Self-Regulatory Organizations; MIAX Emerald LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule for Purge Ports, 35891-35899 [2024-09473]
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Federal Register / Vol. 89, No. 86 / Thursday, May 2, 2024 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.53
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–09477 Filed 5–1–24; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–100039; File No. SR–
EMERALD–2024–14]
Self-Regulatory Organizations; MIAX
Emerald LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Its Fee
Schedule for Purge Ports
April 26, 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 April 15,
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.
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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 fees for Purge Ports.3
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’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
53 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The proposed fee change is based on a recent
proposal by Nasdaq Phlx LLC (‘‘Phlx’’) to adopt fees
for purge ports. See Securities Exchange Act
Release No. 97825 (June 30, 2023), 88 FR 43405
(July 7, 2023) (SR–Phlx–2023–28).
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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.
The Exchange proposes to amend the
fees for Purge Ports, which is a function
enabling Market Makers 4 to cancel all
open quotes or a subset of open quotes
through a single cancel message. The
Exchange currently provides Market
Makers the option to purchase Purge
Ports to assist in their quoting activity.
Purge Ports provide Market Makers with
the ability to send purge messages to the
Exchange System.5 Purge Ports are not
capable of sending or receiving any
other type of messages or information.
The use of Purge Ports is completely
optional and no rule or regulation
requires that a Market Maker utilize
them.
The Exchange initially filed the
proposal on September 29, 2023 (the
‘‘Initial Proposal’’).6 On November 22,
2023, the Exchange withdrew the Initial
Proposal and replaced with a revised
filing (the ‘‘Second Proposal’’).7 On
January 17, 2024, the Exchange
withdrew the Second Proposal and, on
January 31, 2024, replaced it with a
further revised filing (the ‘‘Third
Proposal’’).8 On March 8, 2024, the
Exchange withdrew the Third Proposal
and replaced it with a further revised
filing (the ‘‘Fourth Proposal’’).9 On
April 15, 2024, the Exchange withdrew
the Fourth Proposal and replaced it with
a further revised filing (the ‘‘Fifth
Proposal’’).
The Exchange is including a cost
analysis in this filing to justify the
proposed fees. As described more fully
below, the cost analysis includes,
among other things, descriptions of how
4 The term ‘‘Market Makers’’ refers to Lead Market
Makers (‘‘LMMs’’), Primary Lead Market Makers
(‘‘PLMMs’’), and Registered Market Makers
(‘‘RMMs’’) collectively. See Exchange Rule 100.
5 The term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See Exchange Rule 100.
6 See Securities Exchange Act Release No. 98734
(October 12, 2023), 88 FR 71894 (October 18, 2023)
(SR–EMERALD–2023–26).
7 See Securities Exchange Act Release No. 99089
(December 5, 2023), 88 FR 85941 (December 11,
2023) (SR–EMERALD–2023–29).
8 See Securities Exchange Act Release No. 99529
(February 13, 2024), 89 FR 12907 (February 20,
2024) (SR–EMERALD–2024–05).
9 See Securities Exchange Act Release No. 99812
(March 20, 2024), 89 FR 21080 (March 26, 2024)
(SR–EMERALD–2024–11).
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the Exchange allocated costs among it
and its affiliated exchanges for similar
proposed fee changes (separately
between MIAX Pearl Options 10 and
MIAX,11 collectively referred to herein
as the ‘‘affiliated markets’’), to ensure no
cost was allocated more than once, as
well as 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 similar proposals submitted by the
affiliated markets. The proposed fees are
intended to cover the Exchange’s cost of
providing Purge Ports with a reasonable
mark-up over those costs.
Purge Port Fee Change
Unlike other options exchanges that
charge fees for Purge Ports on a per port
basis,12 the Exchange assesses a flat fee
of $1,500 per month, regardless of the
number of Purge Ports utilized by a
Market Maker. Prior to the Initial
Proposal, a Market Maker could request
and be allocated two (2) Purge Ports per
Matching Engine 13 to which it connects
and not all Market Makers connected to
all of the Exchange’s Matching Engines.
The Exchange now proposes to amend
the fee for Purge Ports to align more
closely with other exchanges who
charge on a per port basis by providing
two (2) Purge Ports per Matching Engine
for a monthly flat fee of $600 per month
per Matching Engine. The only
difference with a per port structure is
that Market Makers receive two (2)
Purge Ports per Matching Engine for the
10 MIAX Pearl Options is the options market of
MIAX PEARL, LLC (‘‘MIAX Pearl’’), which also
operates an equities trading facility called MIAX
Pearl Equities. See Exchange Rule 100 and MIAX
Pearl Rule 1901.
11 The term ‘‘MIAX’’ means Miami International
Securities Exchange, LLC. See Exchange Rule 100.
12 See Cboe BXZ Exchange, Inc. (‘‘BZX’’) Options
Fee Schedule, Options Logical Port Fees, Purge
Ports ($750 per purge port per month); Cboe EDGX
Exchange, Inc. (‘‘EDGX’’) Options Fee Schedule,
Options Logical Port Fees, Purge Ports ($750 per
purge port per month); Cboe Exchange, Inc.
(‘‘Cboe’’) Fee Schedule ($850 per purge port per
month). See also Nasdaq GEMX, Options 7, Pricing
Schedule, Section 6.C.(3). Nasdaq GEMX, LLC
(‘‘Nasdaq GEMX’’) assesses its members $1,250 per
SQF Purge Port per month, subject to a monthly cap
of $17,500 for SQF Purge Ports and SQF Ports,
applicable to market makers. See also Securities
Exchange Act Release No. 97825 (June 30, 2023), 88
FR 43405 (July 7, 2023) (SR–Phlx–2023–28).
13 A Matching Engine is a part of the Exchange’s
electronic system that processes options quotes and
trades on a symbol-by-symbol basis. Some matching
engines will process option classes with multiple
root symbols, and other matching engines will be
dedicated to one single option root symbol (for
example, options on SPY will 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.
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same proposed monthly fee, rather than
being charged a separate fee for each
Purge Port. The Exchange proposes to
charge the proposed fee for Purge Ports
per Matching Engine, instead on a per
Purge Port basis, due to its System
architecture which provides two (2)
Purge Ports per Matching Engine for
redundancy purposes. In addition, the
proposed fee is lower than the
comparable fee charged by competing
exchanges that also charge on a per port
basis, notwithstanding that the
Exchange is providing up to two (2)
Purge Ports for that same lower fee.14
Other exchanges may also maintain a
different number of matching engines
within their architecture than the
Exchange (i.e., MIAX maintains twentyfour (24) matching engines, MIAX Pearl
Options maintains twelve (12) matching
engines, and MIAX Emerald maintains
twelve (12) matching engines).
Similar to a per port charge, Market
Makers are able to select the Matching
Engines that they want to connect to,15
based on the business needs of each
Market Maker, and pay the applicable
fee based on the number of Matching
Engines and ports utilized. The
Exchange believes that the proposed fee
provides Market Makers with flexibility
to control their Purge Port costs based
on the number of Matching Engines
each Marker Maker elects to connect to
based on each Market Maker’s business
needs.
*
*
*
*
*
A logical port represents a port
established by the Exchange within the
Exchange’s System for trading and
billing purposes. Each logical port
grants a Member 16 the ability to
accomplish a specific function, such as
order entry, order cancellation, access to
execution reports, and other
administrative information.
Purge Ports are designed to assist
Market Makers 17 in the management of,
and risk control over, their quotes,
particularly if the firm is dealing with
a large number of securities. For
example, if a Market Maker detects
market indications that may influence
the execution potential of their quotes,
the Market Maker may use Purge Ports
14 See
supra note 12.
Exchange notes that each Matching Engine
corresponds to a specified group of symbols.
Certain Market Makers choose to only quote in
certain symbols while other Market Makers choose
to quote the entire market.
16 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.
17 Members seeking to become registered as a
Market Maker must comply with the applicable
requirements of Chapter VI of the Exchange’s Rules.
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15 The
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to reduce uncertainty and to manage
risk by purging all quotes in a number
of securities. This allows Market Makers
to seamlessly avoid unintended
executions, while continuing to evaluate
the market, their positions, and their
risk levels. Purge Ports are used by
Market Makers that conduct business
activity that exposes them to a large
amount of risk across a number of
securities. Purge Ports enable Market
Makers to cancel all open quotes, or a
subset of open quotes through a single
cancel message. The Exchange notes
that Purge Ports increase efficiency of
already existing functionality enabling
the cancellation of quotes.
The Exchange operates highly
performant systems with significant
throughput and determinism which
allows participants to enter, update and
cancel quotes at high rates. Market
Makers may currently cancel individual
quotes through the existing
functionality, such as through the use of
a mass cancel message by which a
Market Maker may request that the
Exchange remove all or a subset of its
quotations and block all or a subset of
its new inbound quotations.18 Other
than Purge Ports being a dedicated line
for cancelling quotations, Purge Ports
operate in the same manner as a mass
cancel message being sent over a
different type of port. For example, like
Purge Ports, mass cancellations sent
over a logical port may be done at either
the firm or MPID level. As a result,
Market Makers can currently cancel
quotes in rapid succession across their
existing logical ports 19 or through a
single cancel message, all open quotes
or a subset of open quotes.
Similarly, Market Makers may also
use cancel-on-disconnect control when
they experience a disruption in
connection to the Exchange to
automatically cancel all quotes, as
configured or instructed by the Member
or Market Maker.20 In addition, the
Exchange already provides similar
ability to mass cancel quotes through
the Exchange’s risk controls, which are
offered at no charge and enables Market
Makers to establish pre-determined
levels of risk exposure, and can be used
to cancel all open quotes.21
Accordingly, the Exchange believes that
the Purge Ports provide an efficient
option as an alternative to already
18 See
Exchange Rule 519C(a) and (b).
Exchange port functionality supports
cancelation rates that exceed one thousand
messages per second and the Exchange’s research
indicates that certain market participants rely on
such functionality and at times utilize such
cancelation rates.
20 See Exchange Rule 519C (c).
21 See Exchange Rule 532.
19 Current
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available services and enhance the
Market Maker’s ability to manage their
risk.
The Exchange believes that market
participants benefit from a dedicated
purge mechanism for specific Market
Makers and to the market as a whole.
Market Makers will have the benefit of
efficient risk management and purge
tools. The market will benefit from
potential increased quoting and
liquidity as Market Makers may use
Purge Ports to manage their risk more
robustly. Only Market Makers that
request Purge Ports would be subject to
the proposed fees, and other Market
Makers can continue to operate in
exactly the same manner as they do
today without dedicated Purge Ports,
but with the additional purging
capabilities described above.
Implementation Date
The proposed fee change is
immediately effective.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Act,22 in general, and
furthers the objectives of Section 6(b)(5)
of the Act,23 in particular, in that it is
not designed to permit unfair
discrimination among customers,
brokers, or dealers. The Exchange also
believes that its proposed fee is
consistent with Section 6(b)(4) of the
Act 24 because it represents an equitable
allocation of reasonable dues, fees and
other charges among market
participants.
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 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
22 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
24 15 U.S.C. 78f(b)(4).
23 15
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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,25 and Rule 19b–4 thereunder,26
with respect to the types of information
exchanges should provide when filing
fee changes, and Section 6(b) of the
Act,27 which requires, among other
things, that exchange fees be reasonable
and equitably allocated,28 not designed
to permit unfair discrimination,29 and
that they not impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.30 The Exchange
notes 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 Staff
Guidance.31
As detailed below, the Exchange
recently calculated its aggregate annual
costs for providing Purge Ports to be
$822,969 (or approximately $68,581 per
month, rounded to the nearest dollar
when dividing the annual cost by 12
months). In order to cover the aggregate
costs of providing Purge Ports to its
Market Makers going forward and to
make a modest profit, as described
below, the Exchange proposes to modify
its Fee Schedule to charge a fee of $600
per Matching Engine for Purge Ports.
In 2019, the Exchange completed a
study of its aggregate costs to produce
market data and connectivity (the ‘‘Cost
Analysis’’).32 The Cost Analysis
required a detailed analysis of the
Exchange’s aggregate baseline costs,
including a determination and
allocation of costs for core services
provided by the Exchange—transaction
execution, market data, membership
services, physical connectivity, and port
access (which provide order entry,
25 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
27 15 U.S.C. 78f(b).
28 15 U.S.C. 78f(b)(4).
29 15 U.S.C. 78f(b)(5).
30 15 U.S.C. 78f(b)(8).
31 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’’).
32 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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cancellation and modification
functionality, risk and purge
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’’). The Exchange recently
update its Cost Analysis using its 2024
estimated budget as described below.
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,33 storage needs,
dedicated infrastructure versus shared
infrastructure allocated per platform
based on the resources required to
support each platform, number of
available connections, and employees
allocated time. All of these factors result
in different allocation percentages
among the Exchange and its affiliated
markets, i.e., the different percentages of
the overall cost driver allocated to the
Exchange and its affiliated markets will
cause the dollar amount of the overall
cost allocated among the Exchange and
its affiliated markets to also differ.
Because the Exchange’s parent company
currently owns and operates four
separate and distinct marketplaces, the
Exchange must determine the costs
associated with each actual market—as
opposed to the Exchange’s parent
company simply concluding that all
costs drivers are the same at each
individual marketplace and dividing
33 For example, MIAX maintains 24 matching
engines, MIAX Pearl Options maintains 12
matching engines, MIAX Pearl Equities maintains
24 matching engines, and MIAX Emerald maintains
12 matching engines.
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35893
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.
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
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potentially use to fund its operations:
transaction fees, fees for connectivity
and port services, membership fees,
regulatory fees, and market data fees.
Accordingly, the Exchange must cover
its expenses from these five primary
sources of revenue. The Exchange also
notes that as a general matter each of
these sources of revenue is based on
services that are interdependent. For
instance, the Exchange’s system for
executing transactions is dependent on
physical hardware and connectivity;
only Members and parties that they
sponsor to participate directly on the
Exchange may submit orders to the
Exchange; many Members (but not all)
consume market data from the Exchange
in order to trade on the Exchange; and,
the Exchange consumes market data
from external sources in order to
comply with regulatory obligations.
Accordingly, given this
interdependence, the allocation of costs
to each service or revenue source
required judgment of the Exchange and
was weighted based on estimates of the
Exchange that the Exchange believes are
reasonable, as set forth below. While
there is no standardized and generally
accepted methodology for the allocation
of an exchange’s costs, the Exchange’s
methodology is the result of an
extensive review and analysis and will
be consistently applied going forward
for any other potential fee proposals. In
the absence of the Commission
attempting to specify a methodology for
the allocation of exchanges’
interdependent costs, the Exchange will
continue to be left with its best efforts
to attempt to conduct such an allocation
in a thoughtful and reasonable manner.
Through the Exchange’s extensive
updated Cost Analysis, which was again
recently further refined, the Exchange
analyzed every expense item in the
Exchange’s general expense ledger to
determine whether each such expense
relates to the provision of connectivity
and port services, and, if such expense
did so relate, what portion (or
percentage) of such expense actually
supports the provision of Purge Port
services, and thus bears a relationship
that is, ‘‘in nature and closeness,’’
directly related to Purge 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 Purge
Port services is $68,581, as further
detailed below.
Costs Related to Offering Purge Ports
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
Purge Ports 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 2.2% of its
overall Human Resources cost to
offering Purge Ports).
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 ......................................................................................................
$491,123
868
4,914
20,379
16,268
36,917
252,500
$40,927
72
410
1,698
1,356
3,076
21,042
2.2
0.9
0.9
1.3
0.9
1.0
2.9
Total ....................................................................................................................................
822,969
68,581
2.1
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
Purge Ports. While some costs were
attempted to be allocated as equally as
possible among the Exchange and its
affiliated markets, the Exchange notes
that some of its cost allocation
percentages for certain cost drivers
differ when compared to the same cost
drivers for the Exchange’s affiliated
markets in their similar proposed fee
changes for Purge 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
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the reason for the deviation) for the
significant differences.
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
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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 Purge Ports
and performance thereof (primarily the
Exchange’s network infrastructure team,
which spends most of their time
performing functions necessary to
provide port and connectivity services).
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
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Exchange is then allocated to port
services. From that portion allocated to
the Exchange that applied to ports, the
Exchange then allocated a weighted
average of 2.6% of each employee’s time
from the above group to Purge Ports.
The Exchange also allocated Human
Resources costs to provide Purge Ports
to a limited subset of personnel with
ancillary functions related to
establishing and maintaining such ports
(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 Purge
Ports) and then applied a smaller
allocation to such employees’ time to
Purge Ports (1.3%). This other group of
personnel with a smaller allocation of
Human Resources costs also have a
direct nexus to Purge Ports, whether it
is a sales person selling port services,
finance personnel billing for port
services or providing budget analysis, or
information security ensuring that such
ports are 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 Purge Ports, 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 Purge Ports:
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 2.6% of each of their
employee’s time assigned to the
Exchange for Purge Ports, as stated
above. Employees from these
departments perform numerous
functions to support Purge Ports, such
as the installation, re-location,
configuration, and maintenance of Purge
Ports 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 Purge Ports and
design, and support the development
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and on-going maintenance of internallydeveloped 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 Purge Ports, 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 Purge Ports related
Human Resources costs to the extent
that they are involved in overseeing
tasks related to providing Purge Ports.
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
vendors 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 which includes Purge
Ports. Without these services providers,
the Exchange would not be able to
connect to other national securities
exchanges, market data providers or
OPRA and, therefore, would not be able
to operate and support its System
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35895
Networks, including Purge Ports. In
addition, the connectivity is necessary
for the Exchange to notify OPRA and
other market participants that an order
has been cancelled, and that quotes may
have been cancelled as a result of a
Member purging quotes via their Purge
Port. Also, like other types of ports
offered by the Exchange, Purge Ports
leverage the Exchange’s existing 10Gb
ULL connectivity, which also relies on
connectivity to other national securities
exchanges and OPRA. The Exchange
does not employ a separate fee to cover
its connectivity provider expense and
recoups that expense, in part, by
charging for Purge Ports.
Internet Services and External Market
Data
The next cost driver consists of
internet services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
networks, primary and secondary data
centers, and office locations in
Princeton and Miami. For purposes of
Purge 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 OPRA, to receive and
consume market data from other
markets. The Exchange includes
external market data costs towards
Purge Ports because such market data is
necessary to offer certain services
related to such ports, such as checking
for market conditions (e.g., halted
securities). External market data is also
consumed at the Matching Engine level
for, among other things, validating
quotes on entry against the national best
bid or offer (‘‘NBBO’’).34 Purge Ports are
a component of the Matching Engine,
and used by market participants to
cancel multiple resting quotes within
the Matching Engine. While resting, the
Exchange uses external market data to
manage those quotes, such as preventing
trade-throughs, and those quotes are
also reported to OPRA for inclusion in
this consolidated data stream. The
Exchange also must notify OPRA and
other market participants that an order
has been cancelled, and that quotes may
have been cancelled as a result of a
Member purging quotes via their Purge
Port. Thus, since market data from other
exchanges is consumed by the Matching
Engine to validate quotes and check
market conditions, the Exchange
34 The term ‘‘NBBO’’ means the national best bid
or offer as calculated by the Exchange based on
market information received by the Exchange from
OPRA. See Exchange Rule 100.
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believes it is reasonable to allocate a
small amount of such costs to Purge
Ports.
For the reasons set forth above, the
Exchange believes it is reasonable to
allocate a small amount of such costs to
Purge Ports since market data from other
exchanges is consumed at the
Exchange’s Purge Port level to validate
purge messages and the necessity to
cancel a resting quote via a purge
message or via some other means.
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Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide Purge 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. 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. The
Exchange has allocated a percentage of
its Data Center cost (1.3%) to Purge
Ports because the third-party data
centers and the Exchange’s physical
equipment contained therein are
necessary for providing Purge Ports. In
other words, for the Exchange to operate
in a dedicated physical space with
direct connectivity by market
participants to its trading platform, the
data centers are a critical component to
the provision of Purge Ports. If the
Exchange did not maintain such a
presence, then Purge Ports would be of
little 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 Purge Ports for
each Matching Engine of the Exchange.
This hardware includes servers,
network switches, cables, optics,
protocol data units, and cabinets, to
maintain a state-of-the-art technology
platform. Without hardware and
software licenses, Purge Ports would not
be able to be offered to market
participants because hardware and
software are necessary to operate the
Exchange’s Matching Engines, which
are necessary to enable the purging of
quotes. The Exchange also routinely
works to improve the performance of
the hardware and software used to
operate the Exchange’s network and
System. The costs associated with
maintaining and enhancing a state-ofthe-art exchange network is a significant
expense for the Exchange, and thus the
Exchange believes that it is reasonable
and appropriate to allocate a certain
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percentage of its hardware and software
expense to help offset those costs of
providing Purge Port connectivity to its
Matching Engines.
Depreciation
The vast majority of the software the
Exchange uses to provide Ports has been
developed in-house and the cost of such
development, which takes place over an
extended period of time and includes
not just development work, but also
quality assurance and testing to ensure
the software works as intended, is
depreciated over time once the software
is activated in the production
environment. Hardware used to provide
Purge 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 1.0% of all depreciation costs
to providing Purge Ports. The Exchange
allocated depreciation costs for
depreciated software necessary to
operate the Exchange because such
software is related to the provision of
Purge 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 Purge Ports.
Allocated Shared Expenses
Finally, a portion of general shared
expenses was allocated to overall Purge
Port costs as without these general
shared costs the Exchange would not be
able to operate in the manner that it
does and provide Purge 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 3% of the overall cost for
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directors was allocated to providing
Purge Ports.
Approximate Cost for Purge Ports per
Month
Based on projected 2024 data, the
total monthly cost allocated to Purge
Ports of $68,581 was divided by the
total number of Matching Engines in
which Market Makers used Purge Ports
for the month of December 2023, which
was 132, resulting in an approximate
cost of $522 per Matching Engine per
month for Purge Port usage (when
rounding to the nearest dollar). The
Exchange notes that the flat fee of $600
per month per Matching Engine entitles
each Market Maker to two Purge Ports
per Matching Engine. The majority of
Market Makers are connected to all
twenty-four of the Exchange’s Matching
Engines and utilize Purge Ports on each
Matching Engine, except one Market
Maker, which only utilizes Purge Ports
on three Matching Engines.
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 Purge 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. For instance, in calculating
the Human Resources expenses to be
allocated to Purge Ports 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 higher
percentage of the cost of such personnel
(19.3%) given their focus on functions
necessary to provide Ports. The salaries
of those same personnel were allocated
only 2.6% to Purge Ports and the
remaining 97.4% was allocated to
connectivity, other port services,
transaction services, membership
services and market data. The Exchange
did not allocate any other Human
Resources expense for providing Purge
Ports to any other employee group,
outside of a smaller allocation of 1.3%
for Purge Ports, of the cost associated
with certain specified personnel who
work closely with and support network
infrastructure personnel. This is because
a much wider range of personnel are
involved in functions necessary to offer,
monitor and maintain Purge Ports but
the tasks necessary to do so are not a
primary or full-time function.
In total, the Exchange allocated 2.2%
of its personnel costs to providing Purge
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Ports. In turn, the Exchange allocated
the remaining 97.8% of its Human
Resources expense to membership
services, transaction services,
connectivity 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 Purge 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 Purge Port
services to its Market Makers. However,
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing Purge Port
services, but instead allocated
approximately 1.0% of the Exchange’s
overall depreciation and amortization
expense to Purge Ports. The Exchange
allocated the remaining depreciation
and amortization expense
(approximately 99%) toward the cost of
providing transaction services,
membership services, connectivity
services, other port services, and market
data.
The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated. The Exchange does
not yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
Purge Ports, the Exchange will have to
be successful in retaining existing
Market Makers that wish to maintain
Purge Ports or in obtaining new Market
Makers 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
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receive additional revenue to offset
future cost increases. However, if use of
port 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
to fees, and the Exchange commits to do
so.
Projected Revenue 35
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 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
35 For purposes of calculating projected 2024
revenue for Purge Ports, the Exchange used
revenues for the most recently completed full
month.
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35897
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 Purge Port services.
Subscribers, particularly those of Purge
Ports, 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. 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
(connections and ports), 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
Purge Port services will equal $822,969.
Based on current Purge Port services
usage, the Exchange would generate
annual revenue of approximately
$950,400. The Exchange believes this
represents a modest profit of 13.4%
when compared to the cost of providing
Purge Port services, which could
decrease over time.36
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
Purge Port services versus the total
projected revenue of the Exchange
associated with network Purge Port
services.
The Proposed Fees are Also Equitable,
Reasonable, and Not Unfairly
Discriminatory
The Exchange believes that the
proposed rule change would promote
36 Assuming the U.S. inflation rate continues at
its current rate, the Exchange believes that the
projected profit margins in this proposal will
decrease; however, the Exchange cannot predict
with any certainty whether the U.S. inflation rate
will continue at its current rate or its impact on the
Exchange’s future profits or losses. See, e.g., https://
www.usinflationcalculator.com/inflation/currentinflation-rates/ (last visited April 15, 2024).
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just and equitable principles of trade
and remove impediments to and perfect
the mechanism of a free and open
market because offering Market Makers
optional Purge Port services with a
flexible fee structure promotes choice,
flexibility, and efficiency. The Exchange
believes Purge Ports enhance Market
Makers’ ability to manage quotes, which
would, in turn, improve their risk
controls to the benefit of all market
participants. The Exchange believes that
Purge Ports foster cooperation and
coordination with persons engaged in
facilitating transactions in securities
because designating Purge Ports for
purge messages may encourage better
use of such ports. This may, concurrent
with the ports that carry quotes and
other information necessary for market
making activities, enable more efficient,
as well as fair and reasonable, use of
Market Makers’ resources. The
Exchange believes that proper risk
management, including the ability to
efficiently cancel multiple quotes
quickly when necessary is valuable to
all firms, including Market Makers that
have heightened quoting obligations
that are not applicable to other market
participants.
Purge Ports do not relieve Market
Makers of their quoting obligations or
firm quote obligations under Regulation
NMS Rule 602.37 Specifically, any
interest that is executable against a
Member’s or Market Maker’s quotes that
is received by the Exchange prior to the
time of the removal of quotes request
will automatically execute. Market
Makers that purge their quotes will not
be relieved of the obligation to provide
continuous two-sided quotes on a daily
basis, nor will it prohibit the Exchange
from taking disciplinary action against a
Market Maker for failing to meet their
continuous quoting obligation each
trading day.38
The Exchange also believes that
offering Purge Ports at the Matching
Engine level promotes risk management
across the industry, and thereby
facilitates investor protection. Some
market participants, in particular the
larger firms, could and do build similar
risk functionality in their trading
systems that permit the flexible
cancellation of quotes entered on the
Exchange at a high rate. Offering
Matching Engine level protections
ensures that such functionality is
widely available to all firms, including
smaller firms that may otherwise not be
willing to incur the costs and
development work necessary to support
37 See Exchange Rule 604. See also generally
Chapter VI of the Exchange’s Rules.
38 Id.
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their own customized mass cancel
functionality.
The Exchange also believes that
moving to a per Matching Engine fee for
Purge Ports is reasonable due to the
Exchange’s architecture that provides
the Exchange the ability to provide two
(2) Purge Ports per Matching Engine.
The Exchange believes that the
proposed Purge Port fees are equitable
because the proposed Purge Ports are
completely voluntary as they relate
solely to optional risk management
functionality.
The Exchange also believes that the
proposed amendments to its Fee
Schedule are not unfairly
discriminatory because they will apply
uniformly to all Market Makers that
choose to use the optional Purge Ports.
Purge Ports are completely voluntary
and, as they relate solely to optional risk
management functionality, no Market
Maker is required or under any
regulatory obligation to utilize them. All
Market Makers that voluntarily select
this service option will be charged the
same amount for the same services. All
Market Makers have the option to select
any port or connectivity option, and
there is no differentiation among Market
Makers with regard to the fees charged
for the services offered by the Exchange.
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 not
necessary or appropriate in furtherance
of the purposes of the Act. Purge Ports
are completely voluntary and are
available to all Market Makers on an
equal basis at the same cost. While the
Exchange believes that Purge Ports
provide a valuable service, Market
Makers can choose to purchase, or not
purchase, these ports based on their
own determination of the value and
their business needs. No Market Maker
is required or under any regulatory
obligation to utilize Purge Ports.
Accordingly, the Exchange believes that
Purge Ports offer appropriate risk
management functionality to firms that
trade on the Exchange without imposing
an unnecessary or inappropriate burden
on competition.
The Exchange also does not believe
the proposal would cause any
unnecessary or inappropriate burden on
intermarket competition as other
exchanges are free to introduce their
own purge port functionality and lower
their prices to better compete with the
Exchange’s offering. The Exchange does
not believe the proposed rule change
would cause any unnecessary or
inappropriate burden on intramarket
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competition. Particularly, the proposal
would apply uniformly to any market
participant, in that it does not
differentiate between Market Makers.
The proposal would allow any
interested Market Makers to purchase
Purge Port functionality based on their
business needs.
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 and one
comment letter on the Second Proposal,
both from the same commenter.39 These
comment letters were submitted not
only on these proposals, but also the
proposals by the Exchange and its
affiliates to amend fees for 10Gb ULL
connectivity and certain other ports.
The Exchange received one other
comment letter on the Second Proposal,
another on the Third Proposal, and
another on the Fourth Proposal from a
separate commenter.40 Overall, the
Exchange believes that the issues raised
by the first commenter are not germane
to this proposal because they apply
primarily to the other fee filings. Also,
both commenters raised concerns 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. However, the commenters do
raise one issue that concerns this
proposal whereby it asserts that the
Exchange’s comparison to fees charged
by other exchanges for similar ports is
irrelevant and unpersuasive. The core of
the issue raised is regarding the cost to
connect to one exchange compared to
the cost to connect to others. A thorough
response to this comment would require
the Exchange to obtain competitively
sensitive information about other
exchanges’ architecture and how their
members connect. The Exchange is not
privy to this information. Further, the
commenters compare the Exchange’s
proposed rate to other exchanges that
offer purge port functionality across all
matching engines for a single fee, but
fails to provide the same comparison to
other exchanges that charge for purge
functionality as proposed herein.
Nonetheless, the Exchange notes that it
39 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.
40 See letters from John C. Pickford, Counsel,
Susquehanna International Group, LLP (‘‘SIG’’), to
Vanessa Countryman, Secretary, Commission, dated
January 4, 2024, March 1, 2024, and April 11, 2024.
E:\FR\FM\02MYN1.SGM
02MYN1
Federal Register / Vol. 89, No. 86 / Thursday, May 2, 2024 / Notices
is relying on a cost-based justification to
support the proposed fee change, not a
comparison of the proposed fees to the
fees charged by other exchanges for
similar purging services. The Exchange
does not have insight into the technical
architecture of other exchanges so it is
difficult to ascertain the number of
purge ports a firm would need to
connect to another exchange’s entire
market. Therefore, the Exchange is
limited to comparing its proposed fee to
other exchanges’ purge port fees as
listed in their fee schedules.
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,41 and Rule
19b–4(f)(2) 42 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
khammond on DSKJM1Z7X2PROD with NOTICES
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
EMERALD–2024–14 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–2024–14. 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–2024–14 and should be
submitted on or before May 23, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–09473 Filed 5–1–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100037; File No. SR–
PEARL–2024–20]
Self-Regulatory Organizations; MIAX
PEARL, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the MIAX Pearl
Options Fee Schedule for Purge Ports
April 26, 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 April 15,
2024, MIAX PEARL, LLC (‘‘MIAX Pearl’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
43 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
41 15
U.S.C. 78s(b)(3)(A)(ii).
42 17 CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
17:14 May 01, 2024
1 15
Jkt 262001
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
35899
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 Pearl Options Exchange Fee
Schedule (the ‘‘Fee Schedule’’) to
amend fees for MIAX Express Network
(‘‘MEO’’) 3 Purge Ports (‘‘Purge Ports’’).4
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxglobal.com/markets/
us-options/pearl-options/rule-filings at
MIAX Pearl’s principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend the
fees for Purge Ports, which is a function
enabling the Exchange’s two types of
Members,5 Market Makers 6 and
Electronic Exchange Members 7
3 ‘‘MEO Interface’’ or ‘‘MEO’’ means a binary
order interface for certain order types as set forth
in Rule 516 into the MIAX Pearl System. See the
Definitions Section of the Fee Schedule and
Exchange Rule 100.
4 The proposed fee change is based on a recent
proposal by Nasdaq Phlx LLC (‘‘Phlx’’) to adopt fees
for purge ports. See Securities Exchange Act
Release No. 97825 (June 30, 2023), 88 FR 43405
(July 7, 2023) (SR–Phlx–2023–28).
5 The term ‘‘Member’’ means an individual or
organization that is registered with the Exchange
pursuant to Chapter II of Exchange Rules for
purposes of trading on the Exchange as an
‘‘Electronic Exchange Member’’ or ‘‘Market Maker.’’
Members are deemed ‘‘members’’ under the
Exchange Act. See the Definitions Section of the
Fee Schedule and Exchange Rule 100.
6 The term ‘‘Market Maker’’ or ‘‘MM’’ means a
Member registered with the Exchange for the
purpose of making markets in options contracts
traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VI
of the Exchange Rules. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
7 The term ‘‘Electronic Exchange Member’’ or
‘‘EEM’’ means the holder of a Trading Permit who
Continued
E:\FR\FM\02MYN1.SGM
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]]>Agencies
[Federal Register Volume 89, Number 86 (Thursday, May 2, 2024)]
[Notices]
[Pages 35891-35899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09473]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100039; File No. SR-EMERALD-2024-14]
Self-Regulatory Organizations; MIAX Emerald LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee
Schedule for Purge Ports
April 26, 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 April 15, 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 fees for Purge Ports.\3\
---------------------------------------------------------------------------
\3\ The proposed fee change is based on a recent proposal by
Nasdaq Phlx LLC (``Phlx'') to adopt fees for purge ports. See
Securities Exchange Act Release No. 97825 (June 30, 2023), 88 FR
43405 (July 7, 2023) (SR-Phlx-2023-28).
---------------------------------------------------------------------------
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'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 fees for Purge Ports, which is a
function enabling Market Makers \4\ to cancel all open quotes or a
subset of open quotes through a single cancel message. The Exchange
currently provides Market Makers the option to purchase Purge Ports to
assist in their quoting activity. Purge Ports provide Market Makers
with the ability to send purge messages to the Exchange System.\5\
Purge Ports are not capable of sending or receiving any other type of
messages or information. The use of Purge Ports is completely optional
and no rule or regulation requires that a Market Maker utilize them.
---------------------------------------------------------------------------
\4\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See Exchange Rule 100.
\5\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
---------------------------------------------------------------------------
The Exchange initially filed the proposal on September 29, 2023
(the ``Initial Proposal'').\6\ On November 22, 2023, the Exchange
withdrew the Initial Proposal and replaced with a revised filing (the
``Second Proposal'').\7\ On January 17, 2024, the Exchange withdrew the
Second Proposal and, on January 31, 2024, replaced it with a further
revised filing (the ``Third Proposal'').\8\ On March 8, 2024, the
Exchange withdrew the Third Proposal and replaced it with a further
revised filing (the ``Fourth Proposal'').\9\ On April 15, 2024, the
Exchange withdrew the Fourth Proposal and replaced it with a further
revised filing (the ``Fifth Proposal'').
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 98734 (October 12,
2023), 88 FR 71894 (October 18, 2023) (SR-EMERALD-2023-26).
\7\ See Securities Exchange Act Release No. 99089 (December 5,
2023), 88 FR 85941 (December 11, 2023) (SR-EMERALD-2023-29).
\8\ See Securities Exchange Act Release No. 99529 (February 13,
2024), 89 FR 12907 (February 20, 2024) (SR-EMERALD-2024-05).
\9\ See Securities Exchange Act Release No. 99812 (March 20,
2024), 89 FR 21080 (March 26, 2024) (SR-EMERALD-2024-11).
---------------------------------------------------------------------------
The Exchange is including a cost analysis in this filing to justify
the proposed fees. As described more fully below, the cost analysis
includes, among other things, descriptions of how the Exchange
allocated costs among it and its affiliated exchanges for similar
proposed fee changes (separately between MIAX Pearl Options \10\ and
MIAX,\11\ collectively referred to herein as the ``affiliated
markets''), to ensure no cost was allocated more than once, as well as
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 similar proposals submitted by the affiliated markets.
The proposed fees are intended to cover the Exchange's cost of
providing Purge Ports with a reasonable mark-up over those costs.
---------------------------------------------------------------------------
\10\ MIAX Pearl Options is the options market of MIAX PEARL, LLC
(``MIAX Pearl''), which also operates an equities trading facility
called MIAX Pearl Equities. See Exchange Rule 100 and MIAX Pearl
Rule 1901.
\11\ The term ``MIAX'' means Miami International Securities
Exchange, LLC. See Exchange Rule 100.
---------------------------------------------------------------------------
Purge Port Fee Change
Unlike other options exchanges that charge fees for Purge Ports on
a per port basis,\12\ the Exchange assesses a flat fee of $1,500 per
month, regardless of the number of Purge Ports utilized by a Market
Maker. Prior to the Initial Proposal, a Market Maker could request and
be allocated two (2) Purge Ports per Matching Engine \13\ to which it
connects and not all Market Makers connected to all of the Exchange's
Matching Engines.
---------------------------------------------------------------------------
\12\ See Cboe BXZ Exchange, Inc. (``BZX'') Options Fee Schedule,
Options Logical Port Fees, Purge Ports ($750 per purge port per
month); Cboe EDGX Exchange, Inc. (``EDGX'') Options Fee Schedule,
Options Logical Port Fees, Purge Ports ($750 per purge port per
month); Cboe Exchange, Inc. (``Cboe'') Fee Schedule ($850 per purge
port per month). See also Nasdaq GEMX, Options 7, Pricing Schedule,
Section 6.C.(3). Nasdaq GEMX, LLC (``Nasdaq GEMX'') assesses its
members $1,250 per SQF Purge Port per month, subject to a monthly
cap of $17,500 for SQF Purge Ports and SQF Ports, applicable to
market makers. See also Securities Exchange Act Release No. 97825
(June 30, 2023), 88 FR 43405 (July 7, 2023) (SR-Phlx-2023-28).
\13\ A Matching Engine is a part of the Exchange's electronic
system that processes options quotes and trades on a symbol-by-
symbol basis. Some matching engines will process option classes with
multiple root symbols, and other matching engines will be dedicated
to one single option root symbol (for example, options on SPY will
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.
---------------------------------------------------------------------------
The Exchange now proposes to amend the fee for Purge Ports to align
more closely with other exchanges who charge on a per port basis by
providing two (2) Purge Ports per Matching Engine for a monthly flat
fee of $600 per month per Matching Engine. The only difference with a
per port structure is that Market Makers receive two (2) Purge Ports
per Matching Engine for the
[[Page 35892]]
same proposed monthly fee, rather than being charged a separate fee for
each Purge Port. The Exchange proposes to charge the proposed fee for
Purge Ports per Matching Engine, instead on a per Purge Port basis, due
to its System architecture which provides two (2) Purge Ports per
Matching Engine for redundancy purposes. In addition, the proposed fee
is lower than the comparable fee charged by competing exchanges that
also charge on a per port basis, notwithstanding that the Exchange is
providing up to two (2) Purge Ports for that same lower fee.\14\ Other
exchanges may also maintain a different number of matching engines
within their architecture than the Exchange (i.e., MIAX maintains
twenty-four (24) matching engines, MIAX Pearl Options maintains twelve
(12) matching engines, and MIAX Emerald maintains twelve (12) matching
engines).
---------------------------------------------------------------------------
\14\ See supra note 12.
---------------------------------------------------------------------------
Similar to a per port charge, Market Makers are able to select the
Matching Engines that they want to connect to,\15\ based on the
business needs of each Market Maker, and pay the applicable fee based
on the number of Matching Engines and ports utilized. The Exchange
believes that the proposed fee provides Market Makers with flexibility
to control their Purge Port costs based on the number of Matching
Engines each Marker Maker elects to connect to based on each Market
Maker's business needs.
---------------------------------------------------------------------------
\15\ The Exchange notes that each Matching Engine corresponds to
a specified group of symbols. Certain Market Makers choose to only
quote in certain symbols while other Market Makers choose to quote
the entire market.
---------------------------------------------------------------------------
* * * * *
A logical port represents a port established by the Exchange within
the Exchange's System for trading and billing purposes. Each logical
port grants a Member \16\ the ability to accomplish a specific
function, such as order entry, order cancellation, access to execution
reports, and other administrative information.
---------------------------------------------------------------------------
\16\ 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.
---------------------------------------------------------------------------
Purge Ports are designed to assist Market Makers \17\ in the
management of, and risk control over, their quotes, particularly if the
firm is dealing with a large number of securities. For example, if a
Market Maker detects market indications that may influence the
execution potential of their quotes, the Market Maker may use Purge
Ports to reduce uncertainty and to manage risk by purging all quotes in
a number of securities. This allows Market Makers to seamlessly avoid
unintended executions, while continuing to evaluate the market, their
positions, and their risk levels. Purge Ports are used by Market Makers
that conduct business activity that exposes them to a large amount of
risk across a number of securities. Purge Ports enable Market Makers to
cancel all open quotes, or a subset of open quotes through a single
cancel message. The Exchange notes that Purge Ports increase efficiency
of already existing functionality enabling the cancellation of quotes.
---------------------------------------------------------------------------
\17\ Members seeking to become registered as a Market Maker must
comply with the applicable requirements of Chapter VI of the
Exchange's Rules.
---------------------------------------------------------------------------
The Exchange operates highly performant systems with significant
throughput and determinism which allows participants to enter, update
and cancel quotes at high rates. Market Makers may currently cancel
individual quotes through the existing functionality, such as through
the use of a mass cancel message by which a Market Maker may request
that the Exchange remove all or a subset of its quotations and block
all or a subset of its new inbound quotations.\18\ Other than Purge
Ports being a dedicated line for cancelling quotations, Purge Ports
operate in the same manner as a mass cancel message being sent over a
different type of port. For example, like Purge Ports, mass
cancellations sent over a logical port may be done at either the firm
or MPID level. As a result, Market Makers can currently cancel quotes
in rapid succession across their existing logical ports \19\ or through
a single cancel message, all open quotes or a subset of open quotes.
---------------------------------------------------------------------------
\18\ See Exchange Rule 519C(a) and (b).
\19\ Current Exchange port functionality supports cancelation
rates that exceed one thousand messages per second and the
Exchange's research indicates that certain market participants rely
on such functionality and at times utilize such cancelation rates.
---------------------------------------------------------------------------
Similarly, Market Makers may also use cancel-on-disconnect control
when they experience a disruption in connection to the Exchange to
automatically cancel all quotes, as configured or instructed by the
Member or Market Maker.\20\ In addition, the Exchange already provides
similar ability to mass cancel quotes through the Exchange's risk
controls, which are offered at no charge and enables Market Makers to
establish pre-determined levels of risk exposure, and can be used to
cancel all open quotes.\21\ Accordingly, the Exchange believes that the
Purge Ports provide an efficient option as an alternative to already
available services and enhance the Market Maker's ability to manage
their risk.
---------------------------------------------------------------------------
\20\ See Exchange Rule 519C (c).
\21\ See Exchange Rule 532.
---------------------------------------------------------------------------
The Exchange believes that market participants benefit from a
dedicated purge mechanism for specific Market Makers and to the market
as a whole. Market Makers will have the benefit of efficient risk
management and purge tools. The market will benefit from potential
increased quoting and liquidity as Market Makers may use Purge Ports to
manage their risk more robustly. Only Market Makers that request Purge
Ports would be subject to the proposed fees, and other Market Makers
can continue to operate in exactly the same manner as they do today
without dedicated Purge Ports, but with the additional purging
capabilities described above.
Implementation Date
The proposed fee change is immediately effective.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\22\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\23\ in particular, in that it
is not designed to permit unfair discrimination among customers,
brokers, or dealers. The Exchange also believes that its proposed fee
is consistent with Section 6(b)(4) of the Act \24\ because it
represents an equitable allocation of reasonable dues, fees and other
charges among market participants.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
\24\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
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 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
[[Page 35893]]
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,\25\ and Rule 19b-4 thereunder,\26\ with respect to the
types of information exchanges should provide when filing fee changes,
and Section 6(b) of the Act,\27\ which requires, among other things,
that exchange fees be reasonable and equitably allocated,\28\ not
designed to permit unfair discrimination,\29\ and that they not impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\30\ The Exchange notes 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 Staff Guidance.\31\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78s(b)(1).
\26\ 17 CFR 240.19b-4.
\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(4).
\29\ 15 U.S.C. 78f(b)(5).
\30\ 15 U.S.C. 78f(b)(8).
\31\ 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'').
---------------------------------------------------------------------------
As detailed below, the Exchange recently calculated its aggregate
annual costs for providing Purge Ports to be $822,969 (or approximately
$68,581 per month, rounded to the nearest dollar when dividing the
annual cost by 12 months). In order to cover the aggregate costs of
providing Purge Ports to its Market Makers going forward and to make a
modest profit, as described below, the Exchange proposes to modify its
Fee Schedule to charge a fee of $600 per Matching Engine for Purge
Ports.
In 2019, the Exchange completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis'').\32\ The
Cost Analysis required a detailed analysis of the Exchange's aggregate
baseline costs, including a determination and allocation of costs for
core services provided by the Exchange--transaction execution, market
data, membership services, physical connectivity, and port access
(which provide order entry, cancellation and modification
functionality, risk and purge 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''). The Exchange recently update its Cost Analysis using its
2024 estimated budget as described below.
---------------------------------------------------------------------------
\32\ The Exchange frequently updates it Cost Analysis as
strategic initiatives change, costs increase or decrease, and market
participant needs and trading activity changes. The Exchange's most
recent Cost Analysis was conducted ahead of this filing.
---------------------------------------------------------------------------
As an initial step, the Exchange determined the total cost for the
Exchange and the affiliated markets for each cost driver as part of its
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,\33\ storage needs, dedicated
infrastructure versus shared infrastructure allocated per platform
based on the resources required to support each platform, number of
available connections, and employees allocated time. All of these
factors result in different allocation percentages among the Exchange
and its affiliated markets, i.e., the different percentages of the
overall cost driver allocated to the Exchange and its affiliated
markets will cause the dollar amount of the overall cost allocated
among the Exchange and its affiliated markets to also differ. Because
the Exchange's parent company currently owns and operates four separate
and distinct marketplaces, the Exchange must determine the costs
associated with each actual market--as opposed to the Exchange's parent
company simply concluding that all costs drivers are the same at each
individual marketplace and dividing total cost by four (4) (evenly for
each marketplace). Rather, the Exchange's parent company determines an
accurate cost for each marketplace, which results in different
allocations and amounts across exchanges for the same cost drivers, due
to the unique factors of each marketplace as described above. This
allocation methodology also ensures that no cost would be allocated
twice or double-counted between the Exchange and its affiliated
markets. The Finance Team then consolidates the budget and sends it to
senior management, including the Chief Financial Officer and Chief
Executive Officer, for review and approval. Next, the budget is
presented to the Board of Directors and the Finance and Audit
Committees for each exchange for their approval. The above steps
encompass the first step of the cost allocation process.
---------------------------------------------------------------------------
\33\ For example, MIAX maintains 24 matching engines, MIAX Pearl
Options maintains 12 matching engines, MIAX Pearl Equities maintains
24 matching engines, and MIAX Emerald maintains 12 matching engines.
---------------------------------------------------------------------------
The next step involves determining what portion of the cost
allocated to the Exchange pursuant to the above methodology is to be
allocated to each core service, e.g., connectivity and ports, market
data, and transaction services. The Exchange and its affiliated markets
adopted an allocation methodology with thoughtful and consistently
applied principles to guide how much of a particular cost amount
allocated to the Exchange should be allocated within the Exchange to
each core service. This is the final step in the cost allocation
process and is applied to each of the cost drivers set forth below.
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
[[Page 35894]]
potentially use to fund its operations: transaction fees, fees for
connectivity and port services, membership fees, regulatory fees, and
market data fees. Accordingly, the Exchange must cover its expenses
from these five primary sources of revenue. The Exchange also notes
that as a general matter each of these sources of revenue is based on
services that are interdependent. For instance, the Exchange's system
for executing transactions is dependent on physical hardware and
connectivity; only Members and parties that they sponsor to participate
directly on the Exchange may submit orders to the Exchange; many
Members (but not all) consume market data from the Exchange in order to
trade on the Exchange; and, the Exchange consumes market data from
external sources in order to comply with regulatory obligations.
Accordingly, given this interdependence, the allocation of costs to
each service or revenue source required judgment of the Exchange and
was weighted based on estimates of the Exchange that the Exchange
believes are reasonable, as set forth below. While there is no
standardized and generally accepted methodology for the allocation of
an exchange's costs, the Exchange's methodology is the result of an
extensive review and analysis and will be consistently applied going
forward for any other potential fee proposals. In the absence of the
Commission attempting to specify a methodology for the allocation of
exchanges' interdependent costs, the Exchange will continue to be left
with its best efforts to attempt to conduct such an allocation in a
thoughtful and reasonable manner.
Through the Exchange's extensive updated Cost Analysis, which was
again recently further refined, the Exchange analyzed every expense
item in the Exchange's general expense ledger to determine whether each
such expense relates to the provision of connectivity and port
services, and, if such expense did so relate, what portion (or
percentage) of such expense actually supports the provision of Purge
Port services, and thus bears a relationship that is, ``in nature and
closeness,'' directly related to Purge 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 Purge
Port services is $68,581, as further detailed below.
Costs Related to Offering Purge Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Purge Ports 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 2.2% of its overall Human Resources cost to
offering Purge Ports).
----------------------------------------------------------------------------------------------------------------
Allocated Allocated
Cost drivers annual cost \a\ monthly cost \b\ % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................. $491,123 $40,927 2.2
Connectivity (external fees, cabling, switches, etc.)........... 868 72 0.9
Internet Services and External Market Data...................... 4,914 410 0.9
Data Center..................................................... 20,379 1,698 1.3
Hardware and Software Maintenance and Licenses.................. 16,268 1,356 0.9
Depreciation.................................................... 36,917 3,076 1.0
Allocated Shared Expenses....................................... 252,500 21,042 2.9
-----------------------------------------------
Total....................................................... 822,969 68,581 2.1
----------------------------------------------------------------------------------------------------------------
\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 Purge Ports. While
some costs were attempted to be allocated as equally as possible among
the Exchange and its affiliated markets, the Exchange notes that some
of its cost allocation percentages for certain cost drivers differ when
compared to the same cost drivers for the Exchange's affiliated markets
in their similar proposed fee changes for Purge Ports. This is because
the Exchange's cost allocation methodology utilizes the actual
projected costs of the Exchange (which are specific to the Exchange and
are independent of the costs projected and utilized by the Exchange's
affiliated markets) to determine its actual costs, which may vary
across the Exchange and its affiliated markets based on factors that
are unique to each marketplace. The Exchange provides additional
explanation below (including the reason for the deviation) for the
significant differences.
Human Resources
The Exchange notes that it and its affiliated markets 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 Purge Ports and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide port and
connectivity services). 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
[[Page 35895]]
Exchange is then allocated to port services. From that portion
allocated to the Exchange that applied to ports, the Exchange then
allocated a weighted average of 2.6% of each employee's time from the
above group to Purge Ports.
The Exchange also allocated Human Resources costs to provide Purge
Ports to a limited subset of personnel with ancillary functions related
to establishing and maintaining such ports (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 Purge Ports)
and then applied a smaller allocation to such employees' time to Purge
Ports (1.3%). This other group of personnel with a smaller allocation
of Human Resources costs also have a direct nexus to Purge Ports,
whether it is a sales person selling port services, finance personnel
billing for port services or providing budget analysis, or information
security ensuring that such ports are 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 Purge Ports, 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 Purge Ports: 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 2.6% of each of their
employee's time assigned to the Exchange for Purge Ports, as stated
above. Employees from these departments perform numerous functions to
support Purge Ports, such as the installation, re-location,
configuration, and maintenance of Purge Ports 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 Purge Ports 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 Purge
Ports, 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 Purge Ports related Human Resources costs to the
extent that they are involved in overseeing tasks related to providing
Purge Ports. 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 vendors 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 which includes Purge Ports. Without these services
providers, the Exchange would not be able to connect to other national
securities exchanges, market data providers or OPRA and, therefore,
would not be able to operate and support its System Networks, including
Purge Ports. In addition, the connectivity is necessary for the
Exchange to notify OPRA and other market participants that an order has
been cancelled, and that quotes may have been cancelled as a result of
a Member purging quotes via their Purge Port. Also, like other types of
ports offered by the Exchange, Purge Ports leverage the Exchange's
existing 10Gb ULL connectivity, which also relies on connectivity to
other national securities exchanges and OPRA. The Exchange does not
employ a separate fee to cover its connectivity provider expense and
recoups that expense, in part, by charging for Purge Ports.
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 Purge 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 OPRA, to receive and consume market data from other markets.
The Exchange includes external market data costs towards Purge Ports
because such market data is necessary to offer certain services related
to such ports, such as checking for market conditions (e.g., halted
securities). External market data is also consumed at the Matching
Engine level for, among other things, validating quotes on entry
against the national best bid or offer (``NBBO'').\34\ Purge Ports are
a component of the Matching Engine, and used by market participants to
cancel multiple resting quotes within the Matching Engine. While
resting, the Exchange uses external market data to manage those quotes,
such as preventing trade-throughs, and those quotes are also reported
to OPRA for inclusion in this consolidated data stream. The Exchange
also must notify OPRA and other market participants that an order has
been cancelled, and that quotes may have been cancelled as a result of
a Member purging quotes via their Purge Port. Thus, since market data
from other exchanges is consumed by the Matching Engine to validate
quotes and check market conditions, the Exchange
[[Page 35896]]
believes it is reasonable to allocate a small amount of such costs to
Purge Ports.
---------------------------------------------------------------------------
\34\ The term ``NBBO'' means the national best bid or offer as
calculated by the Exchange based on market information received by
the Exchange from OPRA. See Exchange Rule 100.
---------------------------------------------------------------------------
For the reasons set forth above, the Exchange believes it is
reasonable to allocate a small amount of such costs to Purge Ports
since market data from other exchanges is consumed at the Exchange's
Purge Port level to validate purge messages and the necessity to cancel
a resting quote via a purge message or via some other means.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide Purge 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. 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. The Exchange has allocated a
percentage of its Data Center cost (1.3%) to Purge Ports because the
third-party data centers and the Exchange's physical equipment
contained therein are necessary for providing Purge Ports. In other
words, for the Exchange to operate in a dedicated physical space with
direct connectivity by market participants to its trading platform, the
data centers are a critical component to the provision of Purge Ports.
If the Exchange did not maintain such a presence, then Purge Ports
would be of little 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
Purge Ports for each Matching Engine of the Exchange. This hardware
includes servers, network switches, cables, optics, protocol data
units, and cabinets, to maintain a state-of-the-art technology
platform. Without hardware and software licenses, Purge Ports would not
be able to be offered to market participants because hardware and
software are necessary to operate the Exchange's Matching Engines,
which are necessary to enable the purging of quotes. The Exchange also
routinely works to improve the performance of the hardware and software
used to operate the Exchange's network and System. 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 allocate a certain percentage
of its hardware and software expense to help offset those costs of
providing Purge Port connectivity to its Matching Engines.
Depreciation
The vast majority of the software the Exchange uses to provide
Ports has been developed in-house and the cost of such development,
which takes place over an extended period of time and includes not just
development work, but also quality assurance and testing to ensure the
software works as intended, is depreciated over time once the software
is activated in the production environment. Hardware used to provide
Purge 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 1.0% of
all depreciation costs to providing Purge Ports. The Exchange allocated
depreciation costs for depreciated software necessary to operate the
Exchange because such software is related to the provision of Purge
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 Purge Ports.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall Purge Port costs as without these general shared costs the
Exchange would not be able to operate in the manner that it does and
provide Purge 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 3% of
the overall cost for directors was allocated to providing Purge Ports.
Approximate Cost for Purge Ports per Month
Based on projected 2024 data, the total monthly cost allocated to
Purge Ports of $68,581 was divided by the total number of Matching
Engines in which Market Makers used Purge Ports for the month of
December 2023, which was 132, resulting in an approximate cost of $522
per Matching Engine per month for Purge Port usage (when rounding to
the nearest dollar). The Exchange notes that the flat fee of $600 per
month per Matching Engine entitles each Market Maker to two Purge Ports
per Matching Engine. The majority of Market Makers are connected to all
twenty-four of the Exchange's Matching Engines and utilize Purge Ports
on each Matching Engine, except one Market Maker, which only utilizes
Purge Ports on three Matching Engines.
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 Purge 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. For
instance, in calculating the Human Resources expenses to be allocated
to Purge Ports 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 higher percentage of the cost of such personnel
(19.3%) given their focus on functions necessary to provide Ports. The
salaries of those same personnel were allocated only 2.6% to Purge
Ports and the remaining 97.4% was allocated to connectivity, other port
services, transaction services, membership services and market data.
The Exchange did not allocate any other Human Resources expense for
providing Purge Ports to any other employee group, outside of a smaller
allocation of 1.3% for Purge Ports, of the cost associated with certain
specified personnel who work closely with and support network
infrastructure personnel. This is because a much wider range of
personnel are involved in functions necessary to offer, monitor and
maintain Purge Ports but the tasks necessary to do so are not a primary
or full-time function.
In total, the Exchange allocated 2.2% of its personnel costs to
providing Purge
[[Page 35897]]
Ports. In turn, the Exchange allocated the remaining 97.8% of its Human
Resources expense to membership services, transaction services,
connectivity 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 Purge 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 Purge Port services to its Market Makers. However, the Exchange
did not allocate all of the depreciation and amortization expense
toward the cost of providing Purge Port services, but instead allocated
approximately 1.0% of the Exchange's overall depreciation and
amortization expense to Purge Ports. The Exchange allocated the
remaining depreciation and amortization expense (approximately 99%)
toward the cost of providing transaction services, membership services,
connectivity services, other port services, and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated. The Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from Purge Ports, the Exchange will have to be
successful in retaining existing Market Makers that wish to maintain
Purge Ports or in obtaining new Market Makers 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 port services is static or decreases, the Exchange might not
realize the revenue that it anticipates or needs in order to cover
applicable costs. Accordingly, the Exchange is committing to conduct a
one-year review after implementation of these fees. The Exchange
expects that it may propose to adjust fees at that time, to increase
fees in the event that revenues fail to cover costs and a reasonable
mark-up of such costs. Similarly, the Exchange may propose to decrease
fees in the event that revenue materially exceeds our current
projections. In addition, the Exchange will periodically conduct a
review to inform its decision making on whether a fee change is
appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based
analysis) and would propose to increase fees in the event that revenues
fail to cover its costs and a reasonable mark-up, or decrease fees in
the event that revenue or the mark-up materially exceeds our current
projections. In the event that the Exchange determines to propose a fee
change, the results of a timely review, including an updated cost
estimate, will be included in the rule filing proposing the fee change.
More generally, the Exchange believes that it is appropriate for an
exchange to refresh and update information about its relevant costs and
revenues in seeking any future changes to fees, and the Exchange
commits to do so.
Projected Revenue \35\
---------------------------------------------------------------------------
\35\ For purposes of calculating projected 2024 revenue for
Purge Ports, 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 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 Purge Port services. Subscribers,
particularly those of Purge Ports, 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. 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 (connections and ports), 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
Purge Port services will equal $822,969. Based on current Purge Port
services usage, the Exchange would generate annual revenue of
approximately $950,400. The Exchange believes this represents a modest
profit of 13.4% when compared to the cost of providing Purge Port
services, which could decrease over time.\36\
---------------------------------------------------------------------------
\36\ Assuming the U.S. inflation rate continues at its current
rate, the Exchange believes that the projected profit margins in
this proposal will decrease; however, the Exchange cannot predict
with any certainty whether the U.S. inflation rate will continue at
its current rate or its impact on the Exchange's future profits or
losses. See, e.g., https://www.usinflationcalculator.com/inflation/current-inflation-rates/ (last visited April 15, 2024).
---------------------------------------------------------------------------
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 Purge Port services versus the total
projected revenue of the Exchange associated with network Purge Port
services.
The Proposed Fees are Also Equitable, Reasonable, and Not Unfairly
Discriminatory
The Exchange believes that the proposed rule change would promote
[[Page 35898]]
just and equitable principles of trade and remove impediments to and
perfect the mechanism of a free and open market because offering Market
Makers optional Purge Port services with a flexible fee structure
promotes choice, flexibility, and efficiency. The Exchange believes
Purge Ports enhance Market Makers' ability to manage quotes, which
would, in turn, improve their risk controls to the benefit of all
market participants. The Exchange believes that Purge Ports foster
cooperation and coordination with persons engaged in facilitating
transactions in securities because designating Purge Ports for purge
messages may encourage better use of such ports. This may, concurrent
with the ports that carry quotes and other information necessary for
market making activities, enable more efficient, as well as fair and
reasonable, use of Market Makers' resources. The Exchange believes that
proper risk management, including the ability to efficiently cancel
multiple quotes quickly when necessary is valuable to all firms,
including Market Makers that have heightened quoting obligations that
are not applicable to other market participants.
Purge Ports do not relieve Market Makers of their quoting
obligations or firm quote obligations under Regulation NMS Rule
602.\37\ Specifically, any interest that is executable against a
Member's or Market Maker's quotes that is received by the Exchange
prior to the time of the removal of quotes request will automatically
execute. Market Makers that purge their quotes will not be relieved of
the obligation to provide continuous two-sided quotes on a daily basis,
nor will it prohibit the Exchange from taking disciplinary action
against a Market Maker for failing to meet their continuous quoting
obligation each trading day.\38\
---------------------------------------------------------------------------
\37\ See Exchange Rule 604. See also generally Chapter VI of the
Exchange's Rules.
\38\ Id.
---------------------------------------------------------------------------
The Exchange also believes that offering Purge Ports at the
Matching Engine level promotes risk management across the industry, and
thereby facilitates investor protection. Some market participants, in
particular the larger firms, could and do build similar risk
functionality in their trading systems that permit the flexible
cancellation of quotes entered on the Exchange at a high rate. Offering
Matching Engine level protections ensures that such functionality is
widely available to all firms, including smaller firms that may
otherwise not be willing to incur the costs and development work
necessary to support their own customized mass cancel functionality.
The Exchange also believes that moving to a per Matching Engine fee
for Purge Ports is reasonable due to the Exchange's architecture that
provides the Exchange the ability to provide two (2) Purge Ports per
Matching Engine.
The Exchange believes that the proposed Purge Port fees are
equitable because the proposed Purge Ports are completely voluntary as
they relate solely to optional risk management functionality.
The Exchange also believes that the proposed amendments to its Fee
Schedule are not unfairly discriminatory because they will apply
uniformly to all Market Makers that choose to use the optional Purge
Ports. Purge Ports are completely voluntary and, as they relate solely
to optional risk management functionality, no Market Maker is required
or under any regulatory obligation to utilize them. All Market Makers
that voluntarily select this service option will be charged the same
amount for the same services. All Market Makers have the option to
select any port or connectivity option, and there is no differentiation
among Market Makers with regard to the fees charged for the services
offered by the Exchange.
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 not necessary or appropriate in
furtherance of the purposes of the Act. Purge Ports are completely
voluntary and are available to all Market Makers on an equal basis at
the same cost. While the Exchange believes that Purge Ports provide a
valuable service, Market Makers can choose to purchase, or not
purchase, these ports based on their own determination of the value and
their business needs. No Market Maker is required or under any
regulatory obligation to utilize Purge Ports. Accordingly, the Exchange
believes that Purge Ports offer appropriate risk management
functionality to firms that trade on the Exchange without imposing an
unnecessary or inappropriate burden on competition.
The Exchange also does not believe the proposal would cause any
unnecessary or inappropriate burden on intermarket competition as other
exchanges are free to introduce their own purge port functionality and
lower their prices to better compete with the Exchange's offering. The
Exchange does not believe the proposed rule change would cause any
unnecessary or inappropriate burden on intramarket competition.
Particularly, the proposal would apply uniformly to any market
participant, in that it does not differentiate between Market Makers.
The proposal would allow any interested Market Makers to purchase Purge
Port functionality based on their business needs.
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
and one comment letter on the Second Proposal, both from the same
commenter.\39\ These comment letters were submitted not only on these
proposals, but also the proposals by the Exchange and its affiliates to
amend fees for 10Gb ULL connectivity and certain other ports. The
Exchange received one other comment letter on the Second Proposal,
another on the Third Proposal, and another on the Fourth Proposal from
a separate commenter.\40\ Overall, the Exchange believes that the
issues raised by the first commenter are not germane to this proposal
because they apply primarily to the other fee filings. Also, both
commenters raised concerns 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. However, the commenters do
raise one issue that concerns this proposal whereby it asserts that the
Exchange's comparison to fees charged by other exchanges for similar
ports is irrelevant and unpersuasive. The core of the issue raised is
regarding the cost to connect to one exchange compared to the cost to
connect to others. A thorough response to this comment would require
the Exchange to obtain competitively sensitive information about other
exchanges' architecture and how their members connect. The Exchange is
not privy to this information. Further, the commenters compare the
Exchange's proposed rate to other exchanges that offer purge port
functionality across all matching engines for a single fee, but fails
to provide the same comparison to other exchanges that charge for purge
functionality as proposed herein. Nonetheless, the Exchange notes that
it
[[Page 35899]]
is relying on a cost-based justification to support the proposed fee
change, not a comparison of the proposed fees to the fees charged by
other exchanges for similar purging services. The Exchange does not
have insight into the technical architecture of other exchanges so it
is difficult to ascertain the number of purge ports a firm would need
to connect to another exchange's entire market. Therefore, the Exchange
is limited to comparing its proposed fee to other exchanges' purge port
fees as listed in their fee schedules.
---------------------------------------------------------------------------
\39\ 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.
\40\ See letters from John C. Pickford, Counsel, Susquehanna
International Group, LLP (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated January 4, 2024, March 1, 2024, and
April 11, 2024.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\41\ and Rule 19b-4(f)(2) \42\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\41\ 15 U.S.C. 78s(b)(3)(A)(ii).
\42\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-EMERALD-2024-14 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-2024-14. 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-2024-14 and should
be submitted on or before May 23, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09473 Filed 5-1-24; 8:45 am]
BILLING CODE 8011-01-P
