Self-Regulatory Organizations; MIAX Sapphire, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX Sapphire, LLC To Adopt Connectivity and Certain Port Fees for Members and Non-Members, 86024-86046 [2024-25056]
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khammond on DSKJM1Z7X2PROD with NOTICES
86024
Federal Register / Vol. 89, No. 209 / Tuesday, October 29, 2024 / Notices
sections 18(a)(2), 18(c) and 18(i) of the
Act, under sections 6(c) and 23(c) of the
Act for an exemption from rule 23c–3
under the Act, and for an order pursuant
to section 17(d) of the Act and rule 17d–
1 under the Act.
SUMMARY OF APPLICATION: Applicants
request an order to permit certain
registered closed-end investment
companies to issue multiple classes of
shares and to impose asset-based
distribution and/or service fees and
early withdrawal charges.1
APPLICANTS: Gemcorp Capital Advisors
LLC and Gemcorp Commodities
Alternative Products Fund.
FILING DATES: The application was filed
on June 28, 2024, and amended on July
11, 2024, August 23, 2024, and October
22, 2024.
HEARING OR NOTIFICATION OF HEARING:
An order granting the requested relief
will be issued unless the Commission
orders a hearing. Interested persons may
request a hearing on any application by
emailing the SEC’s Secretary at
Secretarys-Office@sec.gov and serving
the Applicants with a copy of the
request by email, if an email address is
listed for the relevant Applicant below,
or personally or by mail, if a physical
address is listed for the relevant
Applicant below. Hearing requests
should be received by the Commission
by 5:30 p.m. on November 13, 2024, and
should be accompanied by proof of
service on the Applicants, in the form
of an affidavit, or, for lawyers, a
certificate of service. Pursuant to rule 0–
5 under the Act, hearing requests should
state the nature of the writer’s interest,
any facts bearing upon the desirability
of a hearing on the matter, the reason for
the request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
emailing the Commission’s Secretary.
ADDRESSES: The Commission:
Secretarys-Office@sec.gov. Applicants:
Sally-Jane Miller, sjmiller@gemcorp.net,
with a copy to Kaitlin McGrath, Esq.,
Dechert LLP, One International Place,
40th Floor, 100 Oliver Street, Boston,
Massachusetts 02110–2605.
FOR FURTHER INFORMATION CONTACT:
Trace W. Rakestraw, Senior Special
Counsel, at (202) 551–6825 (Division of
Investment Management, Chief
Counsel’s Office).
SUPPLEMENTARY INFORMATION: For
Applicants’ representations, legal
analysis, and conditions, please refer to
Applicants’ application, dated October
1 The Commission issued a notice of application
on September 19, 2024. Applicants subsequently
amended the application on October 22, 2024, so
a new notice is being issued.
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22, 2024, which may be obtained via the
Commission’s website by searching for
the file number at the top of this
document, or for an Applicant using the
Company name search field on the
SEC’s EDGAR system. The SEC’s
EDGAR system may be searched at
https://www.sec.gov/edgar/searchedgar/
legacy/companysearch.html. You may
also call the SEC’s Public Reference
Room at (202) 551–8090.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–25046 Filed 10–28–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101418; File No. SR–
SAPPHIRE–2024–32]
Self-Regulatory Organizations; MIAX
Sapphire, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change by MIAX Sapphire, LLC
To Adopt Connectivity and Certain
Port Fees for Members and NonMembers
October 23, 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 October
10, 2024, MIAX Sapphire, LLC (‘‘MIAX
Sapphire’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
as described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend the MIAX Sapphire Options
Exchange Fee Schedule (the ‘‘Fee
Schedule’’) to adopt certain nontransaction fees. The text of the
proposed rule change is available on the
Exchange’s website at https://
www.miaxglobal.com/markets/usoptions/miax-sapphire/rule-filings, at
the Exchange’s principal office, and at
the Commission’s Public Reference
Room.
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On July 15, 2024, the U.S. Securities
and Exchange Commission
(‘‘Commission’’) approved the
Exchange’s Form 1 application to
register as a national securities exchange
under Section 6 of the Exchange Act.3
The Exchange commenced electronic
operations on August 12, 2024.4 The
Exchange proposes to establish the
following sections of the Fee Schedule,
including proposed fee structures and
amounts (the majority of which the
Exchange proposes to waive for a
specified time, as discussed further
below): (1) connectivity fees for
Members 5 and non-Members; and (2)
certain port fees for Members and nonMembers.6 The Exchange initially filed
this proposal on August 9, 2024 (SR–
SAPPHIRE–2024–21). The Exchange
withdrew SR–SAPPHIRE–2024–21 on
August 14, 2024 and submitted SR–
SAPPHIRE–2024–22. On October 10,
2024, the Exchange withdrew SR–
3 See Securities Exchange Act Release No. 100539
(July 15, 2024), 89 FR 58848 (July 19, 2024) (File
No. 10–240) (the ‘‘Approval Order’’).
4 See MIAX Sapphire News Alert, dated August
13, 2024, available at https://www.miaxglobal.com/
alert/2024/08/13/miami-international-holdingsannounces-successful-launch-miaxsapphire?nav=all.
5 The term ‘‘Member’’ means an individual or
organization that is registered with the Exchange
pursuant to Chapter II of the Exchange’s 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 Exchange Rule 100.
6 The Exchange filed a separate rule filing to
establish fees for Purge Ports. See SR–SAPPHIRE–
2024–15. ‘‘Purge Ports’’ provide Market Makers
with the ability to send quote purge messages to the
MIAX Sapphire System. Purge Ports are not capable
of sending or receiving any other type of messages
or information. See the Definitions section of the
Fee Schedule. Fees for all other types of ports are
proposed in this filing.
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SAPPHIRE–2024–22 and submitted this
proposal.
Connectivity Fees
The Exchange proposes to establish
Section 5), System Connectivity Fees,
which will describe network
connectivity fees. The Exchange
proposes to offer to both Members and
non-Members the choice of a 1 Gigabit
(‘‘Gb’’) fiber connection or the 10Gb
ultra-low latency (‘‘ULL’’) fiber
connection to the Exchange’s primary
and secondary facilities, as well as its
disaster recovery facility. The 1Gb and
10Gb ULL fees will be charged to both
Members and non-Members for
connectivity to the Exchange’s primary/
secondary facility and to its disaster
recovery facility.
The Exchange proposes to establish
monthly fees of $1,400 per 1Gb
connection and $13,500 per 10Gb ULL
connection that will be assessed to
Members and non-Members for
connecting to the primary/secondary
facility. The Exchange proposes to
establish monthly fees of $550 per 1Gb
connection and $2,750 per 10Gb ULL
connection that will be assessed to
Members and non-Members for
connecting to the disaster recovery
facility.
Monthly network connectivity fees for
Members and non-Members for
connectivity with the primary/
secondary facility will be assessed in
any month the Member or non-Member
is credentialed to use any of the MIAX
Sapphire Application Programming
Interfaces (‘‘APIs’’) or market data feeds
in the production environment. Further,
the Exchange proposes to pro-rate the
monthly fees when a Member or nonMember makes a change to the
connectivity (by adding or deleting
connections) with such pro-rated fees
based on the number of trading days
that the Member or non-Member has
been credentialed to utilize any of the
MIAX Sapphire APIs or market data
feeds in the production environment
through such connection, divided by the
total number of trading days in such
month multiplied by the applicable
monthly rate. Monthly network
connectivity fees for Members and nonMembers for connectivity to the disaster
recovery facility will be assessed in each
month during which the Member or
non-Member has established
connectivity to the disaster recovery
facility.
The Exchange proposes that Members
and non-Members utilizing the MENI 7
7 The
term ‘‘MENI’’ means the MIAX Express
Network Interconnect, which is a network
infrastructure which provides Members and non-
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to connect to the trading platforms,
market data systems, and disaster
recovery facilities of the Exchange or its
affiliated options markets (MIAX, MIAX
Pearl, and MIAX Emerald) 8 via a single,
shared 1Gb connection will only be
assessed one monthly network
connectivity fee per connection,
regardless of the trading platforms,
market data systems, and disaster
recovery facilities accessed via such
connection.
Waiver Period for Connectivity Fees.
The Exchange proposes to waive the
monthly Member and non-Member
network connectivity fees for the 1Gb
connections to the primary/secondary
facility and disaster recovery facility,
and the 10Gb ULL connections to the
disaster recovery facility for the partial
month in which the Exchange launches
operations, plus an additional three full
calendar months. The proposed
monthly Member and non-Member
network connectivity fees for the 1Gb
connections to the primary/secondary
facility and disaster recovery facility,
and 10Gb ULL connections to the
disaster recovery facility will be
discounted by 50% for the three full
calendar months thereafter.
The Exchange proposes to waive the
monthly Member and non-Member
network connectivity fees for the first
two 10Gb ULL connections on each
switch 9 to the primary/secondary
facility for the partial month in which
the Exchange launches operations, plus
an additional three full calendar
months. The Exchange proposes that the
monthly Member and non-Member
network connectivity fees for the first
Members network connectivity to the MIAX
Sapphire trading platform, market data systems, test
systems, and disaster recovery facilities. When
utilizing a shared 1Gb cross-connect, the MENI can
also be configured to offer network connectivity to
the trading platforms, market data systems, test
systems, and disaster recovery facilities of the
Exchange’s affiliates, MIAX, MIAX Pearl and MIAX
Emerald. When utilizing a Dedicated cross-connect,
the MENI can only be configured to offer network
connectivity to the trading platforms, market data
systems, and test systems of MIAX Sapphire. See
the Definitions section of the Fee Schedule.
8 The term ‘‘MIAX’’ means Miami International
Securities Exchange, LLC. See Exchange Rule 100.
The term ‘‘MIAX Pearl’’ means MIAX PEARL, LLC.
All references to ‘‘MIAX Pearl’’ in this filing are to
the options trading facility of MIAX PEARL, LLC.
References to ‘‘MIAX Pearl Equities’’ are to the
equities trading facility of MIAX PEARL, LLC. See
MIAX Pearl Rule 1901. The term ‘‘MIAX Emerald’’
means MIAX Emerald, LLC. See Exchange Rule 100.
MIAX, MIAX Pearl and MIAX Emerald are
collectively referred to herein as the ‘‘affiliated
markets.’’
9 The network switches are the first layer of
access to the trading platform that firms connect to
before being able to access the Exchange’s matching
engines, each of which pertain to a certain list of
underlying symbols. The Exchange notes that it is
possible to reach each matching engine from a
single switch.
PO 00000
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86025
two 10Gb ULL connections on each
switch to the primary/secondary facility
will be discounted by 50% for the three
full calendar months thereafter. Any
subsequent 10Gb ULL connections on
each switch will be charged the full
monthly rate of $13,500 per 10Gb ULL
connection.
For clarity, the Exchange provides the
below examples regarding connectivity
fees, utilizing the launch date of August
12, 2024:
• Members and non-Members that
subscribe to the 1Gb connection to the
primary/secondary facility and/or
disaster recovery facility, and/or
subscribe to the 10Gb ULL connection
to the disaster recovery facility, will not
be charged the proposed rates (i.e.,
$1,400 for 1Gb connections to the
primary/secondary facility, $550 for 1Gb
connections to the disaster recovery
facility, or $2,750 for 10Gb ULL
connections to the disaster recovery
facility) for the remaining days in
August, as well as for the entire period
covering the months of September 2024
through November 2024. Thereafter,
Members and non-Members will receive
a 50% discount for each 1Gb connection
to the primary/secondary facility and
disaster recovery facility, and for each
10Gb ULL connection to the disaster
recovery facility for entire period
covering December 2024 through
February 2025.
• Members and non-Members that
subscribe to the 10Gb ULL connection
to the primary/secondary facility will
not be charged the proposed rate
($13,500) for the first two 10Gb ULL
connections on each switch to the
primary/secondary facility for the
remaining days in August, as well as the
entire period cover the months of
September through November 2024.
Thereafter, Members and non-Members
will receive a 50% discount for the first
two 10Gb ULL connections on each
switch to the primary/secondary facility
for entire period covering December
2024 through February 2025. For each
10Gb ULL connection on each switch
greater than two (i.e., three or more),
Members and non-Members will be
assessed the entire amount of the
proposed rate beginning upon the
launch of the Exchange.
The Exchange previously
communicated to market participants
that the Exchange intends to waive the
monthly Member and non-Member
network connectivity fees in the manner
described above.10 Even though the
10 See Fee Change Alert, MIAX Sapphire Options
Exchange—Updated Summary of Proposed NonTransaction Fees to Clarify Application of
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Exchange proposes to waive the
Member and non-Member network
connectivity fees for the periods of time
described above, the Exchange believes
that it is appropriate to provide market
participants with the overall structure of
the fees by outlining the structure and
amounts in the Fee Schedule, so that
there is general awareness that the
Exchange intends to assess such fees in
the future. The Exchange notes that its
affiliated markets, MIAX, MIAX Pearl
and MIAX Emerald, provide for the
same structure and amounts, absent the
waiver and discount periods described
above, for connectivity fees assessed to
their Members and non-Members.11
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Port Fees
The Exchange proposes to establish
Section 5)d), Port Fees, which will
provide the fee structure and amounts
for the different types of ports offered by
the Exchange, which are described
below.12 MIAX Sapphire has primary
and secondary data centers and a
disaster recovery center. Each port
provides access to all Exchange data
centers for a single fee. The Exchange
notes that, unless otherwise specifically
set forth in the Fee Schedule, the port
fees include the information
communicated through the port. That is,
unless otherwise specifically set forth in
the Fee Schedule, there is no additional
charge for the information that is
communicated through the port apart
from what the user is assessed for each
port.
Waiver Period. The Exchange
proposes to waive all port fees during
the Initial Waiver Period.13 Even though
the Exchange proposes to fully waive all
port fees during the Initial Waiver
Period upon launching operations, the
Exchange believes that is appropriate to
provide market participants with the
overall structure of the fees by outlining
the structure and amounts in the Fee
Schedule, so that there is general
awareness that the Exchange intends to
Production Connectivity Waiver Period, dated July
26, 2024, available at https://www.miaxglobal.com/
alert/2024/07/26/miax-sapphire-options-exchangeupdated-summary-proposed-non-transaction.
11 See MIAX Fee Schedule, Sections 5)a)–b);
MIAX Pearl Fee Schedule, Sections 5)a)–b); and
MIAX Emerald Fee Schedule, Sections 5)a)–b).
12 The Exchange notes that this filing includes
proposed fees for FIX Ports, Full Service MEO
Ports, Limited Service MEO Ports, Clearing Trade
Drop Ports, and FIX Drop Copy Ports. The Exchange
separately filed to establish fees for Purge Ports. See
SR–SAPPHIRE–2024–26. The Exhibit 5 reflects the
separate filing to establish fees for Purge Ports.
13 The term ‘‘Initial Waiver Period’’ means, for
each applicable fee, the period of time from the
initial effective date of the MIAX Sapphire Fee
Schedule plus an additional six (6) full calendar
months after the completion of the partial month of
the Exchange launch. See the Definitions Section of
the Fee Schedule.
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assess such fees upon the expiration of
the defined period of the Initial Waiver
Period.
FIX Port Fees 14
The Exchange proposes to establish
Section 5)d)i), FIX Port Fees, pursuant
to which the Exchange will assess FIX
Port fees to Members in each month the
Member is credentialed to use a FIX
Port in the production environment and
based upon the number of credentialed
FIX Ports. In particular, the Exchange
proposes to assess Members the
following monthly FIX Port fees: (i)
$275 for the 1st FIX Port; (ii) $175 per
port for the 2nd through 5th FIX Ports;
and (iii) $75 per port for the 6th FIX
Port and each additional FIX Port. FIX
Port fees will be waived during the
Initial Waiver Period.
MEO Port Fees 15
The Exchange proposes to establish
Section 5)d)ii), MEO Port Fees, pursuant
to which the Exchange will assess MEO
Port fees based upon the different types
of MEO Ports offered by the Exchange.
MIAX Sapphire offers different types of
MEO Ports depending on the services
required by Members.
The Exchange proposes to assess
monthly Full Service MEO Port 16 fees
to Market Makers 17 based upon the
number of classes or class volume
accessed by the Market Maker. MIAX
Sapphire will assess monthly Full
Service MEO Port fees to Market Makers
in each month the Marker Maker has
been credentialed to use the Full
Service MEO Port in the production
environment and has registered to quote
in at least one class.
Specifically, the Exchange proposes to
establish the following monthly Full
Service MEO Port fees: (i) $2,500 for
Market Maker registrations in up to 10
option classes or up to 20% of option
classes by volume; (ii) $3,750 for Market
14 The term ‘‘FIX Interface’’ means the Financial
Information Exchange interface used for submitting
certain order types (as set forth in Rule 516) to the
MIAX Sapphire System. See Exchange Rule 100.
The term ‘‘FIX Port’’ means a FIX port that allows
Members to send orders and other messages using
the FIX protocol. See the Definitions section of the
Fee Schedule.
15 The term ‘‘MEO Interface’’ or ‘‘MEO’’ means a
binary order interface for certain order types as set
forth in Rule 516 into the MIAX Sapphire System.
See Exchange Rule 100 and the Definitions section
of the Fee Schedule.
16 The term ‘‘Full Service MEO Port’’ means an
MEO port that supports all MEO input message
types and binary bulk order entry. See the
Definitions section of the Fee Schedule.
17 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’s Rules. See Exchange Rule 100.
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Frm 00092
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Maker registrations in up to 40 option
classes or up to 35% of option classes
by volume; (iii) $5,000 for Market Maker
registrations in up to 100 option classes
or up to 50% of option classes by
volume; and (iv) $6,000 for Market
Maker registrations in over 100 option
classes or over 50% of option classes by
volume up to all option classes listed on
MIAX Sapphire.
The Exchange also proposes to adopt
footnote ‘‘b.’’ for its Full Service MEO
Port fees that will apply to the Market
Makers who fall within the following
Full Service MEO Port fee levels, which
represent the 3rd and 4th levels of the
fee table: Market Makers who have (i)
registrations in up to 100 option classes
or up to 50% of option classes by
volume, and (ii) registrations in over
100 option classes or over 50% of
option classes by volume up to all
option classes listed on MIAX Sapphire.
The Exchange proposes that for these
monthly Full Service MEO Port tier
levels, if the Market Maker’s total
monthly executed volume during the
relevant month is less than 0.015% of
the total monthly executed volume
reported by OCC in the Market Maker
account type for MIAX Sapphire-listed
option classes for that month, then the
fee will be $4,000 instead of the fee
otherwise applicable to such level (i.e.,
$5,000 or $6,000).
The purpose of this proposed lower
monthly Full Service MEO Port fee is to
provide a lower fixed cost to those
Market Makers who quote the entire
Exchange market (or substantial amount
of the Exchange market), as objectively
measured by either number of classes
assigned or national average daily
volume (‘‘ADV’’), but who do not
otherwise execute a significant amount
of volume on the Exchange. The
Exchange believes that, by offering
lower fixed costs to Market Makers that
execute less volume, the Exchange will
retain and attract smaller-scale Market
Makers, which are an integral
component of the option industry
marketplace, but have been decreasing
in number in recent years, due to
industry consolidation and lower
market maker profitability. Since these
smaller-scale Market Makers utilize less
Exchange capacity due to lower overall
volume executed, the Exchange believes
it is reasonable and appropriate to offer
such Market Makers a lower fixed cost.
The Exchange notes that its affiliated
markets, MIAX, MIAX Pearl, and MIAX
Emerald, offer a similar reduced fee for
their full service MEO/MEI ports for
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smaller-scale Market Makers.18
Accordingly, this concept is not novel.
For the calculation of the monthly
Full Service MEO Port fees, the
applicable fee rate is the lesser of either
the per class basis or percentage of total
national ADV measurement. The
amount of the monthly Full Service
MEO Port fee will be based upon the
number of classes in which the Market
Maker was registered to quote on any
given day within the calendar month, or
upon the class volume percentages set
forth in the table in Section 5)d)ii) of the
Fee Schedule. A Market Maker is
determined to be registered in a class if
that Market Maker has been registered
in one or more series in that class.19 The
Exchange will assess MIAX Sapphire
Market Makers the monthly Full Service
MEO Port fee based on the greatest
number of classes listed on MIAX
Sapphire that the MIAX Sapphire
Market Maker registered to quote in on
any given day within a calendar month.
The class volume percentage is based on
the total national average daily volume
in classes listed on MIAX Sapphire in
the prior calendar quarter. Newly listed
option classes are excluded from the
calculation of the monthly Full Service
MEO Port fee until the calendar quarter
following their listing, at which time the
newly listed option classes will be
included in both the per class count and
the percentage of total national average
daily volume.
MEO Port users will be allocated two
(2) Full Service MEO Ports and four (4)
Limited Service MEO Ports per
Matching Engine 20 to which they
connect. MEO Port fees include MEO
Ports at the primary, secondary and
disaster recovery data centers. Market
Makers may request additional Limited
Service MEO Ports for which MIAX
Sapphire proposes to assess Market
Makers $250 per month per additional
Limited Service MEO Port for each
Matching Engine in excess of the four
18 See MIAX Fee Schedule, Section 5)d)ii), note
‘‘*’’; MIAX Pearl Fee Schedule, Section 5)d), page
20, note ‘‘**’’; and MIAX Emerald Fee Schedule,
Section 5)d)ii), note D.
19 See, generally, Chapter VI of the Exchange’s
Rules.
20 A ‘‘Matching Engine’’ is a part of the MIAX
Sapphire electronic system that processes options
orders and trades on a symbol-by-symbol basis.
Some Matching Engines will process option classes
with multiple root symbols, and other Matching
Engines may be dedicated to one single option root
symbol (for example, options on SPY may be
processed by one single Matching Engine that is
dedicated only to SPY). A particular root symbol
may only be assigned to a single designated
Matching Engine. A particular root symbol may not
be assigned to multiple Matching Engines. See the
Definitions section of the Fee Schedule.
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(4) Limited Service MEO Ports
described above.
Full Service MEO Port fees and
Limited Service MEO Port fees will be
waived during the Initial Waiver Period.
Clearing Trade Drop Port Fees 21
The Exchange proposes to establish
Section 5)d)iv), Clearing Trade Drop
Port Fees. The Exchange proposes to
assess a CTD Port fee of $450 per month.
This fixed fee structure and amount is
the same as the CTD Port fee in place
at the Exchange’s affiliate, MIAX
Emerald.22 CTD Port fees will be waived
during the Initial Waiver Period.
FIX Drop Copy Port Fees 23
The Exchange proposes to establish
Section 5)d)v), Fix Drop Copy Port Fees.
The Exchange proposes to assess an
FXD Port fee of $250 per month. This
fixed fee structure is the same as the
FXD Port fee structure in place at the
Exchange’s affiliate, MIAX Emerald, and
is half the price of the FXD Port fee for
MIAX Emerald.24 FXD Port fees will be
waived during the Initial Waiver Period.
*
*
*
*
*
As described more fully below, the
Exchange provides a cost analysis to
supports its proposed connectivity and
port fees that includes, among other
things, descriptions of how the
Exchange allocated costs among it and
its affiliated markets (MIAX, MIAX
Pearl, and MIAX Emerald) to ensure no
cost was allocated more than once, as
21 A ‘‘CTD Port’’ or ‘‘Clearing Trade Drop Port’’
provides an Exchange Member with a real-time
clearing trade updates. The updates include the
Member’s clearing trade messages on a low latency,
real-time basis. The trade messages are routed to a
Member’s connection containing certain
information. The information includes, among other
things, the following: (i) trade date and time; (ii)
symbol information; (iii) trade price/size
information; (iv) Member type (for example, and
without limitation, Market Maker, Electronic
Exchange Member, Broker-Dealer); and (v)
Exchange MPID for each side of the transaction,
including Clearing Member MPID. See the
Definitions section of the Fee Schedule. The term
‘‘Electronic Exchange Member’’ or ‘‘EEM’’ means
the holder of a Trading Permit who is a Member
representing as agent Public Customer Orders or
Non-Customer Orders on the Exchange and those
non-Market Maker Members conducting proprietary
trading. Electronic Exchange Members are deemed
‘‘members’’ under the Exchange Act. See Exchange
Rule 100.
22 See MIAX Emerald Fee Schedule, Section
5)d)iii).
23 The term ‘‘FXD’’ or ‘‘FIX Drop Copy Port’’
means a messaging interface that provides a copy
of real-time trade execution, trade correction and
trade cancellation information to FIX Drop Copy
Port users who subscribe to the service. FXD Port
users are those users who are designated by an EEM
to receive the information and the information is
restricted for use by the EEM only. See the
Definitions section of the Fee Schedule.
24 See MIAX Emerald Fee Schedule, Section
5)d)iv).
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86027
well as additional detail supporting its
cost allocation processes. The Exchange
proposes connectivity and port fees that
are intended to cover the Exchange’s
cost of providing connectivity and ports,
with a reasonable mark-up over those
costs.
2. Statutory Basis
The Exchange believes that the
proposed fees are consistent with
Section 6(b) of the Act 25 in general, and
furthers the objectives of Section 6(b)(4)
of the Act 26 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees and other charges
among Members and other persons
using any facility or system which the
Exchange operates or controls. The
Exchange also believes the proposed
fees further the objectives of Section
6(b)(5) of the Act 27 in that they are
designed to promote just and equitable
principles of trade, remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general protect investors and the public
interest and are not designed to permit
unfair discrimination between
customers, issuers, brokers and dealers.
Cost Analysis
In general, the Exchange believes that
exchanges, in setting fees of all types,
should meet very high standards of
transparency to demonstrate why each
new fee or fee increase meets the
Exchange Act requirements that fees be
reasonable, equitably allocated, not
unfairly discriminatory, and not create
an undue burden on competition among
members and markets. In particular, the
Exchange believes that each exchange
should take extra care to be able to
demonstrate that these fees are based on
its costs and reasonable business needs.
In proposing to charge fees for
connectivity and port services, the
Exchange is especially diligent in
assessing those fees in a transparent way
against its own aggregate costs of
providing the related service, and in
carefully and transparently assessing the
impact on Members—both generally and
in relation to other Members, i.e., to
assure the fee will not create a financial
burden on any participant and will not
have an undue impact in particular on
smaller Members and competition
among Members in general. The
Exchange believes that this level of
diligence and transparency is called for
by the requirements of Section 19(b)(1)
25 15
U.S.C. 78f(b).
U.S.C. 78f(b)(4).
27 15 U.S.C. 78f(b)(5).
26 15
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under the Act,28 and Rule 19b–4
thereunder,29 with respect to the types
of information exchanges should
provide when filing fee changes, and
Section 6(b) of the Act,30 which
requires, among other things, that
exchange fees be reasonable and
equitably allocated,31 not designed to
permit unfair discrimination,32 and that
they not impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act.33 This rule change
proposal addresses those requirements,
and the analysis and data in each of the
sections that follow are designed to
clearly and comprehensively show how
they are met.34
As detailed below, the Exchange
recently calculated its aggregate annual
costs (and approximations for monthly
costs) for providing 1Gb and 10Gb ULL
connectivity, Full Service MEO Ports,
Limited Service MEO Ports, FIX Ports,
CTD Ports, and FXD Ports. For physical
1Gb and 10Gb ULL connectivity
combined, the Exchange calculated its
aggregate annual cost to equal
$6,620,300 (or approximately $551,692
per month, when rounded to the nearest
dollar when dividing the combined
annual cost by 12 months). For the
various port services, the Exchange
calculated the following annual costs:
$605,907 for Full Service MEO Ports (or
approximately $50,491 per month,
when rounded to the nearest dollar
when dividing the combined annual
cost by 12 months); $600,608 for
Limited Service MEO Ports (or
approximately $50,050 per month,
when rounded to the nearest dollar
when dividing the combined annual
cost by 12 months); $158,148 for FIX
Ports (or approximately $13,178 per
month, when rounded to the nearest
dollar when dividing the combined
annual cost by 12 months); $109,908 for
CTD Ports (or approximately $9,158 per
month, when rounded to the nearest
dollar when dividing the combined
annual cost by 12 months); and $36,637
for FXD Ports (or approximately $3,054
per month, when rounded to the nearest
dollar when dividing the combined
annual cost by 12 months). In order to
cover the aggregate costs of providing
connectivity and ports to its users (both
Members and non-Members 35) going
28 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
30 15 U.S.C. 78f(b).
31 15 U.S.C. 78f(b)(4).
32 15 U.S.C. 78f(b)(5).
33 15 U.S.C. 78f(b)(8).
34 See supra note 31.
35 Types of market participants that obtain
connectivity services from the Exchange but are not
Members include service bureaus and extranets.
29 17
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forward and to make a modest profit for
connectivity services, as described
below, the Exchange proposes to modify
its Fee Schedule to establish the
connectivity and port fees described
above, subject to certain fee waiver
periods. The Exchange does not
anticipate that it will make an overall
profit on the various port services
following the expiration of the Initial
Waiver Period, on an annual basis,
based on projected subscriber data.
The Exchange’s affiliates previously
completed a study of their aggregate
costs to provide connectivity and port
services and produce market data,
defined above as its Cost Analysis.36
Personnel began to plan for and develop
the Exchange beginning in early 2023,
and costs included in this Cost Analysis
are related to the development and
buildout of the Exchange since that
time. During the Exchange’s
development and buildout that occurred
throughout 2023 and continues to today,
the Exchange routinely studied its
aggregate costs to provide connectivity
and port services, which were used to
determine the proposed pricing for the
provisions of connectivity and port
services that are part of the Exchange’s
Cost Analysis. The Cost Analysis
required a detailed analysis of the
Exchange’s aggregate baseline costs,
including a determination and
allocation of costs for core services
provided by the Exchange—transaction
execution, market data, membership
services, physical connectivity, and port
access (which provide order entry,
cancellation and modification
functionality, risk functionality, the
ability to receive drop copies, and other
functionality). The Exchange separately
divided its costs between those costs
necessary to deliver each of these core
services, including infrastructure,
software, human resources (i.e.,
personnel), and certain general and
administrative expenses (‘‘cost
drivers’’).
As an initial step, the Exchange
determined the total cost for the
Service bureaus offer technology-based services to
other companies for a fee, including order entry
services, and thus, may access ports on behalf of
one or more Members. Extranets offer physical
connectivity services to Members and nonMembers.
36 See Securities Exchange Act Release Nos.
100041 (April 26, 2024), 89 FR 35868 (May 2, 2024)
(SR–MIAX–2024–25); 100319 (June 12, 2024), 89 FR
51562 (June 18, 2024) (SR–PEARL–2024–25);
100042 (April 26, 2024), 89 FR 35879 (May 2, 2024)
(SR–EMERALD–2024–15). The Exchange frequently
updates it Cost Analysis as strategic initiatives
change, costs increase or decrease, and market
participant needs and trading activity (once live
trading begins) changes. The Exchange’s most
recent Cost Analysis was conducted ahead of this
filing.
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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,37 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. For the 2024 budget
process for MIAX Sapphire, only costs
and anticipated revenues associated
with the electronic exchange were
considered. While MIAX Sapphire plans
on opening its trading floor in 2025
costs and anticipated revenues from the
trading floor were not included as part
of any analysis for MIAX Sapphire for
2024.38 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 five (5) (evenly for each
marketplace). Rather, the Exchange’s
37 For example, MIAX Sapphire maintains 8
matching engines, MIAX Emerald maintains 12
matching engines, MIAX Pearl Options maintains
12 matching engines, MIAX Pearl Equities
maintains 24 matching engines, and MIAX
maintains 24 matching engines.
38 Additionally, while MIAX Sapphire received
approval as a national securities exchange on July
15, 2024, start-up costs associated with the launch
of MIAX Sapphire were not included in the costs
used for the 2024 electronic exchange projections.
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parent company determines an accurate
cost for each marketplace, which results
in different allocations and amounts
across exchanges for the same cost
drivers, due to the unique factors of
each marketplace as described above.
This allocation methodology also
ensures that no cost would be allocated
twice or double-counted between the
Exchange and its affiliated markets. The
Finance Team then consolidates the
budget and sends it to senior
management, including the Chief
Financial Officer and Chief Executive
Officer, for review and approval. Next,
the budget is presented to the Board of
Directors and the Finance and Audit
Committees for each exchange for their
approval. The above steps encompass
the first step of the cost allocation
process.
The next step involves determining
what portion of the cost allocated to the
Exchange pursuant to the above
methodology is to be allocated to each
core service, e.g., connectivity and
ports, market data, and transaction
services. The Exchange and its affiliated
markets adopted an allocation
methodology with thoughtful and
consistently applied principles to guide
how much of a particular cost amount
allocated to the Exchange should be
allocated within the Exchange to each
core service. This is the final step in the
cost allocation process and is applied to
each of the cost drivers set forth below.
For instance, fixed costs that are not
driven by client activity (e.g., message
rates), such as data center costs, were
allocated more heavily to the provision
of 10Gb ULL physical connectivity
(57.7% of total expense amount
allocated to 10Gb ULL connectivity),
with smaller allocations to Full Service
MEO Ports (1.6%) and Limited Service
MEO Ports (1.6%), and the remainder to
the provision of other connectivity,
other ports, transaction execution,
membership services and market data
services (39.1%). This next level of the
allocation methodology at the
individual exchange level also took into
account factors similar to those set forth
under the first step of the allocation
methodology process described above,
to determine the appropriate allocation
to connectivity or market data versus
allocations for other services. This
allocation methodology was developed
through an assessment of costs with
senior management intimately familiar
with each area of the Exchange’s
operations. After adopting this
allocation methodology, the Exchange
then applied an allocation of each cost
driver to each core service, resulting in
the cost allocations described below.
Each of the below cost allocations is
unique to the Exchange and represents
a percentage of overall cost that was
allocated to the Exchange pursuant to
the initial allocation described above.
By allocating segmented costs to each
core service, the Exchange was able to
estimate by core service the potential
margin it might earn based on different
fee models. The Exchange notes that as
a non-listing venue it has five primary
sources of revenue that it can
potentially use to fund its operations:
transaction fees, fees for connectivity
and port services, membership fees,
regulatory fees, and market data fees.
Accordingly, the Exchange must cover
its expenses from these five primary
sources of revenue. The Exchange also
notes that as a general matter each of
these sources of revenue is based on
services that are interdependent. For
instance, the Exchange’s system for
executing transactions is dependent on
physical hardware and connectivity;
only Members and parties that they
sponsor to participate directly on the
Exchange may submit orders to the
Exchange; many Members (but not all)
consume market data from the Exchange
in order to trade on the Exchange; and
the Exchange consumes market data
from external sources in order to
comply with regulatory obligations.
Accordingly, given this
interdependence, the allocation of costs
to each service or revenue source
required judgment of the Exchange and
was weighted based on estimates of the
Exchange that the Exchange believes are
reasonable, as set forth below. While
there is no standardized and generally
accepted methodology for the allocation
of an exchange’s costs, the Exchange’s
methodology is the result of an
extensive review and analysis and will
be consistently applied going forward
for any other potential fee proposals. In
86029
the absence of the Commission
attempting to specify a methodology for
the allocation of exchanges’
interdependent costs, the Exchange will
continue to be left with its best efforts
to attempt to conduct such an allocation
in a thoughtful and reasonable manner.
Through the Exchange’s extensive
updated Cost Analysis, which was again
recently further refined, the Exchange
analyzed every expense item in the
Exchange’s general expense ledger to
determine whether each such expense
relates to the provision of connectivity
and port services, and, if such expense
did so relate, what portion (or
percentage) of such expense actually
supports the provision of connectivity
and port services, and thus bears a
relationship that is, ‘‘in nature and
closeness,’’ directly related to network
connectivity and port services. In turn,
the Exchange allocated certain costs
more to physical connectivity and
others to ports, while certain costs were
only allocated to such services at a very
low percentage or not at all, using
consistent allocation methodologies as
described above. Based on this analysis,
the Exchange estimates that the
aggregate monthly costs for connectivity
and ports are as follows: $532,820 for
10Gb ULL connectivity; $18,872 for 1Gb
connectivity; $50,491 for Full Service
MEO Ports; $50,050 for Limited Service
MEO Ports; $13,178 for FIX Ports;
$9,158 for CTD Ports; and $3,054 for
FXD Ports (all calculations utilized the
number rounded to the nearest dollar
when dividing the annual cost for each
type of connectivity or port by 12
months), as further detailed below.
Costs Related to Offering Physical 1Gb
and 10Gb ULL Connectivity
The following charts detail the
individual line-item costs considered by
the Exchange to be related to offering
physical dedicated 1Gb and 10Gb ULL
connectivity 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 1.2% of its
overall Human Resources cost to
offering 1Gb connectivity and 34.5% to
offering 10Gb ULL physical
connectivity).
khammond on DSKJM1Z7X2PROD with NOTICES
1Gb CONNECTIVITY
Allocated annual
cost a
Cost drivers
Human Resources ...............................................................................................
Connectivity (external fees, cabling, switches, etc.) ...........................................
Internet Services and External Market Data .......................................................
Data Center .........................................................................................................
Hardware and Software Maintenance and Licenses ..........................................
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Allocated monthly
cost b
$125,167
522
3,675
12,571
9,826
E:\FR\FM\29OCN1.SGM
$10,431
44
306
1,048
819
29OCN1
Percent of all
1.2
2.0
2.5
2.0
2.0
86030
Federal Register / Vol. 89, No. 209 / Tuesday, October 29, 2024 / Notices
1Gb CONNECTIVITY—Continued
Allocated annual
cost a
Cost drivers
Allocated monthly
cost b
Percent of all
Depreciation .........................................................................................................
Allocated Shared Expenses ................................................................................
27,679
47,021
2,307
3,918
2.3
1.7
Total ..............................................................................................................
226,461
18,872
1.5
a The
Annual Cost includes figures rounded to the nearest dollar.
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.
b The
10Gb ULL CONNECTIVITY
Allocated annual
cost a
Cost drivers
Allocated monthly
cost b
Percent of all
Human Resources ...............................................................................................
Connectivity (external fees, cabling, switches, etc.) ...........................................
Internet Services and External Market Data .......................................................
Data Center .........................................................................................................
Hardware and Software Maintenance and Licenses ..........................................
Depreciation .........................................................................................................
Allocated Shared Expenses ................................................................................
$3,533,950
14,741
103,750
354,917
277,415
781,473
1,327,593
$294,496
1,228
8,646
29,576
23,118
65,123
110,633
34.5
57.7
69.8
57.7
55.9
63.6
47
Total ..............................................................................................................
6,393,839
532,820
41.1
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
physical 1Gb and 10Gb ULL
connectivity.
khammond on DSKJM1Z7X2PROD with NOTICES
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.
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For personnel costs (Human
Resources), the Exchange calculated an
allocation of employee time for
employees whose functions include
providing and maintaining physical
connectivity and performance thereof
(primarily the Exchange’s network
infrastructure team, which spends most
of their time performing functions
necessary to provide physical
connectivity). As described more fully
above, the Exchange’s parent company
allocates costs to the Exchange and its
affiliated markets and then a portion of
the Human Resources costs allocated to
the Exchange is then allocated to
connectivity. From that portion
allocated to the Exchange that applied
to connectivity, the Exchange then
allocated weighted averages of 49.1%
for 10Gb ULL connectivity and 1.7% for
1Gb connectivity of each employee’s
time from the above group.
The Exchange also allocated Human
Resources costs to provide physical
connectivity to a limited subset of
personnel with ancillary functions
related to establishing and maintaining
such connectivity (such as information
security, sales, membership, and finance
personnel). The Exchange allocated cost
on an employee-by-employee basis (i.e.,
only including those personnel who
support functions related to providing
physical connectivity) and then applied
a smaller allocation to such employees’
time to 10Gb ULL connectivity (18.4%)
and a smaller allocation to 1Gb
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connectivity (0.6%). This other group of
personnel with a smaller allocation of
Human Resources costs also have a
direct nexus to 10Gb ULL connectivity,
whether it is a sales person selling a
connection, finance personnel billing
for connectivity or providing budget
analysis, or information security
ensuring that such connectivity is
secure and adequately defended from an
outside intrusion.
The estimates of Human Resources
cost were therefore determined by
consulting with such department
leaders, determining which employees
are involved in tasks related to
providing physical connectivity, and
confirming that the proposed allocations
were reasonable based on an
understanding of the percentage of time
such employees devote to those tasks.
This includes personnel from the
Exchange departments that are
predominately involved in providing
1Gb and 10Gb ULL connectivity:
Business Systems Development, Trading
Systems Development, Systems
Operations and Network Monitoring,
Network and Data Center Operations,
Listings, Trading Operations, and
Project Management. Again, the
Exchange allocated 49.1% for 10Gb ULL
connectivity and 1.7% for 1Gb
connectivity of each of their employee’s
time assigned to the Exchange for 10Gb
ULL and 1Gb connectivity, as stated
above. Employees from these
departments perform numerous
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functions to support 10Gb ULL
connectivity, such as the installation, relocation, configuration, and
maintenance of 10Gb ULL connections
and the hardware they access. This
hardware includes servers, routers,
switches, firewalls, and monitoring
devices. These employees also perform
software upgrades, vulnerability
assessments, remediation and patch
installs, equipment configuration and
hardening, as well as performance and
capacity management. These employees
also engage in research and
development analysis for equipment
and software supporting 10Gb ULL
connectivity and design, and support
the development and on-going
maintenance of internally-developed
applications as well as data capture and
analysis, and Member and internal
Exchange reports related to network and
system performance. The above list of
employee functions is not exhaustive of
all the functions performed by Exchange
employees to support 10Gb ULL and
1Gb connectivity, but illustrates the
breadth of functions those employees
perform in support of the above cost and
time allocations.
Lastly, the Exchange notes that senior
level executives’ time was only
allocated to the 10Gb ULL and 1Gb
connectivity related Human Resources
costs to the extent that they are involved
in overseeing tasks related to providing
physical connectivity. The Human
Resources cost was calculated using a
blended rate of compensation reflecting
salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity (External Fees, Cabling,
Switches, etc.)
The Connectivity cost driver includes
external fees paid to connect to other
exchanges and third parties, cabling and
switches required to operate the
Exchange. The Connectivity cost driver
is more narrowly focused on technology
used to complete connections to the
Exchange and to connect to external
markets. The Exchange notes that its
connectivity to external markets is
required in order to receive market data
to run the Exchange’s matching engine
and basic operations compliant with
existing regulations, primarily
Regulation NMS.
The Exchange relies on various
connectivity providers for connectivity
to the entire U.S. options industry, and
infrastructure services for critical
components of the network that are
necessary to provide and maintain its
System Networks and access to its
System Networks via 1Gb and 10Gb
ULL connectivity. Specifically, the
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Exchange utilizes connectivity
providers to connect to other national
securities exchanges and the Options
Price Reporting Authority (‘‘OPRA’’).
The Exchange understands that these
service providers provide services to
most, if not all, of the other U.S.
exchanges and other market
participants. Connectivity provided by
these service providers is critical to the
Exchanges daily operations and
performance of its System Networks to
which market participants connect to
via 1Gb and 10Gb ULL connectivity.
Without these services providers, the
Exchange would not be able to connect
to other national securities exchanges,
market data providers or OPRA and,
therefore, would not be able to operate
and support its System Networks. The
Exchange does not employ a separate
fee to cover its connectivity provider
expense and recoups that expense, in
part, by charging for 1Gb and 10Gb ULL
connectivity.
Internet Services and External Market
Data
The next cost driver consists of
internet Services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
networks, primary and secondary data
centers, and office locations in
Princeton, New Jersey and Miami,
Florida.
External market data includes fees
paid to third parties, including other
exchanges, to receive market data. The
Exchange includes external market data
fee costs towards the provisions of
physical connectivity because such
market data is necessary for certain
services related to connectivity,
including pre-trade risk checks and
checks for other conditions (e.g., repricing of orders to avoid locked or
crossed markets and trading collars).
Since external market data from other
exchanges is consumed at the
Exchange’s matching engine level, (to
which physical connectivity provides
access) in order to validate orders before
additional orders enter the matching
engine or are executed, the Exchange
believes it is reasonable to allocate an
amount of such costs to 1Gb and 10Gb
ULL connectivity.
The Exchange relies on various
content service providers for data feeds
for the entire U.S. options industry, as
well as content for critical components
of the network that are necessary to
provide and maintain its System
Networks and access to its System
Networks via 1Gb and 10Gb ULL
connectivity. Specifically, the Exchange
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86031
utilizes content service providers to
receive market data from OPRA, other
exchanges and market data providers.
The Exchange understands that these
service providers provide services to
most, if not all, of the other U.S.
exchanges and other market
participants. Market data provided by
these service providers is critical to the
Exchanges daily operations and
performance of its System Networks to
which market participants connect to
via 1Gb and 10Gb ULL connectivity.
Without these services providers, the
Exchange would not be able to receive
market data and, therefore, would not be
able to operate and support its System
Networks. The Exchange does not
employ a separate fee to cover its
content service provider expense and
recoups that expense, in part, by
charging for 1Gb and 10Gb ULL
connectivity.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment (such as
dedicated space, security services,
cooling and power). The Exchange notes
that it does not own the primary data
center or the secondary data center, but
instead, leases space in data centers
operated by third parties. The Exchange
has allocated a high percentage of the
total Data Center cost to physical 1Gb
and 10Gb ULL connectivity (59.7%
combined) because the third-party data
centers and the Exchange’s physical
equipment contained therein is the most
direct cost in providing physical access
to the Exchange. In other words, for the
Exchange to operate in a dedicated
space with connectivity by market
participants to a physical trading
platform, the data centers are a very
tangible cost, and in turn, if the
Exchange did not maintain such a
presence then physical connectivity
would be of no value to market
participants.
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to operate and monitor physical
assets necessary to offer physical
connectivity to the Exchange. This
software is necessary for the Exchange
to operate its options trading platform in
order to maintain premium network
performance. This hardware includes
servers, network switches, cables,
optics, protocol data units, and cabinets,
to maintain a state-of-the-art technology
platform. Accordingly, the Exchange
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allocated a high percentage of the total
Hardware and Software Maintenance
and License cost to physical 1Gb and
10Gb ULL connectivity (57.9%
combined) because the hardware and
software licenses are the most direct
cost in providing physical access to the
Exchange’s platform.
khammond on DSKJM1Z7X2PROD with NOTICES
Depreciation
All physical assets, software, and
hardware used to provide 1Gb and 10Gb
ULL connectivity, which also includes
assets used for testing and monitoring of
Exchange infrastructure, were valued at
cost, and depreciated or leased over
periods ranging from three to five years.
Thus, the depreciation cost primarily
relates to servers necessary to operate
the Exchange, some of which are owned
by the Exchange and some of which are
leased by the Exchange in order to allow
efficient periodic technology refreshes.
The Exchange also included in the
Depreciation cost driver certain
budgeted improvements that the
Exchange intends to capitalize and
depreciate with respect to 1Gb and 10Gb
ULL connectivity in the near-term. As
with the other allocated costs in the
Exchange’s updated Cost Analysis, the
Depreciation cost was therefore
narrowly tailored to depreciation related
to 1Gb and 10Gb ULL connectivity. As
noted above, the Exchange allocated
63.6% of its allocated depreciation costs
to providing physical 10Gb ULL
connectivity and 2.3% of all
depreciation costs to providing 1Gb
connectivity.
Allocated Shared Expenses
Finally, as with other exchange
products and services, a portion of
general shared expenses was allocated
to overall physical connectivity costs.
These general shared costs are integral
to exchange operations, including its
ability to provide physical connectivity.
Costs included in general shared
expenses include office space and office
expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and
training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications. Similarly, the cost
of paying directors to serve on the
Exchange’s Board of Directors is also
included in the Exchange’s general
shared expense cost driver.39 These
39 The Exchange notes that MEMX allocated a
precise amount of 10% of the overall cost for
directors to providing physical connectivity. See
Securities Exchange Act Release No. 95936
(September 27, 2022), 87 FR 59845 (October 3,
2022) (SR–MEMX–2022–26). The Exchange does
not calculate is expenses at that granular a level.
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general shared expenses are incurred by
the Exchange’s parent company, MIH, as
a direct result of operating the Exchange
and its affiliated markets.
The Exchange employed a process to
determine a reasonable percentage to
allocate general shared expenses to 1Gb
and 10Gb ULL connectivity pursuant to
its multi-layered allocation process.
First, general expenses were allocated
among the Exchange and affiliated
markets as described above. Then, the
general shared expense assigned to the
Exchange was allocated across core
services of the Exchange, including
connectivity. Then, these costs were
further allocated to sub-categories
within the final categories, i.e., 1Gb and
10Gb ULL connectivity as sub-categories
of connectivity. In determining the
percentage of general shared expenses
allocated to connectivity that ultimately
apply to 1Gb and 10Gb ULL
connectivity, the Exchange looked at the
percentage allocations of each of the
cost drivers and determined a
reasonable allocation percentage. The
Exchange also held meetings with
senior management, department heads,
and the Finance Team to determine the
proper amount of the shared general
expense to allocate to 1Gb and 10Gb
ULL connectivity. The Exchange,
therefore, believes it is reasonable to
assign allocations, in the range of
allocations for other cost drivers, while
continuing to ensure that these expenses
are only allocated once. Again, the
general shared expenses are incurred by
the Exchange’s parent company as a
result of operating the Exchange and its
affiliated markets and it is therefore
reasonable to allocate a percentage of
those expenses to the Exchange and
ultimately to specific product offerings
such as 1Gb and 10Gb ULL
connectivity.
Again, a portion of all shared
expenses were allocated to the Exchange
(and its affiliated markets) which, in
turn, allocated a portion of that overall
allocation to all physical connectivity
on the Exchange. The Exchange then
allocated 47% of the portion allocated
to physical connectivity to 10Gb ULL
connectivity and 1.7% of the portion
allocated to physical connectivity to
1Gb connectivity. The Exchange
believes these allocation percentages are
reasonable because, while the overall
dollar amounts may be higher than
other cost drivers, the percentages are
based on and in line with the percentage
allocations of each of the Exchange’s
other cost drivers for each provision of
connectivity. The percentage allocated
Instead, director costs are included as part of the
overall general allocation.
PO 00000
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Fmt 4703
Sfmt 4703
to 10Gb ULL connectivity also reflects
its importance to the Exchange’s
strategy and necessity towards the
nature of the Exchange’s overall
operations, which is to provide a
resilient, highly deterministic trading
system that relies on faster 10Gb ULL
connectivity than the Exchange’s
competitors to maintain premium
performance. This allocation reflects the
Exchange’s focus on providing and
maintaining high performance network
connectivity, of which 10Gb ULL
connectivity is a main contributor. The
Exchange intends to differentiate itself
by offering a ‘‘premium-product’’
network experience, as an operator of a
high performance, ultra-low latency
network with unparalleled system
throughput, which system networks can
support access to four distinct options
markets and multiple competing market
makers having affirmative obligations to
continuously quote over 1,100,000
distinct trading products (per exchange),
and the capacity to handle
approximately 8 million quote messages
per second. The ‘‘premium-product’’
network experience enables users of
10Gb ULL connections to receive the
network monitoring and reporting
services for those approximately
1,100,000 distinct trading products.
These value add services are part of the
Exchange’s strategy for offering a high
performance trading system, which
utilizes 10Gb ULL connectivity.
The Exchange notes that the 47%
allocation of general shared expenses for
physical 10Gb ULL connectivity is
higher than that allocated to general
shared expenses for all other types of
connectivity and ports. This is based on
its allocation methodology that
weighted costs attributable to each core
service. While physical connectivity has
several areas where certain tangible
costs are heavily weighted towards
providing such service (e.g., Data
Center, as described above), other types
of connectivity and ports do not require
as many broad or indirect resources as
other core services.
*
*
*
*
*
Approximate Cost per 1Gb and 10Gb
ULL Connection per Month
The Exchange divided the total
monthly cost for 10Gb ULL connectivity
of $532,820 by the number of physical
10Gb ULL connections the Exchange
anticipates maintaining upon expiration
of the full length of the waiver period
for 10Gb ULL connections at the time
the proposed pricing was determined
(40), to arrive at a cost of approximately
$13,321 per month (rounded to the
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nearest dollar), per physical 10Gb ULL
connection.
Similarly, the Exchange divided the
total monthly cost for 1Gb connectivity
of $18,872 by the number of physical
1Gb connections the Exchange
anticipates maintaining upon expiration
of the waiver period at the time the
proposed pricing was determined (12),
to arrive at a cost of approximately
$1,573 per month (rounded to the
nearest dollar), per physical 1Gb
connection.
*
*
*
*
*
Costs Related to Offering Full Service
MEO Ports
The following chart details the
individual line-item costs considered by
86033
the Exchange to be related to offering
Full Service MEO Ports as well as the
percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 5.1% of its
overall Human Resources cost to
offering Full Service MEO Ports).
FULL SERVICE MEO PORTS
Allocated annual
cost a
Cost drivers
Allocated monthly
cost b
Percent 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 ................................................................................
$517,369
160
929
9,615
3,106
27,745
46,983
$43,114
13
77
801
259
2,312
3,915
5.1
0.6
0.6
1.6
0.6
2.3
1.7
Total ..............................................................................................................
605,907
50,491
3.9
a The
Annual Cost includes figures rounded to the nearest dollar.
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.
b The
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
Full Service MEO Ports.
khammond on DSKJM1Z7X2PROD with NOTICES
Human Resources
With respect to Full Service MEO
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing Full
Service MEO Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). Just as described above for
connectivity, the estimates of Human
Resources cost were again determined
by consulting with department leaders,
determining which employees are
involved in tasks related to providing
Full Service MEO Ports and maintaining
performance thereof, and confirming
that the proposed allocations were
reasonable based on an understanding
of the percentage of their time such
employees devote to tasks related to
providing Full Service MEO Ports and
maintaining performance thereof. This
includes personnel from the following
Exchange departments that are
predominately involved in providing
Full Service MEO Ports: Business
Systems Development, Trading Systems
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Jkt 265001
Development, Systems Operations and
Network Monitoring, Network and Data
Center Operations, Listings, Trading
Operations, and Project Management.
The Exchange notes that senior level
executives were allocated Human
Resources costs to the extent they are
involved in overseeing tasks specifically
related to providing Full Service MEO
Ports. Senior level executives were only
allocated Human Resources costs to the
extent that they are involved in
managing personnel responsible for
tasks integral to providing Full Service
MEO Ports. The Human Resources cost
was again calculated using a blended
rate of compensation reflecting salary,
equity and bonus compensation,
benefits, payroll taxes, and 401(k)
matching contributions.
Connectivity (External Fees, Cabling,
Switches, etc.)
The Connectivity cost driver includes
external fees paid to connect to other
exchanges and cabling and switches, as
described above.
Internet Services and External Market
Data
The next cost driver consists of
internet services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
networks, primary and secondary data
centers, and office locations in
Princeton and Miami. For purposes of
Full Service MEO Ports, the Exchange
PO 00000
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Fmt 4703
Sfmt 4703
also includes a portion of its costs
related to external market data. External
market data includes fees paid to third
parties, including other exchanges, to
receive and consume market data from
other markets. The Exchange includes
external market data costs towards the
provision of Full Service MEO Ports
because such market data is necessary
(in addition to physical connectivity) to
offer certain services related to such
ports, such as validating orders on entry
against the NBBO and checking for
other conditions (e.g., halted
securities).40 Thus, since market data
from other exchanges is consumed at
the Exchange’s Full Service MEO Port
level in order to validate orders, before
additional processing occurs with
respect to such orders, the Exchange
believes it is reasonable to allocate a
small amount of such costs to Full
Service MEO Ports.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide Full Service MEO
Ports in the third-party data centers
where it maintains its equipment as
well as related costs for market data to
then enter the Exchange’s system via
Full Service MEO Ports (the Exchange
does not own the primary data center or
40 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
providing physical connectivity. See Securities
Exchange Act Release No. 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–
2022–26).
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secondary date center, but instead leases
space in data centers operated by third
parties).
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
Depreciation
The vast majority of the software the
Exchange uses to provide Full Service
MEO Ports has been developed in-house
and the cost of such development,
which takes place over an extended
period of time and includes not just
development work, but also quality
assurance and testing to ensure the
software works as intended, is
depreciated over time once the software
is activated in the production
environment. Hardware used to provide
Full Service MEO Ports includes
equipment used for testing and
monitoring of order entry infrastructure
and other physical equipment the
Exchange purchased and is also
depreciated over time.
All hardware and software, which
also includes assets used for testing and
monitoring of order entry infrastructure,
were valued at cost, depreciated or
leased over periods ranging from three
to five years. Thus, the depreciation cost
primarily relates to servers necessary to
operate the Exchange, some of which is
owned by the Exchange and some of
which is leased by the Exchange in
order to allow efficient periodic
technology refreshes. The Exchange
allocated 2.3% of all depreciation costs
to providing Full Service MEO Ports.
The Exchange allocated depreciation
costs for depreciated software necessary
to operate the Exchange to Full Service
MEO Ports because such software is
related to the provision of Full Service
MEO Ports. As with the other allocated
costs in the Exchange’s updated Cost
Analysis, the Depreciation cost driver
was therefore narrowly tailored to
depreciation related to Full Service
MEO Ports.
Allocated Shared Expenses
Finally, a portion of general shared
expenses was allocated to overall Full
Service MEO Port costs as without these
general shared costs the Exchange
would not be able to operate in the
manner that it does and provide
application sessions. The costs included
in general shared expenses include
general expenses of the Exchange,
including office space and office
expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and
training, marketing and advertising
costs, professional fees for legal, tax and
accounting services (including external
and internal audit expenses), and
telecommunications costs. The
Exchange again notes that the cost of
paying directors to serve on its Board of
Directors is included in the calculation
of Allocated Shared Expenses, and thus
a portion of such overall cost amounting
to less than 4% of the overall cost for
directors was allocated to providing Full
Service MEO Ports. The Exchange notes
that the 1.7% allocation of general
shared expenses for Full Service MEO
Ports is lower than that allocated to
general shared expenses for physical
connectivity based on its allocation
methodology that weighted costs
attributable to each Core Service based
on an understanding of each area. While
Full Service MEO Ports have several
areas where certain tangible costs are
heavily weighted towards providing
such service (e.g., data centers, as
described above), 10Gb ULL
connectivity requires a broader level of
support from Exchange personnel in
different areas, which in turn leads to a
broader general level of cost to the
Exchange.
*
*
*
*
*
Approximate Cost per Full Service MEO
Port per Month
The Exchange divided the total
monthly cost for Full Service MEO Ports
of $50,491 by the number of Full
Service MEO Ports the Exchange
anticipates maintaining upon expiration
of the Initial Waiver Period at the time
the proposed pricing was determined
(112), to arrive at a cost of
approximately $451 per month
(rounded to the nearest dollar), per Full
Service MEO Port.
*
*
*
*
*
Costs Related to Offering Limited
Service MEO Ports
The following chart details the
individual line-item costs considered by
the Exchange to be related to offering
Limited Service MEO Ports as well as
the percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 5% of its
overall Human Resources cost to
offering Limited Service MEO Ports).
LIMITED SERVICE MEO PORTS
Allocated annual
cost a
Cost drivers
Allocated monthly
cost b
Percent 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 ................................................................................
$512,844
158
921
9,531
3,079
27,503
46,572
$42,737
13
77
794
256
2,292
3,881
5
0.6
0.6
1.6
0.6
2.2
1.7
Total ..............................................................................................................
600,608
50,050
3.9
a The
Annual Cost includes figures rounded to the nearest dollar.
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.
khammond on DSKJM1Z7X2PROD with NOTICES
b The
Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
Limited Service MEO Ports.
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Human Resources
With respect to Limited Service MEO
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing Limited
PO 00000
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Fmt 4703
Sfmt 4703
Service MEO Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
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limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). Just as described above for
connectivity, the estimates of Human
Resources cost were again determined
by consulting with department leaders,
determining which employees are
involved in tasks related to providing
Limited Service MEO Ports and
maintaining performance thereof, and
confirming that the proposed allocations
were reasonable based on an
understanding of the percentage of their
time such employees devote to tasks
related to providing Limited Service
MEO Ports and maintaining
performance thereof. This includes
personnel from the following Exchange
departments that are predominately
involved in providing Limited Service
MEO Ports: Business Systems
Development, Trading Systems
Development, Systems Operations and
Network Monitoring, Network and Data
Center Operations, Listings, Trading
Operations, and Project Management.
The Exchange notes that senior level
executives were allocated Human
Resources costs to the extent they are
involved in overseeing tasks specifically
related to providing Limited Service
MEO Ports. Senior level executives were
only allocated Human Resources costs
to the extent that they are involved in
managing personnel responsible for
tasks integral to providing and
maintaining Limited Service MEO Ports.
The Human Resources cost was again
calculated using a blended rate of
compensation reflecting salary, equity
and bonus compensation, benefits,
payroll taxes, and 401(k) matching
contributions.
khammond on DSKJM1Z7X2PROD with NOTICES
Connectivity (External Fees, Cabling,
Switches, etc.)
The Connectivity cost includes
external fees paid to connect to other
exchanges and cabling and switches, as
described above.
Internet Services and External Market
Data
The next cost driver consists of
internet services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
networks, primary and secondary data
centers, and office locations in
Princeton and Miami. For purposes of
Limited Service MEO Ports, the
Exchange also includes a portion of its
costs related to external market data.
External market data includes fees paid
to third parties, including other
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Jkt 265001
exchanges, to receive and consume
market data from other markets. The
Exchange includes external market data
costs towards the provision of Limited
Service MEO Ports because such market
data is necessary (in addition to
physical connectivity) to offer certain
services related to such ports, such as
validating orders on entry against the
NBBO and checking for other conditions
(e.g., halted securities).41 Thus, since
market data from other exchanges is
consumed at the Exchange’s Limited
Service MEO Port level in order to
validate orders, before additional
processing occurs with respect to such
orders, the Exchange believes it is
reasonable to allocate a small amount of
such costs to Limited Service MEI MEO.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide Limited Service MEO
Ports in the third-party data centers
where it maintains its equipment as
well as related costs for market data to
then enter the Exchange’s System via
Limited Service MEO Ports (the
Exchange does not own the primary
data center or the secondary data center,
but instead leases space in data centers
operated by third parties).
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
Depreciation
The vast majority of the software the
Exchange uses to provide Limited
Service MEO Ports has been developed
in-house and the cost of such
development, which takes place over an
extended period of time and includes
not just development work, but also
quality assurance and testing to ensure
the software works as intended, is
depreciated over time once the software
is activated in the production
environment. Hardware used to provide
Limited Service MEO Ports includes
equipment used for testing and
monitoring of order entry infrastructure
and other physical equipment the
Exchange purchased and is also
depreciated over time.
All hardware and software, which
also includes assets used for testing and
41 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
providing physical connectivity. See Securities
Exchange Act Release No. 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–
2022–26).
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
86035
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 2.2% of all depreciation costs
to providing Limited Service MEO
Ports. The Exchange allocated
depreciation costs for depreciated
software necessary to operate the
Exchange because such software is
related to the provision of Limited
Service MEO Ports. As with the other
allocated costs in the Exchange’s
updated Cost Analysis, the Depreciation
cost driver was therefore narrowly
tailored to depreciation related to
Limited Service MEO Ports.
Allocated Shared Expenses
Finally, a portion of general shared
expenses was allocated to overall
Limited Service MEO Port costs as
without these general shared costs the
Exchange would not be able to operate
in the manner that it does and provide
Limited Service MEO 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 4% of the overall cost for
directors was allocated to providing
Limited Service MEO Ports. The
Exchange notes that the 1.7% allocation
of general shared expenses for Limited
Service MEO Ports is lower than that
allocated to general shared expenses for
physical connectivity based on its
allocation methodology that weighted
costs attributable to each Core Service
based on an understanding of each area.
While Limited Service MEO Ports have
several areas where certain tangible
costs are heavily weighted towards
providing such service (e.g., data center,
as described above), Limited Service
MEO Ports require a broader level of
support from Exchange personnel in
different areas, which in turn leads to a
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broader general level of cost to the
Exchange.
*
*
*
*
*
Approximate Cost per Limited Service
MEO Port per Month
The Exchange divided the total
monthly cost for Limited Service MEO
Ports of $50,050 by the number of
Limited Service MEO Ports the
Exchange anticipates maintaining upon
expiration of the Initial Waiver Period at
the time the proposed pricing was
determined (208, for charged ports,
without the cap on the number of
Limited Service MEO Ports), to arrive at
a cost of approximately $241 per month
(rounded to the nearest dollar), per
Limited Service MEO Port.
*
*
*
*
*
Costs Related to Offering FIX, CTD and
FXD Ports
The following charts detail the
individual line-item costs considered by
the Exchange to be related to offering
FIX, CTD and FXD Ports as well as the
percentage of the Exchange’s overall
costs such costs represent for such area
(e.g., as set forth below, the Exchange
allocated approximately 1.3%, 0.9%,
and 0.3% of its overall Human
Resources cost to offering FIX Ports,
CTD Ports, and FXD Ports, respectively).
FIX PORTS
Allocated
annual cost a
Cost drivers
Allocated
monthly cost b
Percent
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 ......................................................................................
$135,037
42
243
2,510
811
7,242
12,263
$11,253
4
20
209
66
604
1,022
1.3
0.2
0.2
0.4
0.2
0.6
0.4
Total ....................................................................................................................
158,148
13,178
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.
CTD PORTS
Allocated
annual cost a
Cost drivers
Allocated
monthly cost b
Percent
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 ......................................................................................
$93,848
29
169
1,744
563
5,033
8,522
$7,821
2
14
145
47
419
710
0.9
0.1
0.1
0.3
0.1
0.4
0.3
Total ....................................................................................................................
109,908
9,158
0.7
a The
Annual Cost includes figures rounded to the nearest dollar.
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.
b The
FXD PORTS
Allocated
annual cost a
khammond on DSKJM1Z7X2PROD with NOTICES
Cost drivers
Allocated
monthly cost b
Percent
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 ......................................................................................
$31,283
10
56
581
188
1,678
2,841
$2,607
1
5
48
16
140
237
0.3
0.04
0.04
0.1
0.04
0.1
0.1
Total ....................................................................................................................
36,637
3,054
0.2
a The
Annual Cost includes figures rounded to the nearest dollar.
b The Monthly Cost was determined by dividing the Annual Cost for each line item by twelve (12) months and rounding up or down to the nearest dollar.
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Below are additional details regarding
each of the line-item costs considered
by the Exchange to be related to offering
FIX, CTD and FXD Ports.
Human Resources
With respect to FIX, CTD and FXD
Ports, the Exchange calculated Human
Resources cost by taking an allocation of
employee time for employees whose
functions include providing FIX, CTD
and FXD Ports and maintaining
performance thereof (including a
broader range of employees such as
technical operations personnel, market
operations personnel, and software
engineering personnel) as well as a
limited subset of personnel with
ancillary functions related to
maintaining such connectivity (such as
sales, membership, and finance
personnel). Just as described above for
connectivity, the estimates of Human
Resources cost were again determined
by consulting with department leaders,
determining which employees are
involved in tasks related to providing
FIX, CTD and FXD Ports and
maintaining performance thereof, and
confirming that the proposed allocations
were reasonable based on an
understanding of the percentage of their
time such employees devote to tasks
related to providing FIX, CTD and FXD
Ports and maintaining performance
thereof. This includes personnel from
the following Exchange departments
that are predominately involved in
providing FIX, CTD and FXD Ports:
Business Systems Development, Trading
Systems Development, Systems
Operations and Network Monitoring,
Network and Data Center Operations,
Listings, Trading Operations, and
Project Management. The Exchange
notes that senior level executives were
allocated Human Resources costs to the
extent they are involved in overseeing
tasks specifically related to providing
FIX, CTD and FXD Ports. Senior level
executives were only allocated Human
Resources costs to the extent that they
are involved in managing personnel
responsible for tasks integral to
providing and maintaining FIX, CTD
and FXD Ports. The Human Resources
cost was again calculated using a
blended rate of compensation reflecting
salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k)
matching contributions.
Lastly, the Exchange notes that the
Human Resource allocations for Full
Service MEO Ports and Limited Service
MEO Ports are greater than the Human
Resource allocations for FIX, CTD and
FXD Ports. For its Human Resource cost
driver, the Exchange allocated 5.1% to
Full Service MEO Ports, 5% to Limited
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Service MEO Ports, 1.3% to FIX Ports,
0.9% to CTD Ports, and 0.3% to FXD
Ports. This is because the MEO interface
is a customized binary interface that the
Exchange developed in-house and
maintains on its own. The FIX interface
is the industry standard for simple order
entry which requires less development,
maintenance, and support than the MEO
interface. Likewise, the CTD and FXD
interfaces only provide information
concerning clearing trade updates and
trade execution, respectively, which
also require less development,
maintenance and support than the MEO
interface. The MEO interface is
performance oriented and designed to
meet the needs of more latency sensitive
Members. Due to the in-house
development of the MEO interface, the
Exchange was required to expend more
internal personnel to support the MEO
interface than the FIX, CTD or FXD
interfaces. Because of the materially
higher cost associated with maintaining
and supporting MEO Ports (Full Service
and Limited Service) versus FIX, CTD
and FXD Ports, the Exchange allocates
a materially higher percentage of
Human Resource expense to MEO Ports
versus FIX, CTD and FXD Ports.
Connectivity (external fees, cabling,
switches, etc.)
The Connectivity cost includes
external fees paid to connect to other
exchanges and cabling and switches, as
described above.
Internet Services and External Market
Data
The next cost driver consists of
internet services and external market
data. Internet services includes thirdparty service providers that provide the
internet, fiber and bandwidth
connections between the Exchange’s
networks, primary and secondary data
centers, and office locations in
Princeton and Miami. For purposes of
FIX, CTD and FXD Ports, the Exchange
also includes a portion of its costs
related to external market data. External
market data includes fees paid to third
parties, including other exchanges, to
receive and consume market data from
other markets. The Exchange includes
external market data costs towards the
provision of FIX, CTD and FXD Ports
because such market data is necessary
(in addition to physical connectivity) to
offer certain services related to such
ports, such as validating orders on entry
against the NBBO and checking for
other conditions (e.g., halted
securities).42 Thus, as market data from
42 The Exchange notes that MEMX separately
allocated 7.5% of its external market data costs to
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86037
other exchanges is consumed at the port
level in order to validate orders before
additional processing occurs with
respect to such orders, the Exchange
believes it is reasonable to allocate a
small amount of such costs to FIX, CTD
and FXD Ports.
Data Center
Data Center costs includes an
allocation of the costs the Exchange
incurs to provide physical connectivity
in the third-party data centers where it
maintains its equipment as well as
related costs for market data to then
enter the Exchange’s System via FIX,
CTD and FXD Ports (the Exchange does
not own the primary data center or the
secondary data center, but instead leases
space in data centers operated by third
parties).
Hardware and Software Maintenance
and Licenses
Hardware and Software Licenses
includes hardware and software licenses
used to monitor the health of the order
entry services provided by the
Exchange, as described above.
Depreciation
The vast majority of the software the
Exchange uses to provide FIX, CTD and
FXD 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
FIX, CTD and FXD 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 0.6%, 0.4% and 0.1% of all
depreciation costs to providing FIX,
CTD and FXD Ports, respectively. The
Exchange allocated depreciation costs
providing physical connectivity. See Securities
Exchange Act Release No. 95936 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR–MEMX–
2022–26).
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for depreciated software necessary to
operate the Exchange because such
software is related to the provision of
FIX, CTD and FXD 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 FIX,
CTD and FXD Ports.
Lastly, the Exchange notes that the
Depreciation allocations for MEO Ports
(Full Service and Limited Service) are
greater than the Depreciation allocations
for FIX, CTD and FXD Ports. For its
Depreciation cost driver, the Exchange
allocated 2.3% to Full Service MEO
Ports, 2.2% to Limited Service MEO
Ports, 0.6% to FIX Ports, 0.4% to CTD
Ports, and 0.1% to FXD Ports. As
discussed above, this is because the
MEO interface is a customized binary
interface that the Exchange developed
in-house and maintains on its own. The
FIX interface is the industry standard
for simple order entry which requires
less development, maintenance, and
support than the MEO interface.
Likewise, the CTD and FXD interfaces
only provide information concerning
clearing trade updates and trade
execution, respectively, which also
require less development, maintenance
and support than the MEO interface.
The Exchange maintains more dedicated
hardware per port for the MEO interface
compared to the FIX, CTD and FXD
interfaces. As a result, the MEO
interface is supported by more
dedicated in-house hardware and
software than the FIX, CTD and FXD
interfaces that is subject to depreciation.
Thus, there is a greater amount of
equipment supporting the MEO
interface than the FIX, CTD and FXD
interfaces, resulting in higher
depreciation costs.
Allocated Shared Expenses
Finally, a portion of general shared
expenses was allocated to overall FIX,
CTD and FXD Port costs as without
these general shared costs the Exchange
would not be able to operate in the
manner that it does and provide FIX,
CTD and FXD 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
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a portion of such overall cost amounting
to less than 2% of the overall cost for
directors was allocated to providing
FIX, CTD and FXD Ports. The Exchange
notes that the 0.4%, 0.3% and 0.1%
allocations of general shared expenses
for FIX, CTD and FXD Ports,
respectively, are lower than that
allocated to general shared expenses for
physical connectivity based on its
allocation methodology that weighted
costs attributable to each Core Service
based on an understanding of each area.
While MEO Ports (Full Service and
Limited Service) have several areas
where certain tangible costs are heavily
weighted towards providing such
service (e.g., data center, as described
above), FIX, CTD and FXD Ports require
a broader level of support from
Exchange personnel in different areas,
which in turn leads to a broader general
level of cost to the Exchange.
Lastly, the Exchange notes that the
Allocated Shared Expense allocations
for MEO Ports (Full Service and Limited
Service) are greater than the same
allocations for FIX, CTD and FXD Ports.
For its Allocated Shared Expense cost
driver, the Exchange allocated 1.7% to
Full Service MEO Ports, 1.7% to
Limited Service MEO Ports, 0.4% to FIX
Ports, 0.3% to CTD Ports, and 0.1% to
FXD Ports. As discussed above, this is
because the MEO interface is a
customized binary interface that the
Exchange developed in-house and
maintains on its own. The FIX interface
is the industry standard for simple order
entry which requires less development,
maintenance, and support than the MEO
interface. Likewise, the CTD and FXD
interfaces only provide information
concerning clearing trade updates and
trade execution, respectively, which
also require less development,
maintenance and support than the MEO
interface. The FIX interface is the
industry standard for simple order entry
which requires less development,
maintenance, and support than the MEO
interface. The MEO interface is
performance oriented and designed to
meet the needs of more latency sensitive
Members. This required more internal
personnel and resources to support than
the FIX, CTD and FXD interfaces.
Because of the materially higher cost
associated with maintaining and
supporting MEO Ports versus FIX, CTD
and FXD Ports, the Exchange allocates
a materially higher percentage of
Allocated Shared expense to MEO Ports
versus FIX, CTD and FXD Ports, which
are less complex, standardized
solutions.
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Approximate Cost Per FIX, CTD and
FXD Port Per Month
The Exchange divided the total
monthly cost for FIX Ports of $13,178 by
the number of FIX Ports the Exchange
anticipates maintaining upon expiration
of the Initial Waiver Period at the time
the proposed pricing was determined
(25), to arrive at a cost of approximately
$527 per month (rounded to the nearest
dollar), per FIX Port.
Similarly, the Exchange divided the
total monthly cost for CTD Ports of
$9,158 by the number of CTD Ports the
Exchange anticipates maintaining upon
expiration of the Initial Waiver Period at
the time the proposed pricing was
determined (10), to arrive at a cost of
approximately $916 per month
(rounded to the nearest dollar), per CTD
Port.
Finally, the Exchange divided the
total monthly cost for FXD Ports of
$3,054 by the number of FXD Ports the
Exchange anticipates maintaining upon
expiration of the Initial Waiver Period at
the time the proposed pricing was
determined (6), to arrive at a cost of
approximately $509 per month
(rounded to the nearest dollar), per FXD
Port.
*
*
*
*
*
Cost Analysis—Additional Discussion
In conducting its Cost Analysis, the
Exchange did not allocate any of its
expenses in full to any core services
(including physical connectivity or
ports) and did not double-count any
expenses. Instead, as described above,
the Exchange allocated applicable cost
drivers across its core services and used
the same Cost Analysis to form the basis
of this proposal and the separate filings
the Exchange submitted (or plans to
submit) proposing fees for proprietary
market data feeds offered by the
Exchange, as well as for Purge Ports. For
instance, in calculating the Human
Resources expenses to be allocated to
physical connections based upon the
above described methodology, the
Exchange has a team of employees
dedicated to network infrastructure and
with respect to such employees the
Exchange allocated network
infrastructure personnel with a high
percentage of the cost of such personnel
(49.1%) given their focus on functions
necessary to provide 10Gb ULL physical
connections. The salaries of those same
personnel were allocated only 6.8% to
Full Service MEO Ports and 6.7% to
Limited Service MEO Ports and the
remaining 37.4% was allocated to 1Gb
connectivity, other port services,
transaction services, membership
services and market data. The Exchange
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did not allocate any other Human
Resources expense for providing
physical connections to any other
employee group, outside of a smaller
allocation of 18.4% for 10Gb ULL
connectivity or 19.7% for the entire
network (i.e., 18.4% for 10Gb ULL,
0.7% for Test Bed Connectivity, and
0.6% for 1Gb for a total of 19.7%), of the
cost associated with certain specified
personnel who work closely with and
support network infrastructure
personnel. In contrast, the Exchange
allocated much smaller percentages of
costs (3.1% for Full Service MEO Ports
and 0.6% for Limited Service MEO
Ports) across a wider range of personnel
groups in order to allocate Human
Resources costs to providing Full
Service MEO Ports and Limited Service
MEO Ports (0.2% for FIX Ports, 0.1% for
CTD Ports, and 0.04% for FXD Ports).
This is because a much wider range of
personnel are involved in functions
necessary to offer, monitor and maintain
Full Service MEO Ports and Limited
Service MEO Ports but the tasks
necessary to do so are not a primary or
full-time function.
In total, the Exchange allocated 35.7%
of its personnel costs to providing 10Gb
ULL and 1Gb ULL connectivity, 5.1% of
its personnel costs to providing Full
Service MEO Ports, 5% of its personnel
costs to providing Limited Service MEO
Ports, 1.3% of its personnel costs to
providing FIX Ports, 0.9% of its
personnel costs to providing CTD Ports,
and 0.3% of its personnel costs to
providing FXD Ports, for a total
allocation of 48.3% Human Resources
expense to provide these specific
connectivity and port services. In turn,
the Exchange allocated the remaining
51.7% of its Human Resources expense
to membership services, transaction
services, other port services and market
data. Thus, again, the Exchange’s
allocations of cost across core services
were based on real costs of operating the
Exchange and were not double-counted
across the core services or their
associated revenue streams.
As another example, the Exchange
allocated depreciation expense to all
core services, including physical
connections and 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
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would not be able to operate the
network and provide connectivity and
port services to its Members and nonMembers and their customers. However,
the Exchange did not allocate all of the
depreciation and amortization expense
toward the cost of providing
connectivity services, but instead
allocated approximately 65.9% of the
Exchange’s overall depreciation and
amortization expense to connectivity
services (63.6% attributed to 10Gb ULL
physical connections, 2.3% to 1Gb
physical connections, and 5.6%
attributed to Full Service MEO Ports,
Limited Service MEO Ports, FIX Ports,
CTD Ports, and FXD Ports, combined).
The Exchange allocated the remaining
depreciation and amortization expense
(approximately 28.5%) toward the cost
of providing transaction services,
membership services, other port
services, and market data.
The Exchange notes that its revenue
estimates are based on projections
across all potential revenue streams and
will only be realized to the extent such
revenue streams actually produce the
revenue estimated once the waiver
periods expire for each applicable
proposed fee. The Exchange does not
yet know whether such expectations
will be realized. For instance, in order
to generate the revenue expected from
connectivity, the Exchange will have to
be successful in retaining existing
clients that wish to maintain physical
connectivity and/or ports or in
obtaining new clients that will purchase
such services. Similarly, the Exchange
will have to be successful in retaining
a positive net capture on transaction
fees in order to realize the anticipated
revenue from transaction pricing.
The Exchange notes that personnel
began to plan for and develop the
Exchange beginning in early 2023, and
costs included in this Cost Analysis are
related to the development and buildout
of the Exchange since that time. During
the Exchange’s development and
buildout that occurred throughout 2023
and continues to today, the Exchange
routinely studied its aggregate costs to
provide connectivity and port services,
which were used to determine the
proposed pricing for the provisions of
connectivity and port services that are
part of the Exchange’s Cost Analysis,
including projections. It is possible,
however, that actual costs may be higher
or lower. To the extent the Exchange
sees growth in use of connectivity or
port services it will receive additional
revenue to offset future cost increases.
However, if use of connectivity or port
services is static or decreases, the
Exchange might not realize the revenue
that it anticipates or needs in order to
PO 00000
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86039
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
The proposed fees will allow the
Exchange to cover certain costs incurred
by the Exchange associated with
providing and maintaining necessary
hardware and other network
infrastructure as well as network
monitoring and support services;
without such hardware, infrastructure,
monitoring and support the Exchange
would be unable to provide the
connectivity and port services. Much of
the cost relates to monitoring and
analysis of data and performance of the
network via the subscriber’s
connection(s). The above costs, 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
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network is a significant expense for the
Exchange, and thus the Exchange
believes that it is reasonable and
appropriate to help offset those costs by
amending fees for connectivity services.
Subscribers, particularly those of 10Gb
ULL connectivity, expect the Exchange
to provide this level of support to
connectivity so they continue to receive
the performance they expect. This
differentiates the Exchange from its
competitors. As detailed above, the
Exchange has five primary sources of
revenue that it can potentially use to
fund its operations: transaction fees,
fees for connectivity services,
membership and regulatory fees, and
market data fees. Accordingly, the
Exchange must cover its expenses from
these five primary sources of revenue.
All revenue projections are based
upon an annual return for each of the
proposed fees once the relevant waiver
periods expire.
The Exchange’s Cost Analysis
estimates the annual cost to provide 1Gb
connectivity services will equal
$226,461. Based on projected 1Gb
connectivity services usage, the
Exchange would generate annual
revenue of approximately $241,200. The
Exchange believes this represents a
modest profit of 6.1% when compared
to the cost of providing 1Gb
connectivity services.
The Exchange’s Cost Analysis
estimates the annual cost to provide
10Gb ULL connectivity services will
equal $6,393,839. Based on projected
10Gb ULL connectivity services usage,
the Exchange would generate annual
revenue of approximately $6,810,000.
The Exchange believes this represents a
modest profit of 6.1% when compared
to the cost of providing 10Gb
connectivity services.
The Exchange’s Cost Analysis
estimates the annual cost to provide
Full Service MEO Port services will
equal $605,907. Based on projected Full
Service MEO Port service usage, the
Exchange would generate annual
revenue of approximately $399,000. The
Exchange believes this represents a loss
of 51.9% when compared to the cost of
providing Full Service MEO Port
services.
The Exchange’s Cost Analysis
estimates the annual cost to provide
Limited Service MEO Port services will
equal $600,608. Since launch, taking
into account the proposal to remove the
cap on the number of Limited Service
MEO Ports available and based on
projected Limited Service MEO Port
service usage, the Exchange would
generate annual revenue of
approximately $624,000. The Exchange
believes this represents a modest profit
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Jkt 265001
of 3.7% for providing Limited Service
MEO Port services.
The Exchange’s Cost Analysis
estimates the annual cost to provide FIX
Port services will equal $158,148. Based
on projected FIX Port service usage, the
Exchange would generate annual
revenue of approximately $77,700. The
Exchange estimates that its costs to
provide FIX Port services will exceed its
revenues by 103.5%.
The Exchange’s Cost Analysis
estimates the annual cost to provide
CTD Port services will equal $109,908.
Based on projected CTD Port service
usage, the Exchange would generate
annual revenue of approximately
$54,000. The Exchange estimates that its
costs to provide CTD Port services will
exceed its revenues by 103.5%.
The Exchange’s Cost Analysis
estimates the annual cost to provide
FXD Port services will equal $36,637.
Based on projected FXD Port service
usage, the Exchange would generate
annual revenue of approximately
$18,000. The Exchange estimates that its
costs FXD Port services will exceed its
revenues by 103.5%.
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
each of the proposed connectivity and
port services versus the total projected
revenue of the Exchange associated with
connectivity and port services. The
Exchange’s affiliated options markets
recently filed to raise certain
connectivity and port fees to the same,
or similar, rates as proposed herein and
those filings were not suspended by the
Commission.43
*
*
*
*
*
The Exchange notes that its revenue
estimate is based on projections and
will only be realized to the extent
customer activity produces the revenue
estimated. As a competitor in the hyper43 See Securities Exchange Act Release Nos.
99822 (March 21, 2024), 89 FR 21337 (March 27,
2024) (SR–MIAX–2024–16) (raising monthly 10Gb
ULL connectivity fee to $13,500 per connection and
raising fee for Limited Service MEI Ports to $275
per month per port); 99823 (March 21, 2024), 89 FR
21312 (March 27, 2024) (SR–PEARL–2024–14)
(raising monthly 10Gb ULL connectivity fee to
$13,500 per connection and establishing tiered fees
for Full Service MEO Ports ranging from $5,000 to
$12,000 per month); and 99824 (March 21, 2024),
89 FR 21379 (March 27, 2024) (SR–EMERALD–
2024–12) (raising monthly 10Gb ULL connectivity
fee to $13,500 per connection and raising fee for
Limited Service MEI Ports to $420 per month per
port).
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competitive exchange environment, and
an exchange focused on driving
competition, the Exchange does not yet
know whether such projections will be
realized. For instance, in order to
generate the revenue expected from
10Gb ULL connectivity and Ports, the
Exchange will have to be successful in
retaining existing clients that wish to
utilize 10Gb ULL connectivity and Ports
and/or obtaining new clients that will
purchase such access. To the extent the
Exchange is successful in encouraging
new clients to utilize 10Gb ULL
connectivity and Ports, the Exchange
does not believe it should be penalized
for such success. To the extent the
Exchange has mispriced and
experiences a net loss in connectivity
clients or in transaction activity, the
Exchange could experience a net
reduction in revenue. While the
Exchange is supportive of transparency
around costs and potential margins
(applied across all exchanges), as well
as periodic review of revenues and
applicable costs (as discussed below),
the Exchange does not believe that these
estimates should form the sole basis of
whether or not a proposed fee is
reasonable or can be adopted. Instead,
the Exchange believes that the
information should be used solely to
confirm that an Exchange is not
earning—or seeking to earn—supracompetitive profits. The Exchange
believes the Cost Analysis and related
projections in this filing demonstrate
this fact.
The Exchange is owned by a holding
company that is the parent company of
five exchange markets and, therefore,
the Exchange and its affiliated markets
must allocate shared costs across all of
those markets accordingly, pursuant to
the above-described allocation
methodology. In contrast, the IEX,
which currently operates only one
exchange, and MEMX, which just
started operating two exchanges, in their
recent non-transaction fee filings
allocate the entire amount of that same
cost to a single exchange. This can
result in lower profit margins for the
non-transaction fees established by IEX
and MEMX because the single allocated
cost does not experience the efficiencies
and synergies that result from sharing
costs across multiple exchanges. The
Exchange and its affiliated markets often
share a single cost, which results in cost
efficiencies that can cause a broader gap
between the allocated cost amount and
projected revenue, even though the fee
levels being proposed are lower or
competitive with competing markets (as
described above). To the extent that the
application of a cost-based standard
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results in Commission Staff making
determinations as to the appropriateness
of certain profit margins, the Exchange
believes that Commission Staff should
also consider whether the proposed fee
level is comparable to, or competitive
with, the same fee charged by
competing exchanges and how different
cost allocation methodologies (such as
across multiple markets) may result in
different profit margins for comparable
fee levels. Further, if Commission Staff
is making determinations as to
appropriate profit margins in their
approval of exchange fees, the Exchange
believes that the Commission should be
clear to all market participants as to
what they have determined is an
appropriate profit margin and should
apply such determinations consistently
and, in the case of certain legacy
exchanges, retroactively, if such
standards are to avoid having a
discriminatory effect.
Further, as is reflected in the
proposal, the Exchange continuously
and aggressively works to control its
costs as a matter of good business
practice. A potential profit margin
should not be evaluated solely on its
size; that assessment should also
consider cost management and whether
the ultimate fee reflects the value of the
services provided. For example, a profit
margin on one exchange should not be
deemed excessive where that exchange
has been successful in controlling its
costs, but not excessive on another
exchange where that exchange is
charging comparable fees but has a
lower profit margin due to higher costs.
Doing so could have the perverse effect
of not incentivizing cost control where
higher costs alone could be used to
justify fees increases.
khammond on DSKJM1Z7X2PROD with NOTICES
The Proposed Pricing Is Not Unfairly
Discriminatory and Provides for the
Equitable Allocation of Fees, Dues, and
Other Charges
The Exchange believes that the
proposed fees for connectivity and ports
are reasonable, fair, equitable, and not
unfairly discriminatory because they are
designed to align fees with services
provided and will apply equally to all
subscribers.
Connectivity
The Exchange believes that the
proposed fees are equitably allocated
among anticipated users of the network
connectivity and port alternatives, as
the Exchange expects that users of 10Gb
ULL connections will consume
substantially more bandwidth and
network resources than users of 1Gb
ULL connection. It is the experience of
the Exchange’s affiliates that this is the
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case as 10Gb ULL connection users
account for more than 99% of message
traffic over the network on those
markets, which drives other costs that
are linked to capacity utilization, as
described above, while the users of the
1Gb ULL connections account for less
than 1% of message traffic over the
network. In the experience of the
Exchange’s affiliates, users of the 1Gb
connections do not have the same
business needs for the high-performance
network as 10Gb ULL users.
The Exchange’s high-performance
network and supporting infrastructure
(including employee support), will
provide unparalleled system throughput
with the network ability to support
access to several distinct options
markets. To achieve a consistent,
premium network performance, the
Exchange must build out and maintain
a network that has the capacity to
handle the message rate requirements of
its most heavy network consumers.
These billions of messages per day will
consume the Exchange’s resources and
significantly contribute to the overall
network connectivity expense for
storage and network transport
capabilities, just as they do for the
Exchange’s affiliate markets. The
Exchange must then purchase
additional storage capacity on an
ongoing basis to ensure it has sufficient
capacity to store these messages to
satisfy its record keeping requirements
under the Exchange Act.44 Thus, as the
number of messages an entity increases,
certain other costs incurred by the
Exchange that are correlated to, though
not directly affected by, connection
costs (e.g., storage costs, surveillance
costs, service expenses) will likely also
increase. Given this anticipated
difference in network utilization rate,
the Exchange believes that it is
reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users
pay for the vast majority of the shared
network resources from which all
market participants’ will benefit.
Full Service MEO Ports
The proposed fees for Full Service
MEO Ports are not unfairly
discriminatory because they would
apply to all Market Makers equally. The
Exchange proposes a pricing structure
for Full Service MEO Ports that is the
same as that used by the Exchange’s
affiliates, MIAX, MIAX Pearl, and MIAX
Emerald, except with lower pricing for
44 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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86041
each tier.45 In the experience of the
Exchange’s affiliated markets, Members
that are frequently in the highest tier for
Full Service MEO/MEI Ports consume
the most bandwidth and resources of
the network. For example, the
Exchange’s affiliate, MIAX Pearl,
recently noted that Market Makers who
reach the highest tier for Full Service
MEO Ports accounted for greater than
84% of ADV on MIAX Pearl, while
Market Makers that are typically in the
lowest Tier for Full Service MEO Ports,
accounted for less than 14% of ADV on
the Exchange.46 Further, as noted by
MIAX Pearl, the remaining 1% was
accounted for by Market Makers who
are frequently in the middle Tier for
Full Service MEO Ports.47
To achieve a consistent, premium
network performance, the Exchange
must build out and maintain a network
that has the capacity to handle the
message rate requirements of its most
heavy network consumers during
anticipated peak market conditions. The
need to support billions of messages per
day will consume the Exchange’s
resources and significantly contribute to
the overall network connectivity
expense for storage and network
transport capabilities. The Exchange
may have to purchase additional storage
capacity on an ongoing basis to ensure
it has sufficient capacity to store these
messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.48 Thus, as the number of
connections a Market Maker has
increases, the related pull on Exchange
resources may also increase once the
Exchange launches operations. The
Exchange sought to design the proposed
tiered-pricing structure to set the
amount of the fees to relate to the
number of ports a firm purchases. The
more ports purchased by a Market
Maker likely results in greater
expenditure of Exchange resources and
increased cost to the Exchange.
The Exchange further believes that the
proposed fees are reasonable, equitably
allocated and not unfairly
discriminatory because, for the flat fee
in each tier, the Exchange provides each
Member two (2) Full Service MEO Ports
for each matching engine to which that
45 See MIAX Fee Schedule, Section 5)d)ii), MIAX
Pearl Fee Schedule, Section 5)d), and MIAX
Emerald Fee Schedule, Section 5)d)ii).
46 See Securities Exchange Act Release No. 99823
(March 21, 2024), 89 FR 21312 (March 27, 2024)
(SR–PEARL–2024–14).
47 Id.
48 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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Member is connected. Unlike other
options exchanges that provide similar
port functionality and charge fees on a
per port basis,49 the Exchange offers
Full Service MEO Ports as a package
and provides Market Makers with the
option to receive up to two Full Service
MEO Ports per matching engine to
which it connects. The Exchange
currently has eight matching engines,
which means Market Makers may
receive up to sixteen Full Service MEO
Ports for a single monthly fee, that can
vary based on certain volume
percentages or classes the Market Maker
is registered in. Assuming a Market
Maker connects to all eight matching
engines during the month, and achieves
the highest Tier for that month, with
two Full Service MEO Ports per
matching engine, this would result in a
cost of $375 per Full Service MEO Port
($6,000 divided by 16).
The Exchange believes its proposal to
provide a reduced Full Service MEO
Port fee to Market Makers that fall
within the 3rd and 4th levels of the
proposed fee table is not unfairly
discriminatory because this proposed
lower monthly fee is designed to
provide a lower fixed cost to those
Market Makers who are willing to quote
the entire Exchange market (or
substantial amount of the Exchange
market), as objectively measured by
either number of classes assigned or
national ADV, but who do not otherwise
execute a significant amount of volume
on the Exchange. The Exchange believes
that, by offering lower fixed costs to
Market Makers that execute less volume,
the Exchange will retain and attract
smaller-scale Market Makers, which are
an integral component of the option
industry marketplace, but have been
decreasing in number in recent years,
due to industry consolidation and lower
market maker profitability. The
Exchange believes it is beneficial to
incentivize these additional Market
Makers to register to make markets on
the Exchange to increase liquidity as the
Exchange begins operations. Increased
liquidity from a diverse set of market
participants helps facilitate price
discovery and the interaction of orders,
which benefits all market participants of
the Exchange. Since these smaller-scale
49 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services (similar to the MIAX Pearl
Options’ MEO Ports, SQF ports are primarily
utilized by Market Makers); ISE Pricing Schedule,
Options 7, Section 7, Connectivity Fees and ISE
Rules, General 8: Connectivity; NYSE American
Options Fee Schedule, Section V.A. Port Fees and
Section V.B. Co-Location Fees; GEMX Pricing
Schedule, Options 7, Section 6, Connectivity Fees
and GEMX Rules, General 8: Connectivity.
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Market Makers may utilize less
Exchange capacity due to lower overall
volume executed, the Exchange believes
it is reasonable, equitably allocated and
not unfairly discriminatory to offer such
Market Makers a lower fixed cost. The
Exchange notes that its affiliated
markets, MIAX, MIAX Pearl, and MIAX
Emerald, offer a similar reduced fee for
their Full Service MEO/MEI Ports for
smaller-scale Market Makers.50
Limited Service MEO Ports
The proposed fees for Limited Service
MEO Ports are not unfairly
discriminatory because they would
apply to all Market Makers equally. All
Market Makers will be eligible to receive
four (4) free Limited Service MEO Ports
per matching engine and those that elect
to purchase more would be subject to
the same monthly rate upon the
expiration of the Initial Waiver Period,
regardless of the number of additional
Limited Service MEO Ports they
purchase. In the experience of the
Exchange’s affiliated markets, certain
market participants choose to purchase
additional Limited Service MEO Ports
based on their own particular trading/
quoting strategies and feel they need a
certain number of connections to the
Exchange to execute on those strategies.
Other market participants may continue
to choose to only utilize the free Limited
Service MEO Ports to accommodate
their own trading or quoting strategies,
or other business models. All market
participants elect to receive or purchase
the amount of Limited Service MEO
Ports they require based on their own
business decisions and all market
participants would be subject to the
same fee structure and flat fee. Every
market participant may receive up to
four (4) free Limited Service MEO Ports
and those that choose to purchase
additional Limited Service MEO Ports
may elect to do so based on their own
business decisions and would continue
to be subject to the same monthly fee.
The Exchange believes that its
proposed fee for Limited Service MEO
Ports is reasonable, equitable, and not
unfairly discriminatory because it is
designed to align fees with services
provided, will apply equally to all
Members that are assigned Limited
Service MEO Ports (either directly or
through a Service Bureau), and will
minimize barriers to entry by providing
all Members with four free Limited
Service MEO Ports from the time the
50 See MIAX Fee Schedule, Section 5)d)ii), note
‘‘*’’; MIAX Pearl Fee Schedule, Section 5)d), page
20, note ‘‘**’’; and MIAX Emerald Fee Schedule,
Section 5)d)ii), note D.
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Exchange launches operations.51 As a
result of the proposed fee structure, a
significant majority of Members may not
be subject to any fee. In contrast, other
exchanges generally charge in excess of
$450 per port without providing any
free ports.52 Even for Members that
choose to maintain more than four
Limited Service MEI Ports, the
Exchange believes that the cost-based
fee proposed herein is low enough that
it will not operate to restrain any
Member’s ability to maintain the
number of Limited Service MEO Ports
that it determines are consistent with its
business objectives. Although the
Exchange projects that no Members will
utilize more than the four free Limited
Service MEO Ports, if there is a small
number of Members that do utilize more
ports and are subject to the proposed fee
of $250 per port, those Members will
still pay considerably less for such ports
as compared to the fees that competing
exchanges charge.53 Further, the
number of assigned Limited Service
MEO Ports will continue to be based on
decisions by each Member, including
the ability to reduce fees by
discontinuing unused Limited Service
MEO Ports.
The Exchange believes that providing
four free Limited Service MEO Ports is
reasonable, equitable, and not unfairly
discriminatory because it will enable
Members to access the Exchange on this
basis without having to pay for Limited
Service MEO Ports, thereby encouraging
51 The following rationale to support providing a
certain number of Limited Service MEI Ports for
free prior to applying a fee is similar to that used
by the IEX in a 2020 proposal to do the same as
proposed herein. See Securities Exchange Act
Release No. 86626 (August 9, 2019), 84 FR 41793
(August 15, 2019) (SR–IEX–2019–07).
52 See NASDAQ Pricing Schedule, Options 7,
Section 3, Ports and Other Services and NASDAQ
Rules, General 8: Connectivity, Section 1. CoLocation Services (similar to the Exchange’s MEI
Ports, SQF ports are primarily utilized by Market
Makers); ISE Pricing Schedule, Options 7, Section
7, Connectivity Fees and ISE Rules, General 8:
Connectivity; NYSE American Options Fee
Schedule, Section V.A. Port Fees and Section V.B.
Co-Location Fees; GEMX Pricing Schedule, Options
7, Section 6, Connectivity Fees and GEMX Rules,
General 8: Connectivity.
53 Assuming a Member selects five Limited
Service MEO Ports based on their business needs
that Member on MIAX Sapphire would be charged
only for the fifth Limited Service MEO Port and pay
only the $250 monthly fee, as the first four Limited
Service MEO Ports would be free. Meanwhile, a
Member that purchases five ports on NYSE Arca
Options would pay $450 per port per month,
resulting in a total charge of $2,250 per month. On
Cboe BZX Options, that same member would pay
$750 per port per month, resulting in a total charge
of $3,750 per months for five ports. See NYSE Arca
Options Fees and Charges, dated March 1, 2024,
available at https://www.nyse.com/publicdocs/
nyse/markets/arca-options/NYSE_Arca_Options_
Fee_Schedule.pdf and Cboe BZX Options Fee
Schedule available at https://www.cboe.com/us/
options/membership/fee_schedule/.
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order flow and liquidity from a diverse
set of market participants, facilitating
price discovery and the interaction of
orders. The Exchange believes that four
Limited Service MEO Ports is an
appropriate number to provide for free
because it aligns with the maximum
number of free Limited Service MEO/
MEI Ports offered by each of the
Exchange’s affiliated options markets,
and the Exchange believes will align
with the amount of such ports that will
be maintained by a substantial majority
of Members once the Exchange launches
operations.
Based on an initial survey of market
participants that the Exchange
anticipates will utilize Limited Service
MEO Ports, the Exchange projects that
only a few Members will be subject to
any Limited Service MEO Port fees
following the expiration of the Initial
Waiver Period. In determining the
appropriate number of Limited Service
MEO Ports to provide for free, the
Exchange considered several factors.
First, the Exchange believes that, with
respect to Limited Service MEO Port
usage, Members will prefer at least two
Limited Service MEO Ports, for
redundancy purposes. Second, from a
review of the number of Limited Service
MEI Ports currently requested, the
median number of ports per Member
that will utilize Limited Service MEO
Ports upon the launch of the Exchange
is approximately eight. Thus, the
Exchange believes that having four ports
appears to be reasonably sufficient for
the majority of Members to access the
Exchange. On that basis, the Exchange
chose four Limited Service MEO Ports
as the maximum number of ports for
which it will not charge to access the
Exchange. The Exchange notes that
some Members may use more Limited
Service MEO Ports than other Members
(and the four provided for free), which
will be driven by the nature and volume
of the business they conduct on the
Exchange, and the choices they make in
segmenting that business across
different Limited Service MEO Ports.
Allowing for this expansive use of
Exchange capacity represents an
aggregate cost that the Exchange seeks to
recover through charging for ports five
and higher.
The proposed fee structure is also
designed to encourage Members to be
efficient with their Limited Service
MEO Port usage, thereby resulting in a
corresponding increase in the efficiency
that the Exchange would be able to
realize in managing its aggregate costs
for providing Limited Service MEO
Ports. There is no requirement that any
Member maintain a specific number of
Limited Service MEO Ports and a
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Member may choose to maintain as
many or as few of such ports as each
Member deems appropriate.
The Exchange assessed the impact of
the structure and amount of the
proposed fee on all Members that the
Exchange anticipates will utilize
Limited Service MEO Ports. The
Exchange believes that the proposed fee
is fair and equitably allocated across all
Members. As a threshold matter, the fee
will not by design apply differently to
different types or sizes of Members.
Nonetheless, upon launch, the Exchange
will be able to assess whether there may
be any differences in the amount of the
projected fee that correlates to the type
and/or size of different Members. This
assessment will help determine whether
the number of assigned Limited Service
MEO Ports, and thus projected fees,
correlates closely to a Member’s
inbound message volume to the
Exchange. This is a similar assessment
as that performed by the Exchange’s
affiliates, MIAX and MIAX Emerald,
prior to changing their respective
Limited Service MEI Port fees recently.
Based on the experience of the
Exchange’s affiliates, as inbound
message volume increases per Member,
the number of requested and assigned
Limited Service MEO Ports increases.
As the Exchange has not launched
operations at the time of this filing, the
Exchange does not have data to show
any correlation between a Member’s
inbound message volume and the
number of Limited Service MEO Port
assigned to the Member. However,
based on the experience of the
Exchange’s affiliates, MIAX and MIAX
Emerald, Members with relatively
higher inbound message volume were
projected to pay higher fees because
they requested more Limited Service
MEI Ports for those exchanges.
To achieve consistent, premium
network performance, the Exchange
must build and maintain a network that
has the capacity to handle the message
rate requirements of its heaviest
network consumers during anticipated
peak market conditions. The resultant
need to support the anticipated amount
of billions of messages per day will
consume the Exchange’s resources and
significantly contribute to the overall
network connectivity expense for
storage and network transport
capabilities. This need will also require
the Exchange to purchase additional
storage capacity on an ongoing basis to
ensure it has sufficient capacity to store
these messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
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86043
Exchange Act.54 Thus, as the number of
connections per Market Maker
increases, other costs incurred by the
Exchange will likely also increase, e.g.,
storage costs, surveillance costs, service
expenses.
The Exchange further believes that the
proposed fees are reasonable, fair and
equitable, and non-discriminatory
because they will apply to all Members
in the same manner and are not targeted
at a specific type or category of market
participant engaged in any particular
trading strategy. All Members will
receive four free Limited Service MEO
Ports and pay the same proposed fee per
Limited Service MEO Port for each
additional Limited Service MEO Port.
Each Limited Service MEO Port is
identical, providing connectivity to the
Exchange on identical terms. While the
proposed fee will result in a different
effective ‘‘per unit’’ rate for different
Members after factoring in the four free
Limited Service MEO Ports, the
Exchange does not believe that this
difference is material given the overall
low proposed fee per Limited Service
MEO Port. Because the first four Limited
Service MEO Ports are free of charge,
each entity will have a ‘‘per unit’’ rate
of less than the proposed fee. Further,
the fee is not connected to volume based
tiers. All Members will be subject to the
same fee schedule, regardless of the
volume sent to or executed on the
Exchange. The fee also does not depend
on any distinctions between Members,
customers, broker-dealers, or any other
entity. The fee will be assessed solely
based on the number of Limited Service
MEO Ports an entity selects and not on
any other distinction applied by the
Exchange. While entities that send
relatively more inbound messages to the
Exchange may select more Limited
Service MEO Ports, thereby resulting in
higher fees, that distinction is based on
decisions made by each Member and the
extent and nature of the Member’s
business on the Exchange rather than
application of the fee by the Exchange.
Members can determine how many
Limited Service MEO Ports they need to
implement their trading strategies
effectively. The Exchange proposes to
offer additional Limited Service MEO
Ports at a low fee to enable all Members
to purchase as many Limited Service
MEO Ports as their business needs
dictate in order to optimize throughput
and manage latency across the
Exchange.
54 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
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Notwithstanding that Members with
the highest number of Limited Service
MEO Ports will pay a greater percentage
of the total projected fees than is
represented by their Limited Service
MEO Port usage, the Exchange does not
believe that the proposed fee is unfairly
discriminatory. It is not possible to fully
synchronize the Exchange’s objective to
provide four free Limited Service MEO
Ports to all Members, thereby
minimizing barriers to entry and
incentivizing liquidity on the Exchange,
with an approach that exactly aligns the
projected per Member fee with each
Member’s number of requested Limited
Service MEO Ports. As proposed, the
Exchange is providing a reasonable
number of Limited Service MEO Ports to
each Member without charge. Any
variance between projected fees and
Limited Service MEO Port usage is
attributable to objective differences
among Members in terms of the number
of Limited Service MEO Ports they
determine are appropriate based on
their trading on the Exchange. Further,
the Exchange believes that the low
amount of the proposed fee (which in
the aggregate is projected to only
partially recover the Exchange’s
directly-related costs as described
herein) mitigates any disparate impact.
Further, the fee will help to encourage
Limited Service MEO Port usage in a
way that aligns with the Exchange’s
regulatory obligations. As a national
securities exchange, the Exchange is
subject to Regulation Systems
Compliance and Integrity (‘‘Reg SCI’’).55
Reg SCI Rule 1001(a) requires that the
Exchange establish, maintain, and
enforce written policies and procedures
reasonably designed to ensure (among
other things) that its Reg SCI systems
have levels of capacity adequate to
maintain the Exchange’s operational
capability and promote the maintenance
of fair and orderly markets.56 By
encouraging Members to be efficient
with their Limited Service MEO Ports
usage, the proposed fee will support the
Exchange’s Reg SCI obligations in this
regard by ensuring that unused Limited
Service MEO Ports are available to be
allocated based on individual Members
needs and as the Exchange’s overall
order and trade volumes increase.
Additionally, because the Exchange will
continue not to charge connectivity
testing and certification fees to its
disaster recovery facility or where the
Exchange requires testing and
certification, the proposed fee structure
will further support the Exchange’s Reg
SCI compliance by reducing the
55 17
56 17
CFR 242.1000–1007.
CFR 242.1001(a).
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potential impact of a disruption should
the Exchange be required to switch to its
disaster recovery facility and
encouraging Members to engage in any
necessary system testing without
incurring any port fee costs.57
Finally, the Exchange believes that
the proposed fee is consistent with
Section 11A of the Exchange Act in that
it is designed to facilitate the
economically efficient execution of
securities transactions, fair competition
among brokers and dealers, exchange
markets and markets other than
exchange markets, and the practicability
of brokers executing investors’ orders in
the best market. Specifically, the
proposed low, cost-based fee will enable
a broad range of the Exchange Members
to continue to connect to the Exchange,
thereby facilitating the economically
efficient execution of securities
transactions on the Exchange, fair
competition between and among such
Members, and the practicability of
Members that are brokers executing
investors’ orders on the Exchange when
it is the best market.
FIX, CTD, and FXD Ports
To achieve consistent, premium
network performance, the Exchange
must build and maintain a network that
has the capacity to handle the message
rate requirements of its heaviest
network consumers during anticipated
peak market conditions. The resultant
need to support the anticipated amount
of billions of messages per day will
consume the Exchange’s resources and
significantly contribute to the overall
network connectivity expense for
storage and network transport
capabilities. This need will also require
the Exchange to purchase additional
storage capacity on an ongoing basis to
ensure it has sufficient capacity to store
these messages as part of it surveillance
program and to satisfy its record
keeping requirements under the
Exchange Act.58 Thus, as the number of
connections per Market Maker
increases, other costs incurred by the
Exchange will likely also increase, e.g.,
storage costs, surveillance costs, service
expenses.
The Exchange further believes that the
proposed fees for FIX, CTD and FXD
Ports are reasonable, fair and equitable,
and non-discriminatory because they
57 By comparison, some other exchanges charge
less to connect to their disaster recovery facilities,
but still charge an amount that could both recoup
costs and potentially be a source of profits. See, e.g.,
Nasdaq Stock Market LLC Equity 7, Section 115
(Ports and other Services).
58 17 CFR 240.17a–1 (recordkeeping rule for
national securities exchanges, national securities
associations, registered clearing agencies and the
Municipal Securities Rulemaking Board).
PO 00000
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Fmt 4703
Sfmt 4703
will apply to all Members in the same
manner and are not targeted at a specific
type or category of market participant
engaged in any particular trading
strategy. The fee for each type of port
does not depend on any distinctions
between Members, customers, brokerdealers, or any other entity. The fee will
be assessed solely based on the number
of FIX, CTD or FXD Ports an entity
selects and not on any other distinction
applied 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 that is not
necessary or appropriate in furtherance
of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed
fees will not result in any burden on
intra-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act because the
proposed fees will allow the Exchange
to recoup its costs with a small profit for
providing 1Gb and 10Gb ULL
connectivity, while recouping some of
its costs for a negative margin for
providing Full Service MEO Ports,
Limited Service MEO Ports, FIX Ports,
CTD Ports and FXD Ports, following
expiration of the respective waiver
periods for each fee. As described
above, the Exchange anticipates
operating at a loss for the majority of the
above services in order to provide a lowcost alternative to attract order flow and
encourage market participants to
experience the high determinism and
resiliency of the Exchange’s trading
Systems. To do so, the Exchange
chooses to waive the fees for all of the
connectivity and port services for a
specified time period. This will likely
result in the Exchange forgoing revenue
it could generate from assessing any fees
without a waiver period or higher fees
upon expiration of the waiver periods.
The Exchange could seek to charge
higher fees upon launch, but that could
serve to discourage participation on the
Exchange. Instead, the Exchange
chooses to provide a low-cost exchange
alternative to the options industry,
which may result in lower initial
revenues.
Further, the Exchange does not
believe that the proposed fees would
place certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. The proposed
fees will apply uniformly to all market
participants regardless of the number of
E:\FR\FM\29OCN1.SGM
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Federal Register / Vol. 89, No. 209 / Tuesday, October 29, 2024 / Notices
1Gb or 10Gb ULL connections they
choose to purchase. The proposed fees
do not favor certain categories of market
participants in a manner that would
impose an undue burden on
competition.
The Exchange does not believe that
the proposed rule change would place
certain market participants at the
Exchange at a relative disadvantage
compared to other market participants
or affect the ability of such market
participants to compete. In particular,
Exchange personnel has been informally
discussing potential fees for
connectivity services with a diverse
group of market participants that are
likely to connect to the Exchange for
launch (including large and small firms,
firms with large connectivity service
footprints and small connectivity
service footprints, as well as extranets
and service bureaus) for several months
leading up to that time. The Exchange
does not believe the proposed fees for
connectivity services would negatively
impact the ability of Members, nonMembers (extranets or service bureaus),
third-parties that purchase the
Exchange’s connectivity and resell it,
and customers of those resellers to
compete with other market participants
or that they are placed at a
disadvantage.
The Exchange does anticipate,
however, that some market participants
may reduce or discontinue use of
connectivity services provided directly
by the Exchange once the relevant
waiver periods expire. The Exchange’s
affiliates have experienced similar
reductions in use by their members for
similar non-transaction fee increases.
For example, one MIAX Pearl Options
Market Maker terminated their MIAX
Pearl Options membership on January 1,
2023 as a direct result of the similar
proposed fee changes by MIAX Pearl
Options.59
The Exchange does not believe that
the proposed fees for connectivity
services place certain market
participants at a relative disadvantage to
other market participants because the
khammond on DSKJM1Z7X2PROD with NOTICES
59 The
Exchange acknowledges that IEX included
in its proposal to adopt market data fees after
offering market data for free an analysis of what its
projected revenue would be if all of its existing
customers continued to subscribe versus what its
projected revenue would be if a limited number of
customers subscribed due to the new fees. See
Securities Exchange Act Release No. 94630 (April
7, 2022), 87 FR 21945 (April 13, 2022) (SR–IEX–
2022–02). MEMX did not include a similar analysis
in its recent non-transaction fee proposal. See supra
note 41. The Exchange does not believe a similar
analysis would be useful here because it is
amending existing fees, not proposing to charge a
new fee where existing subscribers may terminate
connections because they are no longer enjoying the
service at no cost.
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17:34 Oct 28, 2024
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proposed connectivity pricing is
associated with relative usage of the
Exchange by each market participant
and does not impose a barrier to entry
to smaller participants. The Exchange
believes its proposed pricing is
reasonable and, when coupled with the
availability of third-party providers that
also offer connectivity solutions, that
participation on the Exchange is
affordable for all market participants,
including smaller trading firms. As
described above, the connectivity
services purchased by market
participants typically increase based on
their additional message traffic and/or
the complexity of their operations. The
market participants that utilize more
connectivity services typically utilize
the most bandwidth, and those are the
participants that consume the most
resources from the network.
Accordingly, the proposed fees for
connectivity services do not favor
certain categories of market participants
in a manner that would impose a
burden on competition; rather, the
allocation of the proposed connectivity
fees reflects the network resources
consumed by the various size of market
participants and the costs to the
Exchange of providing such
connectivity services.
The Exchange does not believe its
proposed fees for Limited Service MEO
Ports will place certain market
participants at a relative disadvantage to
other market participants. All market
participants would be eligible to receive
four (4) free Limited Service MEO Ports
and those that elect to purchase more
would be subject to the same flat fee
regardless of the number of additional
Limited Service MEO Ports they
purchase. All firms purchase the
amount of Limited Service MEO Ports
they require based on their own
business decisions and similarly
situated firms are subject to the same
fees.
Inter-Market Competition
The Exchange also does not believe
that the proposed rule change and price
increase will result in any burden on
inter-market competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. As this is a
fee increase, arguably if set too high,
this fee would make it easier for other
exchanges to compete with the
Exchange. Only if this were a
substantial fee decrease could this be
considered a form of predatory pricing.
In contrast, the Exchange believes that,
without this fee increase, we are
potentially at a competitive
disadvantage to certain other exchanges
that have in place higher fees for similar
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
86045
services. As we have noted, the
Exchange believes that connectivity fees
can be used to foster more competitive
transaction pricing and additional
infrastructure investment and there are
other options markets of which market
participants may connect to trade
options at higher rates than the
Exchange’s. Accordingly, the Exchange
does not believe its proposed fee
changes impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,60 and Rule
19b–4(f)(2) 61 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:
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–
SAPPHIRE–2024–32 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.
60 15
61 17
E:\FR\FM\29OCN1.SGM
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
29OCN1
86046
Federal Register / Vol. 89, No. 209 / Tuesday, October 29, 2024 / Notices
All submissions should refer to file
number SR–SAPPHIRE–2024–32. 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–SAPPHIRE–2024–32 and should be
submitted on or before November 19,
2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.62
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–25056 Filed 10–28–24; 8:45 am]
khammond on DSKJM1Z7X2PROD with NOTICES
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101412; File No. SR–OCC–
2024–011]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Designation of Longer Period for
Commission Action on Proposed Rule
Change, as Modified by Partial
Amendment No. 1, by the Options
Clearing Corporation Concerning Its
Stock Loan Programs
October 23, 2024.
On August 22, 2024, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2024–
011 pursuant to Section 19(b) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4 2
thereunder to address limitations in the
structure of OCC’s Stock Loan/Hedge
(‘‘Hedge’’) Program and Market Loan
Program (together, the ‘‘Stock Loan
Programs’’) by creating the framework
for a single, enhanced program designed
to support current and future needs. The
proposed rule change, as modified by
Partial Amendment No. 1 (hereafter
‘‘Proposed Rule Change’’), was
published for public comment in the
Federal Register on September 10,
2024.3 The Commission has not
received comments regarding the
Proposed Rule Change.
Section 19(b)(2)(i) of the Exchange
Act 4 provides that, within 45 days of
the publication of notice of the filing of
a proposed rule change, the Commission
shall either approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether the proposed rule
change should be disapproved unless
the Commission extends the period
within which it must act as provided in
Section 19(b)(2)(ii) of the Exchange
Act.5 Section 19(b)(2)(ii) of the
Exchange Act allows the Commission to
designate a longer period for review (up
to 90 days from the publication of notice
of the filing of a proposed rule change)
if the Commission finds such longer
period to be appropriate and publishes
its reasons for so finding, or as to which
the self-regulatory organization
consents.6
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 100930
(Sept. 4, 2024), 89 FR 73466 (Sept. 10, 2024) (File
No. SR–OCC–2024–011).
4 15 U.S.C. 78s(b)(2)(i).
5 15 U.S.C. 78s(b)(2)(ii).
6 Id.
2 17
62 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
17:34 Oct 28, 2024
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Fmt 4703
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The 45th day after publication of the
Notice of Filing is October 25, 2024. In
order to provide the Commission with
sufficient time to consider the Proposed
Rule Change, the Commission finds that
it is appropriate to designate a longer
period within which to take action on
the Proposed Rule Change, and
therefore is extending this 45-day time
period.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the
Exchange Act,7 designates December 9,
2024, as the date by which the
Commission shall either approve,
disapprove, or institute proceedings to
determine whether to disapprove the
Proposed Rule Change.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–25051 Filed 10–28–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101416; File No. SR–
CboeEDGA–2024–037]
Self-Regulatory Organizations; Cboe
EDGA Exchange, Inc.; Notice of Filing
of a Proposed Rule Change With
Respect to Amendments to the
Seventh Amended and Restated
Bylaws (the ‘‘CGM Bylaws’’) of Its
Parent Corporation, Cboe Global
Markets, Inc. (‘‘Cboe’’ or ‘‘Corporation’’)
October 23, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
11, 2024, Cboe EDGA Exchange, Inc.
(the ‘‘Exchange’’ or ‘‘EDGA’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’) is filing with
the Securities and Exchange
7 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
8 17
E:\FR\FM\29OCN1.SGM
29OCN1
]]>Agencies
[Federal Register Volume 89, Number 209 (Tuesday, October 29, 2024)]
[Notices]
[Pages 86024-86046]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-25056]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101418; File No. SR-SAPPHIRE-2024-32]
Self-Regulatory Organizations; MIAX Sapphire, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX
Sapphire, LLC To Adopt Connectivity and Certain Port Fees for Members
and Non-Members
October 23, 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 October 10, 2024, MIAX Sapphire, LLC (``MIAX Sapphire'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the MIAX Sapphire
Options Exchange Fee Schedule (the ``Fee Schedule'') to adopt certain
non-transaction fees. The text of the proposed rule change is available
on the Exchange's website at https://www.miaxglobal.com/markets/us-options/miax-sapphire/rule-filings, at the Exchange'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
On July 15, 2024, the U.S. Securities and Exchange Commission
(``Commission'') approved the Exchange's Form 1 application to register
as a national securities exchange under Section 6 of the Exchange
Act.\3\ The Exchange commenced electronic operations on August 12,
2024.\4\ The Exchange proposes to establish the following sections of
the Fee Schedule, including proposed fee structures and amounts (the
majority of which the Exchange proposes to waive for a specified time,
as discussed further below): (1) connectivity fees for Members \5\ and
non-Members; and (2) certain port fees for Members and non-Members.\6\
The Exchange initially filed this proposal on August 9, 2024 (SR-
SAPPHIRE-2024-21). The Exchange withdrew SR-SAPPHIRE-2024-21 on August
14, 2024 and submitted SR-SAPPHIRE-2024-22. On October 10, 2024, the
Exchange withdrew SR-
[[Page 86025]]
SAPPHIRE-2024-22 and submitted this proposal.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 100539 (July 15,
2024), 89 FR 58848 (July 19, 2024) (File No. 10-240) (the ``Approval
Order'').
\4\ See MIAX Sapphire News Alert, dated August 13, 2024,
available at https://www.miaxglobal.com/alert/2024/08/13/miami-international-holdings-announces-successful-launch-miax-sapphire?nav=all.
\5\ The term ``Member'' means an individual or organization that
is registered with the Exchange pursuant to Chapter II of the
Exchange's 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 Exchange Rule 100.
\6\ The Exchange filed a separate rule filing to establish fees
for Purge Ports. See SR-SAPPHIRE-2024-15. ``Purge Ports'' provide
Market Makers with the ability to send quote purge messages to the
MIAX Sapphire System. Purge Ports are not capable of sending or
receiving any other type of messages or information. See the
Definitions section of the Fee Schedule. Fees for all other types of
ports are proposed in this filing.
---------------------------------------------------------------------------
Connectivity Fees
The Exchange proposes to establish Section 5), System Connectivity
Fees, which will describe network connectivity fees. The Exchange
proposes to offer to both Members and non-Members the choice of a 1
Gigabit (``Gb'') fiber connection or the 10Gb ultra-low latency
(``ULL'') fiber connection to the Exchange's primary and secondary
facilities, as well as its disaster recovery facility. The 1Gb and 10Gb
ULL fees will be charged to both Members and non-Members for
connectivity to the Exchange's primary/secondary facility and to its
disaster recovery facility.
The Exchange proposes to establish monthly fees of $1,400 per 1Gb
connection and $13,500 per 10Gb ULL connection that will be assessed to
Members and non-Members for connecting to the primary/secondary
facility. The Exchange proposes to establish monthly fees of $550 per
1Gb connection and $2,750 per 10Gb ULL connection that will be assessed
to Members and non-Members for connecting to the disaster recovery
facility.
Monthly network connectivity fees for Members and non-Members for
connectivity with the primary/secondary facility will be assessed in
any month the Member or non-Member is credentialed to use any of the
MIAX Sapphire Application Programming Interfaces (``APIs'') or market
data feeds in the production environment. Further, the Exchange
proposes to pro-rate the monthly fees when a Member or non-Member makes
a change to the connectivity (by adding or deleting connections) with
such pro-rated fees based on the number of trading days that the Member
or non-Member has been credentialed to utilize any of the MIAX Sapphire
APIs or market data feeds in the production environment through such
connection, divided by the total number of trading days in such month
multiplied by the applicable monthly rate. Monthly network connectivity
fees for Members and non-Members for connectivity to the disaster
recovery facility will be assessed in each month during which the
Member or non-Member has established connectivity to the disaster
recovery facility.
The Exchange proposes that Members and non-Members utilizing the
MENI \7\ to connect to the trading platforms, market data systems, and
disaster recovery facilities of the Exchange or its affiliated options
markets (MIAX, MIAX Pearl, and MIAX Emerald) \8\ via a single, shared
1Gb connection will only be assessed one monthly network connectivity
fee per connection, regardless of the trading platforms, market data
systems, and disaster recovery facilities accessed via such connection.
---------------------------------------------------------------------------
\7\ The term ``MENI'' means the MIAX Express Network
Interconnect, which is a network infrastructure which provides
Members and non-Members network connectivity to the MIAX Sapphire
trading platform, market data systems, test systems, and disaster
recovery facilities. When utilizing a shared 1Gb cross-connect, the
MENI can also be configured to offer network connectivity to the
trading platforms, market data systems, test systems, and disaster
recovery facilities of the Exchange's affiliates, MIAX, MIAX Pearl
and MIAX Emerald. When utilizing a Dedicated cross-connect, the MENI
can only be configured to offer network connectivity to the trading
platforms, market data systems, and test systems of MIAX Sapphire.
See the Definitions section of the Fee Schedule.
\8\ The term ``MIAX'' means Miami International Securities
Exchange, LLC. See Exchange Rule 100. The term ``MIAX Pearl'' means
MIAX PEARL, LLC. All references to ``MIAX Pearl'' in this filing are
to the options trading facility of MIAX PEARL, LLC. References to
``MIAX Pearl Equities'' are to the equities trading facility of MIAX
PEARL, LLC. See MIAX Pearl Rule 1901. The term ``MIAX Emerald''
means MIAX Emerald, LLC. See Exchange Rule 100. MIAX, MIAX Pearl and
MIAX Emerald are collectively referred to herein as the ``affiliated
markets.''
---------------------------------------------------------------------------
Waiver Period for Connectivity Fees. The Exchange proposes to waive
the monthly Member and non-Member network connectivity fees for the 1Gb
connections to the primary/secondary facility and disaster recovery
facility, and the 10Gb ULL connections to the disaster recovery
facility for the partial month in which the Exchange launches
operations, plus an additional three full calendar months. The proposed
monthly Member and non-Member network connectivity fees for the 1Gb
connections to the primary/secondary facility and disaster recovery
facility, and 10Gb ULL connections to the disaster recovery facility
will be discounted by 50% for the three full calendar months
thereafter.
The Exchange proposes to waive the monthly Member and non-Member
network connectivity fees for the first two 10Gb ULL connections on
each switch \9\ to the primary/secondary facility for the partial month
in which the Exchange launches operations, plus an additional three
full calendar months. The Exchange proposes that the monthly Member and
non-Member network connectivity fees for the first two 10Gb ULL
connections on each switch to the primary/secondary facility will be
discounted by 50% for the three full calendar months thereafter. Any
subsequent 10Gb ULL connections on each switch will be charged the full
monthly rate of $13,500 per 10Gb ULL connection.
---------------------------------------------------------------------------
\9\ The network switches are the first layer of access to the
trading platform that firms connect to before being able to access
the Exchange's matching engines, each of which pertain to a certain
list of underlying symbols. The Exchange notes that it is possible
to reach each matching engine from a single switch.
---------------------------------------------------------------------------
For clarity, the Exchange provides the below examples regarding
connectivity fees, utilizing the launch date of August 12, 2024:
Members and non-Members that subscribe to the 1Gb
connection to the primary/secondary facility and/or disaster recovery
facility, and/or subscribe to the 10Gb ULL connection to the disaster
recovery facility, will not be charged the proposed rates (i.e., $1,400
for 1Gb connections to the primary/secondary facility, $550 for 1Gb
connections to the disaster recovery facility, or $2,750 for 10Gb ULL
connections to the disaster recovery facility) for the remaining days
in August, as well as for the entire period covering the months of
September 2024 through November 2024. Thereafter, Members and non-
Members will receive a 50% discount for each 1Gb connection to the
primary/secondary facility and disaster recovery facility, and for each
10Gb ULL connection to the disaster recovery facility for entire period
covering December 2024 through February 2025.
Members and non-Members that subscribe to the 10Gb ULL
connection to the primary/secondary facility will not be charged the
proposed rate ($13,500) for the first two 10Gb ULL connections on each
switch to the primary/secondary facility for the remaining days in
August, as well as the entire period cover the months of September
through November 2024. Thereafter, Members and non-Members will receive
a 50% discount for the first two 10Gb ULL connections on each switch to
the primary/secondary facility for entire period covering December 2024
through February 2025. For each 10Gb ULL connection on each switch
greater than two (i.e., three or more), Members and non-Members will be
assessed the entire amount of the proposed rate beginning upon the
launch of the Exchange.
The Exchange previously communicated to market participants that
the Exchange intends to waive the monthly Member and non-Member network
connectivity fees in the manner described above.\10\ Even though the
[[Page 86026]]
Exchange proposes to waive the Member and non-Member network
connectivity fees for the periods of time described above, the Exchange
believes that it is appropriate to provide market participants with the
overall structure of the fees by outlining the structure and amounts in
the Fee Schedule, so that there is general awareness that the Exchange
intends to assess such fees in the future. The Exchange notes that its
affiliated markets, MIAX, MIAX Pearl and MIAX Emerald, provide for the
same structure and amounts, absent the waiver and discount periods
described above, for connectivity fees assessed to their Members and
non-Members.\11\
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\10\ See Fee Change Alert, MIAX Sapphire Options Exchange--
Updated Summary of Proposed Non-Transaction Fees to Clarify
Application of Production Connectivity Waiver Period, dated July 26,
2024, available at https://www.miaxglobal.com/alert/2024/07/26/miax-sapphire-options-exchange-updated-summary-proposed-non-transaction.
\11\ See MIAX Fee Schedule, Sections 5)a)-b); MIAX Pearl Fee
Schedule, Sections 5)a)-b); and MIAX Emerald Fee Schedule, Sections
5)a)-b).
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Port Fees
The Exchange proposes to establish Section 5)d), Port Fees, which
will provide the fee structure and amounts for the different types of
ports offered by the Exchange, which are described below.\12\ MIAX
Sapphire has primary and secondary data centers and a disaster recovery
center. Each port provides access to all Exchange data centers for a
single fee. The Exchange notes that, unless otherwise specifically set
forth in the Fee Schedule, the port fees include the information
communicated through the port. That is, unless otherwise specifically
set forth in the Fee Schedule, there is no additional charge for the
information that is communicated through the port apart from what the
user is assessed for each port.
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\12\ The Exchange notes that this filing includes proposed fees
for FIX Ports, Full Service MEO Ports, Limited Service MEO Ports,
Clearing Trade Drop Ports, and FIX Drop Copy Ports. The Exchange
separately filed to establish fees for Purge Ports. See SR-SAPPHIRE-
2024-26. The Exhibit 5 reflects the separate filing to establish
fees for Purge Ports.
---------------------------------------------------------------------------
Waiver Period. The Exchange proposes to waive all port fees during
the Initial Waiver Period.\13\ Even though the Exchange proposes to
fully waive all port fees during the Initial Waiver Period upon
launching operations, the Exchange believes that is appropriate to
provide market participants with the overall structure of the fees by
outlining the structure and amounts in the Fee Schedule, so that there
is general awareness that the Exchange intends to assess such fees upon
the expiration of the defined period of the Initial Waiver Period.
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\13\ The term ``Initial Waiver Period'' means, for each
applicable fee, the period of time from the initial effective date
of the MIAX Sapphire Fee Schedule plus an additional six (6) full
calendar months after the completion of the partial month of the
Exchange launch. See the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------
FIX Port Fees \14\
---------------------------------------------------------------------------
\14\ The term ``FIX Interface'' means the Financial Information
Exchange interface used for submitting certain order types (as set
forth in Rule 516) to the MIAX Sapphire System. See Exchange Rule
100. The term ``FIX Port'' means a FIX port that allows Members to
send orders and other messages using the FIX protocol. See the
Definitions section of the Fee Schedule.
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The Exchange proposes to establish Section 5)d)i), FIX Port Fees,
pursuant to which the Exchange will assess FIX Port fees to Members in
each month the Member is credentialed to use a FIX Port in the
production environment and based upon the number of credentialed FIX
Ports. In particular, the Exchange proposes to assess Members the
following monthly FIX Port fees: (i) $275 for the 1st FIX Port; (ii)
$175 per port for the 2nd through 5th FIX Ports; and (iii) $75 per port
for the 6th FIX Port and each additional FIX Port. FIX Port fees will
be waived during the Initial Waiver Period.
MEO Port Fees \15\
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\15\ The term ``MEO Interface'' or ``MEO'' means a binary order
interface for certain order types as set forth in Rule 516 into the
MIAX Sapphire System. See Exchange Rule 100 and the Definitions
section of the Fee Schedule.
---------------------------------------------------------------------------
The Exchange proposes to establish Section 5)d)ii), MEO Port Fees,
pursuant to which the Exchange will assess MEO Port fees based upon the
different types of MEO Ports offered by the Exchange. MIAX Sapphire
offers different types of MEO Ports depending on the services required
by Members.
The Exchange proposes to assess monthly Full Service MEO Port \16\
fees to Market Makers \17\ based upon the number of classes or class
volume accessed by the Market Maker. MIAX Sapphire will assess monthly
Full Service MEO Port fees to Market Makers in each month the Marker
Maker has been credentialed to use the Full Service MEO Port in the
production environment and has registered to quote in at least one
class.
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\16\ The term ``Full Service MEO Port'' means an MEO port that
supports all MEO input message types and binary bulk order entry.
See the Definitions section of the Fee Schedule.
\17\ 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's Rules. See Exchange Rule 100.
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Specifically, the Exchange proposes to establish the following
monthly Full Service MEO Port fees: (i) $2,500 for Market Maker
registrations in up to 10 option classes or up to 20% of option classes
by volume; (ii) $3,750 for Market Maker registrations in up to 40
option classes or up to 35% of option classes by volume; (iii) $5,000
for Market Maker registrations in up to 100 option classes or up to 50%
of option classes by volume; and (iv) $6,000 for Market Maker
registrations in over 100 option classes or over 50% of option classes
by volume up to all option classes listed on MIAX Sapphire.
The Exchange also proposes to adopt footnote ``b.'' for its Full
Service MEO Port fees that will apply to the Market Makers who fall
within the following Full Service MEO Port fee levels, which represent
the 3rd and 4th levels of the fee table: Market Makers who have (i)
registrations in up to 100 option classes or up to 50% of option
classes by volume, and (ii) registrations in over 100 option classes or
over 50% of option classes by volume up to all option classes listed on
MIAX Sapphire. The Exchange proposes that for these monthly Full
Service MEO Port tier levels, if the Market Maker's total monthly
executed volume during the relevant month is less than 0.015% of the
total monthly executed volume reported by OCC in the Market Maker
account type for MIAX Sapphire-listed option classes for that month,
then the fee will be $4,000 instead of the fee otherwise applicable to
such level (i.e., $5,000 or $6,000).
The purpose of this proposed lower monthly Full Service MEO Port
fee is to provide a lower fixed cost to those Market Makers who quote
the entire Exchange market (or substantial amount of the Exchange
market), as objectively measured by either number of classes assigned
or national average daily volume (``ADV''), but who do not otherwise
execute a significant amount of volume on the Exchange. The Exchange
believes that, by offering lower fixed costs to Market Makers that
execute less volume, the Exchange will retain and attract smaller-scale
Market Makers, which are an integral component of the option industry
marketplace, but have been decreasing in number in recent years, due to
industry consolidation and lower market maker profitability. Since
these smaller-scale Market Makers utilize less Exchange capacity due to
lower overall volume executed, the Exchange believes it is reasonable
and appropriate to offer such Market Makers a lower fixed cost. The
Exchange notes that its affiliated markets, MIAX, MIAX Pearl, and MIAX
Emerald, offer a similar reduced fee for their full service MEO/MEI
ports for
[[Page 86027]]
smaller-scale Market Makers.\18\ Accordingly, this concept is not
novel.
---------------------------------------------------------------------------
\18\ See MIAX Fee Schedule, Section 5)d)ii), note ``*''; MIAX
Pearl Fee Schedule, Section 5)d), page 20, note ``**''; and MIAX
Emerald Fee Schedule, Section 5)d)ii), note [ssquf].
---------------------------------------------------------------------------
For the calculation of the monthly Full Service MEO Port fees, the
applicable fee rate is the lesser of either the per class basis or
percentage of total national ADV measurement. The amount of the monthly
Full Service MEO Port fee will be based upon the number of classes in
which the Market Maker was registered to quote on any given day within
the calendar month, or upon the class volume percentages set forth in
the table in Section 5)d)ii) of the Fee Schedule. A Market Maker is
determined to be registered in a class if that Market Maker has been
registered in one or more series in that class.\19\ The Exchange will
assess MIAX Sapphire Market Makers the monthly Full Service MEO Port
fee based on the greatest number of classes listed on MIAX Sapphire
that the MIAX Sapphire Market Maker registered to quote in on any given
day within a calendar month. The class volume percentage is based on
the total national average daily volume in classes listed on MIAX
Sapphire in the prior calendar quarter. Newly listed option classes are
excluded from the calculation of the monthly Full Service MEO Port fee
until the calendar quarter following their listing, at which time the
newly listed option classes will be included in both the per class
count and the percentage of total national average daily volume.
---------------------------------------------------------------------------
\19\ See, generally, Chapter VI of the Exchange's Rules.
---------------------------------------------------------------------------
MEO Port users will be allocated two (2) Full Service MEO Ports and
four (4) Limited Service MEO Ports per Matching Engine \20\ to which
they connect. MEO Port fees include MEO Ports at the primary, secondary
and disaster recovery data centers. Market Makers may request
additional Limited Service MEO Ports for which MIAX Sapphire proposes
to assess Market Makers $250 per month per additional Limited Service
MEO Port for each Matching Engine in excess of the four (4) Limited
Service MEO Ports described above.
---------------------------------------------------------------------------
\20\ A ``Matching Engine'' is a part of the MIAX Sapphire
electronic system that processes options orders and trades on a
symbol-by-symbol basis. Some Matching Engines will process option
classes with multiple root symbols, and other Matching Engines may
be dedicated to one single option root symbol (for example, options
on SPY may be processed by one single Matching Engine that is
dedicated only to SPY). A particular root symbol may only be
assigned to a single designated Matching Engine. A particular root
symbol may not be assigned to multiple Matching Engines. See the
Definitions section of the Fee Schedule.
---------------------------------------------------------------------------
Full Service MEO Port fees and Limited Service MEO Port fees will
be waived during the Initial Waiver Period.
Clearing Trade Drop Port Fees \21\
---------------------------------------------------------------------------
\21\ A ``CTD Port'' or ``Clearing Trade Drop Port'' provides an
Exchange Member with a real-time clearing trade updates. The updates
include the Member's clearing trade messages on a low latency, real-
time basis. The trade messages are routed to a Member's connection
containing certain information. The information includes, among
other things, the following: (i) trade date and time; (ii) symbol
information; (iii) trade price/size information; (iv) Member type
(for example, and without limitation, Market Maker, Electronic
Exchange Member, Broker-Dealer); and (v) Exchange MPID for each side
of the transaction, including Clearing Member MPID. See the
Definitions section of the Fee Schedule. The term ``Electronic
Exchange Member'' or ``EEM'' means the holder of a Trading Permit
who is a Member representing as agent Public Customer Orders or Non-
Customer Orders on the Exchange and those non-Market Maker Members
conducting proprietary trading. Electronic Exchange Members are
deemed ``members'' under the Exchange Act. See Exchange Rule 100.
---------------------------------------------------------------------------
The Exchange proposes to establish Section 5)d)iv), Clearing Trade
Drop Port Fees. The Exchange proposes to assess a CTD Port fee of $450
per month. This fixed fee structure and amount is the same as the CTD
Port fee in place at the Exchange's affiliate, MIAX Emerald.\22\ CTD
Port fees will be waived during the Initial Waiver Period.
---------------------------------------------------------------------------
\22\ See MIAX Emerald Fee Schedule, Section 5)d)iii).
---------------------------------------------------------------------------
FIX Drop Copy Port Fees \23\
---------------------------------------------------------------------------
\23\ The term ``FXD'' or ``FIX Drop Copy Port'' means a
messaging interface that provides a copy of real-time trade
execution, trade correction and trade cancellation information to
FIX Drop Copy Port users who subscribe to the service. FXD Port
users are those users who are designated by an EEM to receive the
information and the information is restricted for use by the EEM
only. See the Definitions section of the Fee Schedule.
---------------------------------------------------------------------------
The Exchange proposes to establish Section 5)d)v), Fix Drop Copy
Port Fees. The Exchange proposes to assess an FXD Port fee of $250 per
month. This fixed fee structure is the same as the FXD Port fee
structure in place at the Exchange's affiliate, MIAX Emerald, and is
half the price of the FXD Port fee for MIAX Emerald.\24\ FXD Port fees
will be waived during the Initial Waiver Period.
---------------------------------------------------------------------------
\24\ See MIAX Emerald Fee Schedule, Section 5)d)iv).
---------------------------------------------------------------------------
* * * * *
As described more fully below, the Exchange provides a cost
analysis to supports its proposed connectivity and port fees that
includes, among other things, descriptions of how the Exchange
allocated costs among it and its affiliated markets (MIAX, MIAX Pearl,
and MIAX Emerald) to ensure no cost was allocated more than once, as
well as additional detail supporting its cost allocation processes. The
Exchange proposes connectivity and port fees that are intended to cover
the Exchange's cost of providing connectivity and ports, with a
reasonable mark-up over those costs.
2. Statutory Basis
The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \25\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \26\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of Section 6(b)(5) of the Act \27\ in that
they are designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general protect investors
and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(4).
\27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Cost Analysis
In general, the Exchange believes that exchanges, in setting fees
of all types, should meet very high standards of transparency to
demonstrate why each new fee or fee increase meets the Exchange Act
requirements that fees be reasonable, equitably allocated, not unfairly
discriminatory, and not create an undue burden on competition among
members and markets. In particular, the Exchange believes that each
exchange should take extra care to be able to demonstrate that these
fees are based on its costs and reasonable business needs.
In proposing to charge fees for connectivity and port services, the
Exchange is especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and in carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not have an undue impact in particular on smaller
Members and competition among Members in general. The Exchange believes
that this level of diligence and transparency is called for by the
requirements of Section 19(b)(1)
[[Page 86028]]
under the Act,\28\ and Rule 19b-4 thereunder,\29\ with respect to the
types of information exchanges should provide when filing fee changes,
and Section 6(b) of the Act,\30\ which requires, among other things,
that exchange fees be reasonable and equitably allocated,\31\ not
designed to permit unfair discrimination,\32\ and that they not impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\33\ This rule change proposal addresses those
requirements, and the analysis and data in each of the sections that
follow are designed to clearly and comprehensively show how they are
met.\34\
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\28\ 15 U.S.C. 78s(b)(1).
\29\ 17 CFR 240.19b-4.
\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(4).
\32\ 15 U.S.C. 78f(b)(5).
\33\ 15 U.S.C. 78f(b)(8).
\34\ See supra note 31.
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As detailed below, the Exchange recently calculated its aggregate
annual costs (and approximations for monthly costs) for providing 1Gb
and 10Gb ULL connectivity, Full Service MEO Ports, Limited Service MEO
Ports, FIX Ports, CTD Ports, and FXD Ports. For physical 1Gb and 10Gb
ULL connectivity combined, the Exchange calculated its aggregate annual
cost to equal $6,620,300 (or approximately $551,692 per month, when
rounded to the nearest dollar when dividing the combined annual cost by
12 months). For the various port services, the Exchange calculated the
following annual costs: $605,907 for Full Service MEO Ports (or
approximately $50,491 per month, when rounded to the nearest dollar
when dividing the combined annual cost by 12 months); $600,608 for
Limited Service MEO Ports (or approximately $50,050 per month, when
rounded to the nearest dollar when dividing the combined annual cost by
12 months); $158,148 for FIX Ports (or approximately $13,178 per month,
when rounded to the nearest dollar when dividing the combined annual
cost by 12 months); $109,908 for CTD Ports (or approximately $9,158 per
month, when rounded to the nearest dollar when dividing the combined
annual cost by 12 months); and $36,637 for FXD Ports (or approximately
$3,054 per month, when rounded to the nearest dollar when dividing the
combined annual cost by 12 months). In order to cover the aggregate
costs of providing connectivity and ports to its users (both Members
and non-Members \35\) going forward and to make a modest profit for
connectivity services, as described below, the Exchange proposes to
modify its Fee Schedule to establish the connectivity and port fees
described above, subject to certain fee waiver periods. The Exchange
does not anticipate that it will make an overall profit on the various
port services following the expiration of the Initial Waiver Period, on
an annual basis, based on projected subscriber data.
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\35\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services, and thus, may access ports on behalf of one or more
Members. Extranets offer physical connectivity services to Members
and non-Members.
---------------------------------------------------------------------------
The Exchange's affiliates previously completed a study of their
aggregate costs to provide connectivity and port services and produce
market data, defined above as its Cost Analysis.\36\ Personnel began to
plan for and develop the Exchange beginning in early 2023, and costs
included in this Cost Analysis are related to the development and
buildout of the Exchange since that time. During the Exchange's
development and buildout that occurred throughout 2023 and continues to
today, the Exchange routinely studied its aggregate costs to provide
connectivity and port services, which were used to determine the
proposed pricing for the provisions of connectivity and port services
that are part of the Exchange's Cost Analysis. The Cost Analysis
required a detailed analysis of the Exchange's aggregate baseline
costs, including a determination and allocation of costs for core
services provided by the Exchange--transaction execution, market data,
membership services, physical connectivity, and port access (which
provide order entry, cancellation and modification functionality, risk
functionality, the ability to receive drop copies, and other
functionality). The Exchange separately divided its costs between those
costs necessary to deliver each of these core services, including
infrastructure, software, human resources (i.e., personnel), and
certain general and administrative expenses (``cost drivers'').
---------------------------------------------------------------------------
\36\ See Securities Exchange Act Release Nos. 100041 (April 26,
2024), 89 FR 35868 (May 2, 2024) (SR-MIAX-2024-25); 100319 (June 12,
2024), 89 FR 51562 (June 18, 2024) (SR-PEARL-2024-25); 100042 (April
26, 2024), 89 FR 35879 (May 2, 2024) (SR-EMERALD-2024-15). The
Exchange frequently updates it Cost Analysis as strategic
initiatives change, costs increase or decrease, and market
participant needs and trading activity (once live trading begins)
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,\37\ 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. For the 2024
budget process for MIAX Sapphire, only costs and anticipated revenues
associated with the electronic exchange were considered. While MIAX
Sapphire plans on opening its trading floor in 2025 costs and
anticipated revenues from the trading floor were not included as part
of any analysis for MIAX Sapphire for 2024.\38\ 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 five (5) (evenly for each
marketplace). Rather, the Exchange's
[[Page 86029]]
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.
---------------------------------------------------------------------------
\37\ For example, MIAX Sapphire maintains 8 matching engines,
MIAX Emerald maintains 12 matching engines, MIAX Pearl Options
maintains 12 matching engines, MIAX Pearl Equities maintains 24
matching engines, and MIAX maintains 24 matching engines.
\38\ Additionally, while MIAX Sapphire received approval as a
national securities exchange on July 15, 2024, start-up costs
associated with the launch of MIAX Sapphire were not included in the
costs used for the 2024 electronic exchange projections.
---------------------------------------------------------------------------
The next step involves determining what portion of the cost
allocated to the Exchange pursuant to the above methodology is to be
allocated to each core service, e.g., connectivity and ports, market
data, and transaction services. The Exchange and its affiliated markets
adopted an allocation methodology with thoughtful and consistently
applied principles to guide how much of a particular cost amount
allocated to the Exchange should be allocated within the Exchange to
each core service. This is the final step in the cost allocation
process and is applied to each of the cost drivers set forth below. For
instance, fixed costs that are not driven by client activity (e.g.,
message rates), such as data center costs, were allocated more heavily
to the provision of 10Gb ULL physical connectivity (57.7% of total
expense amount allocated to 10Gb ULL connectivity), with smaller
allocations to Full Service MEO Ports (1.6%) and Limited Service MEO
Ports (1.6%), and the remainder to the provision of other connectivity,
other ports, transaction execution, membership services and market data
services (39.1%). This next level of the allocation methodology at the
individual exchange level also took into account factors similar to
those set forth under the first step of the allocation methodology
process described above, to determine the appropriate allocation to
connectivity or market data versus allocations for other services. This
allocation methodology was developed through an assessment of costs
with senior management intimately familiar with each area of the
Exchange's operations. After adopting this allocation methodology, the
Exchange then applied an allocation of each cost driver to each core
service, resulting in the cost allocations described below. Each of the
below cost allocations is unique to the Exchange and represents a
percentage of overall cost that was allocated to the Exchange pursuant
to the initial allocation described above.
By allocating segmented costs to each core service, the Exchange
was able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has five primary sources of revenue that it can potentially
use to fund its operations: transaction fees, fees for connectivity and
port services, membership fees, regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these five
primary sources of revenue. The Exchange also notes that as a general
matter each of these sources of revenue is based on services that are
interdependent. For instance, the Exchange's system for executing
transactions is dependent on physical hardware and connectivity; only
Members and parties that they sponsor to participate directly on the
Exchange may submit orders to the Exchange; many Members (but not all)
consume market data from the Exchange in order to trade on the
Exchange; and the Exchange consumes market data from external sources
in order to comply with regulatory obligations. Accordingly, given this
interdependence, the allocation of costs to each service or revenue
source required judgment of the Exchange and was weighted based on
estimates of the Exchange that the Exchange believes are reasonable, as
set forth below. While there is no standardized and generally accepted
methodology for the allocation of an exchange's costs, the Exchange's
methodology is the result of an extensive review and analysis and will
be consistently applied going forward for any other potential fee
proposals. In the absence of the Commission attempting to specify a
methodology for the allocation of exchanges' interdependent costs, the
Exchange will continue to be left with its best efforts to attempt to
conduct such an allocation in a thoughtful and reasonable manner.
Through the Exchange's extensive updated Cost Analysis, which was
again recently further refined, the Exchange analyzed every expense
item in the Exchange's general expense ledger to determine whether each
such expense relates to the provision of connectivity and port
services, and, if such expense did so relate, what portion (or
percentage) of such expense actually supports the provision of
connectivity and port services, and thus bears a relationship that is,
``in nature and closeness,'' directly related to network connectivity
and port services. In turn, the Exchange allocated certain costs more
to physical connectivity and others to ports, while certain costs were
only allocated to such services at a very low percentage or not at all,
using consistent allocation methodologies as described above. Based on
this analysis, the Exchange estimates that the aggregate monthly costs
for connectivity and ports are as follows: $532,820 for 10Gb ULL
connectivity; $18,872 for 1Gb connectivity; $50,491 for Full Service
MEO Ports; $50,050 for Limited Service MEO Ports; $13,178 for FIX
Ports; $9,158 for CTD Ports; and $3,054 for FXD Ports (all calculations
utilized the number rounded to the nearest dollar when dividing the
annual cost for each type of connectivity or port by 12 months), as
further detailed below.
Costs Related to Offering Physical 1Gb and 10Gb ULL Connectivity
The following charts detail the individual line-item costs
considered by the Exchange to be related to offering physical dedicated
1Gb and 10Gb ULL connectivity 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 1.2% of
its overall Human Resources cost to offering 1Gb connectivity and 34.5%
to offering 10Gb ULL physical connectivity).
1Gb Connectivity
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \a\ cost \b\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources..................................... $125,167 $10,431 1.2
Connectivity (external fees, cabling, switches, 522 44 2.0
etc.)..............................................
Internet Services and External Market Data.......... 3,675 306 2.5
Data Center......................................... 12,571 1,048 2.0
Hardware and Software Maintenance and Licenses...... 9,826 819 2.0
[[Page 86030]]
Depreciation........................................ 27,679 2,307 2.3
Allocated Shared Expenses........................... 47,021 3,918 1.7
-----------------------------------------------------------
Total........................................... 226,461 18,872 1.5
----------------------------------------------------------------------------------------------------------------
\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.
10Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \a\ cost \b\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources..................................... $3,533,950 $294,496 34.5
Connectivity (external fees, cabling, switches, 14,741 1,228 57.7
etc.)..............................................
Internet Services and External Market Data.......... 103,750 8,646 69.8
Data Center......................................... 354,917 29,576 57.7
Hardware and Software Maintenance and Licenses...... 277,415 23,118 55.9
Depreciation........................................ 781,473 65,123 63.6
Allocated Shared Expenses........................... 1,327,593 110,633 47
-----------------------------------------------------------
Total........................................... 6,393,839 532,820 41.1
----------------------------------------------------------------------------------------------------------------
\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 physical 1Gb and
10Gb ULL connectivity.
Human Resources
The Exchange notes that it and its affiliated markets anticipate
that by year-end 2024, there will be 289 employees (excluding employees
at non-options/equities exchange subsidiaries of Miami International
Holdings, Inc. (``MIH''), the holding company of the Exchange and its
affiliated markets), and each department leader has direct knowledge of
the time spent by each employee with respect to the various tasks
necessary to operate the Exchange. Specifically, twice a year, and as
needed with additional new hires and new project initiatives, in
consultation with employees as needed, managers and department heads
assign a percentage of time to every employee and then allocate that
time amongst the Exchange and its affiliated markets to determine each
market's individual Human Resources expense. Then, managers and
department heads assign a percentage of each employee's time allocated
to the Exchange into buckets including network connectivity, ports,
market data, and other exchange services. This process ensures that
every employee is 100% allocated, ensuring there is no double counting
between the Exchange and its affiliated markets.
For personnel costs (Human Resources), the Exchange calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the Exchange's network infrastructure team, which spends
most of their time performing functions necessary to provide physical
connectivity). As described more fully above, the Exchange's parent
company allocates costs to the Exchange and its affiliated markets and
then a portion of the Human Resources costs allocated to the Exchange
is then allocated to connectivity. From that portion allocated to the
Exchange that applied to connectivity, the Exchange then allocated
weighted averages of 49.1% for 10Gb ULL connectivity and 1.7% for 1Gb
connectivity of each employee's time from the above group.
The Exchange also allocated Human Resources costs to provide
physical connectivity to a limited subset of personnel with ancillary
functions related to establishing and maintaining such connectivity
(such as information security, sales, membership, and finance
personnel). The Exchange allocated cost on an employee-by-employee
basis (i.e., only including those personnel who support functions
related to providing physical connectivity) and then applied a smaller
allocation to such employees' time to 10Gb ULL connectivity (18.4%) and
a smaller allocation to 1Gb connectivity (0.6%). This other group of
personnel with a smaller allocation of Human Resources costs also have
a direct nexus to 10Gb ULL connectivity, whether it is a sales person
selling a connection, finance personnel billing for connectivity or
providing budget analysis, or information security ensuring that such
connectivity is secure and adequately defended from an outside
intrusion.
The estimates of Human Resources cost were therefore determined by
consulting with such department leaders, determining which employees
are involved in tasks related to providing physical connectivity, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of time such employees devote to those
tasks. This includes personnel from the Exchange departments that are
predominately involved in providing 1Gb and 10Gb ULL connectivity:
Business Systems Development, Trading Systems Development, Systems
Operations and Network Monitoring, Network and Data Center Operations,
Listings, Trading Operations, and Project Management. Again, the
Exchange allocated 49.1% for 10Gb ULL connectivity and 1.7% for 1Gb
connectivity of each of their employee's time assigned to the Exchange
for 10Gb ULL and 1Gb connectivity, as stated above. Employees from
these departments perform numerous
[[Page 86031]]
functions to support 10Gb ULL connectivity, such as the installation,
re-location, configuration, and maintenance of 10Gb ULL connections and
the hardware they access. This hardware includes servers, routers,
switches, firewalls, and monitoring devices. These employees also
perform software upgrades, vulnerability assessments, remediation and
patch installs, equipment configuration and hardening, as well as
performance and capacity management. These employees also engage in
research and development analysis for equipment and software supporting
10Gb ULL connectivity and design, and support the development and on-
going maintenance of internally-developed applications as well as data
capture and analysis, and Member and internal Exchange reports related
to network and system performance. The above list of employee functions
is not exhaustive of all the functions performed by Exchange employees
to support 10Gb ULL and 1Gb connectivity, but illustrates the breadth
of functions those employees perform in support of the above cost and
time allocations.
Lastly, the Exchange notes that senior level executives' time was
only allocated to the 10Gb ULL and 1Gb connectivity related Human
Resources costs to the extent that they are involved in overseeing
tasks related to providing physical connectivity. The Human Resources
cost was calculated using a blended rate of compensation reflecting
salary, equity and bonus compensation, benefits, payroll taxes, and
401(k) matching contributions.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost driver includes external fees paid to connect
to other exchanges and third parties, cabling and switches required to
operate the Exchange. The Connectivity cost driver is more narrowly
focused on technology used to complete connections to the Exchange and
to connect to external markets. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with existing regulations, primarily Regulation NMS.
The Exchange relies on various connectivity providers for
connectivity to the entire U.S. options industry, and infrastructure
services for critical components of the network that are necessary to
provide and maintain its System Networks and access to its System
Networks via 1Gb and 10Gb ULL connectivity. Specifically, the Exchange
utilizes connectivity providers to connect to other national securities
exchanges and the Options Price Reporting Authority (``OPRA''). The
Exchange understands that these service providers provide services to
most, if not all, of the other U.S. exchanges and other market
participants. Connectivity provided by these service providers is
critical to the Exchanges daily operations and performance of its
System Networks to which market participants connect to via 1Gb and
10Gb ULL connectivity. Without these services providers, the Exchange
would not be able to connect to other national securities exchanges,
market data providers or OPRA and, therefore, would not be able to
operate and support its System Networks. The Exchange does not employ a
separate fee to cover its connectivity provider expense and recoups
that expense, in part, by charging for 1Gb and 10Gb ULL connectivity.
Internet Services and External Market Data
The next cost driver consists of internet Services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton, New Jersey and Miami, Florida.
External market data includes fees paid to third parties, including
other exchanges, to receive market data. The Exchange includes external
market data fee costs towards the provisions of physical connectivity
because such market data is necessary for certain services related to
connectivity, including pre-trade risk checks and checks for other
conditions (e.g., re-pricing of orders to avoid locked or crossed
markets and trading collars). Since external market data from other
exchanges is consumed at the Exchange's matching engine level, (to
which physical connectivity provides access) in order to validate
orders before additional orders enter the matching engine or are
executed, the Exchange believes it is reasonable to allocate an amount
of such costs to 1Gb and 10Gb ULL connectivity.
The Exchange relies on various content service providers for data
feeds for the entire U.S. options industry, as well as content for
critical components of the network that are necessary to provide and
maintain its System Networks and access to its System Networks via 1Gb
and 10Gb ULL connectivity. Specifically, the Exchange utilizes content
service providers to receive market data from OPRA, other exchanges and
market data providers. The Exchange understands that these service
providers provide services to most, if not all, of the other U.S.
exchanges and other market participants. Market data provided by these
service providers is critical to the Exchanges daily operations and
performance of its System Networks to which market participants connect
to via 1Gb and 10Gb ULL connectivity. Without these services providers,
the Exchange would not be able to receive market data and, therefore,
would not be able to operate and support its System Networks. The
Exchange does not employ a separate fee to cover its content service
provider expense and recoups that expense, in part, by charging for 1Gb
and 10Gb ULL connectivity.
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the primary data center or the secondary data center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the total Data Center cost to
physical 1Gb and 10Gb ULL connectivity (59.7% combined) because the
third-party data centers and the Exchange's physical equipment
contained therein is the most direct cost in providing physical access
to the Exchange. In other words, for the Exchange to operate in a
dedicated space with connectivity by market participants to a physical
trading platform, the data centers are a very tangible cost, and in
turn, if the Exchange did not maintain such a presence then physical
connectivity would be of no value to market participants.
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to operate and monitor physical assets necessary to offer
physical connectivity to the Exchange. This software is necessary for
the Exchange to operate its options trading platform in order to
maintain premium network performance. This hardware includes servers,
network switches, cables, optics, protocol data units, and cabinets, to
maintain a state-of-the-art technology platform. Accordingly, the
Exchange
[[Page 86032]]
allocated a high percentage of the total Hardware and Software
Maintenance and License cost to physical 1Gb and 10Gb ULL connectivity
(57.9% combined) because the hardware and software licenses are the
most direct cost in providing physical access to the Exchange's
platform.
Depreciation
All physical assets, software, and hardware used to provide 1Gb and
10Gb ULL connectivity, which also includes assets used for testing and
monitoring of Exchange infrastructure, were valued at cost, and
depreciated or leased over periods ranging from three to five years.
Thus, the depreciation cost primarily relates to servers necessary to
operate the Exchange, some of which are owned by the Exchange and some
of which are leased by the Exchange in order to allow efficient
periodic technology refreshes. The Exchange also included in the
Depreciation cost driver certain budgeted improvements that the
Exchange intends to capitalize and depreciate with respect to 1Gb and
10Gb ULL connectivity in the near-term. As with the other allocated
costs in the Exchange's updated Cost Analysis, the Depreciation cost
was therefore narrowly tailored to depreciation related to 1Gb and 10Gb
ULL connectivity. As noted above, the Exchange allocated 63.6% of its
allocated depreciation costs to providing physical 10Gb ULL
connectivity and 2.3% of all depreciation costs to providing 1Gb
connectivity.
Allocated Shared Expenses
Finally, as with other exchange products and services, a portion of
general shared expenses was allocated to overall physical connectivity
costs. These general shared costs are integral to exchange operations,
including its ability to provide physical connectivity. Costs included
in general shared expenses include office space and office expenses
(e.g., occupancy and overhead expenses), utilities, recruiting and
training, marketing and advertising costs, professional fees for legal,
tax and accounting services (including external and internal audit
expenses), and telecommunications. Similarly, the cost of paying
directors to serve on the Exchange's Board of Directors is also
included in the Exchange's general shared expense cost driver.\39\
These general shared expenses are incurred by the Exchange's parent
company, MIH, as a direct result of operating the Exchange and its
affiliated markets.
---------------------------------------------------------------------------
\39\ The Exchange notes that MEMX allocated a precise amount of
10% of the overall cost for directors to providing physical
connectivity. See Securities Exchange Act Release No. 95936
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26). The Exchange does not calculate is expenses at that granular a
level. Instead, director costs are included as part of the overall
general allocation.
---------------------------------------------------------------------------
The Exchange employed a process to determine a reasonable
percentage to allocate general shared expenses to 1Gb and 10Gb ULL
connectivity pursuant to its multi-layered allocation process. First,
general expenses were allocated among the Exchange and affiliated
markets as described above. Then, the general shared expense assigned
to the Exchange was allocated across core services of the Exchange,
including connectivity. Then, these costs were further allocated to
sub-categories within the final categories, i.e., 1Gb and 10Gb ULL
connectivity as sub-categories of connectivity. In determining the
percentage of general shared expenses allocated to connectivity that
ultimately apply to 1Gb and 10Gb ULL connectivity, the Exchange looked
at the percentage allocations of each of the cost drivers and
determined a reasonable allocation percentage. The Exchange also held
meetings with senior management, department heads, and the Finance Team
to determine the proper amount of the shared general expense to
allocate to 1Gb and 10Gb ULL connectivity. The Exchange, therefore,
believes it is reasonable to assign allocations, in the range of
allocations for other cost drivers, while continuing to ensure that
these expenses are only allocated once. Again, the general shared
expenses are incurred by the Exchange's parent company as a result of
operating the Exchange and its affiliated markets and it is therefore
reasonable to allocate a percentage of those expenses to the Exchange
and ultimately to specific product offerings such as 1Gb and 10Gb ULL
connectivity.
Again, a portion of all shared expenses were allocated to the
Exchange (and its affiliated markets) which, in turn, allocated a
portion of that overall allocation to all physical connectivity on the
Exchange. The Exchange then allocated 47% of the portion allocated to
physical connectivity to 10Gb ULL connectivity and 1.7% of the portion
allocated to physical connectivity to 1Gb connectivity. The Exchange
believes these allocation percentages are reasonable because, while the
overall dollar amounts may be higher than other cost drivers, the
percentages are based on and in line with the percentage allocations of
each of the Exchange's other cost drivers for each provision of
connectivity. The percentage allocated to 10Gb ULL connectivity also
reflects its importance to the Exchange's strategy and necessity
towards the nature of the Exchange's overall operations, which is to
provide a resilient, highly deterministic trading system that relies on
faster 10Gb ULL connectivity than the Exchange's competitors to
maintain premium performance. This allocation reflects the Exchange's
focus on providing and maintaining high performance network
connectivity, of which 10Gb ULL connectivity is a main contributor. The
Exchange intends to differentiate itself by offering a ``premium-
product'' network experience, as an operator of a high performance,
ultra-low latency network with unparalleled system throughput, which
system networks can support access to four distinct options markets and
multiple competing market makers having affirmative obligations to
continuously quote over 1,100,000 distinct trading products (per
exchange), and the capacity to handle approximately 8 million quote
messages per second. The ``premium-product'' network experience enables
users of 10Gb ULL connections to receive the network monitoring and
reporting services for those approximately 1,100,000 distinct trading
products. These value add services are part of the Exchange's strategy
for offering a high performance trading system, which utilizes 10Gb ULL
connectivity.
The Exchange notes that the 47% allocation of general shared
expenses for physical 10Gb ULL connectivity is higher than that
allocated to general shared expenses for all other types of
connectivity and ports. This is based on its allocation methodology
that weighted costs attributable to each core service. While physical
connectivity has several areas where certain tangible costs are heavily
weighted towards providing such service (e.g., Data Center, as
described above), other types of connectivity and ports do not require
as many broad or indirect resources as other core services.
* * * * *
Approximate Cost per 1Gb and 10Gb ULL Connection per Month
The Exchange divided the total monthly cost for 10Gb ULL
connectivity of $532,820 by the number of physical 10Gb ULL connections
the Exchange anticipates maintaining upon expiration of the full length
of the waiver period for 10Gb ULL connections at the time the proposed
pricing was determined (40), to arrive at a cost of approximately
$13,321 per month (rounded to the
[[Page 86033]]
nearest dollar), per physical 10Gb ULL connection.
Similarly, the Exchange divided the total monthly cost for 1Gb
connectivity of $18,872 by the number of physical 1Gb connections the
Exchange anticipates maintaining upon expiration of the waiver period
at the time the proposed pricing was determined (12), to arrive at a
cost of approximately $1,573 per month (rounded to the nearest dollar),
per physical 1Gb connection.
* * * * *
Costs Related to Offering Full Service MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Full Service MEO
Ports as well as the percentage of the Exchange's overall costs such
costs represent for such area (e.g., as set forth below, the Exchange
allocated approximately 5.1% of its overall Human Resources cost to
offering Full Service MEO Ports).
Full Service MEO Ports
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \a\ cost \b\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources..................................... $517,369 $43,114 5.1
Connectivity (external fees, cabling, switches, 160 13 0.6
etc.)..............................................
Internet Services and External Market Data.......... 929 77 0.6
Data Center......................................... 9,615 801 1.6
Hardware and Software Maintenance and Licenses...... 3,106 259 0.6
Depreciation........................................ 27,745 2,312 2.3
Allocated Shared Expenses........................... 46,983 3,915 1.7
-----------------------------------------------------------
Total........................................... 605,907 50,491 3.9
----------------------------------------------------------------------------------------------------------------
\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 Full Service MEO
Ports.
Human Resources
With respect to Full Service MEO Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Full Service MEO Ports and
maintaining performance thereof (including a broader range of employees
such as technical operations personnel, market operations personnel,
and software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). Just
as described above for connectivity, the estimates of Human Resources
cost were again determined by consulting with department leaders,
determining which employees are involved in tasks related to providing
Full Service MEO Ports and maintaining performance thereof, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of their time such employees devote to
tasks related to providing Full Service MEO Ports and maintaining
performance thereof. This includes personnel from the following
Exchange departments that are predominately involved in providing Full
Service MEO Ports: Business Systems Development, Trading Systems
Development, Systems Operations and Network Monitoring, Network and
Data Center Operations, Listings, Trading Operations, and Project
Management. The Exchange notes that senior level executives were
allocated Human Resources costs to the extent they are involved in
overseeing tasks specifically related to providing Full Service MEO
Ports. Senior level executives were only allocated Human Resources
costs to the extent that they are involved in managing personnel
responsible for tasks integral to providing Full Service MEO Ports. The
Human Resources cost was again calculated using a blended rate of
compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost driver includes external fees paid to connect
to other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. For purposes of Full Service MEO
Ports, the Exchange also includes a portion of its costs related to
external market data. External market data includes fees paid to third
parties, including other exchanges, to receive and consume market data
from other markets. The Exchange includes external market data costs
towards the provision of Full Service MEO Ports because such market
data is necessary (in addition to physical connectivity) to offer
certain services related to such ports, such as validating orders on
entry against the NBBO and checking for other conditions (e.g., halted
securities).\40\ Thus, since market data from other exchanges is
consumed at the Exchange's Full Service MEO Port level in order to
validate orders, before additional processing occurs with respect to
such orders, the Exchange believes it is reasonable to allocate a small
amount of such costs to Full Service MEO Ports.
---------------------------------------------------------------------------
\40\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
See Securities Exchange Act Release No. 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26).
---------------------------------------------------------------------------
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide Full Service MEO Ports in the third-party data
centers where it maintains its equipment as well as related costs for
market data to then enter the Exchange's system via Full Service MEO
Ports (the Exchange does not own the primary data center or
[[Page 86034]]
secondary date center, but instead leases space in data centers
operated by third parties).
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
Depreciation
The vast majority of the software the Exchange uses to provide Full
Service MEO Ports has been developed in-house and the cost of such
development, which takes place over an extended period of time and
includes not just development work, but also quality assurance and
testing to ensure the software works as intended, is depreciated over
time once the software is activated in the production environment.
Hardware used to provide Full Service MEO Ports includes equipment used
for testing and monitoring of order entry infrastructure and other
physical equipment the Exchange purchased and is also depreciated over
time.
All hardware and software, which also includes assets used for
testing and monitoring of order entry infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 2.3% of
all depreciation costs to providing Full Service MEO Ports. The
Exchange allocated depreciation costs for depreciated software
necessary to operate the Exchange to Full Service MEO Ports because
such software is related to the provision of Full Service MEO Ports. As
with the other allocated costs in the Exchange's updated Cost Analysis,
the Depreciation cost driver was therefore narrowly tailored to
depreciation related to Full Service MEO Ports.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall Full Service MEO Port costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 4% of the overall cost for
directors was allocated to providing Full Service MEO Ports. The
Exchange notes that the 1.7% allocation of general shared expenses for
Full Service MEO Ports is lower than that allocated to general shared
expenses for physical connectivity based on its allocation methodology
that weighted costs attributable to each Core Service based on an
understanding of each area. While Full Service MEO Ports have several
areas where certain tangible costs are heavily weighted towards
providing such service (e.g., data centers, as described above), 10Gb
ULL connectivity requires a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange.
* * * * *
Approximate Cost per Full Service MEO Port per Month
The Exchange divided the total monthly cost for Full Service MEO
Ports of $50,491 by the number of Full Service MEO Ports the Exchange
anticipates maintaining upon expiration of the Initial Waiver Period at
the time the proposed pricing was determined (112), to arrive at a cost
of approximately $451 per month (rounded to the nearest dollar), per
Full Service MEO Port.
* * * * *
Costs Related to Offering Limited Service MEO Ports
The following chart details the individual line-item costs
considered by the Exchange to be related to offering Limited Service
MEO Ports as well as the percentage of the Exchange's overall costs
such costs represent for such area (e.g., as set forth below, the
Exchange allocated approximately 5% of its overall Human Resources cost
to offering Limited Service MEO Ports).
Limited Service MEO Ports
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \a\ cost \b\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources..................................... $512,844 $42,737 5
Connectivity (external fees, cabling, switches, 158 13 0.6
etc.)..............................................
Internet Services and External Market Data.......... 921 77 0.6
Data Center......................................... 9,531 794 1.6
Hardware and Software Maintenance and Licenses...... 3,079 256 0.6
Depreciation........................................ 27,503 2,292 2.2
Allocated Shared Expenses........................... 46,572 3,881 1.7
-----------------------------------------------------------
Total........................................... 600,608 50,050 3.9
----------------------------------------------------------------------------------------------------------------
\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 Limited Service
MEO Ports.
Human Resources
With respect to Limited Service MEO Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing Limited Service MEO Ports
and maintaining performance thereof (including a broader range of
employees such as technical operations personnel, market operations
personnel, and software engineering personnel) as well as a
[[Page 86035]]
limited subset of personnel with ancillary functions related to
maintaining such connectivity (such as sales, membership, and finance
personnel). Just as described above for connectivity, the estimates of
Human Resources cost were again determined by consulting with
department leaders, determining which employees are involved in tasks
related to providing Limited Service MEO Ports and maintaining
performance thereof, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing Limited Service MEO
Ports and maintaining performance thereof. This includes personnel from
the following Exchange departments that are predominately involved in
providing Limited Service MEO Ports: Business Systems Development,
Trading Systems Development, Systems Operations and Network Monitoring,
Network and Data Center Operations, Listings, Trading Operations, and
Project Management. The Exchange notes that senior level executives
were allocated Human Resources costs to the extent they are involved in
overseeing tasks specifically related to providing Limited Service MEO
Ports. Senior level executives were only allocated Human Resources
costs to the extent that they are involved in managing personnel
responsible for tasks integral to providing and maintaining Limited
Service MEO Ports. The Human Resources cost was again calculated using
a blended rate of compensation reflecting salary, equity and bonus
compensation, benefits, payroll taxes, and 401(k) matching
contributions.
Connectivity (External Fees, Cabling, Switches, etc.)
The Connectivity cost includes external fees paid to connect to
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. For purposes of Limited Service MEO
Ports, the Exchange also includes a portion of its costs related to
external market data. External market data includes fees paid to third
parties, including other exchanges, to receive and consume market data
from other markets. The Exchange includes external market data costs
towards the provision of Limited Service MEO Ports because such market
data is necessary (in addition to physical connectivity) to offer
certain services related to such ports, such as validating orders on
entry against the NBBO and checking for other conditions (e.g., halted
securities).\41\ Thus, since market data from other exchanges is
consumed at the Exchange's Limited Service MEO Port level in order to
validate orders, before additional processing occurs with respect to
such orders, the Exchange believes it is reasonable to allocate a small
amount of such costs to Limited Service MEI MEO.
---------------------------------------------------------------------------
\41\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
See Securities Exchange Act Release No. 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26).
---------------------------------------------------------------------------
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide Limited Service MEO Ports in the third-party data
centers where it maintains its equipment as well as related costs for
market data to then enter the Exchange's System via Limited Service MEO
Ports (the Exchange does not own the primary data center or the
secondary data center, but instead leases space in data centers
operated by third parties).
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
Depreciation
The vast majority of the software the Exchange uses to provide
Limited Service MEO Ports has been developed in-house and the cost of
such development, which takes place over an extended period of time and
includes not just development work, but also quality assurance and
testing to ensure the software works as intended, is depreciated over
time once the software is activated in the production environment.
Hardware used to provide Limited Service MEO Ports includes equipment
used for testing and monitoring of order entry infrastructure and other
physical equipment the Exchange purchased and is also depreciated over
time.
All hardware and software, which also includes assets used for
testing and monitoring of order entry infrastructure, were valued at
cost, depreciated or leased over periods ranging from three to five
years. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. The Exchange allocated 2.2% of
all depreciation costs to providing Limited Service MEO Ports. The
Exchange allocated depreciation costs for depreciated software
necessary to operate the Exchange because such software is related to
the provision of Limited Service MEO Ports. As with the other allocated
costs in the Exchange's updated Cost Analysis, the Depreciation cost
driver was therefore narrowly tailored to depreciation related to
Limited Service MEO Ports.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall Limited Service MEO Port costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide Limited Service MEO 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 4% of the overall cost for
directors was allocated to providing Limited Service MEO Ports. The
Exchange notes that the 1.7% allocation of general shared expenses for
Limited Service MEO Ports is lower than that allocated to general
shared expenses for physical connectivity based on its allocation
methodology that weighted costs attributable to each Core Service based
on an understanding of each area. While Limited Service MEO Ports have
several areas where certain tangible costs are heavily weighted towards
providing such service (e.g., data center, as described above), Limited
Service MEO Ports require a broader level of support from Exchange
personnel in different areas, which in turn leads to a
[[Page 86036]]
broader general level of cost to the Exchange.
* * * * *
Approximate Cost per Limited Service MEO Port per Month
The Exchange divided the total monthly cost for Limited Service MEO
Ports of $50,050 by the number of Limited Service MEO Ports the
Exchange anticipates maintaining upon expiration of the Initial Waiver
Period at the time the proposed pricing was determined (208, for
charged ports, without the cap on the number of Limited Service MEO
Ports), to arrive at a cost of approximately $241 per month (rounded to
the nearest dollar), per Limited Service MEO Port.
* * * * *
Costs Related to Offering FIX, CTD and FXD Ports
The following charts detail the individual line-item costs
considered by the Exchange to be related to offering FIX, CTD and FXD
Ports as well as the percentage of the Exchange's overall costs such
costs represent for such area (e.g., as set forth below, the Exchange
allocated approximately 1.3%, 0.9%, and 0.3% of its overall Human
Resources cost to offering FIX Ports, CTD Ports, and FXD Ports,
respectively).
FIX Ports
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \a\ cost \b\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources........................................ $135,037 $11,253 1.3
Connectivity (external fees, cabling, switches, etc.).. 42 4 0.2
Internet Services and External Market Data............. 243 20 0.2
Data Center............................................ 2,510 209 0.4
Hardware and Software Maintenance and Licenses......... 811 66 0.2
Depreciation........................................... 7,242 604 0.6
Allocated Shared Expenses.............................. 12,263 1,022 0.4
--------------------------------------------------------
Total.............................................. 158,148 13,178 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.
CTD Ports
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \a\ cost \b\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources........................................ $93,848 $7,821 0.9
Connectivity (external fees, cabling, switches, etc.).. 29 2 0.1
Internet Services and External Market Data............. 169 14 0.1
Data Center............................................ 1,744 145 0.3
Hardware and Software Maintenance and Licenses......... 563 47 0.1
Depreciation........................................... 5,033 419 0.4
Allocated Shared Expenses.............................. 8,522 710 0.3
--------------------------------------------------------
Total.............................................. 109,908 9,158 0.7
----------------------------------------------------------------------------------------------------------------
\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.
FXD Ports
----------------------------------------------------------------------------------------------------------------
Allocated annual Allocated monthly
Cost drivers cost \a\ cost \b\ Percent of all
----------------------------------------------------------------------------------------------------------------
Human Resources........................................ $31,283 $2,607 0.3
Connectivity (external fees, cabling, switches, etc.).. 10 1 0.04
Internet Services and External Market Data............. 56 5 0.04
Data Center............................................ 581 48 0.1
Hardware and Software Maintenance and Licenses......... 188 16 0.04
Depreciation........................................... 1,678 140 0.1
Allocated Shared Expenses.............................. 2,841 237 0.1
--------------------------------------------------------
Total.............................................. 36,637 3,054 0.2
----------------------------------------------------------------------------------------------------------------
\a\ The Annual Cost includes figures rounded to the nearest dollar.
\b\ The Monthly Cost was determined by dividing the Annual Cost for each line item by twelve (12) months and
rounding up or down to the nearest dollar.
[[Page 86037]]
Below are additional details regarding each of the line-item costs
considered by the Exchange to be related to offering FIX, CTD and FXD
Ports.
Human Resources
With respect to FIX, CTD and FXD Ports, the Exchange calculated
Human Resources cost by taking an allocation of employee time for
employees whose functions include providing FIX, CTD and FXD Ports and
maintaining performance thereof (including a broader range of employees
such as technical operations personnel, market operations personnel,
and software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). Just
as described above for connectivity, the estimates of Human Resources
cost were again determined by consulting with department leaders,
determining which employees are involved in tasks related to providing
FIX, CTD and FXD Ports and maintaining performance thereof, and
confirming that the proposed allocations were reasonable based on an
understanding of the percentage of their time such employees devote to
tasks related to providing FIX, CTD and FXD Ports and maintaining
performance thereof. This includes personnel from the following
Exchange departments that are predominately involved in providing FIX,
CTD and FXD Ports: Business Systems Development, Trading Systems
Development, Systems Operations and Network Monitoring, Network and
Data Center Operations, Listings, Trading Operations, and Project
Management. The Exchange notes that senior level executives were
allocated Human Resources costs to the extent they are involved in
overseeing tasks specifically related to providing FIX, CTD and FXD
Ports. Senior level executives were only allocated Human Resources
costs to the extent that they are involved in managing personnel
responsible for tasks integral to providing and maintaining FIX, CTD
and FXD Ports. The Human Resources cost was again calculated using a
blended rate of compensation reflecting salary, equity and bonus
compensation, benefits, payroll taxes, and 401(k) matching
contributions.
Lastly, the Exchange notes that the Human Resource allocations for
Full Service MEO Ports and Limited Service MEO Ports are greater than
the Human Resource allocations for FIX, CTD and FXD Ports. For its
Human Resource cost driver, the Exchange allocated 5.1% to Full Service
MEO Ports, 5% to Limited Service MEO Ports, 1.3% to FIX Ports, 0.9% to
CTD Ports, and 0.3% to FXD Ports. This is because the MEO interface is
a customized binary interface that the Exchange developed in-house and
maintains on its own. The FIX interface is the industry standard for
simple order entry which requires less development, maintenance, and
support than the MEO interface. Likewise, the CTD and FXD interfaces
only provide information concerning clearing trade updates and trade
execution, respectively, which also require less development,
maintenance and support than the MEO interface. The MEO interface is
performance oriented and designed to meet the needs of more latency
sensitive Members. Due to the in-house development of the MEO
interface, the Exchange was required to expend more internal personnel
to support the MEO interface than the FIX, CTD or FXD interfaces.
Because of the materially higher cost associated with maintaining and
supporting MEO Ports (Full Service and Limited Service) versus FIX, CTD
and FXD Ports, the Exchange allocates a materially higher percentage of
Human Resource expense to MEO Ports versus FIX, CTD and FXD Ports.
Connectivity (external fees, cabling, switches, etc.)
The Connectivity cost includes external fees paid to connect to
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
The next cost driver consists of internet services and external
market data. Internet services includes third-party service providers
that provide the internet, fiber and bandwidth connections between the
Exchange's networks, primary and secondary data centers, and office
locations in Princeton and Miami. For purposes of FIX, CTD and FXD
Ports, the Exchange also includes a portion of its costs related to
external market data. External market data includes fees paid to third
parties, including other exchanges, to receive and consume market data
from other markets. The Exchange includes external market data costs
towards the provision of FIX, CTD and FXD Ports because such market
data is necessary (in addition to physical connectivity) to offer
certain services related to such ports, such as validating orders on
entry against the NBBO and checking for other conditions (e.g., halted
securities).\42\ Thus, as market data from other exchanges is consumed
at the port level in order to validate orders before additional
processing occurs with respect to such orders, the Exchange believes it
is reasonable to allocate a small amount of such costs to FIX, CTD and
FXD Ports.
---------------------------------------------------------------------------
\42\ The Exchange notes that MEMX separately allocated 7.5% of
its external market data costs to providing physical connectivity.
See Securities Exchange Act Release No. 95936 (September 27, 2022),
87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26).
---------------------------------------------------------------------------
Data Center
Data Center costs includes an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment as well as related costs for market
data to then enter the Exchange's System via FIX, CTD and FXD Ports
(the Exchange does not own the primary data center or the secondary
data center, but instead leases space in data centers operated by third
parties).
Hardware and Software Maintenance and Licenses
Hardware and Software Licenses includes hardware and software
licenses used to monitor the health of the order entry services
provided by the Exchange, as described above.
Depreciation
The vast majority of the software the Exchange uses to provide FIX,
CTD and FXD 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 FIX, CTD and FXD 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 0.6%,
0.4% and 0.1% of all depreciation costs to providing FIX, CTD and FXD
Ports, respectively. The Exchange allocated depreciation costs
[[Page 86038]]
for depreciated software necessary to operate the Exchange because such
software is related to the provision of FIX, CTD and FXD 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 FIX, CTD and FXD Ports.
Lastly, the Exchange notes that the Depreciation allocations for
MEO Ports (Full Service and Limited Service) are greater than the
Depreciation allocations for FIX, CTD and FXD Ports. For its
Depreciation cost driver, the Exchange allocated 2.3% to Full Service
MEO Ports, 2.2% to Limited Service MEO Ports, 0.6% to FIX Ports, 0.4%
to CTD Ports, and 0.1% to FXD Ports. As discussed above, this is
because the MEO interface is a customized binary interface that the
Exchange developed in-house and maintains on its own. The FIX interface
is the industry standard for simple order entry which requires less
development, maintenance, and support than the MEO interface. Likewise,
the CTD and FXD interfaces only provide information concerning clearing
trade updates and trade execution, respectively, which also require
less development, maintenance and support than the MEO interface. The
Exchange maintains more dedicated hardware per port for the MEO
interface compared to the FIX, CTD and FXD interfaces. As a result, the
MEO interface is supported by more dedicated in-house hardware and
software than the FIX, CTD and FXD interfaces that is subject to
depreciation. Thus, there is a greater amount of equipment supporting
the MEO interface than the FIX, CTD and FXD interfaces, resulting in
higher depreciation costs.
Allocated Shared Expenses
Finally, a portion of general shared expenses was allocated to
overall FIX, CTD and FXD Port costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide FIX, CTD and FXD 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 2% of the overall cost for
directors was allocated to providing FIX, CTD and FXD Ports. The
Exchange notes that the 0.4%, 0.3% and 0.1% allocations of general
shared expenses for FIX, CTD and FXD Ports, respectively, are lower
than that allocated to general shared expenses for physical
connectivity based on its allocation methodology that weighted costs
attributable to each Core Service based on an understanding of each
area. While MEO Ports (Full Service and Limited Service) have several
areas where certain tangible costs are heavily weighted towards
providing such service (e.g., data center, as described above), FIX,
CTD and FXD Ports require a broader level of support from Exchange
personnel in different areas, which in turn leads to a broader general
level of cost to the Exchange.
Lastly, the Exchange notes that the Allocated Shared Expense
allocations for MEO Ports (Full Service and Limited Service) are
greater than the same allocations for FIX, CTD and FXD Ports. For its
Allocated Shared Expense cost driver, the Exchange allocated 1.7% to
Full Service MEO Ports, 1.7% to Limited Service MEO Ports, 0.4% to FIX
Ports, 0.3% to CTD Ports, and 0.1% to FXD Ports. As discussed above,
this is because the MEO interface is a customized binary interface that
the Exchange developed in-house and maintains on its own. The FIX
interface is the industry standard for simple order entry which
requires less development, maintenance, and support than the MEO
interface. Likewise, the CTD and FXD interfaces only provide
information concerning clearing trade updates and trade execution,
respectively, which also require less development, maintenance and
support than the MEO interface. The FIX interface is the industry
standard for simple order entry which requires less development,
maintenance, and support than the MEO interface. The MEO interface is
performance oriented and designed to meet the needs of more latency
sensitive Members. This required more internal personnel and resources
to support than the FIX, CTD and FXD interfaces. Because of the
materially higher cost associated with maintaining and supporting MEO
Ports versus FIX, CTD and FXD Ports, the Exchange allocates a
materially higher percentage of Allocated Shared expense to MEO Ports
versus FIX, CTD and FXD Ports, which are less complex, standardized
solutions.
Approximate Cost Per FIX, CTD and FXD Port Per Month
The Exchange divided the total monthly cost for FIX Ports of
$13,178 by the number of FIX Ports the Exchange anticipates maintaining
upon expiration of the Initial Waiver Period at the time the proposed
pricing was determined (25), to arrive at a cost of approximately $527
per month (rounded to the nearest dollar), per FIX Port.
Similarly, the Exchange divided the total monthly cost for CTD
Ports of $9,158 by the number of CTD Ports the Exchange anticipates
maintaining upon expiration of the Initial Waiver Period at the time
the proposed pricing was determined (10), to arrive at a cost of
approximately $916 per month (rounded to the nearest dollar), per CTD
Port.
Finally, the Exchange divided the total monthly cost for FXD Ports
of $3,054 by the number of FXD Ports the Exchange anticipates
maintaining upon expiration of the Initial Waiver Period at the time
the proposed pricing was determined (6), to arrive at a cost of
approximately $509 per month (rounded to the nearest dollar), per FXD
Port.
* * * * *
Cost Analysis--Additional Discussion
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to any core services (including physical
connectivity or ports) and did not double-count any expenses. Instead,
as described above, the Exchange allocated applicable cost drivers
across its core services and used the same Cost Analysis to form the
basis of this proposal and the separate filings the Exchange submitted
(or plans to submit) proposing fees for proprietary market data feeds
offered by the Exchange, as well as for Purge Ports. For instance, in
calculating the Human Resources expenses to be allocated to physical
connections based upon the above described methodology, the Exchange
has a team of employees dedicated to network infrastructure and with
respect to such employees the Exchange allocated network infrastructure
personnel with a high percentage of the cost of such personnel (49.1%)
given their focus on functions necessary to provide 10Gb ULL physical
connections. The salaries of those same personnel were allocated only
6.8% to Full Service MEO Ports and 6.7% to Limited Service MEO Ports
and the remaining 37.4% was allocated to 1Gb connectivity, other port
services, transaction services, membership services and market data.
The Exchange
[[Page 86039]]
did not allocate any other Human Resources expense for providing
physical connections to any other employee group, outside of a smaller
allocation of 18.4% for 10Gb ULL connectivity or 19.7% for the entire
network (i.e., 18.4% for 10Gb ULL, 0.7% for Test Bed Connectivity, and
0.6% for 1Gb for a total of 19.7%), of the cost associated with certain
specified personnel who work closely with and support network
infrastructure personnel. In contrast, the Exchange allocated much
smaller percentages of costs (3.1% for Full Service MEO Ports and 0.6%
for Limited Service MEO Ports) across a wider range of personnel groups
in order to allocate Human Resources costs to providing Full Service
MEO Ports and Limited Service MEO Ports (0.2% for FIX Ports, 0.1% for
CTD Ports, and 0.04% for FXD Ports). This is because a much wider range
of personnel are involved in functions necessary to offer, monitor and
maintain Full Service MEO Ports and Limited Service MEO Ports but the
tasks necessary to do so are not a primary or full-time function.
In total, the Exchange allocated 35.7% of its personnel costs to
providing 10Gb ULL and 1Gb ULL connectivity, 5.1% of its personnel
costs to providing Full Service MEO Ports, 5% of its personnel costs to
providing Limited Service MEO Ports, 1.3% of its personnel costs to
providing FIX Ports, 0.9% of its personnel costs to providing CTD
Ports, and 0.3% of its personnel costs to providing FXD Ports, for a
total allocation of 48.3% Human Resources expense to provide these
specific connectivity and port services. In turn, the Exchange
allocated the remaining 51.7% of its Human Resources expense to
membership services, transaction services, other port services and
market data. Thus, again, the Exchange's allocations of cost across
core services were based on real costs of operating the Exchange and
were not double-counted across the core services or their associated
revenue streams.
As another example, the Exchange allocated depreciation expense to
all core services, including physical connections and ports, but in
different amounts. The Exchange believes it is reasonable to allocate
the identified portion of such expense because such expense includes
the actual cost of the computer equipment, such as dedicated servers,
computers, laptops, monitors, information security appliances and
storage, and network switching infrastructure equipment, including
switches and taps that were purchased to operate and support the
network. Without this equipment, the Exchange would not be able to
operate the network and provide connectivity and port services to its
Members and non-Members and their customers. However, the Exchange did
not allocate all of the depreciation and amortization expense toward
the cost of providing connectivity services, but instead allocated
approximately 65.9% of the Exchange's overall depreciation and
amortization expense to connectivity services (63.6% attributed to 10Gb
ULL physical connections, 2.3% to 1Gb physical connections, and 5.6%
attributed to Full Service MEO Ports, Limited Service MEO Ports, FIX
Ports, CTD Ports, and FXD Ports, combined). The Exchange allocated the
remaining depreciation and amortization expense (approximately 28.5%)
toward the cost of providing transaction services, membership services,
other port services, and market data.
The Exchange notes that its revenue estimates are based on
projections across all potential revenue streams and will only be
realized to the extent such revenue streams actually produce the
revenue estimated once the waiver periods expire for each applicable
proposed fee. The Exchange does not yet know whether such expectations
will be realized. For instance, in order to generate the revenue
expected from connectivity, the Exchange will have to be successful in
retaining existing clients that wish to maintain physical connectivity
and/or ports or in obtaining new clients that will purchase such
services. Similarly, the Exchange will have to be successful in
retaining a positive net capture on transaction fees in order to
realize the anticipated revenue from transaction pricing.
The Exchange notes that personnel began to plan for and develop the
Exchange beginning in early 2023, and costs included in this Cost
Analysis are related to the development and buildout of the Exchange
since that time. During the Exchange's development and buildout that
occurred throughout 2023 and continues to today, the Exchange routinely
studied its aggregate costs to provide connectivity and port services,
which were used to determine the proposed pricing for the provisions of
connectivity and port services that are part of the Exchange's Cost
Analysis, including projections. It is possible, however, that actual
costs may be higher or lower. To the extent the Exchange sees growth in
use of connectivity or port services it will receive additional revenue
to offset future cost increases. However, if use of connectivity or
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
The proposed fees will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity and port services. Much of the cost relates to monitoring
and analysis of data and performance of the network via the
subscriber's connection(s). The above costs, 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
[[Page 86040]]
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those costs by amending fees for connectivity services. Subscribers,
particularly those of 10Gb ULL connectivity, expect the Exchange to
provide this level of support to connectivity so they continue to
receive the performance they expect. This differentiates the Exchange
from its competitors. As detailed above, the Exchange has five primary
sources of revenue that it can potentially use to fund its operations:
transaction fees, fees for connectivity services, membership and
regulatory fees, and market data fees. Accordingly, the Exchange must
cover its expenses from these five primary sources of revenue.
All revenue projections are based upon an annual return for each of
the proposed fees once the relevant waiver periods expire.
The Exchange's Cost Analysis estimates the annual cost to provide
1Gb connectivity services will equal $226,461. Based on projected 1Gb
connectivity services usage, the Exchange would generate annual revenue
of approximately $241,200. The Exchange believes this represents a
modest profit of 6.1% when compared to the cost of providing 1Gb
connectivity services.
The Exchange's Cost Analysis estimates the annual cost to provide
10Gb ULL connectivity services will equal $6,393,839. Based on
projected 10Gb ULL connectivity services usage, the Exchange would
generate annual revenue of approximately $6,810,000. The Exchange
believes this represents a modest profit of 6.1% when compared to the
cost of providing 10Gb connectivity services.
The Exchange's Cost Analysis estimates the annual cost to provide
Full Service MEO Port services will equal $605,907. Based on projected
Full Service MEO Port service usage, the Exchange would generate annual
revenue of approximately $399,000. The Exchange believes this
represents a loss of 51.9% when compared to the cost of providing Full
Service MEO Port services.
The Exchange's Cost Analysis estimates the annual cost to provide
Limited Service MEO Port services will equal $600,608. Since launch,
taking into account the proposal to remove the cap on the number of
Limited Service MEO Ports available and based on projected Limited
Service MEO Port service usage, the Exchange would generate annual
revenue of approximately $624,000. The Exchange believes this
represents a modest profit of 3.7% for providing Limited Service MEO
Port services.
The Exchange's Cost Analysis estimates the annual cost to provide
FIX Port services will equal $158,148. Based on projected FIX Port
service usage, the Exchange would generate annual revenue of
approximately $77,700. The Exchange estimates that its costs to provide
FIX Port services will exceed its revenues by 103.5%.
The Exchange's Cost Analysis estimates the annual cost to provide
CTD Port services will equal $109,908. Based on projected CTD Port
service usage, the Exchange would generate annual revenue of
approximately $54,000. The Exchange estimates that its costs to provide
CTD Port services will exceed its revenues by 103.5%.
The Exchange's Cost Analysis estimates the annual cost to provide
FXD Port services will equal $36,637. Based on projected FXD Port
service usage, the Exchange would generate annual revenue of
approximately $18,000. The Exchange estimates that its costs FXD Port
services will exceed its revenues by 103.5%.
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 each of the proposed connectivity and port
services versus the total projected revenue of the Exchange associated
with connectivity and port services. The Exchange's affiliated options
markets recently filed to raise certain connectivity and port fees to
the same, or similar, rates as proposed herein and those filings were
not suspended by the Commission.\43\
---------------------------------------------------------------------------
\43\ See Securities Exchange Act Release Nos. 99822 (March 21,
2024), 89 FR 21337 (March 27, 2024) (SR-MIAX-2024-16) (raising
monthly 10Gb ULL connectivity fee to $13,500 per connection and
raising fee for Limited Service MEI Ports to $275 per month per
port); 99823 (March 21, 2024), 89 FR 21312 (March 27, 2024) (SR-
PEARL-2024-14) (raising monthly 10Gb ULL connectivity fee to $13,500
per connection and establishing tiered fees for Full Service MEO
Ports ranging from $5,000 to $12,000 per month); and 99824 (March
21, 2024), 89 FR 21379 (March 27, 2024) (SR-EMERALD-2024-12)
(raising monthly 10Gb ULL connectivity fee to $13,500 per connection
and raising fee for Limited Service MEI Ports to $420 per month per
port).
---------------------------------------------------------------------------
* * * * *
The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent customer activity
produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving
competition, the Exchange does not yet know whether such projections
will be realized. For instance, in order to generate the revenue
expected from 10Gb ULL connectivity and Ports, the Exchange will have
to be successful in retaining existing clients that wish to utilize
10Gb ULL connectivity and Ports and/or obtaining new clients that will
purchase such access. To the extent the Exchange is successful in
encouraging new clients to utilize 10Gb ULL connectivity and Ports, the
Exchange does not believe it should be penalized for such success. To
the extent the Exchange has mispriced and experiences a net loss in
connectivity clients or in transaction activity, the Exchange could
experience a net reduction in revenue. While the Exchange is supportive
of transparency around costs and potential margins (applied across all
exchanges), as well as periodic review of revenues and applicable costs
(as discussed below), the Exchange does not believe that these
estimates should form the sole basis of whether or not a proposed fee
is reasonable or can be adopted. Instead, the Exchange believes that
the information should be used solely to confirm that an Exchange is
not earning--or seeking to earn--supra-competitive profits. The
Exchange believes the Cost Analysis and related projections in this
filing demonstrate this fact.
The Exchange is owned by a holding company that is the parent
company of five exchange markets and, therefore, the Exchange and its
affiliated markets must allocate shared costs across all of those
markets accordingly, pursuant to the above-described allocation
methodology. In contrast, the IEX, which currently operates only one
exchange, and MEMX, which just started operating two exchanges, in
their recent non-transaction fee filings allocate the entire amount of
that same cost to a single exchange. This can result in lower profit
margins for the non-transaction fees established by IEX and MEMX
because the single allocated cost does not experience the efficiencies
and synergies that result from sharing costs across multiple exchanges.
The Exchange and its affiliated markets often share a single cost,
which results in cost efficiencies that can cause a broader gap between
the allocated cost amount and projected revenue, even though the fee
levels being proposed are lower or competitive with competing markets
(as described above). To the extent that the application of a cost-
based standard
[[Page 86041]]
results in Commission Staff making determinations as to the
appropriateness of certain profit margins, the Exchange believes that
Commission Staff should also consider whether the proposed fee level is
comparable to, or competitive with, the same fee charged by competing
exchanges and how different cost allocation methodologies (such as
across multiple markets) may result in different profit margins for
comparable fee levels. Further, if Commission Staff is making
determinations as to appropriate profit margins in their approval of
exchange fees, the Exchange believes that the Commission should be
clear to all market participants as to what they have determined is an
appropriate profit margin and should apply such determinations
consistently and, in the case of certain legacy exchanges,
retroactively, if such standards are to avoid having a discriminatory
effect.
Further, as is reflected in the proposal, the Exchange continuously
and aggressively works to control its costs as a matter of good
business practice. A potential profit margin should not be evaluated
solely on its size; that assessment should also consider cost
management and whether the ultimate fee reflects the value of the
services provided. For example, a profit margin on one exchange should
not be deemed excessive where that exchange has been successful in
controlling its costs, but not excessive on another exchange where that
exchange is charging comparable fees but has a lower profit margin due
to higher costs. Doing so could have the perverse effect of not
incentivizing cost control where higher costs alone could be used to
justify fees increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
The Exchange believes that the proposed fees for connectivity and
ports are reasonable, fair, equitable, and not unfairly discriminatory
because they are designed to align fees with services provided and will
apply equally to all subscribers.
Connectivity
The Exchange believes that the proposed fees are equitably
allocated among anticipated users of the network connectivity and port
alternatives, as the Exchange expects that users of 10Gb ULL
connections will consume substantially more bandwidth and network
resources than users of 1Gb ULL connection. It is the experience of the
Exchange's affiliates that this is the case as 10Gb ULL connection
users account for more than 99% of message traffic over the network on
those markets, which drives other costs that are linked to capacity
utilization, as described above, while the users of the 1Gb ULL
connections account for less than 1% of message traffic over the
network. In the experience of the Exchange's affiliates, users of the
1Gb connections do not have the same business needs for the high-
performance network as 10Gb ULL users.
The Exchange's high-performance network and supporting
infrastructure (including employee support), will provide unparalleled
system throughput with the network ability to support access to several
distinct options markets. To achieve a consistent, premium network
performance, the Exchange must build out and maintain a network that
has the capacity to handle the message rate requirements of its most
heavy network consumers. These billions of messages per day will
consume the Exchange's resources and significantly contribute to the
overall network connectivity expense for storage and network transport
capabilities, just as they do for the Exchange's affiliate markets. The
Exchange must then purchase additional storage capacity on an ongoing
basis to ensure it has sufficient capacity to store these messages to
satisfy its record keeping requirements under the Exchange Act.\44\
Thus, as the number of messages an entity increases, certain other
costs incurred by the Exchange that are correlated to, though not
directly affected by, connection costs (e.g., storage costs,
surveillance costs, service expenses) will likely also increase. Given
this anticipated difference in network utilization rate, the Exchange
believes that it is reasonable, equitable, and not unfairly
discriminatory that the 10Gb ULL users pay for the vast majority of the
shared network resources from which all market participants' will
benefit.
---------------------------------------------------------------------------
\44\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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Full Service MEO Ports
The proposed fees for Full Service MEO Ports are not unfairly
discriminatory because they would apply to all Market Makers equally.
The Exchange proposes a pricing structure for Full Service MEO Ports
that is the same as that used by the Exchange's affiliates, MIAX, MIAX
Pearl, and MIAX Emerald, except with lower pricing for each tier.\45\
In the experience of the Exchange's affiliated markets, Members that
are frequently in the highest tier for Full Service MEO/MEI Ports
consume the most bandwidth and resources of the network. For example,
the Exchange's affiliate, MIAX Pearl, recently noted that Market Makers
who reach the highest tier for Full Service MEO Ports accounted for
greater than 84% of ADV on MIAX Pearl, while Market Makers that are
typically in the lowest Tier for Full Service MEO Ports, accounted for
less than 14% of ADV on the Exchange.\46\ Further, as noted by MIAX
Pearl, the remaining 1% was accounted for by Market Makers who are
frequently in the middle Tier for Full Service MEO Ports.\47\
---------------------------------------------------------------------------
\45\ See MIAX Fee Schedule, Section 5)d)ii), MIAX Pearl Fee
Schedule, Section 5)d), and MIAX Emerald Fee Schedule, Section
5)d)ii).
\46\ See Securities Exchange Act Release No. 99823 (March 21,
2024), 89 FR 21312 (March 27, 2024) (SR-PEARL-2024-14).
\47\ Id.
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To achieve a consistent, premium network performance, the Exchange
must build out and maintain a network that has the capacity to handle
the message rate requirements of its most heavy network consumers
during anticipated peak market conditions. The need to support billions
of messages per day will consume the Exchange's resources and
significantly contribute to the overall network connectivity expense
for storage and network transport capabilities. The Exchange may have
to purchase additional storage capacity on an ongoing basis to ensure
it has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\48\ Thus, as the number of connections a Market
Maker has increases, the related pull on Exchange resources may also
increase once the Exchange launches operations. The Exchange sought to
design the proposed tiered-pricing structure to set the amount of the
fees to relate to the number of ports a firm purchases. The more ports
purchased by a Market Maker likely results in greater expenditure of
Exchange resources and increased cost to the Exchange.
---------------------------------------------------------------------------
\48\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange further believes that the proposed fees are
reasonable, equitably allocated and not unfairly discriminatory
because, for the flat fee in each tier, the Exchange provides each
Member two (2) Full Service MEO Ports for each matching engine to which
that
[[Page 86042]]
Member is connected. Unlike other options exchanges that provide
similar port functionality and charge fees on a per port basis,\49\ the
Exchange offers Full Service MEO Ports as a package and provides Market
Makers with the option to receive up to two Full Service MEO Ports per
matching engine to which it connects. The Exchange currently has eight
matching engines, which means Market Makers may receive up to sixteen
Full Service MEO Ports for a single monthly fee, that can vary based on
certain volume percentages or classes the Market Maker is registered
in. Assuming a Market Maker connects to all eight matching engines
during the month, and achieves the highest Tier for that month, with
two Full Service MEO Ports per matching engine, this would result in a
cost of $375 per Full Service MEO Port ($6,000 divided by 16).
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\49\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services (similar to the MIAX Pearl Options'
MEO Ports, SQF ports are primarily utilized by Market Makers); ISE
Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE
Rules, General 8: Connectivity; NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. Co-Location Fees; GEMX
Pricing Schedule, Options 7, Section 6, Connectivity Fees and GEMX
Rules, General 8: Connectivity.
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The Exchange believes its proposal to provide a reduced Full
Service MEO Port fee to Market Makers that fall within the 3rd and 4th
levels of the proposed fee table is not unfairly discriminatory because
this proposed lower monthly fee is designed to provide a lower fixed
cost to those Market Makers who are willing to quote the entire
Exchange market (or substantial amount of the Exchange market), as
objectively measured by either number of classes assigned or national
ADV, but who do not otherwise execute a significant amount of volume on
the Exchange. The Exchange believes that, by offering lower fixed costs
to Market Makers that execute less volume, the Exchange will retain and
attract smaller-scale Market Makers, which are an integral component of
the option industry marketplace, but have been decreasing in number in
recent years, due to industry consolidation and lower market maker
profitability. The Exchange believes it is beneficial to incentivize
these additional Market Makers to register to make markets on the
Exchange to increase liquidity as the Exchange begins operations.
Increased liquidity from a diverse set of market participants helps
facilitate price discovery and the interaction of orders, which
benefits all market participants of the Exchange. Since these smaller-
scale Market Makers may utilize less Exchange capacity due to lower
overall volume executed, the Exchange believes it is reasonable,
equitably allocated and not unfairly discriminatory to offer such
Market Makers a lower fixed cost. The Exchange notes that its
affiliated markets, MIAX, MIAX Pearl, and MIAX Emerald, offer a similar
reduced fee for their Full Service MEO/MEI Ports for smaller-scale
Market Makers.\50\
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\50\ See MIAX Fee Schedule, Section 5)d)ii), note ``*''; MIAX
Pearl Fee Schedule, Section 5)d), page 20, note ``**''; and MIAX
Emerald Fee Schedule, Section 5)d)ii), note [ssquf].
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Limited Service MEO Ports
The proposed fees for Limited Service MEO Ports are not unfairly
discriminatory because they would apply to all Market Makers equally.
All Market Makers will be eligible to receive four (4) free Limited
Service MEO Ports per matching engine and those that elect to purchase
more would be subject to the same monthly rate upon the expiration of
the Initial Waiver Period, regardless of the number of additional
Limited Service MEO Ports they purchase. In the experience of the
Exchange's affiliated markets, certain market participants choose to
purchase additional Limited Service MEO Ports based on their own
particular trading/quoting strategies and feel they need a certain
number of connections to the Exchange to execute on those strategies.
Other market participants may continue to choose to only utilize the
free Limited Service MEO Ports to accommodate their own trading or
quoting strategies, or other business models. All market participants
elect to receive or purchase the amount of Limited Service MEO Ports
they require based on their own business decisions and all market
participants would be subject to the same fee structure and flat fee.
Every market participant may receive up to four (4) free Limited
Service MEO Ports and those that choose to purchase additional Limited
Service MEO Ports may elect to do so based on their own business
decisions and would continue to be subject to the same monthly fee.
The Exchange believes that its proposed fee for Limited Service MEO
Ports is reasonable, equitable, and not unfairly discriminatory because
it is designed to align fees with services provided, will apply equally
to all Members that are assigned Limited Service MEO Ports (either
directly or through a Service Bureau), and will minimize barriers to
entry by providing all Members with four free Limited Service MEO Ports
from the time the Exchange launches operations.\51\ As a result of the
proposed fee structure, a significant majority of Members may not be
subject to any fee. In contrast, other exchanges generally charge in
excess of $450 per port without providing any free ports.\52\ Even for
Members that choose to maintain more than four Limited Service MEI
Ports, the Exchange believes that the cost-based fee proposed herein is
low enough that it will not operate to restrain any Member's ability to
maintain the number of Limited Service MEO Ports that it determines are
consistent with its business objectives. Although the Exchange projects
that no Members will utilize more than the four free Limited Service
MEO Ports, if there is a small number of Members that do utilize more
ports and are subject to the proposed fee of $250 per port, those
Members will still pay considerably less for such ports as compared to
the fees that competing exchanges charge.\53\ Further, the number of
assigned Limited Service MEO Ports will continue to be based on
decisions by each Member, including the ability to reduce fees by
discontinuing unused Limited Service MEO Ports.
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\51\ The following rationale to support providing a certain
number of Limited Service MEI Ports for free prior to applying a fee
is similar to that used by the IEX in a 2020 proposal to do the same
as proposed herein. See Securities Exchange Act Release No. 86626
(August 9, 2019), 84 FR 41793 (August 15, 2019) (SR-IEX-2019-07).
\52\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services (similar to the Exchange's MEI
Ports, SQF ports are primarily utilized by Market Makers); ISE
Pricing Schedule, Options 7, Section 7, Connectivity Fees and ISE
Rules, General 8: Connectivity; NYSE American Options Fee Schedule,
Section V.A. Port Fees and Section V.B. Co-Location Fees; GEMX
Pricing Schedule, Options 7, Section 6, Connectivity Fees and GEMX
Rules, General 8: Connectivity.
\53\ Assuming a Member selects five Limited Service MEO Ports
based on their business needs that Member on MIAX Sapphire would be
charged only for the fifth Limited Service MEO Port and pay only the
$250 monthly fee, as the first four Limited Service MEO Ports would
be free. Meanwhile, a Member that purchases five ports on NYSE Arca
Options would pay $450 per port per month, resulting in a total
charge of $2,250 per month. On Cboe BZX Options, that same member
would pay $750 per port per month, resulting in a total charge of
$3,750 per months for five ports. See NYSE Arca Options Fees and
Charges, dated March 1, 2024, available at https://www.nyse.com/publicdocs/nyse/markets/arca-options/NYSE_Arca_Options_Fee_Schedule.pdf and Cboe BZX Options Fee Schedule
available at https://www.cboe.com/us/options/membership/fee_schedule/.
---------------------------------------------------------------------------
The Exchange believes that providing four free Limited Service MEO
Ports is reasonable, equitable, and not unfairly discriminatory because
it will enable Members to access the Exchange on this basis without
having to pay for Limited Service MEO Ports, thereby encouraging
[[Page 86043]]
order flow and liquidity from a diverse set of market participants,
facilitating price discovery and the interaction of orders. The
Exchange believes that four Limited Service MEO Ports is an appropriate
number to provide for free because it aligns with the maximum number of
free Limited Service MEO/MEI Ports offered by each of the Exchange's
affiliated options markets, and the Exchange believes will align with
the amount of such ports that will be maintained by a substantial
majority of Members once the Exchange launches operations.
Based on an initial survey of market participants that the Exchange
anticipates will utilize Limited Service MEO Ports, the Exchange
projects that only a few Members will be subject to any Limited Service
MEO Port fees following the expiration of the Initial Waiver Period. In
determining the appropriate number of Limited Service MEO Ports to
provide for free, the Exchange considered several factors. First, the
Exchange believes that, with respect to Limited Service MEO Port usage,
Members will prefer at least two Limited Service MEO Ports, for
redundancy purposes. Second, from a review of the number of Limited
Service MEI Ports currently requested, the median number of ports per
Member that will utilize Limited Service MEO Ports upon the launch of
the Exchange is approximately eight. Thus, the Exchange believes that
having four ports appears to be reasonably sufficient for the majority
of Members to access the Exchange. On that basis, the Exchange chose
four Limited Service MEO Ports as the maximum number of ports for which
it will not charge to access the Exchange. The Exchange notes that some
Members may use more Limited Service MEO Ports than other Members (and
the four provided for free), which will be driven by the nature and
volume of the business they conduct on the Exchange, and the choices
they make in segmenting that business across different Limited Service
MEO Ports. Allowing for this expansive use of Exchange capacity
represents an aggregate cost that the Exchange seeks to recover through
charging for ports five and higher.
The proposed fee structure is also designed to encourage Members to
be efficient with their Limited Service MEO Port usage, thereby
resulting in a corresponding increase in the efficiency that the
Exchange would be able to realize in managing its aggregate costs for
providing Limited Service MEO Ports. There is no requirement that any
Member maintain a specific number of Limited Service MEO Ports and a
Member may choose to maintain as many or as few of such ports as each
Member deems appropriate.
The Exchange assessed the impact of the structure and amount of the
proposed fee on all Members that the Exchange anticipates will utilize
Limited Service MEO Ports. The Exchange believes that the proposed fee
is fair and equitably allocated across all Members. As a threshold
matter, the fee will not by design apply differently to different types
or sizes of Members. Nonetheless, upon launch, the Exchange will be
able to assess whether there may be any differences in the amount of
the projected fee that correlates to the type and/or size of different
Members. This assessment will help determine whether the number of
assigned Limited Service MEO Ports, and thus projected fees, correlates
closely to a Member's inbound message volume to the Exchange. This is a
similar assessment as that performed by the Exchange's affiliates, MIAX
and MIAX Emerald, prior to changing their respective Limited Service
MEI Port fees recently. Based on the experience of the Exchange's
affiliates, as inbound message volume increases per Member, the number
of requested and assigned Limited Service MEO Ports increases. As the
Exchange has not launched operations at the time of this filing, the
Exchange does not have data to show any correlation between a Member's
inbound message volume and the number of Limited Service MEO Port
assigned to the Member. However, based on the experience of the
Exchange's affiliates, MIAX and MIAX Emerald, Members with relatively
higher inbound message volume were projected to pay higher fees because
they requested more Limited Service MEI Ports for those exchanges.
To achieve consistent, premium network performance, the Exchange
must build and maintain a network that has the capacity to handle the
message rate requirements of its heaviest network consumers during
anticipated peak market conditions. The resultant need to support the
anticipated amount of billions of messages per day will consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. This need will also require the Exchange to purchase
additional storage capacity on an ongoing basis to ensure it has
sufficient capacity to store these messages as part of it surveillance
program and to satisfy its record keeping requirements under the
Exchange Act.\54\ Thus, as the number of connections per Market Maker
increases, other costs incurred by the Exchange will likely also
increase, e.g., storage costs, surveillance costs, service expenses.
---------------------------------------------------------------------------
\54\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange further believes that the proposed fees are
reasonable, fair and equitable, and non-discriminatory because they
will apply to all Members in the same manner and are not targeted at a
specific type or category of market participant engaged in any
particular trading strategy. All Members will receive four free Limited
Service MEO Ports and pay the same proposed fee per Limited Service MEO
Port for each additional Limited Service MEO Port. Each Limited Service
MEO Port is identical, providing connectivity to the Exchange on
identical terms. While the proposed fee will result in a different
effective ``per unit'' rate for different Members after factoring in
the four free Limited Service MEO Ports, the Exchange does not believe
that this difference is material given the overall low proposed fee per
Limited Service MEO Port. Because the first four Limited Service MEO
Ports are free of charge, each entity will have a ``per unit'' rate of
less than the proposed fee. Further, the fee is not connected to volume
based tiers. All Members will be subject to the same fee schedule,
regardless of the volume sent to or executed on the Exchange. The fee
also does not depend on any distinctions between Members, customers,
broker-dealers, or any other entity. The fee will be assessed solely
based on the number of Limited Service MEO Ports an entity selects and
not on any other distinction applied by the Exchange. While entities
that send relatively more inbound messages to the Exchange may select
more Limited Service MEO Ports, thereby resulting in higher fees, that
distinction is based on decisions made by each Member and the extent
and nature of the Member's business on the Exchange rather than
application of the fee by the Exchange. Members can determine how many
Limited Service MEO Ports they need to implement their trading
strategies effectively. The Exchange proposes to offer additional
Limited Service MEO Ports at a low fee to enable all Members to
purchase as many Limited Service MEO Ports as their business needs
dictate in order to optimize throughput and manage latency across the
Exchange.
[[Page 86044]]
Notwithstanding that Members with the highest number of Limited
Service MEO Ports will pay a greater percentage of the total projected
fees than is represented by their Limited Service MEO Port usage, the
Exchange does not believe that the proposed fee is unfairly
discriminatory. It is not possible to fully synchronize the Exchange's
objective to provide four free Limited Service MEO Ports to all
Members, thereby minimizing barriers to entry and incentivizing
liquidity on the Exchange, with an approach that exactly aligns the
projected per Member fee with each Member's number of requested Limited
Service MEO Ports. As proposed, the Exchange is providing a reasonable
number of Limited Service MEO Ports to each Member without charge. Any
variance between projected fees and Limited Service MEO Port usage is
attributable to objective differences among Members in terms of the
number of Limited Service MEO Ports they determine are appropriate
based on their trading on the Exchange. Further, the Exchange believes
that the low amount of the proposed fee (which in the aggregate is
projected to only partially recover the Exchange's directly-related
costs as described herein) mitigates any disparate impact.
Further, the fee will help to encourage Limited Service MEO Port
usage in a way that aligns with the Exchange's regulatory obligations.
As a national securities exchange, the Exchange is subject to
Regulation Systems Compliance and Integrity (``Reg SCI'').\55\ Reg SCI
Rule 1001(a) requires that the Exchange establish, maintain, and
enforce written policies and procedures reasonably designed to ensure
(among other things) that its Reg SCI systems have levels of capacity
adequate to maintain the Exchange's operational capability and promote
the maintenance of fair and orderly markets.\56\ By encouraging Members
to be efficient with their Limited Service MEO Ports usage, the
proposed fee will support the Exchange's Reg SCI obligations in this
regard by ensuring that unused Limited Service MEO Ports are available
to be allocated based on individual Members needs and as the Exchange's
overall order and trade volumes increase. Additionally, because the
Exchange will continue not to charge connectivity testing and
certification fees to its disaster recovery facility or where the
Exchange requires testing and certification, the proposed fee structure
will further support the Exchange's Reg SCI compliance by reducing the
potential impact of a disruption should the Exchange be required to
switch to its disaster recovery facility and encouraging Members to
engage in any necessary system testing without incurring any port fee
costs.\57\
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\55\ 17 CFR 242.1000-1007.
\56\ 17 CFR 242.1001(a).
\57\ By comparison, some other exchanges charge less to connect
to their disaster recovery facilities, but still charge an amount
that could both recoup costs and potentially be a source of profits.
See, e.g., Nasdaq Stock Market LLC Equity 7, Section 115 (Ports and
other Services).
---------------------------------------------------------------------------
Finally, the Exchange believes that the proposed fee is consistent
with Section 11A of the Exchange Act in that it is designed to
facilitate the economically efficient execution of securities
transactions, fair competition among brokers and dealers, exchange
markets and markets other than exchange markets, and the practicability
of brokers executing investors' orders in the best market.
Specifically, the proposed low, cost-based fee will enable a broad
range of the Exchange Members to continue to connect to the Exchange,
thereby facilitating the economically efficient execution of securities
transactions on the Exchange, fair competition between and among such
Members, and the practicability of Members that are brokers executing
investors' orders on the Exchange when it is the best market.
FIX, CTD, and FXD Ports
To achieve consistent, premium network performance, the Exchange
must build and maintain a network that has the capacity to handle the
message rate requirements of its heaviest network consumers during
anticipated peak market conditions. The resultant need to support the
anticipated amount of billions of messages per day will consume the
Exchange's resources and significantly contribute to the overall
network connectivity expense for storage and network transport
capabilities. This need will also require the Exchange to purchase
additional storage capacity on an ongoing basis to ensure it has
sufficient capacity to store these messages as part of it surveillance
program and to satisfy its record keeping requirements under the
Exchange Act.\58\ Thus, as the number of connections per Market Maker
increases, other costs incurred by the Exchange will likely also
increase, e.g., storage costs, surveillance costs, service expenses.
---------------------------------------------------------------------------
\58\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------
The Exchange further believes that the proposed fees for FIX, CTD
and FXD Ports are reasonable, fair and equitable, and non-
discriminatory because they will apply to all Members in the same
manner and are not targeted at a specific type or category of market
participant engaged in any particular trading strategy. The fee for
each type of port does not depend on any distinctions between Members,
customers, broker-dealers, or any other entity. The fee will be
assessed solely based on the number of FIX, CTD or FXD Ports an entity
selects and not on any other distinction applied 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 that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intra-Market Competition
The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup its costs with a small profit for
providing 1Gb and 10Gb ULL connectivity, while recouping some of its
costs for a negative margin for providing Full Service MEO Ports,
Limited Service MEO Ports, FIX Ports, CTD Ports and FXD Ports,
following expiration of the respective waiver periods for each fee. As
described above, the Exchange anticipates operating at a loss for the
majority of the above services in order to provide a low-cost
alternative to attract order flow and encourage market participants to
experience the high determinism and resiliency of the Exchange's
trading Systems. To do so, the Exchange chooses to waive the fees for
all of the connectivity and port services for a specified time period.
This will likely result in the Exchange forgoing revenue it could
generate from assessing any fees without a waiver period or higher fees
upon expiration of the waiver periods. The Exchange could seek to
charge higher fees upon launch, but that could serve to discourage
participation on the Exchange. Instead, the Exchange chooses to provide
a low-cost exchange alternative to the options industry, which may
result in lower initial revenues.
Further, the Exchange does not believe that the proposed fees would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. The proposed fees will
apply uniformly to all market participants regardless of the number of
[[Page 86045]]
1Gb or 10Gb ULL connections they choose to purchase. The proposed fees
do not favor certain categories of market participants in a manner that
would impose an undue burden on competition.
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, Exchange
personnel has been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are likely to connect to the Exchange for launch (including large and
small firms, firms with large connectivity service footprints and small
connectivity service footprints, as well as extranets and service
bureaus) for several months leading up to that time. The Exchange does
not believe the proposed fees for connectivity services would
negatively impact the ability of Members, non-Members (extranets or
service bureaus), third-parties that purchase the Exchange's
connectivity and resell it, and customers of those resellers to compete
with other market participants or that they are placed at a
disadvantage.
The Exchange does anticipate, however, that some market
participants may reduce or discontinue use of connectivity services
provided directly by the Exchange once the relevant waiver periods
expire. The Exchange's affiliates have experienced similar reductions
in use by their members for similar non-transaction fee increases. For
example, one MIAX Pearl Options Market Maker terminated their MIAX
Pearl Options membership on January 1, 2023 as a direct result of the
similar proposed fee changes by MIAX Pearl Options.\59\
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\59\ The Exchange acknowledges that IEX included in its proposal
to adopt market data fees after offering market data for free an
analysis of what its projected revenue would be if all of its
existing customers continued to subscribe versus what its projected
revenue would be if a limited number of customers subscribed due to
the new fees. See Securities Exchange Act Release No. 94630 (April
7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-2022-02). MEMX did
not include a similar analysis in its recent non-transaction fee
proposal. See supra note 41. The Exchange does not believe a similar
analysis would be useful here because it is amending existing fees,
not proposing to charge a new fee where existing subscribers may
terminate connections because they are no longer enjoying the
service at no cost.
---------------------------------------------------------------------------
The Exchange does not believe that the proposed fees for
connectivity services place certain market participants at a relative
disadvantage to other market participants because the proposed
connectivity pricing is associated with relative usage of the Exchange
by each market participant and does not impose a barrier to entry to
smaller participants. The Exchange believes its proposed pricing is
reasonable and, when coupled with the availability of third-party
providers that also offer connectivity solutions, that participation on
the Exchange is affordable for all market participants, including
smaller trading firms. As described above, the connectivity services
purchased by market participants typically increase based on their
additional message traffic and/or the complexity of their operations.
The market participants that utilize more connectivity services
typically utilize the most bandwidth, and those are the participants
that consume the most resources from the network. Accordingly, the
proposed fees for connectivity services do not favor certain categories
of market participants in a manner that would impose a burden on
competition; rather, the allocation of the proposed connectivity fees
reflects the network resources consumed by the various size of market
participants and the costs to the Exchange of providing such
connectivity services.
The Exchange does not believe its proposed fees for Limited Service
MEO Ports will place certain market participants at a relative
disadvantage to other market participants. All market participants
would be eligible to receive four (4) free Limited Service MEO Ports
and those that elect to purchase more would be subject to the same flat
fee regardless of the number of additional Limited Service MEO Ports
they purchase. All firms purchase the amount of Limited Service MEO
Ports they require based on their own business decisions and similarly
situated firms are subject to the same fees.
Inter-Market Competition
The Exchange also does not believe that the proposed rule change
and price increase will result in any burden on inter-market
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. As this is a fee increase, arguably if set too
high, this fee would make it easier for other exchanges to compete with
the Exchange. Only if this were a substantial fee decrease could this
be considered a form of predatory pricing. In contrast, the Exchange
believes that, without this fee increase, we are potentially at a
competitive disadvantage to certain other exchanges that have in place
higher fees for similar services. As we have noted, the Exchange
believes that connectivity fees can be used to foster more competitive
transaction pricing and additional infrastructure investment and there
are other options markets of which market participants may connect to
trade options at higher rates than the Exchange's. Accordingly, the
Exchange does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\60\ and Rule 19b-4(f)(2) \61\ 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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\60\ 15 U.S.C. 78s(b)(3)(A)(ii).
\61\ 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-SAPPHIRE-2024-32 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.
[[Page 86046]]
All submissions should refer to file number SR-SAPPHIRE-2024-32. 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-SAPPHIRE-2024-32 and should
be submitted on or before November 19, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
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\62\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-25056 Filed 10-28-24; 8:45 am]
BILLING CODE 8011-01-P
