[Federal Register Volume 84, Number 215 (Wednesday, November 6, 2019)]
[Notices]
[Pages 59878-59889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24186]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87433; File No. SR-EMERALD-2019-35]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Fee Schedule

October 31, 2019
    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 22, 2019, MIAX Emerald, LLC (``MIAX Emerald'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 Emerald Fee 
Schedule (the ``Fee Schedule'') to adopt the Exchange's system 
connectivity fees.
    The Exchange previously filed the proposal on August 23, 2019 (SR-
EMERALD-2019-31). That filing has been withdrawn and replaced with the 
current filing (SR-EMERALD-2019-35).
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/emerald, at MIAX's 
principal office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is refiling its proposal to amend the Fee Schedule in 
order to provide additional analysis of its baseline revenues, costs, 
and profitability (before the proposed fee change) and the Exchange's 
expected revenues, costs, and profitability (following the proposed fee 
change) for its network connectivity services. This additional analysis 
includes information regarding its methodology for determining the 
baseline costs and revenues, as well as expected costs and revenues, 
for its network connectivity services. The Exchange is also refiling 
its proposal in order to address certain points raised in the only 
comment letter received by the Commission on the Exchange's prior 
proposal to increase connectivity fees.\3\ In order to determine the 
Exchange's baseline costs associated with providing network 
connectivity services, the Exchange conducted an extensive cost review 
in which the Exchange analyzed every expense item in the Exchange's 
general expense ledger to determine whether each such expense relates 
to the provision of network connectivity services, and, if such expense 
did so relate, what portion (or percentage) of such expense actually 
supports the provision of network connectivity services. The sum of all 
such portions of expenses represents the total actual baseline cost of 
the Exchange to provide network connectivity services. (For the 
avoidance of doubt, no expense amount was allocated twice.) The 
Exchange is presenting the results of its cost review in a way that 
corresponds directly with the Exchange's 2018 Audited Unconsolidated 
Financial Statement, the relevant section of which is attached [sic] 
hereto as Exhibit 3, which is publicly available as part of the 
Exchange's Form 1 Amendment.\4\ The

[[Page 59879]]

purpose of presenting it in this manner is to provide greater 
transparency into the Exchange's actual and expected revenues, costs, 
and profitability associated with providing network connectivity 
services. Based on this analysis, the Exchange believes that its 
proposed fees are fair and reasonable because they will permit recovery 
of less than all of the Exchange's costs for providing the network 
connectivity services and will not result in excessive pricing or 
supra-competitive profit, when comparing the Exchange's total annual 
expense associated with providing the network connectivity services 
versus the total projected annual revenue the Exchange projects to 
collect for providing the network connectivity services.
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    \3\ See Letter from John Ramsay, Chief Market Policy Officer, 
Investors Exchange LLC (``IEX''), to Vanessa Countryman, Secretary, 
Commission, dated October 9, 2019 (``Third IEX Letter,'' as further 
described below).
    \4\ See the complete Audited Unconsolidated Financial Statement 
of MIAX Emerald, LLC, as of December 31, 2018, which is listed under 
Exhibit D of MIAX Form 1 Amendment 2019-7 Annual Filing at https://www.sec.gov/Archives/edgar/vprr/1900/19003680.pdf.
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    Specifically, the Exchange proposes to amend Sections 5(a) and (b) 
of the Fee Schedule to adopt the network connectivity fees for the 1 
Gigabit (``Gb'') fiber connection and the 10Gb ultra-low latency 
(``ULL'') fiber connection, which are charged to both Members \5\ and 
non-Members of the Exchange for connectivity to the Exchange's primary/
secondary facility. The Exchange also proposes to adopt network 
connectivity fees for the 1Gb and 10Gb fiber connections for 
connectivity to the Exchange's disaster recovery facility. Each of 
these connections (with the exception of the 10Gb ULL) are shared 
connections (collectively, the ``Shared Connections''), and thus can be 
utilized to access the Exchange and both of the Exchange's affiliates, 
Miami International Securities Exchange, LLC (``MIAX'') and MIAX PEARL, 
LLC (``MIAX PEARL''). The 10Gb ULL connection is a dedicated connection 
(``Dedicated Connection''), which provides network connectivity solely 
to the trading platforms, market data systems, and test system 
facilities of MIAX Emerald. These proposed fees are collectively 
referred to herein as the ``Proposed Fees.'' The amounts of the 
Proposed Fees for the Shared Connections are the same amounts that are 
currently in place at MIAX and MIAX PEARL.\6\ While the Exchange is new 
and only launched trading on March 1, 2019, since: (i) All of the 
Proposed Fees (except for the fee relating to the 10Gb ULL connection) 
relate to Shared Connections, and thus are the same amounts as are 
currently in place at MIAX and MIAX PEARL; (ii) all of the Members of 
MIAX Emerald are also members of either MIAX and/or MIAX PEARL, and 
most of those Members already have connectivity to the Exchange via 
existing Shared Connections (without paying any new incremental 
connectivity fees), the Exchange is providing similar information to 
that which was provided in the MIAX and PEARL Fee Filings, including 
providing detail about the market participants impacted by the Proposed 
Fees, as well as the costs incurred by the Exchange associated with 
providing the connectivity alternatives, in order to provide 
transparency and support relating to the Exchange's belief that the 
Proposed Fees are reasonable, equitable, and non-discriminatory, and to 
provide sufficient information for the Commission to determine that the 
Proposed Fees are consistent with the Act.
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    \5\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \6\ See SR-MIAX-2019-46 and SR-PEARL-2019-33 (the ``MIAX and 
PEARL Fee Filings'').
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    The Exchange initially filed the Proposed Fees on March 1, 2019, 
designating the Proposed Fees immediately effective.\7\ The First 
Proposed Rule Change was published for comment in the Federal Register 
on March 20, 2019.\8\ The First Proposed Rule Change provided 
information about the market participants impacted by the Proposed 
Fees, as well as the additional costs incurred by the Exchange 
associated with providing the connectivity alternatives, in order to 
provide transparency and support relating to the Exchange's belief that 
the Proposed Fees are reasonable, equitable, and non-discriminatory, 
and to provide sufficient information for the Commission to determine 
that the Proposed Fees are consistent with the Act.
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    \7\ See Securities Exchange Act Release No. 85316 (March 14, 
2019), 84 FR 10350 (March 20, 2019) (SR-EMERALD-2019-11) (the 
``First Proposed Rule Change'').
    \8\ Id.
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    On March 29, 2019, the Commission issued its Order Disapproving 
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC 
Options Facility to Establish BOX Connectivity Fees for Participants 
and Non-Participants Who Connect to the BOX Network (the ``BOX 
Order'').\9\ In the BOX Order, the Commission highlighted a number of 
deficiencies it found in three separate rule filings by BOX Exchange 
LLC (``BOX'') to increase BOX's connectivity fees that prevented the 
Commission from finding that BOX's proposed connectivity fees were 
consistent with the Act. These deficiencies relate to topics that the 
Commission believes should be discussed in a connectivity fee filing.
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    \9\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04).
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    After the BOX Order was issued, the Commission received four 
comment letters on the First Proposed Rule Change.\10\
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    \10\ See Letter from Joseph W. Ferraro III, SVP & Deputy General 
Counsel, MIAX, to Vanessa Countryman, Acting Secretary, Commission, 
dated April 5, 2019 (``MIAX Letter''); Letter from Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA, to Vanessa 
Countryman, Acting Secretary, Commission, dated April 10, 2019 
(``Second SIFMA Letter''); Letter from John Ramsay, Chief Market 
Policy Officer, IEX, to Vanessa Countryman, Acting Secretary, 
Commission, dated April 10, 2019 (``IEX Letter''); and Letter from 
Tyler Gellasch, Executive Director, Healthy Markets, to Brent J. 
Fields, Secretary, Commission, dated April 18, 2019 (``Second 
Healthy Markets Letter'').
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    The Second SIFMA Letter argued that the Exchange did not provide 
sufficient information in its First Proposed Rule Change to support a 
finding that the proposal should be approved by the Commission after 
further review of the Proposed Fees. Specifically, the Second SIFMA 
Letter argued that the Exchange's market data fees and connectivity 
fees were not constrained by competitive forces, the Exchange's filing 
lacked sufficient information regarding cost and competition, and that 
the Commission should establish a framework for determining whether 
fees for exchange products and services are reasonable when those 
products and services are not constrained by significant competitive 
forces.
    The IEX Letter argued that the Exchange did not provide sufficient 
information in its First Proposed Rule Change to support a finding that 
the proposal should be approved by the Commission and that the 
Commission should extend the time for public comment on the First 
Proposed Rule Change. Despite the objection to the Proposed Fees, the 
IEX Letter did find that ``MIAX has provided more transparency and 
analysis in these filings than other exchanges have sought to do for 
their own fee increases.'' \11\ The IEX Letter specifically argued that 
the Proposed Fees were not constrained by competition, the Exchange 
should provide data on the Exchange's actual costs and how those costs 
relate to the product or service in question, and whether and how MIAX 
Emerald and its affiliates considered changes to transaction fees as an 
alternative to offsetting exchange costs.
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    \11\ See IEX Letter, pg. 1.
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    The Second Healthy Markets Letter did not object to the First 
Proposed Rule

[[Page 59880]]

Change and the information provided by the Exchange in support of the 
Proposed Fees. Specifically, the Second Healthy Markets Letter stated 
that the First Proposed Rule Change was ``remarkably different,'' and 
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went on to further state as follows:

    The instant MIAX filings--along with their April 5th 
supplement--provide much greater detail regarding users of 
connectivity, the market for connectivity, and costs than the 
Initial MIAX Filings. They also appear to address many of the issues 
raised by the Commission staff's BOX disapproval order. This third 
round of MIAX filings suggests that MIAX is operating in good faith 
to provide what the Commission and staff seek.\12\

    On April 29, 2019, the Exchange withdrew the First Proposed Rule 
Change.\13\
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    \12\ See Second Healthy MarketsLetter, pg. 2.
    \13\ See SR-EMERALD-2019-11.
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    The Exchange refiled the Proposed Fees on April 30, 2019, 
designating the Proposed Fees immediately effective.\14\ The Second 
Proposed Rule Change was published for comment in the Federal Register 
on May 16, 2019.\15\ The Second Proposed Rule Change provided further 
cost analysis information to squarely and comprehensively address each 
and every topic raised for discussion in the BOX Order, the IEX Letter 
and the Second SIFMA Letter to ensure that the Proposed Fees are 
reasonable, equitable, and non-discriminatory, and that the Commission 
should find that the Proposed Fees are consistent with the Act.
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    \14\ See Securities Exchange Act Release No. 85839 (May 10, 
2019), 84 FR 22192 (May 16, 2019) (SR-EMERALD-2019-20) (the ``Second 
Proposed Rule Change'') (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Adopt System Connectivity 
Fees).
    \15\ Id.
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    On May 21, 2019, the Commission issued the Staff Guidance on SRO 
Rule Filings Relating to Fees.\16\
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    \16\ See Staff Guidance on SRO Rule Filings Relating to Fees 
(May 21, 2019), at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Guidance'').
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    The Commission received two comment letters on the Second Proposed 
Rule Change, after the Guidance was released.\17\ The Second IEX Letter 
and the Third SIFMA Letter argued that the Exchange did not provide 
sufficient information in its Second Proposed Rule Change to justify 
the Proposed Fees based on the Guidance and the BOX Order. Of note, 
however, is that unlike their previous comment letter, the Third SIFMA 
Letter did not call for the Commission to suspend the Second Proposed 
Rule Change. Also, Healthy Markets did not comment on the Second 
Proposed Rule Change.
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    \17\ See Letter from John Ramsay, Chief Market Policy Officer, 
IEX, to Vanessa Countryman, Acting Secretary, Commission, dated June 
5, 2019 (the ``Second IEX Letter'') and Letter from Theodore R. 
Lazo, Managing Director and Associate General Counsel, and Ellen 
Greene, Managing Director, SIFMA, to Vanessa Countryman, Acting 
Secretary, Commission, dated June 6, 2019 (the ``Third SIFMA 
Letter'').
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    On June 26, 2019, the Exchange withdrew the Second Proposed Rule 
Change.\18\
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    \18\ See SR-EMERALD-2019-20.
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    The Exchange refiled the Proposed Fees on June 26, 2019, 
designating the Proposed Fees immediately effective.\19\ The Third 
Proposed Rule Change was published for comment in the Federal Register 
on July 16, 2019.\20\ The Third Proposed Rule Change bolstered the 
Exchange's previous cost-based discussion to support its claim that the 
Proposed Fees are fair and reasonable because they will permit recovery 
of the Exchange's costs and will not result in excessive pricing or 
supra-competitive profit, in light of the Guidance issued by Commission 
staff subsequent to the Second Proposed Rule Change.
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    \19\ See Securities Exchange Act Release No. 86344 (July 10, 
2019), 84 FR 34030 (July 16, 2019) (SR-EMERALD-2019-24) (the ``Third 
Proposed Rule Change'').
    \20\ Id.
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    The Commission received three comment letters on the Third Proposed 
Rule Change.\21\
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    \21\ See Letter from John Ramsay, Chief Market Policy Officer, 
IEX, to Vanessa Countryman, Acting Secretary, Commission, dated 
August 8, 2019 (``Third IEX Letter''); Letter from Tyler Gellasch, 
Executive Director, Healthy Markets, to Vanessa Countryman, Acting 
Secretary, Commission, dated August 5, 2019 (``Third Healthy Markets 
Letter''); and Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel and Ellen Greene, Managing Director 
Financial Services Operations, SIFMA, to Vanessa Countryman, Acting 
Secretary, Commission, dated August 5, 2019 (``Fourth SIFMA 
Letter'').
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    Neither the Third Healthy Markets Letter nor the Fourth SIFMA 
Letter called for the Commission to suspend or disapprove the Proposed 
Fee Increases. In fact, the Third Healthy Markets Letter acknowledged 
that ``it appears as though MIAX is operating in good faith to provide 
what the Commission, its staff, and market participants the information 
needed to appropriately assess the filings.'' The Third IEX Letter only 
reiterated points from the Second IEX Letter and failed to address any 
of the new information in the Fifth Proposed Rule Change concerning the 
Exchange's revenue figures, cost allocation or that the Proposed Fee 
Increases did not result in excessive pricing or a supra-competitive 
profit for the Exchange.
    On August 23, 2019, the Exchange withdrew the Third Proposed Rule 
Change.\22\
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    \22\ See SR-EMERALD-2019-24.
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    The Exchange refiled the Proposed Fee Increases on August 23, 2019, 
designating the Proposed Fee Increases immediately effective.\23\ The 
Fourth Proposed Rule Change was published for comment in the Federal 
Register on July 16, 2019.\24\ The Fourth Proposed Rule Change provided 
greater detail and clarity concerning the Exchange's cost methodology 
as it pertains to the Exchange's expenses for network connectivity 
services, using a line-by-line analysis of the Exchange's general 
expense ledger to determine what, if any, portion of those expenses 
supports the provision of network connectivity services.
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    \23\ See Securities Exchange Act Release No. 86839 (August 30, 
2019), 84 FR 47009 (September 6, 2019) (SR-EMERALD-2019-31) (the 
``Fourth Proposed Rule Change'').
    \24\ Id.
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    The Commission received only one comment letter on the Fourth 
Proposed Rule Change, twelve days after the comment period deadline 
ended.\25\ Of note, no member of the Exchange commented on the Fourth 
Proposed Rule Change. Also, no issuer or other person using the 
facilities of the Exchange commented on the Fourth Proposed Rule 
Change. Also, no industry group that represents members, issuers, or 
other persons using the facilities of the Exchange commented on the 
Fourth Proposed Rule Change. Also, no operator of an options market 
commented on the Fourth Proposed Rule Change. Also, no operator of a 
high performance, ultra-low latency network, which network can support 
access to three distinct exchanges and provides premium network 
monitoring and reporting services to customers, commented on the Fourth 
Proposed Rule Change. Rather, the only comment letter came from an 
operator of a single equities market (equities market structure and 
resulting network demands are fundamentally different from those in the 
options markets),\26\ which operator also has a fundamentally different 
business model (and agenda) than does the Exchange. That letter--the 
Third IEX Letter--called for, among other things, the Exchange to 
explain its basis for concluding that it incurred substantially higher 
costs to provide lower-latency connections and further describe the 
nature and closeness of the relationship

[[Page 59881]]

between the identified costs and connectivity products and services as 
stated in the Exchange's cost allocation analysis.
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    \25\ See supra note 3.
    \26\ See infra pages 16 to 18 (describing the differences in 
equity market structure and options market structure).
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    On October 22, 2019, the Exchange withdrew the Fourth Proposed Rule 
Change.\27\
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    \27\ See SR-EMERALD-2019-31.
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    The Exchange is now refiling the Proposed Fees to provide 
additional analysis of its baseline revenues, costs, and profitability 
(before the proposed fee change) and the Exchange's expected revenues, 
costs, and profitability (following the proposed fee change) for its 
network connectivity services. This additional analysis includes 
information regarding its methodology for determining the baseline 
costs and revenues, as well as expected costs and revenues, for its 
network connectivity services. The Exchange is also refiling its 
proposal in order to address certain points raised in the Third IEX 
Letter. The Exchange believes that the Proposed Fees are consistent 
with the Act because they (i) are reasonable, equitably allocated, not 
unfairly discriminatory, and not an undue burden on competition; (ii) 
comply with the BOX Order and the Guidance; (iii) are supported by 
evidence (including data and analysis), constrained by significant 
competitive forces; and (iv) are supported by specific information 
(including quantitative information), fair and reasonable because they 
will permit recovery of the Exchange's costs (less than all) and will 
not result in excessive pricing or supra-competitive profit. 
Accordingly, the Exchange believes that the Commission should find that 
the Proposed Fees are consistent with the Act. The proposed rule change 
is immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Act.
    The Exchange offers to both Members and non-Members various 
bandwidth alternatives for connectivity to the Exchange, to its primary 
and secondary facilities, consisting of a 1Gb fiber connection and a 
10Gb ULL fiber connection. The 10Gb ULL offering uses an ultra-low 
latency switch, which provides faster processing of messages sent to it 
in comparison to the switch used for the other types of connectivity. 
The Exchange also offers to both Members and non-Members various 
bandwidth alternatives for connectivity to the Exchange, to its 
disaster recovery facility, consisting of a 1Gb fiber connection and a 
10Gb connection.
    For the Shared Connections, the Exchange's MIAX Express Network 
Interconnect (``MENI'') can be configured to provide Members and non-
Members of the Exchange network connectivity to the trading platforms, 
market data systems, test systems, and disaster recovery facilities of 
the Exchange and its affiliates, MIAX and MIAX PEARL, via a single, 
shared connection. Any Member or non-Member can purchase a Shared 
Connection.
    For the Dedicated Connection, the Exchange's MENI is configured to 
provide Members and non-Members of the Exchange network connectivity to 
the trading platforms, market data systems, test systems, and disaster 
recovery facilities of the Exchange. Any Member or non-Member can 
purchase a Dedicated Connection. The Exchange determined to design its 
network architecture in a manner that offered 10Gb ULL connections as 
dedicated connections (as opposed to shared connections) in order to 
provide cost saving opportunities for itself and for its Members, by 
reducing the amount of equipment that the Exchange would have to 
purchase and to which the Members would have to connect. Accordingly, 
the Exchange is able to offer to its Members 10Gb ULL connectivity at a 
lower price point than is offered on MIAX and MIAX PEARL, the price 
difference being reflective of the lower cost to the Exchange.
    For the Shared Connections, Members and non-Members utilizing the 
MENI to connect to the trading platforms, market data systems, test 
systems and disaster recovery facilities of the Exchange, MIAX, and 
MIAX PEARL via a single, shared connection are assessed only one 
monthly network connectivity fee per connection, regardless of the 
trading platforms, market data systems, test systems, and disaster 
recovery facilities accessed via such connection. Thus, since all of 
the Members of MIAX Emerald are also members of either MIAX and/or MIAX 
PEARL, and most of those Members already have connectivity to the 
Exchange via existing Shared Connections, most Members of MIAX Emerald 
have instant connectivity to the Exchange without paying any new 
incremental connectivity fees, as more fully-detailed below.
    The Exchange proposes to establish the monthly network connectivity 
fees for such connections for both Members and non-Members. As 
discussed above, the amounts of the Proposed Fees for the Shared 
Connections are the same amounts that are currently in place at MIAX 
and MIAX PEARL. The amount of the Proposed Fee for the Dedicated 
Connection is offered at a substantial discount to the amount currently 
in place at MIAX and MIAX PEARL. The reasons for the substantial 
discount are that the Dedicated Connection offers access to only a 
single market (the Exchange), whereas the 10Gb ULL connection offered 
by MIAX and MIAX PEARL offers access to two markets (MIAX and MIAX 
PEARL), as well as cost savings the Exchange was able to achieve (and 
thus pass through to its Members) as a result of a dedicated 
architecture. The network connectivity fees for connectivity to the 
Exchange's primary/secondary facility will be as follows: (a) 1,400 for 
the 1Gb connection; and (b) $6,000 for the 10Gb ULL connection. The 
network connectivity fees for connectivity to the Exchange's disaster 
recovery facility will be as follows: (a) $550 for the 1Gb connection; 
and (b) $2,750 for the 10Gb connection.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \28\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \29\ in 
particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among Exchange Members and 
issuers and other persons using any facility or system which the 
Exchange operates or controls. The Exchange also believes the proposal 
furthers the objectives of Section 6(b)(5) of the Act \30\ in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general to protect 
investors and the public interest and is not designed to permit unfair 
discrimination between customer, issuers, brokers and dealers.
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    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(4).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. In Regulation NMS, 
the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \31\
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    \31\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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    The Exchange believes that its proposal is consistent with Section

[[Page 59882]]

6(b)(4) of the Act, in that the Proposed Fees are fair, equitable and 
not unreasonably discriminatory, because the fees for the connectivity 
alternatives available on the Exchange, as proposed, are constrained by 
significant competitive forces. The U.S. options markets are highly 
competitive (there are currently 16 options markets) and a reliance on 
competitive markets is an appropriate means to ensure equitable and 
reasonable prices.
    The Exchange acknowledges that there is no regulatory requirement 
that any market participant connect to the Exchange, or that any 
participant connect at any specific connection speed. The rule 
structure for options exchanges are, in fact, fundamentally different 
from those of equities exchanges. In particular, options market 
participants are not forced to connect to (and purchase market data 
from) all options exchanges, as shown by the number of Members of MIAX 
Emerald as compared to the much greater number of members at other 
options exchanges (as further detailed below). MIAX Emerald is a brand 
new exchange, having only commenced operations in March 2019. Not only 
does MIAX Emerald have less than half the number of members as certain 
other options exchanges, but there are also a number of the Exchange's 
Members that do not connect directly to MIAX Emerald. Further, of the 
number of Members that connect directly to MIAX Emerald, many such 
Members do not purchase market data from MIAX Emerald. There are a 
number of large market makers and broker-dealers that are members of 
other options exchanges but not Members of MIAX Emerald. For example, 
the following are not Members of MIAX Emerald: The D. E. Shaw Group, 
CTC, XR Trading LLC, Hardcastle Trading AG, Ronin Capital LLC, 
Belvedere Trading, LLC, Bluefin Trading, and HAP Capital LLC. In 
addition, of the market makers that are connected to MIAX Emerald, it 
is the individual needs of the market maker that require whether they 
need one connection or multiple connections to the Exchange. The 
Exchange has market maker Members that only purchase one connection and 
the Exchange has market maker Members that purchase multiple 
connections. It is all driven by the business needs of the market 
maker. Market makers that are consolidators that target resting order 
flow tend to purchase more connectivity than market makers that simply 
quote all symbols on the Exchange. Even though non-Members purchase and 
resell 10Gb ULL connections to both Members and non-Members, no market 
makers currently connect to the Exchange indirectly through such 
resellers.
    The argument that all broker-dealers are required to connect to all 
exchanges is not true in the options markets. The options markets have 
evolved differently than the equities markets both in terms of market 
structure and functionality. For example, there are many order types 
that are available in the equities markets that are not utilized in the 
options markets, which relate to mid-point pricing and pegged pricing 
which require connection to the SIPs and each of the equities exchanges 
in order to properly execute those orders in compliance with best 
execution obligations. In addition, in the options markets there is a 
single SIP (OPRA) versus two SIPs in the equities markets, resulting in 
fewer hops and thus alleviating the need to connect directly to all the 
options exchanges. Additionally, in the options markets, the linkage 
routing and trade through protection are handled by the exchanges, not 
by the individual members. Thus not connecting to an options exchange 
or disconnecting from an options exchange does not potentially subject 
a broker-dealer to violate order protection requirements. Gone are the 
days when the retail brokerage firms (the Fidelity's, the Schwab's, the 
eTrade's) were members of the options exchanges--they are not members 
of MIAX Emerald or its affiliates, MIAX and MIAX PEARL, they do not 
purchase connectivity to MIAX Emerald, and they do not purchase market 
data from MIAX Emerald. The Exchange further recognizes that the 
decision of whether to connect to the Exchange is separate and distinct 
from the decision of whether and how to trade on the Exchange. The 
Exchange acknowledges that many firms may choose to connect to the 
Exchange, but ultimately not trade on it, based on their particular 
business needs.
    To assist prospective Members or firms considering connecting to 
MIAX Emerald, the Exchange provides information about the Exchange's 
available connectivity alternatives in a Connectivity Guide, which 
contains detailed specifications regarding, among other things, 
throughput and latency for each available connection.\32\ The decision 
of which type of connectivity to purchase, or whether to purchase 
connectivity at all for a particular exchange, is based on the business 
needs of the firm. For example, if the firm wants to receive the top-
of-market data feed product or depth data feed product, due to the 
amount/size of data contained in those feeds, such firm would need to 
purchase a 10Gb ULL connection. The 1Gb connection is too small to 
support those data feed products. MIAX Emerald notes that there are 
twelve (12) Members that only purchase the 1Gb connectivity 
alternative. Thus, while there is a meaningful percentage of purchasers 
of only 1Gb connections (12 of 33), by definition, those twelve (12) 
members purchase connectivity that cannot support the top-of-market 
data feed product or depth data feed product and thus they do not 
purchase such data feed products. Accordingly, purchasing market data 
is a business decision/choice, and thus the pricing for it is 
constrained by competition.
---------------------------------------------------------------------------

    \32\ See the MIAX Connectivity Guide at https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Connectivity_Guide_v3.6_01142019.pdf.
---------------------------------------------------------------------------

    There is competition for connectivity to MIAX Emerald and its 
affiliates. MIAX Emerald competes with eight (8) non-Members, who 
resell MIAX Emerald connectivity. These are resellers of MIAX Emerald 
connectivity--they are not arrangements between broker-dealers to share 
connectivity costs. Those non-Members resell that connectivity to 
multiple market participants over that same connection, including both 
Members and non-Members of MIAX Emerald (typically extranets and 
service bureaus). When connectivity is re-sold by a third-party, MIAX 
Emerald does not receive any connectivity revenue from that sale. It is 
entirely between the third-party and the purchaser, thus constraining 
the ability of MIAX Emerald to set its connectivity pricing as indirect 
connectivity is a substitute for direct connectivity. In fact, there 
are currently seven (7) non-Members that purchase 1Gb direct 
connectivity that are able to access MIAX Emerald, MIAX and MIAX PEARL. 
Those non-Members resell that connectivity to eight (8) customers, some 
of whom are agency broker-dealers that have tens of customers of their 
own. Some of those eight (8) customers also purchase connectivity 
directly from MIAX Emerald and/or its affiliates, MIAX and MIAX PEARL. 
Accordingly, indirect connectivity is a viable alternative used by non-
Members of MIAX Emerald, constraining the price that MIAX Emerald is 
able to charge for connectivity to its Exchange.

[[Page 59883]]

    The Exchange,\33\ MIAX,\34\ and MIAX PEARL \35\ are comprised of 41 
distinct members amongst all three exchanges, excluding any additional 
affiliates of such members that are also members of the Exchange, MIAX, 
MIAX PEARL, or any combination thereof. Of those 41 distinct members, 
28 of those distinct members are Members of MIAX Emerald. (Currently, 
there are no Members of MIAX Emerald that are not also members of MIAX 
or MIAX PEARL, or both.) Of those 28 distinct Members of MIAX Emerald, 
there are 6 Members that have no connectivity to the Exchange. Members 
are not forced to purchase connectivity to the Exchange, and these 
Members have elected not to purchase such connectivity. Of note, these 
same 6 Members also do not have connectivity to either MIAX or MIAX 
PEARL. These Members either trade indirectly through other Members or 
non-Members that have connectivity to the Exchange, or do not trade and 
conduct another type of business on the Exchange. Of the remaining 22 
distinct Members of MIAX Emerald, all 22 of those distinct Members 
already had connectivity to the Exchange via existing Shared 
Connections, thus providing all such 22 MIAX Emerald Members with 
instant connectivity to the Exchange without paying any new incremental 
connectivity fees.
---------------------------------------------------------------------------

    \33\ The Exchange has 28 distinct Members, excluding affiliated 
entities. See MIAX Emerald Exchange Member Directory, available at 
https://www.miaxoptions.com.
    \34\ MIAX has 38 distinct Members, excluding affiliated 
entities. See MIAX Exchange Member Directory, available at https://www.miaxoptions.com.
    \35\ MIAX PEARL has 36 distinct Members, excluding affiliated 
entities. See MIAX PEARL Exchange Member Directory, available at 
https://www.miaxoptions.com.
---------------------------------------------------------------------------

    Further, of those 22 Members, 14 of such Members elected to 
purchase additional connectivity to the Exchange, including additional 
Shared Connections and additional Dedicated Connections. The Exchange 
made available in advance to all of its prospective Members its 
proposed connectivity pricing (subject to regulatory clearance), in 
order for those prospective Members to make an informed decision about 
whether to become a Member of the Exchange and whether to purchase 
connectivity to the Exchange. Accordingly, each such Member made the 
decision to become a Member of the Exchange and to purchase 
connectivity to the Exchange, knowing in advance the connectivity 
pricing. And the vast majority of the additional connectivity purchased 
by those Members were for Dedicated Connections, the most expensive 
connectivity option.
    As a result, of those 22 Members, through existing Shared 
Connections, newly purchased Shared Connections, and newly purchased 
Dedicated Connections: 14 Members have 1Gb (primary/secondary) 
connections; 13 Members have 10Gb ULL (primary/secondary) connections; 
3 Members have 10Gb (disaster recovery) connections; and 10 Members 
have 1Gb (disaster recovery) connections, or some combination of 
multiple various connections. All such Members with those Shared 
Connections and Dedicated Connections trade on MIAX Emerald.
    The 6 Members who have not purchased any connectivity to the 
Exchange are still able to trade on the Exchange indirectly through 
other Members or non-Member service bureaus that are connected. These 6 
Members who have not purchased connectivity are not forced or compelled 
to purchase connectivity, and they retain all of the other benefits of 
membership with the Exchange. Accordingly, Members have the choice to 
purchase connectivity and are not compelled to do so in any way.
    In addition, there are 5 non-Member service bureaus that already 
have connectivity to the Exchange via existing Shared Connections, thus 
providing all 5 of those non-Member service bureaus with instant 
connectivity to the Exchange without paying any new incremental 
connectivity fees. These non-Members freely purchased their 
connectivity from one of the Exchange's affiliates, either MIAX or MIAX 
PEARL, in order to offer trading services to other firms and customers, 
as well as access to the market data services that their connections to 
the Exchange provide them, but they are not required or compelled to 
purchase any of the Exchange's connectivity options.
    The Exchange believes that the Proposed Fees are fair, equitable 
and not unreasonably discriminatory because the connectivity pricing is 
directly related to the relative costs to the Exchange to provide those 
respective services, and does not impose a barrier to entry to smaller 
participants. Accordingly, the Exchange offers two direct connectivity 
alternatives and various indirect connectivity (via third-party) 
alternatives, as described above. MIAX Emerald recognizes that there 
are various business models and varying sizes of market participants 
conducting business on the Exchange. The 1Gb direct connectivity 
alternative is 1/10th the size of the 10Gb ULL direct connectivity 
alternative. Because it is 1/10th of the size, it does not offer access 
to many of the products and services offered by the Exchange, such as 
the ability to quote or receive certain market data products. 
Approximately just less than half of MIAX Emerald, MIAX and MIAX PEARL 
Members that connect (15 out of 33) purchase 1Gb connections. The 1Gb 
direct connection can support the sending of orders and the consumption 
of all market data feed products, other than the top-of-market data 
feed product or depth data feed product (which require a 10Gb 
connection). The 1Gb direct connection is generally purchased by market 
participants that utilize less bandwidth and also generally do not 
require the high touch network support services provided by the 
Exchange. Accordingly, these connections consume the least resources of 
the Exchange and are the least costly to the Exchange to provide. The 
market participants that purchase 10Gb ULL direct connections utilize 
the most bandwidth and also generally do require the high touch network 
support services provided by the Exchange. Accordingly, these 
connections consume the most resources of the Exchange and are the most 
costly to the Exchange to provide. Accordingly, the Exchange believes 
the allocation of the Proposed Fees ($6,000 for a 10Gb ULL connection 
versus $1,400 for a 1Gb connection) are reasonable based on the 
resources consumed by the respective type of connection--lowest 
resource consuming members pay the least, and highest resource 
consuming members pay the most, particularly since higher resource 
consumption translates directly to higher costs to the Exchange. The 
10Gb ULL connection offers optimized connectivity for latency sensitive 
participants. This lower latency is achieved through more advanced 
network equipment, such as advanced hardware and switching components, 
which translates to increased costs to the Exchange.
    The Exchange launched trading on March 1, 2019. Thus, at the time 
that the 14 Members who elected to purchase connectivity to the 
Exchange, the Exchange was untested and unproven, and had 0% market 
share of the U.S. options industry. For September of 2019, the Exchange 
had only a 0.81% market share of the U.S. options industry in Equity/
Exchange Traded Fund (``ETF'') classes according to the OCC.\36\ For 
September of 2019, the

[[Page 59884]]

Exchange's affiliate, MIAX, had only 3.87% market share of the U.S. 
options industry in Equity/ETF classes according to the OCC.\37\ For 
September of 2019, the Exchange's affiliate, MIAX PEARL, had only 5.30% 
market share of the U.S. options industry in Equity/ETF classes 
according to the OCC.\38\ The Exchange is not aware of any evidence 
that a combined market share less than 10% provides the Exchange with 
anti-competitive pricing power. This, in addition to the fact that not 
all broker-dealers are required to connect to all options exchanges, 
supports the Exchange's conclusion that its pricing is constrained by 
competition. Certainly, an untested and unproven exchange, with less 
than 1% market share in any month, and no rule or requirement that a 
market participant must join or connect to it, does not have anti-
competitive pricing power, with respect to setting the pricing for the 
Dedicated Connections or the Shared Connections. If the Exchange were 
to attempt to establish unreasonable connectivity pricing, then no 
market participant would join or connect. Therefore, since 28 distinct 
Members joined MIAX Emerald and 14 of those distinct Members purchased 
additional connectivity to the Exchange, all knowing, in advance, the 
connectivity fees, the Exchange believes the Proposed Fees are 
reasonable, equitable, and not unfairly discriminatory.
---------------------------------------------------------------------------

    \36\ See Exchange Market Share of Equity Products--2019, The 
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
    \37\ Id.
    \38\ Id.
---------------------------------------------------------------------------

    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
Members of the Exchange if the Exchange were to establish unreasonable 
and uncompetitive price increases for its connectivity alternatives. 
Market participants choose to connect to a particular exchange and 
because it is a choice, MIAX Emerald must set reasonable connectivity 
pricing, otherwise prospective members would not connect and existing 
members would disconnect or connect through a third-party reseller of 
connectivity. No options market participant is required by rule, 
regulation, or competitive forces to be a Member of the Exchange. As 
evidence of the fact that market participants can and do disconnect 
from exchanges based on connectivity pricing, see the R2G Services LLC 
(``R2G'') letter based on BOX's proposed rule changes to increase its 
connectivity fees (SR-BOX-2018-24, SR-BOX-2018-37, and SR-BOX-2019-
04).\39\ The R2G Letter stated, ``[w]hen BOX instituted a $10,000/month 
price increase for connectivity; we had no choice but to terminate 
connectivity into them as well as terminate our market data 
relationship. The cost benefit analysis just didn't make any sense for 
us at those new levels.'' Accordingly, this example shows that if an 
exchange sets too high of a fee for connectivity and/or market data 
services for its relevant marketplace, market participants can choose 
to disconnect from the exchange.
---------------------------------------------------------------------------

    \39\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman, 
Acting Secretary, Commission, dated March 27, 2019 (the ``R2G 
Letter'').
---------------------------------------------------------------------------

    Several market participants choose not to be Members of the 
Exchange and choose not to access the Exchange, and several market 
participants are proposing to access the Exchange indirectly through 
another market participant. To illustrate, the Exchange has only 34 
total Members (including all such Members' affiliate Members). However, 
Cboe Exchange, Inc. (``Cboe'') has over 200 members,\40\ Nasdaq ISE, 
LLC has approximately 100 members,\41\ and NYSE American LLC has over 
80 members.\42\ If all market participants were required to be Members 
of the Exchange and connect directly to the Exchange, the Exchange 
would have over 200 Members, in line with Cboe's total membership. But 
it does not. The Exchange only has 34 Members.
---------------------------------------------------------------------------

    \40\ See Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002831.pdf); Form 1/A, filed August 30, 
2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002833.pdf); 
Form 1/A, filed July 24, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002781.pdf); Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/data/1473845/999999999718007832/9999999997-18-007832-index.htm).
    \41\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
    \42\ See https://www.nyse.com/markets/american-options/membership#directory.
---------------------------------------------------------------------------

    Further, since there are 41 distinct members amongst all three 
exchanges, and only 28 of those distinct members decided to become 
Members of MIAX Emerald, there were 13 distinct members that decided 
not to become Members of MIAX Emerald. This further reinforces the fact 
that all market participants are not required to be Members of the 
Exchange and are not required to connect to the Exchange. It is a 
choice whether to join and it is a choice to connect. Therefore, the 
Exchange believes that the Proposed Fees are fair, equitable, and non-
discriminatory, as the fees are competitive.
    With respect to the now MIAX Emerald Members that had Shared 
Connections in place as of August 1, 2018 (via a previously purchased 
Shared Connection from MIAX or MIAX PEARL), the Exchange finds it 
compelling that all of those Members continued to purchase those Shared 
Connections after August 1, 2018, when MIAX and MIAX PEARL increased 
the connectivity fees for the Shared Connections to the current amounts 
proposed by the Exchange herein. In particular, the Exchange believes 
that the Proposed Fees for the Shared Connections are reasonable 
because MIAX and MIAX PEARL, which charge the same amount for the 
Shared Connections, did not lose any Members (or the number of Shared 
Connections each Member purchased) or non-Member Shared Connections 
when MIAX and MIAX PEARL proposed to increase the connectivity fees for 
the Shared Connections on August 1, 2018. For example, with respect to 
the Shared Connections maintained by now Members of MIAX Emerald who 
had Shared Connections in place as of July 2018, 12 Members purchased 
1Gb connections. The vast majority of those Members purchased multiple 
such connections, the number of connections depending on their 
throughput requirements based on the volume of their quote/order 
traffic and market data needs associated with their business model. 
After the fee increase, beginning August 1, 2018, the same 12 Members 
purchased 1Gb connections. Furthermore, the total number of connections 
did not decrease from July to August.
    Further, with respect to the Shared Connections maintained by now 
Members of MIAX Emerald who had Shared Connections in place as of July 
2018, of those Members and non-Members that bought multiple 
connections, no firm dropped any connections beginning August 1, 2018, 
when MIAX and MIAX PEARL increased its fees. Furthermore, the Exchange 
understands that MIAX and MIAX PEARL did not receive any official 
comment letters or complaints from any now Members of MIAX Emerald who 
had Shared Connections in place as of July 2018 regarding the increased 
fees regarding how the change was unreasonable, unduly burdensome, or 
would negatively impact their competitiveness amongst other market 
participants. These facts, coupled with the discussion above, showing 
that it is not necessary to join and/or connect to all options 
exchanges and market participants can disconnect if pricing is

[[Page 59885]]

set too high (the R2G example),\43\ demonstrate that the Exchange's 
fees are constrained by competition and are reasonable and not contrary 
to the Law of Demand. Therefore, the Exchange believes that the 
Proposed Fees are fair, equitable, and non-discriminatory, as the fees 
are competitive.
---------------------------------------------------------------------------

    \43\ See supra note 39.
---------------------------------------------------------------------------

    The Exchange believes that the Proposed Fees are equitably 
allocated among Members and non-Members, as evidenced by the fact that 
the fees are allocated across all connectivity alternatives according 
to the Exchange's costs to provide such alternatives, and there is not 
a disproportionate number of Members purchasing any alternative--14 
Members have 1Gb (primary/secondary) connections; 14 Members have 10Gb 
ULL (primary/secondary) connections; 3 Members have 10Gb (disaster 
recovery) connections; and 11 Members have 1Gb (disaster recovery) 
connections, or some combination of multiple various connections.
    Further, the Exchange believes that the fees are equitably 
allocated as the users of the higher bandwidth connections consume the 
most resources of the Exchange. Also, these firms account for the vast 
majority of the Exchange's trading volume. The purchasers of the 10Gb 
ULL connectivity account for approximately 76% of the volume on the 
Exchange. For example, for all of September 2019, 2.2 million contracts 
of the 2.9 million contracts executed were done by the top market 
making firms on the Exchange in simple (non-complex) volume. The 
Exchange further believes that the fees are equitably allocated, as the 
amount of the fees for the various connectivity alternatives are 
directly related to the actual costs associated with providing the 
respective connectivity alternatives. That is, the cost to the Exchange 
of providing a 1Gb network connection is significantly lower than the 
cost to the Exchange of providing a 10Gb ULL network connection. 
Pursuant to its extensive cost review described above, the Exchange 
believes that the average cost to provide a 10Gb ULL network connection 
is approximately 4 to 6 times more than the average cost to provide a 
1Gb connection. The simple hardware and software component costs alone 
of a 10Gb ULL connection are not 4 to 6 times more than the 1Gb 
connection. Rather, it is the associated premium-product level network 
monitoring, reporting, and support services costs that accompany a 10Gb 
ULL connection which cause it to be 4 to 6 times more costly to provide 
than the 1Gb connection. As discussed above, the Exchange 
differentiates itself by offering a ``premium-product'' network 
experience, as an operator of a high performance, ultra-low latency 
network with unparalleled system throughput, which network can support 
access to three distinct options markets and multiple competing market-
makers having affirmative obligations to continuously quote over 
750,000 distinct trading products (per exchange), and the capacity to 
handle approximately 18 million quote messages per second. The 
``premium-product'' network experience enables users of 10Gb ULL 
connections to receive the network monitoring and reporting services 
for those approximately 750,000 distinct trading products. There is a 
significant, quantifiable amount of research and development (``R&D'') 
effort, employee compensation and benefits expense, and other expense 
associated with providing the high touch network monitoring and 
reporting services that are utilized by the 10Gb ULL connections 
offered by the Exchange. These value add services are fully-discussed 
herein, and the actual costs associated with providing these services 
are the basis for the differentiated amount of the fees for the various 
connectivity alternatives.
    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act because the Proposed Fees will permit recovery of 
the Exchange's costs and will not result in excessive or supra-
competitive profit. The Proposed Fees will allow the Exchange to 
recover a portion (less than all) of the costs incurred by the Exchange 
associated with providing and maintaining the necessary hardware and 
other infrastructure as well as network monitoring and support services 
in order to provide the network connectivity services. The Exchange 
believes that it is reasonable and appropriate to establish its fees 
charged for use of its connectivity at a level that will partially 
offset the costs to the Exchange associated with maintaining and 
enhancing a state-of-the-art exchange network infrastructure in the 
U.S. options industry.
    The costs associated with making the network accessible to Exchange 
Members and non-Members, through the expansion associated with new 
Shared Connections and Dedicated Connections, as well as the general 
expansion of a state-of-the-art infrastructure, are extensive, have 
increased year-over-year in the past two years, and are projected to 
increase year-over-year in the future. This is due to several factors, 
including costs associated with maintaining and expanding a team of 
highly-skilled network engineers, fees charged by the Exchange's third-
party data center operator, and costs associated with projects and 
initiatives designed to improve overall network performance and 
stability, through the Exchange's R&D efforts.
    In order to provide more detail and to quantify the Exchange's 
costs, the Exchange notes that costs are associated with the 
infrastructure and headcount to fully-support the advances in 
infrastructure and expansion of network level services, including 
customer monitoring, alerting and reporting. The Exchange incurs 
technology expenses related to establishing and maintaining Information 
Security services, enhanced network monitoring and customer reporting, 
as well as Regulation SCI mandated processes, associated with its 
network technology. Additionally, the Exchange incurred costs in the 
expansion/buildout of the network leading up to the launch of 
operations, and the network maintenance costs continue to increase 
year-over-year. While some of the expense is fixed, much of the expense 
is not fixed, and thus increases as the number of connections increase. 
For example, new 1Gb and 10Gb ULL connections require the purchase of 
additional hardware to support those connections as well as enhanced 
monitoring and reporting of customer performance that MIAX Emerald and 
its affiliates provide. And 10Gb ULL connections require the purchase 
of specialized, more costly hardware. Further, as the total number of 
all connections increase, MIAX Emerald and its affiliates need to 
increase their data center footprint and consume more power, resulting 
in increased costs charged by their third-party data center provider. 
Accordingly, the cost to MIAX Emerald and its affiliates is not 
entirely fixed. Just the initial fixed cost buildout of the network 
infrastructure of MIAX Emerald and its affiliates, including both 
primary/secondary sites and disaster recovery, was over $30 million.
    A more detailed breakdown of the expense increases since the 
initial phases of the buildout of the Exchange over two years ago 
include the following: With respect to the network, there has been an 
approximate 70% increase in technology-related personnel costs in 
infrastructure, due to expansion of services/support (increase of 
approximately $800,000); an approximate 10% increase in datacenter 
costs due to price increases and footprint expansion (increase of 
approximately $500,000); an

[[Page 59886]]

approximate 5% increase in vendor-supplied dark fiber due to price 
increases and expanded capabilities (increase of approximately 
$25,000); and a 30% increase in market data connectivity fees (increase 
of approximately $200,000). Of note, regarding market data connectivity 
fee cost, this is the cost associated with MIAX Emerald consuming 
connectivity/content from the equities markets in order to operate the 
Exchange, causing MIAX Emerald to effectively pay its competitors for 
this connectivity.
    There was also significant capital expenditures over this same 
period to upgrade and enhance the underlying technology components. The 
Exchange believes that it is reasonable and appropriate to establish 
its fees charged for use of its connectivity at a level that will 
partially offset the costs to the Exchange associated with the 
buildout, maintenance, and enhancement of its network infrastructure.
    Further, because the costs of operating a data center are 
significant and not economically feasible for the Exchange, the 
Exchange does not operate its own data centers, and instead contracts 
with a third-party data center provider. The Exchange notes that 
larger, dominant exchange operators own/operate their data centers, 
which offers them greater control over their data center costs. Because 
those exchanges own and operate their data centers as profit centers, 
the Exchange is subject to additional costs. Connectivity fees, which 
are charged for accessing the Exchange's data center network 
infrastructure, are directly related to the network and offset costs 
such costs.
    Further, the Exchange invests significant resources in network R&D 
to improve the overall performance and stability of its network. For 
example, the Exchange has a number of network monitoring tools (some of 
which were developed in-house, and some of which are licensed from 
third-parties), that continually monitor, detect, and report network 
performance, many of which serve as significant value-adds to the 
Exchange's Members and enable the Exchange to provide a high level of 
customer service. These tools detect and report performance issues, and 
thus enable the Exchange to proactively notify a Member (and the SIPs) 
when the Exchange detects a problem with a Member's connectivity. In 
fact, the Exchange often receives inquiries from other industry 
participants regarding the status of networking issues outside of the 
Exchange's own network environment that are impacting the industry as a 
whole via the SIPs, including inquiries from regulators, because the 
Exchange has a superior, state-of the-art network that, through its 
enhanced monitoring and reporting solutions, often detects and 
identifies industry-wide networking issues ahead of the SIPs. The 
Exchange also incurs costs associated with the maintenance and 
improvement of existing tools and the development of new tools.
    Certain recently developed network aggregation and monitoring tools 
provide the Exchange with the ability to measure network traffic with a 
much more granular level of variability. This is important as Exchange 
Members demand a higher level of network determinism and the ability to 
measure variability in terms of single digit nanoseconds. Also, routine 
R&D projects to improve the performance of the network's hardware 
infrastructure result in additional cost. As an example, in the last 
year, R&D efforts resulted in a performance improvement, requiring the 
purchase of new equipment to support that improvement, and thus 
resulting in increased costs in the hundreds of thousands of dollars 
range. In sum, the costs associated with maintaining and enhancing a 
state-of-the-art exchange network in the U.S. options industry is a 
significant expense for the Exchange that also increases year-over-
year, and thus the Exchange believes that it is reasonable to offset a 
portion of those costs through establishing network connectivity fees, 
which are designed to recover those costs, as proposed herein. Overall, 
the Proposed Fees are projected to offset only a portion of the 
Exchange's network connectivity costs. The Exchange invests in and 
offers a superior network infrastructure as part of its overall options 
exchange services offering, resulting in significant costs associated 
with maintaining this network infrastructure, which are directly tied 
to the amount of the connectivity fees that must be charged to access 
it, in order to recover those costs. In fact, the Exchange often 
receives inquiries from other industry participants regarding the 
status of networking issues outside of the Exchange's own network 
environment that are impacting the industry as a whole via the SIPs, 
including inquiries from regulators, because the Exchange has a 
superior, state-of the-art network that, through its enhanced 
monitoring and reporting solutions, often detects and identifies 
industry-wide networking issues ahead of the SIPs. As detailed in the 
Exchange's 2018 Audited Unconsolidated Financial Statements, the 
Exchange only has four primary sources of revenue: Transaction fees, 
access fees (of which network connectivity constitute the majority), 
regulatory fees, and market data fees. Accordingly, the Exchange must 
cover all of its expenses from these four primary sources of revenue.
    The Proposed Fees are fair and reasonable because they will not 
result in excessive pricing or supra-competitive profit, when comparing 
the total annual expense of MIAX Emerald associated with providing 
network connectivity services versus the total projected annual revenue 
of the Exchange associated with providing network connectivity 
services. For 2018, the total annual expense associated with providing 
network connectivity services for MIAX Emerald was approximately $4.7 
million. The $4.7 million in total annual expense is comprised of the 
following, all of which are directly related to the provision of 
network connectivity services by MIAX Emerald to its respective Members 
and non-Members: (1) Third-party expense, relating to fees paid by MIAX 
Emerald to third-parties for certain products and services; and (2) 
internal expense, relating to the internal costs of MIAX Emerald to 
provide the network connectivity services. All such expenses are more 
fully-described below, and are mapped to MIAX Emerald's 2018 Statements 
of Operations and Member's Deficit (the ``2018 Financial Statements''). 
The $4.7 million in total annual expense is directly related to the 
provision of network connectivity services and not any other product or 
service offered by the Exchange. It does not, as the Third IEX Letter 
baselessly claims, include general costs of operating matching systems 
and other trading technology. (And as stated previously, no expense 
amount was allocated twice.) As discussed, the Exchange conducted an 
extensive cost review in which the Exchange analyzed every expense item 
in the Exchange's general expense ledger (this includes over 150 
separate and distinct expense items) to determine whether each such 
expense relates to the provision of network connectivity services, and, 
if such expense did so relate, what portion (or percentage) of such 
expense actually supports the provision of network connectivity 
services, and thus bears a relationship that is, ``in nature and 
closeness,'' directly related to network connectivity services. The sum 
of all such portions of expenses represents the total actual baseline 
cost of the Exchange to provide network connectivity services.
    As discussed above, the Exchange differentiates itself by offering 
a ``premium-product'' network

[[Page 59887]]

experience, as an operator of a high performance, ultra-low latency 
network with unparalleled system throughput, which network can support 
access to three distinct options markets and multiple competing market-
makers having affirmative obligations to continuously quote over 
750,000 distinct trading products (per exchange), and the capacity to 
handle approximately 18 million quote messages per second. The 
``premium-product'' network experience enables users of 10Gb ULL 
connections to receive the network monitoring and reporting services 
for those approximately 750,000 distinct trading products. Thus, the 
Exchange is acutely aware of and can isolate the actual costs 
associated with providing such a service to its customers, a 
significant portion of which relates to the premium, value-add customer 
network monitoring and support services that accompany the service, as 
fully-described above. IEX, on the other hand, does not offer such a 
network, and thus has no legal basis to offer a qualified opinion on 
the Exchange's costs associated with operating such a network. In fact, 
IEX differentiates itself as a provider of low cost connectivity 
solutions to an intentionally delayed trading platform--quite the 
opposite from the Exchange. Thus, there is no relevant comparison 
between IEX network connectivity costs and the Exchange's network 
connectivity costs, and IEX's attempt to do so in the Third IEX Letter 
is ill-informed and self-serving.\44\
---------------------------------------------------------------------------

    \44\ See Third IEX Letter, pg. 5.
---------------------------------------------------------------------------

    For 2018, total third-party expense, relating to fees paid by MIAX 
Emerald to third-parties for certain products and services for the 
Exchange to be able to provide network connectivity services, was 
$728,246. This includes, but is not limited to, a portion of the fees 
paid to: (1) Equinix, for data center services, for the primary, 
secondary, and disaster recovery locations of the MIAX Emerald trading 
system infrastructure; (2) Zayo Group Holdings, Inc. (``Zayo'') for 
connectivity services (fiber and bandwidth connectivity) linking MIAX 
Emerald's office locations in Princeton, NJ and Miami, FL to all data 
center locations; (3) Secure Financial Transaction Infrastructure 
(``SFTI''), \45\ which supports connectivity and feeds for the entire 
U.S. options industry; (4) various other services providers (including 
Thompson Reuters, NYSE, Nasdaq, and Internap), which provide content, 
connectivity services, and infrastructure services for critical 
components of options connectivity; and (5) various other hardware and 
software providers (including Dell and Cisco, which support the 
production environment in which Members and non-Members connect to the 
network to trade, receive market data, etc.).
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    \45\ In fact, on October 22, 2019, the Exchange was notified by 
SFTI that it is again raising its fees charged to the Exchange by 
approximately 11%, without having to show that such fee change 
complies with the Act by being reasonable, equitably allocated, and 
not unfairly discriminatory. It is unfathomable to the Exchange 
that, given the critical nature of the infrastructure services 
provided by SFTI, that its fees are not required to be rule-filed 
with the Commission pursuant to Section 19(b)(1) of the Act and Rule 
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively.
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    All of the third-party expense described above is contained in the 
information technology and communication costs line item under the 
section titled ``Operating Expenses Incurred Directly or Allocated From 
Parent'' of the 2018 Financial Statements. For clarity, only a portion 
of all fees paid to such third-parties is included in the third-party 
expense herein (only the portion that actually supports the provision 
of network connectivity services), and no expense amount is allocated 
twice. Accordingly, MIAX Emerald does not allocate its entire 
information technology and communication costs to the provision of 
network connectivity services.
    For 2018, total internal expense, relating to the internal costs of 
MIAX Emerald to provide the network connectivity services, was 
$4,031,491. This includes, but is not limited to, costs associated 
with: (1) Employee compensation and benefits for full-time employees 
that support network connectivity services, including staff in network 
operations, trading operations, development, system operations, 
business, etc., as well as staff in general corporate departments (such 
as legal, regulatory, and finance) that support those employees and 
functions; (2) depreciation and amortization of hardware and software 
used to provide network connectivity services, including equipment, 
servers, cabling, purchased software and internally developed software 
used in the production environment to support connectivity for trading; 
and (3) occupancy costs for leased office space for staff that support 
network connectivity services. The breakdown of these costs is more 
fully-described below.
    All of the internal expenses described above are contained in the 
following line items under the section titled ``Operating Expenses 
Incurred Directly or Allocated From Parent'' in the 2018 Financial 
Statements: (1) Employee compensation and benefits; (2) Depreciation 
and amortization; and (3) Occupancy costs. For clarity, only a portion 
of all such internal expenses are included in the internal expense 
herein (only the portion that supports the provision of network 
connectivity services), and no expense amount is allocated twice. 
Accordingly, MIAX Emerald does not allocate its entire costs contained 
in those line items to the provision of network connectivity services.
    MIAX Emerald's employee compensation and benefits expense relating 
to providing network connectivity services was $3,262,226, which is 
only a portion of the $10,193,837 total expense for employee 
compensation and benefits that is stated in the 2018 Financial 
Statements. MIAX Emerald's depreciation and amortization expense 
relating to providing network connectivity services was $416,807, which 
is only a portion of the $616,785 total expense for depreciation and 
amortization that is stated in the 2018 Financial Statements. MIAX 
Emerald's occupancy expense relating to providing network connectivity 
services was $352,458, which is only a portion of the $732,720 total 
expense for occupancy that is stated in the 2018 Financial Statements.
    The total projected MIAX Emerald revenue for providing network 
connectivity services, on a full year run rate, is $3.0 million. 
However, since MIAX Emerald was launched on March 1, 2019, it did not 
start collecting revenue for network connectivity services until March 
1, 2019. Thus, for 2018, MIAX Emerald's expense for providing network 
connectivity services was approximately $4.7 million, while its revenue 
for providing network connectivity services was $0. For 2019, MIAX 
Emerald projects 10 full months of revenue for network connectivity 
services (March 1-December 31), of $2.5 million, however it also 
projects increased expense for providing network connectivity services 
for 2019, as compared to 2018. Nevertheless, utilizing 2018 expense 
figures, for 2019, MIAX Emerald's expense for providing network 
connectivity services would be approximately $4.7 million, while its 
revenue for providing network connectivity services would be $2.5 
million. On a fully annualized basis, utilizing 2018 expense figures 
and 2019 projected revenue extrapolated out to a full year run rate, 
MIAX Emerald's expense for providing network connectivity services 
would be approximately $4.7 million, while its revenue for providing 
network connectivity services would be $3

[[Page 59888]]

million. Accordingly, for both 2018 and 2019, the total MIAX Emerald 
projected revenue for providing network connectivity services during 
2018 ($0) and during 2019 ($2.5 million) is less than total actual and 
projected MIAX Emerald expense for providing network connectivity 
services for 2018 ($4.7 million) and 2019 (greater than $4.7 million).
    For the avoidance of doubt, none of the expenses included herein 
relating to the provision of network connectivity services relate to 
the provision of any other services offered by MIAX Emerald. Stated 
differently, no expense amount of the Exchange is allocated twice.
    Accordingly, the Proposed Fee Increases are fair and reasonable 
because they do not result in excessive pricing or supra-competitive 
profit, when comparing the actual network connectivity costs to the 
Exchange versus the projected network connectivity annual revenue, 
including the increased amount. Additional information on overall 
revenue and expense of the Exchange can be found in the Exchange's 2018 
Financial Statements.
    The Exchange also believes its proposal to offer 10Gb ULL 
connections as dedicated connections furthers the objectives of Section 
6(b)(5) of the Act \46\ in that it is designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general to protect investors and the public interest and is not 
designed to permit unfair discrimination between customer, issuers, 
brokers and dealers. In particular, for the Dedicated Connection, the 
Exchange's MENI is configured to provide Members and non-Members of the 
Exchange network connectivity to the trading platforms, market data 
systems, test systems, and disaster recovery facilities of the 
Exchange. Any Member or non-Member can purchase a Dedicated Connection. 
The Exchange determined to design its network architecture in a manner 
that offered 10Gb ULL connections as dedicated connections (as opposed 
to shared connections) in order to provide cost saving opportunities 
for itself and for its Members, by reducing the amount of equipment 
that the Exchange would have to purchase and to which the Members would 
have to connect. A dedicated 10Gb ULL connection does not offer any 
unfair advantage over a shared 10GB ULL connection, as is being offered 
solely as a cost-saving measure to the Exchange and its Members.
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    \46\ 15 U.S.C. 78f(b)(5).
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    The Exchange notes that other exchanges have similar connectivity 
alternatives for their participants, including similar low-latency 
connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE Arca, Inc. 
(``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq ISE, LLC 
(``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet 
connectivity alternatives to each of their participants.\47\ The 
Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities,\48\ however the Exchange also notes that the 
Exchange's 10Gb ULL connection is dedicated solely to one market (the 
Exchange) whereas the Exchange believes that other exchanges offer a 
shared 10Gb ULL connection to multiple markets. While MIAX Emerald's 
proposed connectivity fees are substantially lower than the fees 
charged by Phlx, ISE, Arca and NYSE American, MIAX Emerald believes 
that it offers significant value to Members over other exchanges in 
terms of network monitoring and reporting, which MIAX Emerald believes 
is a competitive advantage, and differentiates its connectivity versus 
connectivity to other exchanges. Additionally, the Exchange's proposed 
connectivity fees to its disaster recovery facility are within the 
range of the fees charged by other exchanges for similar connectivity 
alternatives.\49\
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    \47\ See Phlx and ISE Rules, General Equity and Options Rules, 
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of 
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and 
$15,000 for each 10Gb Ultra connection, which the equivalent of the 
Exchange's 10Gb ULL connection. See also NYSE American Fee Schedule, 
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE 
American and Arca each charge a monthly fee of $5,000 for each 1Gb 
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX 
circuit, which the equivalent of the Exchange's 10Gb ULL connection.
    \48\ Id.
    \49\ See Nasdaq ISE, Options Rules, Options 7, Pricing Schedule, 
Section 11.D. (charging $3,000 for disaster recovery testing & 
relocation services); see also Cboe Exchange, Inc. (``Cboe'') Fees 
Schedule, p. 14, Cboe Command Connectivity Charges (charging a 
monthly fee of $2,000 for a 1Gb disaster recovery network access 
port and a monthly fee of $6,000 for a 10Gb disaster recovery 
network access port).
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B. Self-Regulatory Organization's Statement on 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, the 
Exchange has received no official complaints from Members, non-Members 
(extranets and service bureaus), third-parties that purchase the 
Exchange's connectivity and resell it, and customers of those 
resellers, that the Exchange's fees or the Proposed Fees are negatively 
impacting or would negatively impact their abilities to compete with 
other market participants or that they are placed at a disadvantage.
    The Exchange believes that the Proposed Fees do not place certain 
market participants at a relative disadvantage to other market 
participants because the connectivity pricing is associated with 
relative usage of the various market participants and does not impose a 
barrier to entry to smaller participants. As described above, the less 
expensive 1Gb direct connection is generally purchased by market 
participants that utilize less bandwidth. The market participants that 
purchase 10Gb ULL direct connections utilize the most bandwidth, and 
those are the participants that consume the most resources from the 
network. Accordingly, the Proposed Fees do not favor certain categories 
of market participants in a manner that would impose a burden on 
competition; rather, the allocation of the Proposed Fees reflects the 
network resources consumed by the various size of market participants--
lowest bandwidth consuming members pay the least, and highest bandwidth 
consuming members pays the most, particularly since higher bandwidth 
consumption translates to higher costs to the Exchange.
Inter-Market Competition
    The Exchange believes the Proposed Fees do not place an undue 
burden on competition on other SROs that is not necessary or 
appropriate. In particular, options market participants are not forced 
to connect to (and purchase market data from) all options exchanges, as 
shown by the number of Members of the Exchange as compared to the much 
greater number of members at other options exchanges (as described 
above). Not only does MIAX Emerald have less than half the number of 
members as certain other options exchanges, but there are also a number 
of the Exchange's Members that do not connect directly to MIAX Emerald. 
There are a number of large market makers and broker-dealers that are 
members of other options exchange but not Members of MIAX Emerald. 
Additionally, other exchanges have similar connectivity alternatives 
for their participants, including similar

[[Page 59889]]

low-latency connectivity, but with much higher rates to connect.\50\ 
The Exchange is also unaware of any assertion that its existing fee 
levels or the Proposed Fees would somehow unduly impair its competition 
with other options exchanges. To the contrary, if the fees charged are 
deemed too high by market participants, they can simply disconnect.
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    \50\ See supra note 47.
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    While the Exchange recognizes the distinction between connecting to 
an exchange and trading at the exchange, the Exchange notes that it 
operates in a highly competitive options market in which market 
participants can readily connect and trade with venues they desire. In 
such an environment, the Exchange must continually adjust its fees to 
remain competitive with other exchanges. The Exchange believes that the 
proposed changes reflect this competitive environment.

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,\51\ and Rule 19b-4(f)(2) \52\ 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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    \51\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \52\ 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-EMERALD-2019-35 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-EMERALD-2019-35. 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 (http://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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-EMERALD-2019-35 and should be submitted 
on or before November 27, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24186 Filed 11-5-19; 8:45 am]
BILLING CODE 8011-01-P


