[Federal Register Volume 86, Number 158 (Thursday, August 19, 2021)]
[Notices]
[Pages 46726-46733]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17759]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92662; File No. SR-EMERALD-2021-25]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Its Fee Schedule To Adopt a Tiered-Pricing Structure for Additional 
Limited Service MIAX Emerald Express Interface Ports

August 13, 2021.
    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 August 2, 2021, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the Exchange's Fee 
Schedule (the ``Fee Schedule'') to amend certain port fees.
    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.

[[Page 46727]]

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule to adopt a tiered-
pricing structure for additional Limited Service MIAX Emerald Express 
Interface (``MEI'') Ports \3\ available to Market Makers.\4\ The 
Exchange believes a tiered-pricing structure will encourage Market 
Makers to be more efficient and economical when determining how to 
connect to the Exchange. This should also enable the Exchange to better 
monitor and provide access to the Exchange's network to ensure 
sufficient capacity and headroom in the System.\5\
---------------------------------------------------------------------------

    \3\ The MIAX Emerald Express Interface (``MEI'') is a connection 
to the MIAX Emerald System that enables Market Makers to submit 
simple and complex electronic quotes to MIAX Emerald. See the 
Definitions Section of the Fee Schedule.
    \4\ The term ``Market Makers'' refers to Lead Market Makers 
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered 
Market Makers (``RMMs'') collectively. See the Definitions Section 
of the Fee Schedule and Exchange Rule 100.
    \5\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See the Definitions 
Section of the Fee Schedule and Exchange Rule 100.
---------------------------------------------------------------------------

Additional Limited Service MEI Port Tiered-Pricing Structure
    The Exchange proposes to amend the fees for additional Limited 
Service MEI Ports. Currently, the Exchange allocates two (2) Full 
Service MEI Ports \6\ and two (2) Limited Service MEI Ports \7\ per 
matching engine \8\ to which each Market Maker connects. Market Makers 
may also request additional Limited Service MEI Ports for each matching 
engine to which they connect. The Full Service MEI Ports, Limited 
Service MEI Ports and the additional Limited Service MEI Ports all 
include access to the Exchange's primary and secondary data centers and 
its disaster recovery center. Market Makers may request additional 
Limited Service MEI Ports for which they are assessed a $100 monthly 
fee for each additional Limited Service MEI Port for each matching 
engine.
---------------------------------------------------------------------------

    \6\ ``Full Service MEI Ports'' means a port which provides 
Market Makers with the ability to send Market Maker simple and 
complex quotes, eQuotes, and quote purge messages to the MIAX 
Emerald System. Full Service MEI Ports are also capable of receiving 
administrative information. Market Makers are limited to two Full 
Service MEI Ports per Matching Engine. See the Definitions Section 
of the Fee Schedule.
    \7\ ``Limited Service MEI Ports'' means a port which provides 
Market Makers with the ability to send simple and complex eQuotes 
and quote purge messages only, but not Market Maker Quotes, to the 
MIAX Emerald System. Limited Service MEI Ports are also capable of 
receiving administrative information. Market Makers initially 
receive two Limited Service MEI Ports per Matching Engine. See the 
Definitions Section of the Fee Schedule.
    \8\ ``Matching Engine'' means a part of the MIAX Emerald 
electronic system that processes options orders and trades on a 
symbol-by-symbol basis. Some Matching Engines will process option 
classes with multiple root symbols, and other Matching Engines may 
be dedicated to one single option root symbol (for example, options 
on SPY may be processed by one single Matching Engine that is 
dedicated only to SPY). A particular root symbol may only be 
assigned to a single designated Matching Engine. A particular root 
symbol may not be assigned to multiple Matching Engines. See the 
Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------

    The Exchange now proposes to move from a flat monthly fee per 
additional Limited Service MEI Port for each matching engine to a 
tiered-pricing structure per additional Limited Service MEI Ports for 
each matching engine under which the monthly fee would vary depending 
on the number of additional Limited Service MEI Ports the Market Maker 
elects to purchase. Specifically, the Exchange will continue to provide 
the first and second additional Limited Service MEI Ports for each 
matching engine free of charge, as described above, per the initial 
allocation of Limited Service MEI Ports that Market Makers receive. 
Specifically, (i) the third and fourth additional Limited Service MEI 
Ports for each matching engine will increase from the current flat 
monthly fee of $100 to $200 per port; (ii) the fifth and sixth 
additional Limited Service MEI Ports for engine matching engine will 
increase from the current flat monthly fee of $100 to $300 per port; 
and (iii) the seventh to the twelfth additional Limited Service MEI 
Ports will increase from the current monthly flat fee of $100 to $400 
per port (collectively, the ``Proposed Access Fees'').
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \9\ in general, and furthers 
the objectives of Section 6(b)(4) of the Act \10\ 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 \11\ 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 customers, issuers, 
brokers and dealers.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues if they 
deem fee levels at a particular venue to be excessive. In such an 
environment, the Exchange must continually adjust its fees for services 
and products, in addition to order flow, to remain competitive with 
other exchanges. The Exchange believes that the proposed changes 
reflect this competitive environment.
    The Exchange believes the proposal to move from a flat fee per 
month to a tiered-pricing structure is reasonable, equitably allocated 
and not unfairly discriminatory because the Exchange believes the 
proposed structure would encourage firms to be more economical and 
efficient in the number of additional Limited Service MEI Ports they 
purchase. The Exchange believes this will enable the Exchange to better 
monitor and provide access to the Exchange's network to ensure 
sufficient capacity and headroom in the System.
    The Exchange notes that the firms that are primarily order routers 
seeking best-execution do not utilize Limited Service MEI Ports on MIAX 
Emerald. Therefore, the fees described in the proposed tiered-pricing 
structure will only be allocated to market making firms that engage in 
advanced trading strategies and typically request multiple Limited 
Service MEI Ports. Accordingly, the firms engaged in market making 
business generate higher costs by utilizing more of the Exchange's 
resources. The market making firms that purchase higher amounts of 
Limited Service MEI Ports tend to have specific business oriented 
market making and taking strategies, as opposed to firms simply 
engaging in best-execution order routing business. The use of such 
additional Limited Service MEI Ports is entirely voluntary.
    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 requirements of the Act that fees be 
reasonable, equitably allocated, not unfairly discriminatory, and not 
create an undue burden on competition among market participants. The 
Exchange believes this high standard is especially important when an 
exchange imposes various access fees for market participants to access 
an exchange's marketplace. The Exchange deems port fees to be access 
fees. It records these fees as part of its ``Access Fees'' revenue

[[Page 46728]]

in its financial statements. The Exchange believes that it is important 
to demonstrate that these fees are based on its costs and reasonable 
business needs. The Exchange believes the Proposed Access Fees will 
allow the Exchange to offset expense the Exchange has and will incur, 
and that the Exchange is providing sufficient transparency (as 
described below) into how the Exchange determined to charge such fees. 
Accordingly, the Exchange is providing an analysis of its revenues, 
costs, and profitability associated with the Proposed Access Fees. This 
analysis includes information regarding its methodology for determining 
the costs and revenues associated with the Proposed Access Fees.
    In order to determine the Exchange's costs to provide the access 
services associated with the Proposed Access Fees, 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 Proposed Access Fees, and, if 
such expense did so relate, what portion (or percentage) of such 
expense actually supports the access services. The sum of all such 
portions of expenses represents the total cost of the Exchange to 
provide the access services associated with the Proposed Access Fees. 
For the avoidance of doubt, no expense amount was allocated twice. The 
Exchange is also providing detailed information regarding the 
Exchange's cost allocation methodology--namely, information that 
explains the Exchange's rationale for determining that it was 
reasonable to allocate certain expenses described in this filing 
towards the cost to the Exchange to provide the access services 
associated with the Proposed Access Fees.
    In order to determine the Exchange's projected revenues associated 
with the Proposed Access Fees, the Exchange analyzed the number of 
Market Makers currently utilizing Limited Service MEI Ports, and, 
utilizing a recent monthly billing cycle representative of 2021 monthly 
revenue, extrapolated annualized revenue on a going-forward basis. The 
Exchange does not believe it is appropriate to factor into its analysis 
future revenue growth or decline into its projections for purposes of 
these calculations, given the uncertainty of such projections due to 
the continually changing access needs of market participants, discounts 
that can be achieved due to lower trading volume and vice versa, market 
participant consolidation, etc. Additionally, the Exchange similarly 
does not factor into its analysis future cost growth or decline. The 
Exchange is presenting its revenue and expense associated with the 
Proposed Access Fees in this filing in a manner that is consistent with 
how the Exchange presents its revenue and expense in its Audited 
Unconsolidated Financial Statements. The Exchange's most recent Audited 
Unconsolidated Financial Statement is for 2020. However, since the 
revenue and expense associated with the Proposed Access Fees were not 
in place in 2020 or for the first seven months of 2021, the Exchange 
believes its 2020 Audited Unconsolidated Financial Statement is not 
useful for analyzing the reasonableness of the total annual revenue and 
costs associated with the Proposed Access Fees. Accordingly, the 
Exchange believes it is more appropriate to analyze the Proposed Access 
Fees utilizing its 2021 revenue and costs, as described herein, which 
utilize the same presentation methodology as set forth in the 
Exchange's previously-issued Audited Unconsolidated Financial 
Statements. Based on this analysis, the Exchange believes that the 
Proposed Access Fees are fair and reasonable because they will not 
result in excessive pricing or supra-competitive profit when comparing 
the Exchange's total annual expense associated with providing the 
services associated with the Proposed Access Fees versus the total 
projected annual revenue the Exchange will collect for providing those 
services.
* * * * *
    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'').\12\ On May 21, 2019, the Commission issued the Staff Guidance 
on SRO Rule Filings Relating to Fees.\13\ Accordingly, the Exchange 
believes that the Proposed Access 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 comprehensive revenue and cost data and analysis) that they 
are fair and reasonable because they will not result in excessive 
pricing or supra-competitive profit; and (iv) utilize a cost-based 
justification framework that is substantially similar to a framework 
previously used by the Exchange, and its affiliates MIAX PEARL, LLC 
(``MIAX Pearl'') and Miami International Securities Exchange, LLC 
(``MIAX''), to establish or increase other non-transaction fees.\14\ 
Accordingly, the Exchange believes that the Commission should find that 
the Proposed Access Fees are consistent with the Act.
---------------------------------------------------------------------------

    \12\ 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).
    \13\ 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'').
    \14\ See Securities Exchange Act Release Nos. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01) (proposal to 
increase connectivity fees); 90980 (January 25, 2021), 86 FR 7602 
(January 29, 2021) (SR-MIAX-2021-02) (proposal to increase 
connectivity fees).
---------------------------------------------------------------------------

* * * * *
    As of July 31, 2021, the Exchange had a market share of only 4.15% 
of the U.S. equity options industry for the month of July 2021.\15\ The 
Exchange is not aware of any evidence that a market share of 
approximately 4-5% provides the Exchange with anti-competitive pricing 
power. If the Exchange were to attempt to establish unreasonable 
pricing, then no market participant would join or access the Exchange, 
and existing market participants would discontinue all or some of their 
access services.
---------------------------------------------------------------------------

    \15\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited July 31, 2021).
---------------------------------------------------------------------------

    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their access (or not initially 
access an exchange) if an exchange were to establish prices for its 
non-transaction fees that, in the determination of such market 
participant, did not make business or economic sense for such market 
participant to access such exchange. 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 drop their access to exchanges based on non-transaction fee pricing, 
R2G Services LLC (``R2G'') filed a comment letter after BOX's proposed 
rule changes to increase its connectivity fees (SR-BOX-2018-24, SR-BOX-
2018-37, and SR-BOX-2019-04). 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.'' Similarly, the Exchange noted 
in a recent filing that once MIAX Emerald issued a notice that it was 
instituting MEI Port fees, among other

[[Page 46729]]

non-transaction fees, one MIAX Emerald Member dropped its access to 
MIAX Emerald as a result of those fees.\16\ Accordingly, these examples 
show that if an exchange sets too high of a fee for ports and/or other 
non-transaction fees, including other access fees, for its relevant 
marketplace, market participants can choose to drop their access to 
such exchange.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 91460 (April 2, 
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network 
Connectivity Fees, and Increase the Number of Additional Limited 
Service MIAX Emerald Express Interface Ports Available to Market 
Makers) (adopting tiered MEI Port fee structure ranging from $5,000 
to $20,500 per month).
---------------------------------------------------------------------------

    In order to provide more detail and to quantify the Exchange's 
costs associated with providing access to the Exchange in general, the 
Exchange notes that there are material costs associated with providing 
the infrastructure and headcount to fully-support access to the 
Exchange. The Exchange incurs technology expense 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. While some 
of the expense is fixed, much of the expense is not fixed, and thus 
increases as the services associated with the Proposed Access Fees 
increase. For example, new Members to the Exchange may require the 
purchase of additional hardware to support those Members as well as 
enhanced monitoring and reporting of customer performance that the 
Exchange and its affiliates provide. Further, as the total number 
Members increases, the Exchange and its affiliates may 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 the Exchange and its affiliates to provide 
access to its System for market participants is not fixed. The Exchange 
believes the Proposed Access Fees are reasonable in order to offset a 
portion of the costs to the Exchange associated with providing access 
to its network infrastructure.
    The Exchange only has four primary sources of revenue: Transaction 
fees, access fees (which includes the Proposed Access Fees), regulatory 
fees, and market data fees. Accordingly, the Exchange must cover all of 
its expenses from these four primary sources of revenue.
    The Exchange believes that the Proposed Access Fees are fair and 
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the 
Exchange projects to incur in connection with providing these access 
services versus the total annual revenue that the Exchange projects to 
collect in connection with services associated with the Proposed Access 
Fees. For 2021,\17\ the total annual expense for providing the access 
services associated with the Proposed Access Fees is projected to be 
approximately $0.88 million. The approximately $0.88 million in 
projected total annual expense is comprised of the following, all of 
which are directly related to the access services associated with the 
Proposed Access Fees: (1) Third-party expense, relating to fees paid by 
the Exchange to third-parties for certain products and services; and 
(2) internal expense, relating to the internal costs of the Exchange to 
provide the services associated with the Proposed Access Fees.\18\ As 
noted above, the Exchange believes it is more appropriate to analyze 
the Proposed Access Fees utilizing its 2021 revenue and costs, which 
utilize the same presentation methodology as set forth in the 
Exchange's previously-issued Audited Unconsolidated Financial 
Statements.\19\ The $0.88 million in projected total annual expense is 
directly related to the access services associated with the Proposed 
Access Fees, and not any other product or service offered by the 
Exchange. It does not include general costs of operating matching 
systems and other trading technology, and no expense amount was 
allocated twice.
---------------------------------------------------------------------------

    \17\ The Exchange has not yet finalized its 2021 year end 
results.
    \18\ The percentage allocations used in this proposed rule 
change may differ from past filings from the Exchange or its 
affiliates due to, among other things, changes in expenses charged 
by third-parties, adjustments to internal resource allocations, and 
different system architecture of the Exchange as compared to its 
affiliates.
    \19\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the 
information technology and communication costs line item under the 
section titled ``Operating Expenses Incurred Directly or Allocated 
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing 
its financial statements for 2018. See Securities Exchange Act 
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020) 
(SR-EMERALD-2019-39). Accordingly, the third-party expense described 
in this filing is attributed to the same line item for the 
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
---------------------------------------------------------------------------

    As discussed, the Exchange conducted an extensive cost review in 
which the Exchange analyzed expense items 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 access 
services associated with the Proposed Access Fees, and, if such expense 
did so relate, what portion (or percentage) of such expense actually 
supports those services, and thus bears a relationship that is, ``in 
nature and closeness,'' directly related to those services. The sum of 
all such portions of expenses represents the total cost of the Exchange 
to provide access services associated with the Proposed Access Fees.
    For 2021, total third-party expense, relating to fees paid by the 
Exchange to third-parties for certain products and services for the 
Exchange to be able to provide the access services associated with the 
Proposed Access Fees, is projected to be $0.05 million. 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 Exchange's trading system infrastructure; (2) Zayo 
Group Holdings, Inc. (``Zayo'') for network services (fiber and 
bandwidth products and services) linking the Exchange's office 
locations in Princeton, New Jersey and Miami, Florida, to all data 
center locations; (3) Secure Financial Transaction Infrastructure 
(``SFTI''),\20\ 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 network services; and (5) 
various other hardware and software providers (including Dell and 
Cisco, which support the production environment in which Members 
connect to the network to trade, receive market data, etc.). For 
clarity, only a portion of all fees paid to such third-parties is 
included in the third-party expense herein, and no expense amount is 
allocated twice. Accordingly, the Exchange does not allocate its entire 
information technology and communication costs to the access services 
associated with the Proposed Access Fees.
---------------------------------------------------------------------------

    \20\ 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.

---------------------------------------------------------------------------

[[Page 46730]]

    The Exchange believes it is reasonable to allocate such third-party 
expense described above towards the total cost to the Exchange to 
provide the access services associated with the Proposed Access Fees. 
In particular, the Exchange believes it is reasonable to allocate the 
identified portion of the Equinix expense because Equinix operates the 
data centers (primary, secondary, and disaster recovery) that host the 
Exchange's network infrastructure. This includes, among other things, 
the necessary storage space, which continues to expand and increase in 
cost, power to operate the network infrastructure, and cooling 
apparatuses to ensure the Exchange's network infrastructure maintains 
stability. Without these services from Equinix, the Exchange would not 
be able to operate and support the network and provide the access 
services associated with the Proposed Access Fees to its Members and 
their customers. The Exchange did not allocate all of the Equinix 
expense toward the cost of providing the access services associated 
with the Proposed Access Fees, only that portion which the Exchange 
identified as being specifically mapped to providing the access 
services associated with the Proposed Access Fees, approximately 2.05% 
of the total applicable Equinix expense. The Exchange believes this 
allocation is reasonable because it represents the Exchange's actual 
cost to provide the access services associated with the Proposed Access 
Fees, and not any other service, as supported by its cost review.
    The Exchange believes it is reasonable to allocate the identified 
portion of the Zayo expense because Zayo provides the internet, fiber 
and bandwidth connections with respect to the network, linking the 
Exchange with its affiliates, MIAX Pearl and MIAX, as well as the data 
center and disaster recovery locations. As such, all of the trade data, 
including the billions of messages each day per exchange, flow through 
Zayo's infrastructure over the Exchange's network. Without these 
services from Zayo, the Exchange would not be able to operate and 
support the network and provide the access services associated with the 
Proposed Access Fees. The Exchange did not allocate all of the Zayo 
expense toward the cost of providing the access services associated 
with the Proposed Access Fees, only the portion which the Exchange 
identified as being specifically mapped to providing the Proposed 
Access Fees, approximately 1.64% of the total applicable Zayo expense. 
The Exchange believes this allocation is reasonable because it 
represents the Exchange's actual cost to provide the access services 
associated with the Proposed Access Fees, and not any other service, as 
supported by its cost review.
    The Exchange believes it is reasonable to allocate the identified 
portions of the SFTI expense and various other service providers' 
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense 
because those entities provide connectivity and feeds for the entire 
U.S. options industry, as well as the content, connectivity services, 
and infrastructure services for critical components of the network. 
Without these services from SFTI and various other service providers, 
the Exchange would not be able to operate and support the network and 
provide access to its Members and their customers. The Exchange did not 
allocate all of the SFTI and other service providers' expense toward 
the cost of providing the access services associated with the Proposed 
Access Fees, only the portions which the Exchange identified as being 
specifically mapped to providing the access services associated with 
the Proposed Access Fees, approximately 2.05% of the total applicable 
SFTI and other service providers' expense. The Exchange believes this 
allocation is reasonable because it represents the Exchange's actual 
cost to provide the access services associated with the Proposed Access 
Fees.
    The Exchange believes it is reasonable to allocate the identified 
portion of the other hardware and software provider expense because 
this includes costs for dedicated hardware licenses for switches and 
servers, as well as dedicated software licenses for security monitoring 
and reporting across the network. Without this hardware and software, 
the Exchange would not be able to operate and support the network and 
provide access to its Members and their customers. The Exchange did not 
allocate all of the hardware and software provider expense toward the 
cost of providing the access services associated with the Proposed 
Access Fees, only the portions which the Exchange identified as being 
specifically mapped to providing the access services associated with 
the Proposed Access Fees, approximately 1.23% of the total applicable 
hardware and software provider expense. The Exchange believes this 
allocation is reasonable because it represents the Exchange's actual 
cost to provide the access services associated with the Proposed Access 
Fees.
    For 2021, total projected internal expense, relating to the 
internal costs of the Exchange to provide the access services 
associated with the Proposed Access Fees, is projected to be $0.83 
million. This includes, but is not limited to, costs associated with: 
(1) Employee compensation and benefits for full-time employees that 
support the access services associated with the Proposed Access Fees, 
including staff in network operations, trading operations, development, 
system operations, and business that support those employees and 
functions (including an increase as a result of the higher determinism 
project); (2) depreciation and amortization of hardware and software 
used to provide the access services associated with the Proposed Access 
Fees, including equipment, servers, cabling, purchased software and 
internally developed software used in the production environment to 
support the network for trading; and (3) occupancy costs for leased 
office space for staff that provide the access services associated with 
the Proposed Access Fees. The breakdown of these costs is more fully-
described below. For clarity, only a portion of all such internal 
expenses are included in the internal expense herein, and no expense 
amount is allocated twice. Accordingly, the Exchange does not allocate 
its entire costs contained in those items to the access services 
associated with the Proposed Access Fees.
    The Exchange believes it is reasonable to allocate such internal 
expense described above towards the total cost to the Exchange to 
provide the access services associated with the Proposed Access Fees. 
In particular, the Exchange's employee compensation and benefits 
expense relating to providing the access services associated with the 
Proposed Access Fees is projected to be approximately $0.76 million, 
which is only a portion of the $9.74 million total projected expense 
for employee compensation and benefits. The Exchange believes it is 
reasonable to allocate the identified portion of such expense because 
this includes the time spent by employees of several departments, 
including Technology, Back Office, Systems Operations, Networking, 
Business Strategy Development (who create the business requirement 
documents that the Technology staff use to develop network features and 
enhancements), and Trade Operations. As part of the extensive cost 
review conducted by the Exchange, the Exchange reviewed the amount of 
time spent by each employee on matters relating to the provision of 
access services associated with the Proposed Access Fees. Without these 
employees,

[[Page 46731]]

the Exchange would not be able to provide the access services 
associated with the Proposed Access Fees to its Members and their 
customers. The Exchange did not allocate all of the employee 
compensation and benefits expense toward the cost of the access 
services associated with the Proposed Access Fees, only the portions 
which the Exchange identified as being specifically mapped to providing 
the access services associated with the Proposed Access Fees, 
approximately 7.81% of the total applicable employee compensation and 
benefits expense. The Exchange believes this allocation is reasonable 
because it represents the Exchange's actual cost to provide the access 
services associated with the Proposed Access Fees, and not any other 
service, as supported by its cost review.
    The Exchange's depreciation and amortization expense relating to 
providing the services associated with the Proposed Access Fees is 
projected to be $0.06 million, which is only a portion of the $3.13 
million total projected expense for depreciation and amortization. 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 and provide the 
access services associated with the Proposed Access Fees. Without this 
equipment, the Exchange would not be able to operate the network and 
provide the access services associated with the Proposed Access Fees to 
its Members and their customers. The Exchange did not allocate all of 
the depreciation and amortization expense toward the cost of providing 
the access services associated with the Proposed Access Fees, only the 
portion which the Exchange identified as being specifically mapped to 
providing the access services associated with the Proposed Access Fees, 
approximately 1.92% of the total applicable depreciation and 
amortization expense, as these access services would not be possible 
without relying on such. The Exchange believes this allocation is 
reasonable because it represents the Exchange's actual cost to provide 
the access services associated with the Proposed Access Fees, and not 
any other service, as supported by its cost review.
    The Exchange's occupancy expense relating to providing the services 
associated with the Proposed Access Fees is projected to be $0.01 
million, which is only a portion of the $0.52 million total projected 
expense for occupancy. The Exchange believes it is reasonable to 
allocate the identified portion of such expense because such expense 
represents the portion of the Exchange's cost to rent and maintain a 
physical location for the Exchange's staff who operate and support the 
network, including providing the access services associated with the 
Proposed Access Fees. This amount consists primarily of rent for the 
Exchange's Princeton, NJ office, as well as various related costs, such 
as physical security, property management fees, property taxes, and 
utilities. The Exchange operates its Network Operations Center 
(``NOC'') and Security Operations Center (``SOC'') from its Princeton, 
New Jersey office location. A centralized office space is required to 
house the staff that operates and supports the network. The Exchange 
currently has approximately 150 employees. Approximately two-thirds of 
the Exchange's staff are in the Technology department, and the majority 
of those staff have some role in the operation and performance of the 
access services associated with the Proposed Access Fees. Without this 
office space, the Exchange would not be able to operate and support the 
network and provide the access services associated with the Proposed 
Access Fees to its Members and their customers. Accordingly, the 
Exchange believes it is reasonable to allocate the identified portion 
of its occupancy expense because such amount represents the Exchange's 
actual cost to house the equipment and personnel who operate and 
support the Exchange's network infrastructure and the access services 
associated with the Proposed Access Fees. The Exchange did not allocate 
all of the occupancy expense toward the cost of providing the access 
services associated with the Proposed Access Fees, only the portion 
which the Exchange identified as being specifically mapped to operating 
and supporting the network, approximately 1.93% of the total applicable 
occupancy expense. The Exchange believes this allocation is reasonable 
because it represents the Exchange's cost to provide the access 
services associated with the Proposed Access Fees, and not any other 
service, as supported by its cost review.
    The Exchange notes that a material portion of its total overall 
expense is allocated to the provision of access services (including 
connectivity, ports, and trading permits). The Exchange believes this 
is reasonable and in line, as the Exchange operates a technology-based 
business that differentiates itself from its competitors based on its 
trading systems that rely on access to a high performance network, 
resulting in significant technology expense. Over two-thirds of 
Exchange staff are technology-related employees. The majority of the 
Exchange's expense is technology-based. As described above, the 
Exchange has only four primary sources of fees to recover their costs; 
thus, the Exchange believes it is reasonable to allocate a material 
portion of their total overall expense towards access fees.
    Accordingly, based on the facts and circumstances presented, the 
Exchange believes that its provision of the access services associated 
with the Proposed Access Fees will not result in excessive pricing or 
supra-competitive profit. To illustrate, on a going-forward, fully-
annualized basis, the Exchange projects that annualized revenue for 
providing the access services associated with the Proposed Access Fees 
would be approximately $2.07 million per annum, based on a recent 
billing cycle. The Exchange projects that its annualized expense for 
providing the services associated with the Proposed Access Fees will be 
approximately $0.88 million per annum. Accordingly, on a fully-
annualized basis, the Exchange believes its total projected revenue for 
providing the access services associated with the Proposed Access Fees 
will not result in excessive pricing or supra-competitive profit, as 
the Exchange will make a profit margin of approximately 58% ($2.07 
million in total revenue minus $.088 [sic] million in expense = $1.19 
million in profit per annum). Additionally, this profit margin does not 
take into account the cost of capital expenditures (``CapEx'') the 
Exchange projects to spend each year on CapEx going forward.
    For the avoidance of doubt, none of the expenses included herein 
relating to the access services associated with the Proposed Access 
Fees relate to the provision of any other services offered by the 
Exchange or its affiliates. Stated differently, no expense amount of 
the Exchange is allocated twice. The Exchange notes that, with respect 
to expenses associated with the Exchange's affiliates, MIAX Pearl and 
MIAX, those expenses are accounted for separately and are not included 
within the scope of this filing. Stated differently, no expense amount 
of the Exchange is also allocated to MIAX Pearl or MIAX.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to allocate the respective

[[Page 46732]]

percentages of each expense category described above towards the total 
cost to the Exchange of operating and supporting the network, including 
providing the access services associated with the Proposed Access Fees 
because the Exchange performed a line-by-line item analysis of all the 
expenses of the Exchange, and has determined the expenses that directly 
relate to providing access to the Exchange. Further, the Exchange notes 
that, without the specific third-party and internal items listed above, 
the Exchange would not be able to provide the access services 
associated with the Proposed Access Fees to its Members and their 
customers. Each of these expense items, including physical hardware, 
software, employee compensation and benefits, occupancy costs, and the 
depreciation and amortization of equipment, have been identified 
through a line-by-line item analysis to be integral to providing access 
services. The Proposed Access Fees are intended to recover the 
Exchange's costs of providing access to its System. Accordingly, the 
Exchange believes that the Proposed Access Fees are fair and reasonable 
because they do not result in excessive pricing or supra-competitive 
profit, when comparing the actual costs to the Exchange versus the 
projected annual revenue from the Proposed Access Fees.
    The Exchange believes the proposed changes are reasonable, 
equitably allocated and not unfairly discriminatory, and do not result 
in a ``supra-competitive'' \21\ profit. Of note, the Guidance defines 
``supra-competitive profit'' as profits that exceed the profits that 
can be obtained in a competitive market.\22\ With the proposed changes, 
the Exchange anticipates it will have a profit margin of approximately 
58% based on the Proposed Access Fees. Based on the 2020 Audited 
Financial Statements of competing options exchanges (since the 2021 
Audited Financial Statements will likely not become publicly available 
until early July 2022, after the Exchange has submitted this filing), 
the Exchange's profit margin is similar to or below the operating 
profit margins of other competing exchanges. For example, Nasdaq ISE, 
LLC's (``ISE'') operating profit margin for all of 2020 was 
approximately 85%; Nasdaq PHLX LLC's (``PHLX'') operating profit margin 
for all of 2020 was approximately 49%; Nasdaq's operating profit margin 
for all of 2020 was approximately 62%; NYSE Arca, Inc.'s (``Arca'') 
operating profit margin for all of 2020 was approximately 55%; NYSE 
American LLC's (``Amex'') operating profit margin for all of 2020 was 
approximately 59%; Cboe's operating profit margin for all of 2020 was 
approximately 74%; and BZX's operating profit margin for all of 2020 
was approximately 52%.
---------------------------------------------------------------------------

    \21\ See supra note 13.
    \22\ See id.
---------------------------------------------------------------------------

    The Exchange further believes its proposed fees are reasonable, 
equitably allocated and not unfairly discriminatory because the 
Exchange believes that it benefits overall competition in the 
marketplace to allow relatively new entrants like the Exchange and its 
affiliates, MIAX Pearl and MIAX, to propose fees that may help these 
new entrants recoup their substantial investment in building out costly 
infrastructure. The Exchange and its affiliates have historically set 
their fees purposefully low in order to attract business and market 
share. The Exchange notes that the concept of a tiered-pricing 
structure for ports is not new or novel.\23\
---------------------------------------------------------------------------

    \23\ See Cboe BZX Exchange, Inc. (``BZX'') Options Fee Schedule, 
Options Logical Port Fees, Ports with Bulk Quoting Capabilities 
(charging $1,500/month for the 1st and 2nd port, $2,500/month for 
the 3rd port or more); Cboe Exchange, Inc. (``Cboe'') Fee Schedule, 
Logical Connectivity Fees (charging $750/month per port for BOE/FIX 
Logical Ports 1 to 5 and $800/month per port for BOE/FIX Logical 
Ports greater than 5; charging $1,500/month per port for BOE Bulk 
Logical Ports 1 to 5, $2,500/month per port for BOE Bulk Logical 
Ports 6 to 30, and $3,000/month per port for BOE Bulk Logical Ports 
greater than 30); The Nasdaq Stock Market LLC (``Nasdaq''), Options 
7, Pricing Schedule, Section 3 Nasdaq Options Market--Ports and 
Other Services (charging $1,500/month per port for first 5 ports, 
$1,000/month per port for the next 15 ports, and $500/month per port 
for all ports over 20).
---------------------------------------------------------------------------

    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues if they 
deem fee levels at a particular venue to be excessive. In such an 
environment, the Exchange must continually adjust its fees for services 
and products, in addition to order flow, to remain competitive with 
other exchanges. The Exchange believes that the proposed changes 
reflect this competitive environment.
    The Exchange believes the proposal to move from a flat fee per 
month to a tiered-pricing structure is reasonable, equitably allocated 
and not unfairly discriminatory because the Exchange believes the 
proposed structure would encourage firms to be more economical and 
efficient in the number of Limited Service MEI Ports they purchase. The 
Exchange believes this will enable the Exchange to better monitor and 
provide access to the Exchange's network in order to ensure that the 
Exchange meets its obligations under the Act such that access to the 
Exchange is offered on terms that are not unfairly discriminatory, as 
well as to ensure sufficient capacity and headroom in the System.
    There is also no regulatory requirement that any market participant 
access any one options exchange, that each Market Maker access the 
Exchange utilizing more than the two free Limited Service MEI Ports 
that the Exchange provides, access the Exchange in a particular 
capacity, or trade any particular product offered on the Exchange. 
Moreover, membership is not a requirement to participate on the 
Exchange. A market participant may submit orders to the Exchange via a 
Sponsored User.\24\ Indeed, the Exchange is unaware of any one options 
exchange whose membership includes every registered broker-dealer. 
Based on a recent analysis conducted by Cboe, as of October 21, 2020, 
only three (3) of the broker-dealers, out of approximately 250 broker-
dealers, were members of at least one exchange that lists options for 
trading and were members of all 16 options exchanges.\25\ Additionally, 
the Cboe Fee Filing found that several broker-dealers were members of 
only a single exchange that lists options for trading and that the 
number of members at each exchange that trades options varies 
greatly.\26\
---------------------------------------------------------------------------

    \24\ See Exchange Rule 210. The Sponsored User is subject to the 
fees, if any, of the Sponsoring Member. The Exchange notes that the 
Sponsoring Member is not required to publicize, let alone justify or 
file with the Commission its fees, and as such could charge the 
Sponsored User any fees it deems appropriate, even if such fees 
would otherwise be considered supra-competitive, or otherwise 
potentially unreasonable or uncompetitive.
    \25\ See Securities Exchange Act Release No. 90333 (November 4, 
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105) (the 
``Cboe Fee Filing''). The Cboe Fee Filing cited to the October 2020 
Active Broker Dealer Report, provided by the Commission's Office of 
Managing Executive, on October 8, 2020.
    \26\ Id.
---------------------------------------------------------------------------

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.
    With respect to intra-market 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. As stated above, the Exchange does not believe 
its proposed pricing will impose

[[Page 46733]]

a barrier to entry to smaller participants and notes that the proposed 
pricing structure for is associated with relative usage of the various 
market participants. Firms that are primarily order routers seeking 
best-execution do not utilize Limited Service MEI Ports on MIAX Emerald 
and therefore will not pay the fees associated with the tiered-pricing 
structure. Rather, the fees described in the proposed tiered-pricing 
structure will only be allocated to market making firms that engage in 
advanced trading strategies and typically request multiple Limited 
Service MEI Ports. Accordingly, the firms engaged in market making 
business generate higher costs by utilizing more of the Exchange's 
resources. The market making firms that purchase higher amounts of 
Limited Service MEI Ports tend to have specific business oriented 
market making and taking strategies, as opposed to firms simply 
engaging in best-execution order routing business. Additionally, the 
use of such additional Limited Service MEI Ports is entirely voluntary.
    The Exchange also does not believe that the proposed rule change 
will result in any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, options market participants are not forced to access 
all options exchanges. The Exchange operates in a highly competitive 
environment, and as discussed above, its ability to price access and 
ports is constrained by competition among exchanges and third parties. 
There are other options markets of which market participants may access 
in order to trade options. There is also a possible range of 
alternative strategies, including routing to the exchange through 
another participant or market center or accessing the Exchange 
indirectly. For example, there are 15 other U.S. options exchanges, 
which the Exchange must consider in its pricing discipline in order to 
compete for market participants. In this competitive environment, 
market participants are free to choose which competing exchange to use 
to satisfy their business needs. As a result, the Exchange believes 
this proposed rule change permits fair competition among national 
securities exchanges. 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,\27\ and Rule 19b-4(f)(2) \28\ 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.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-EMERALD-2021-25 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-2021-25. 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-2021-25 and should be submitted 
on or before September 9, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17759 Filed 8-18-21; 8:45 am]
BILLING CODE 8011-01-P


