages over
Limited Service MEI Ports. The 28 Members that, based on their December
2023 Limited Service MEI Port usage are not projected to be subject to
any Limited Service MEI Port fees, on average account for only 19.67%
of December 2023 inbound messages over Limited Service MEI Port.
Overall, no Member experienced a fee increase as a result of the
proposed fee change and increase in the number of free ports. Three
Members experienced a modest and proportionate fee decrease. All other
Members saw no change in fees as a result of the proposed changes. On
balance, based on the above data, the Exchange believes that the
proposed fee structure changes (including moving from two free ports to
four free ports) is fair and equitably allocated across all Members,
and the impact of such proposed fee structure changes is consistent
among Members based on Exchange access and usage.
The Exchange believes that the variance between projected fees and
Limited Service MEI Ports usage is not unfairly discriminatory because
it is based on objective differences in Limited Service MEI Port usage
among different Members. The Exchange notes that the distribution of
total inbound message volume is concentrated in relatively few Members,
which consume a much larger proportionate share of the Exchange's
resources (compared to the majority of Members that send substantially
fewer inbound order messages). This distribution of inbound message
volume requires the Exchange to maintain sufficient Limited Service MEI
Port capacity to accommodate the higher existing and anticipated
message volume of higher volume Members. Thus, the Exchange's
incremental aggregate costs for all Limited Service MEI Ports are
disproportionately related to volume from the highest inbound message
volume Members. For these reasons, the Exchange believes it is not
unfairly discriminatory for the Members with the highest inbound
message volume to pay a higher share of the total Limited Service MEI
Ports fees.
While Limited Service MEI Port usage is concentrated in a few
relatively larger Members, the number of such ports requested is not
based on the size or type of Member but rather correlates to a Member's
inbound message volume to the Exchange. Further, Members with
relatively higher inbound message volume also request (and are
assigned) more Limited Service MEI Ports than other Members, which in
turn means they account for a disproportionate share of the Exchange's
aggregate costs for providing Limited Service MEI Ports.\95\ Therefore,
the Exchange believes it is not unfairly discriminatory for the Members
with higher inbound message volume to pay a modestly higher
proportionate share of the Limited Service MEI Port fees.
---------------------------------------------------------------------------
\95\ See Securities Exchange Act Release No. 86626 (August 9,
2019), 84 FR 41793 (August 15, 2019) (SR-IEX-2019-07) (justifying
providing 5 ports for free and charging a fee for every port
purchased in excess of 5 ports based on the higher message traffic
of subscribers with increased number of ports).
---------------------------------------------------------------------------
To achieve consistent, premium network performance, the Exchange
must build and maintain a network that has the capacity to handle the
message rate requirements of its heaviest network consumers during
anticipated peak market conditions. The resultant need to support
billions of messages per day consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. This need also requires
the Exchange to purchase additional storage capacity on an ongoing
basis to ensure it has sufficient capacity to store these messages as
part of it surveillance program and to satisfy its record keeping
requirements under the Exchange Act.\96\ Thus, as the number of
connections per Market Maker increases, other costs incurred by the
Exchange also increase, e.g., storage costs, surveillance costs,
service expenses.
---------------------------------------------------------------------------
\96\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
Accordingly, the Exchange believes that the fee will be applied
consistently with its specific purpose--to partially recover the
Exchange's aggregate costs, encourage the efficient use of Limited
Service MEI Ports, and align fees with Members' Limited Service MEI
Port and system usage.
The Exchange further believes that the proposed fees are
reasonable, fair and equitable, and non-discriminatory because they
will apply to all Members in the same manner and are not targeted at a
specific type or category of market participant engaged in any
particular trading strategy. All Members will receive four free Limited
Service MEI Ports and pay the same proposed fee per Limited Service MEI
Ports for each additional Limited Service MEI Port. Each Limited
Service MEI Port is identical, providing connectivity to the Exchange
on identical terms. While the proposed fee will result in a different
effective ``per unit'' rate for different Members after factoring in
the four free Limited Service MEI Ports, the Exchange does not believe
that this difference is material given the overall low proposed fee per
Limited Service MEI Port. Because the first four Limited Service MEI
Ports are free of charge, each entity will have a ``per unit'' rate of
less than the proposed fee. Further, the fee is not connected to volume
based tiers. All Members will be subject to the same fee schedule,
regardless of the volume sent to or executed on the
[[Page 21399]]
Exchange. The fee also does not depend on any distinctions between
Members, customers, broker-dealers, or any other entity. The fee will
be assessed solely based on the number of Limited Service MEI Ports an
entity selects and not on any other distinction applied by the
Exchange. While entities that send relatively more inbound messages to
the Exchange may select more Limited Service MEI Ports, thereby
resulting in higher fees, that distinction is based on decisions made
by each Member and the extent and nature of the Member's business on
the Exchange rather than application of the fee by the Exchange.
Members can determine how many Limited Service MEI Ports they need to
implement their trading strategies effectively. The Exchange proposes
to offer additional Limited Service MEI Ports at a low fee to enable
all Members to purchase as many Limited Service MEI Ports as their
business needs dictate in order to optimize throughput and manage
latency across the Exchange.
Notwithstanding that Members with the highest number of Limited
Service MEI Ports will pay a greater percentage of the total projected
fees than is represented by their Limited Service MEI Port usage, the
Exchange does not believe that the proposed fee is unfairly
discriminatory. It is not possible to fully synchronize the Exchange's
objective to provide four free Limited Service MEI Ports to all
Members, thereby minimizing barriers to entry and incentivizing
liquidity on the Exchange, with an approach that exactly aligns the
projected per Member fee with each Member's number of requested Limited
Service MEI Ports. As proposed, the Exchange is providing a reasonable
increased number of Limited Service MEI Ports to each Member without
charge. In fact, the Exchange proposes to provide more Limited Service
MEI Ports for free by increasing the number of available Limited
Service MEI Ports that are provided for free from two to four. Any
variance between projected fees and Limited Service MEI Port usage is
attributable to objective differences among Members in terms of the
number of Limited Service MEI Ports they determine are appropriate
based on their trading on the Exchange. Further, the Exchange believes
that the low amount of the proposed fee (which in the aggregate is
projected to only partially recover the Exchange's directly-related
costs as described herein) mitigates any disparate impact.
Further, the fee will help to encourage Limited Service MEI Port
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'').\97\ 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.\98\ By encouraging Members
to be efficient with their Limited Service MEI Ports usage, the
proposed fee will support the Exchange's Reg SCI obligations in this
regard by ensuring that unused Limited Service MEI Ports are available
to be allocated based on individual Members needs and as the Exchange's
overall order and trade volumes increase. Additionally, because the
Exchange will continue not to charge connectivity testing and
certification fees to its Disaster Recovery Facility or where the
Exchange requires testing and certification, 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 without incurring any port fee
costs.\99\
---------------------------------------------------------------------------
\97\ 17 CFR 242.1000-1007.
\98\ 17 CFR 242.1001(a).
\99\ By comparison, some other exchanges charge less to connect
to their disaster recovery facilities, but still charge an amount
that could both recoup costs and potentially be a source of profits.
See, e.g., Nasdaq Stock Market LLC Equity 7, Section 115 (Ports and
other Services).
---------------------------------------------------------------------------
Finally, the Exchange believes that the proposed fee is consistent
with Section 11A of the Exchange Act in that it is designed to
facilitate the economically efficient execution of securities
transactions, fair competition among brokers and dealers, exchange
markets and markets other than exchange markets, and the practicability
of brokers executing investors' orders in the best market.
Specifically, the proposed low, cost-based fee will enable a broad
range of the Exchange Members to continue to connect to the Exchange,
thereby facilitating the economically efficient execution of securities
transactions on the Exchange, fair competition between and among such
Members, and the practicability of Members that are brokers executing
investors' orders on the Exchange when it is the best market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Limited Service MEI Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange operated at a cumulative net annual loss
since its launch in 2019 through 2021 \100\ due to providing a low-cost
alternative to attract order flow and encourage market participants to
experience the high determinism and resiliency of the Exchange's
trading Systems. To do so, the Exchange chose to waive the fees for
some non-transaction related services and Exchange products or provide
them at a very lower fee, which was not profitable to the Exchange.
This resulted in the Exchange forgoing revenue it could have generated
from assessing any fees or higher fees. The Exchange could have sought
to charge higher fees at the outset, but that could have served to
discourage participation on the Exchange. Instead, the Exchange chose
to provide a low-cost exchange alternative to the options industry,
which resulted in lower initial revenues. Examples of this are 10Gb ULL
connectivity and Limited Service MEI Ports, for which the Exchange only
now seeks to adopt fees at a level similar to or lower than those of
other options exchanges.
---------------------------------------------------------------------------
\100\ See supra note 89.
---------------------------------------------------------------------------
Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection change would place certain market
participants at the Exchange at a relative disadvantage compared to
other market participants or affect the ability of such market
participants to compete. As is the case with the current proposed flat
fee, the proposed fee would apply uniformly to all market participants
regardless of the number of connections they choose to purchase. The
proposed fee does not favor certain categories of market participants
in a manner that would impose an undue burden on competition.
[[Page 21400]]
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus) for
several months leading up to that time. The Exchange does not believe
the proposed fees for connectivity services would negatively impact the
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and
customers of those resellers to compete with other market participants
or that they are placed at a disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange in response to the proposed fees. In
fact, as mentioned above, one MIAX Pearl Options Market Maker
terminated their MIAX Pearl Options membership on January 1, 2023 as a
direct result of the similar proposed fee changes by MIAX Pearl
Options.\101\ The Exchange does not believe that the proposed fees for
connectivity services place certain market participants at a relative
disadvantage to other market participants because the proposed
connectivity pricing is associated with relative usage of the Exchange
by each market participant and does not impose a barrier to entry to
smaller participants. The Exchange believes its proposed pricing is
reasonable and, when coupled with the availability of third-party
providers that also offer connectivity solutions, that participation on
the Exchange is affordable for all market participants, including
smaller trading firms. As described above, the connectivity services
purchased by market participants typically increase based on their
additional message traffic and/or the complexity of their operations.
The market participants that utilize more connectivity services
typically utilize the most bandwidth, and those are the participants
that consume the most resources from the network. Accordingly, the
proposed fees for connectivity services do not favor certain categories
of market participants in a manner that would impose a burden on
competition; rather, the allocation of the proposed connectivity fees
reflects the network resources consumed by the various size of market
participants and the costs to the Exchange of providing such
connectivity services.
---------------------------------------------------------------------------
\101\ The Exchange acknowledges that IEX included in its
proposal to adopt market data fees after offering market data for
free an analysis of what its projected revenue would be if all of
its existing customers continued to subscribe versus what its
projected revenue would be if a limited number of customers
subscribed due to the new fees. See Securities Exchange Act Release
No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-
2022-02). MEMX did not include a similar analysis in either of its
recent non-transaction fee proposals. See supra notes 83-84. The
Exchange does not believe a similar analysis would be useful here
because it is amending existing fees, not proposing to charge a new
fee where existing subscribers may terminate connections because
they are no longer enjoying the service at no cost.
---------------------------------------------------------------------------
Lastly, the Exchange does not believe its proposed changes to the
monthly rate for Limited Service MEI Ports will place certain market
participants at a relative disadvantage to other market participants.
All market participants would be eligible to receive four (4) free
Limited Service MEI Ports and those that elect to purchase more would
be subject to the same flat fee regardless of the number of additional
Limited Service MEI Ports they purchase. All firms purchase the amount
of Limited Service MEI Ports they require based on their own business
decisions and similarly situated firms are subject to the same fees.
Inter-Market Competition
The Exchange also does not believe that the proposed rule change
and price increase will result in any burden on inter-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. As this is a fee increase, arguably if set too
high, this fee would make it easier for other exchanges to compete with
the Exchange. Only if this were a substantial fee decrease could this
be considered a form of predatory pricing. In contrast, the Exchange
believes that, without this fee increase, we are potentially at a
competitive disadvantage to certain other exchanges that have in place
higher fees for similar services. As we have noted, the Exchange
believes that connectivity fees can be used to foster more competitive
transaction pricing and additional infrastructure investment and there
are other options markets of which market participants may connect to
trade options at higher rates than the Exchange's. Accordingly, the
Exchange does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
* * * * *
In conclusion, as discussed thoroughly above, the Exchange
regrettably believes that the application of the Revised Review Process
and Staff Guidance has adversely affected inter-market competition
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and
access services (including connectivity and port products and services)
that are on parity or commensurate with fee levels previously
established by legacy exchanges. Since the adoption of the Revised
Review Process and Staff Guidance, and even more so recently, it has
become extraordinarily difficult to adopt or increase fees to generate
revenue necessary to invest in systems, provide innovative trading
products and solutions, and improve competitive standing to the benefit
of non-legacy exchanges' market participants. Although the Staff
Guidance served an important policy goal of improving disclosures and
requiring exchanges to justify that their market data and access fee
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase
fees that would enable them to more fairly compete with legacy
exchanges, despite providing enhanced disclosures and rationale under
both competitive and cost basis approaches provided for by the Revised
Review Process and Staff Guidance to support their proposed fee
changes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange received one comment letter on the Initial Proposal,
one comment letter on the Second Proposal, one comment letter on the
Third Proposal, one comment letter on the Fourth Proposal, one comment
letter on the Fifth Proposal, one comment letter on the Sixth Proposal,
one comment letter on the Seventh Proposal, and one comment letter on
the Eighth Proposal all from the same commenter.\102\ In their letters,
the commenters from SIG seek to
[[Page 21401]]
incorporate comments submitted on previous Exchange proposals to which
the Exchange has previously responded. In addition, one commenter
states in their latest letter that ``the Exchanges are misleading in
stating that their last increase in the 10Gb ULL connection was in 2021
while fully aware that the Exchanges have been charging members this
increased rate since January 2023.'' \103\ The Exchange has clarified
the references to the 2021 fee increase, and acknowledges that a
version of this proposed fee change has been in effect since January
2023, all legally pursuant to the currently effective process set forth
in Section 19(b) of the Exchange Act. The Exchange also received
comment letters from a separate commenter on the Sixth and Seventh
Proposals.\104\ The Exchange believes issues raised by each commenter
are not germane to this proposal in particular, but rather raise larger
issues with the current environment surrounding exchange non-
transaction fee proposals that should be addressed by the Commission
through rule making, or Congress, more holistically and not through an
individual exchange fee filings. Among other things, the commenters are
requesting additional data and information that is both opaque and a
moving target and would constitute a level of disclosure materially
over and above that provided by any competitor exchanges.
---------------------------------------------------------------------------
\102\ See letter from Brian Sopinsky, General Counsel,
Susquehanna International Group, LLP (``SIG''), to Vanessa
Countryman, Secretary, Commission, dated February 7, 2023, letters
from Gerald D. O'Connell, SIG, to Vanessa Countryman, Secretary,
Commission, dated March 21, 2023, May 24, 2023, July 24, 2023 and
September 18, 2023, and letters from John C. Pickford, SIG, to
Vanessa Countryman, Secretary, Commission, dated January 4, 2024,
and March 1, 2024.
\103\ See letter from John C. Pickford, SIG, to Vanessa
Countryman, Secretary, Commission, dated March 1, 2024.
\104\ See letters from Thomas M. Merritt, Deputy General
Counsel, Virtu Financial, Inc. (``Virtu''), to Vanessa Countryman,
Secretary, Commission, dated November 8, 2023 and January 2, 2024.
---------------------------------------------------------------------------
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,\105\ and Rule 19b-4(f)(2) \106\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
---------------------------------------------------------------------------
\105\ 15 U.S.C. 78s(b)(3)(A)(ii).
\106\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments:
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-EMERALD-2024-12 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-EMERALD-2024-12. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-EMERALD-2024-12 and should
be submitted on or before April 17, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\107\
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\107\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-06451 Filed 3-26-24; 8:45 am]
BILLING CODE 8011-01-P
