[Federal Register Volume 86, Number 189 (Monday, October 4, 2021)]
[Notices]
[Pages 54739-54749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21490]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93162; File No. SR-PEARL-2021-45]


Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX 
Pearl Options Fee Schedule To Adopt a Tiered-Pricing Structure for 
Certain Connectivity Fees

September 28, 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 September 24, 2021, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit 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 Pearl Options 
Fee Schedule (the ``Fee Schedule'') to amend certain connectivity fees.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
Pearl's principal office, and at the Commission's Public Reference 
Room.

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

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

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

1. Purpose
    The Exchange proposes to amend the MIAX Pearl Options Fee Schedule 
to adopt a tiered-pricing structure for the 10 gigabit (``Gb'') ultra-
low latency (``ULL'') fiber connection available to Members \3\ and 
non-Members. The Exchange believes a tiered-pricing structure will 
encourage Members and non-Members 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.\4\
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    \3\ The term ``Member'' means an individual or organization that 
is registered with the Exchange pursuant to Chapter II of Exchange 
Rules for purposes of trading on the Exchange as an ``Electronic 
Exchange Member'' or ``Market Maker.'' Members are deemed 
``members'' under the Exchange Act. See the Definitions Section of 
the Fee Schedule and Exchange Rule 100.
    \4\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
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    The Exchange initially filed this proposal on July 30, 2021, with 
the proposed fee changes effective

[[Page 54740]]

beginning August 1, 2021.\5\ The First Proposed Rule Change was 
published for comment in the Federal Register on August 17, 2021.\6\ 
The Commission received one comment letter on the First Proposed Rule 
Change.\7\ The Exchange has withdrawn the First Proposed Rule Change 
and now submits this proposal, which is immediately effective. This 
proposal provides additional justification for the proposed fee changes 
and addresses certain points raised in the single comment letter that 
submitted on the First Proposed Rule Change.
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    \5\ See Securities Exchange Act Release No. 92644 (August 11, 
2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36) (the ``First 
Proposed Rule Change'').
    \6\ Id.
    \7\ See Letter from Richard J. McDonald, Susquehanna 
International Group, LLC (``SIG''), to Vanessa Countryman, 
Secretary, Commission, dated September 7, 2021 (``SIG Comment 
Letter'').
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10Gb ULL Tiered-Pricing Structure
    The Exchange proposes to amend Sections (5)(a)-(b) of the Fee 
Schedule to provide for a tiered-pricing structure for 10Gb ULL 
connections for Members and non-Members. Currently, the Exchange 
assesses Members and non-Members a flat monthly fee of $10,000 per 10Gb 
ULL connection for access to the Exchange's primary and secondary 
facilities.
    The Exchange now proposes to move from a flat monthly fee per 
connection to a tiered-pricing structure under which the monthly fee 
would vary depending on the number of 10Gb ULL connections each Member 
or non-Member elects to purchase per exchange. Specifically, the 
Exchange proposes to decrease the fee for the first and second 10Gb ULL 
connections for each Member and non-Member from the current flat 
monthly fee of $10,000 to $9,000 per connection. To encourage more 
efficient connectivity usage, the Exchange proposes to increase the per 
connection fee for Members and non-Members that purchase more than two 
10Gb ULL connections. In particular, (i) the third and fourth 10Gb ULL 
connections for each Member or non-Member will increase from the 
current flat monthly fee of $10,000 to $11,000 per connection; and (ii) 
for the fifth 10Gb ULL connection, and each 10Gb ULL connection 
purchased by Members and non-Members thereafter, the fee will increase 
from the flat monthly fee of $10,000 to $13,000 per connection. The 
proposed 10Gb ULL tiered-pricing structure and fees are collectively 
referred to herein as the ``Proposed Access Fees.''
    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the MIAX Pearl APIs or market data feeds in the production 
environment. The Exchange proposes to pro-rate the fees when a Member 
or non-Member makes a change to the connectivity (by adding or deleting 
connections) with such pro-rated fees based on the number of trading 
days that the Member or non-Member has been credentialed to utilize any 
of the MIAX Pearl APIs or market data feeds in the production 
environment through such connection, divided by the total number of 
trading days in such month multiplied by the applicable monthly rate. 
The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the disaster recovery 
facility in each month during which the Member or non-Member has 
established connectivity with the disaster recovery facility.
    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 both the Exchange and its 
affiliate, Miami International Securities Exchange, LLC (``MIAX''), via 
a single, shared connection. 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 and MIAX via a single, 
shared connection will continue to only be assessed one monthly 
connectivity fee per connection, regardless of the trading platforms, 
market data systems, test systems, and disaster recovery facilities 
accessed via such connection.
    Pursuant to the proposed tiered-pricing structure, any firm that is 
a Member of both MIAX Pearl Options and MIAX and purchases three or 
four total 10Gb ULL connections, can effectively allocate one or two 
10Gb ULL connections to the Exchange at the lowest rate and the other 
one or two 10Gb ULL connections to MIAX at the lowest rate. This 
allocation will provide additional cost saving benefits to those 
Members and non-Members, due to the shared MENI infrastructure of MIAX 
Pearl and MIAX.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \8\ in general, and furthers 
the objectives of Section 6(b)(4) of the Act \9\ 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 \10\ in that it is designed to promote just 
and equitable principles of trade, remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general protect investors and the public interest and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers and dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4).
    \10\ 15 U.S.C. 78f(b)(5).
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    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 for the 10Gb ULL connection 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 connections 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 believes that the proposal to move to a tiered-pricing 
structure for its 10Gb ULL connections is reasonable, equitably 
allocated and not unfairly discriminatory because the majority of 
Members and non-Members that purchase 10Gb ULL connections will either 
save money or pay the same amount after the tiered-pricing structure is 
implemented. After the effective date of the First Proposed Rule Change 
on August 1, 2021, approximately 80% of the firms that purchased at 
least one 10Gb ULL connection experienced a decrease in their monthly 
connectivity fees, while only approximately 20% of firms experienced an 
increase in their

[[Page 54741]]

monthly connectivity fees as a result of the proposed tiered-pricing 
structure when compared to the flat monthly fee structure. To 
illustrate, firms that purchase only one 10Gb ULL connection per month 
used to pay the flat rate of $10,000 per month for that one 10Gb ULL 
connection. Pursuant to the proposed tiered-pricing structure, these 
firms will now pay $9,000 per month for that one 10Gb ULL connection, 
saving $1,000 per month or $12,000 annually. Further, firms that 
purchase two 10Gb ULL connections per month previously paid a flat rate 
of $20,000 per month ($10,000 x 2) for those two 10Gb ULL connections. 
Pursuant to the proposed tiered-pricing structure, these firms now pay 
$18,000 per month ($9,000 x 2) for those two 10Gb ULL connections, 
saving $2,000 per month or $24,000 annually. Additionally, any firm 
that is a Member of both MIAX Pearl Options and MIAX and purchases four 
total 10Gb ULL connections, can allocate two 10Gb ULL connections to 
MIAX Pearl Options at the $9,000 rate (saving $2,000 per month as 
compared to the flat fee) and two 10Gb ULL connections to MIAX at the 
$9,000 rate (saving an additional $2,000 per month as compared to the 
flat fee), for a total savings of $4,000 per month, or $48,000 
annually, due to the shared MENI infrastructure of MIAX Pearl Options 
and MIAX.
    The Exchange also notes that firms that primarily route orders 
seeking best-execution generally only need a limited number of 
connections to fulfill that obligation. Therefore, the connectivity 
costs will likely be lower for these firms based on the proposed 
tiered-pricing structure. The firms that engage in advanced trading 
strategies typically require multiple connections and, therefore, 
generate higher costs by utilizing more of the Exchange's resources. 
These firms experienced increased connectivity costs based on the 
proposed tiered-pricing structure, as shown by the 20% of firms that 
may have experienced an increase in their monthly connectivity fees. 
Additionally, the firms that purchase a higher amount of 10Gb ULL 
connections tend to have specific business-driven trading strategies, 
as opposed to firms engaging solely in order routing as part of their 
best-execution obligations.
    The Exchange also notes that, for firms that are primarily order 
routers seeking best-execution, a limited number of connections are 
needed. Therefore, the connectivity costs will likely be lower for 
these firms based on the proposed tiered-pricing structure. The firms 
that engage in advanced trading strategies typically require multiple 
connections and, therefore, generate higher costs by utilizing more of 
the Exchange's resources. These firms will absorb the increased 
connectivity cost based on the proposed tiered-pricing structure, as 
shown by the 20% of firms that will likely see an increase in their 
monthly fees. Additionally, the firms that purchase a higher amount of 
10Gb ULL connections tend to have specific business oriented market 
making and taking strategies, as opposed to firms simply engaging in 
best-execution order routing business.
    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 connectivity to be access 
fees. It records these fees as part of its ``Access Fees'' revenue 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 
nearly 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 to 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 revenue associated 
with the Proposed Access Fees, the Exchange analyzed the number of 
Members and non-Members currently utilizing the 10Gb ULL fiber 
connection, 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 representative of its 
current total annualized 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

[[Page 54742]]

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'').\11\ On May 21, 2019, the Commission issued the Staff Guidance 
on SRO Rule Filings Relating to Fees.\12\ 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 and MIAX 
Emerald, LLC (``MIAX Emerald''), to establish or increase other non-
transaction fees.\13\ Accordingly, the Exchange believes that the 
Proposed Access Fees are consistent with the Act.
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    \11\ 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).
    \12\ 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'').
    \13\ See Securities Exchange Act Release Nos. 91460 (April 2, 
2021), 86 FR 18349 (SR-EMERALD-2021-11) (proposal to adopt port 
fees, increase connectivity fees, and increase additional limited 
service ports); 91033 (February 1, 2021), 86 FR 8455 (February 5, 
2021) (SR-EMERALD-2021-03) (proposal to adopt trading permit fees); 
90980 (January 25, 2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-
2021-02) (proposal to increase connectivity fees).
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* * * * *
    As of September 23, 2021, the Exchange had a market share of only 
3.86% of the U.S. equity options industry for the month of September 
2021.\14\ The Exchange is not aware of any evidence that a market share 
of approximately 3-4% provides the Exchange with anti-competitive 
pricing power. If the Exchange were to attempt to establish 
unreasonable pricing for any of its means provided to access the 
Exchange, market participants may look to access the Exchange via other 
means such as through a third party service provider, or look to 
connect to the Exchange via a competing exchange with cheaper access 
alternatives that also provides routing services to the Exchange. In 
addition, existing market participants that are connected to the 
Exchange may choose to disconnect from the Exchange or reduce their 
number of connections to the Exchange as a means to reduce their 
overall costs.
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    \14\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited September 23, 2021).
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    The Exchange believes the proposed tiered-pricing structure for 
10Gb ULL connections is equitable and reasonable because the proposed 
highest tier is still less than fees charged for similar connectivity 
provided by other options exchanges with comparable market shares. For 
example, The Nasdaq Stock Market LLC (``NASDAQ'') (equity options 
market share of 7.79% as of September 22, 2021 for the month of 
September) \15\ charges a monthly fee of $10,000 per 10Gb fiber 
connection and $15,000 per 10Gb Ultra fiber connection.\16\ The highest 
tier of the Exchange's proposed fee structure for a 10Gb ULL connection 
is $2,000 per month less than NASDAQ and, unlike NASDAQ, the Exchange 
does not charge installation fees. The Exchange notes that the same 
connectivity fees described above for NASDAQ also apply to its 
affiliates, Nasdaq ISE, LLC (``ISE'') (equity options market share of 
6.47% as of September 22, 2021 for the month of September) \17\ and 
NASDAQ PHLX LLC (``PHLX'') (equity options market share of 11.25% as of 
September 22, 2021 for the month of September).\18\ NYSE American LLC 
(``Amex'') (equity options market share of 7.89% as of September 22, 
2021 for the month of September) \19\ charges $15,000 per connection 
initially plus $22,000 monthly per 10Gb LX LCN circuit connection.\20\ 
Again, the highest tier of the Exchange's proposed fee structure for a 
10Gb ULL connection is $9,000 per month lower than the Amex 
connectivity fee after the first month.
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    \15\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited September 22, 2021).
    \16\ See Nasdaq Stock Market LLC Rules, General 8: Connectivity, 
Section 1. Co-Location Services; Nasdaq ISE Rules, General 8: 
Connectivity.
    \17\ See id.
    \18\ See id. See also PHLX Rules, General 8: Connectivity.
    \19\ See supra note 15.
    \20\ See NYSE American Options Fee Schedule, Section IV.
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    In the each of the above cases, the Exchange's highest tier in the 
proposed tiered-pricing structure is significantly lower than that of 
competing options exchanges with similar market share. Further, as 
described in more detail below, those exchanges generate higher overall 
operating profit margins and higher ``access fees'' than the Exchange, 
even with this proposed fee change. Despite proposing lower or similar 
fees to that of competing options exchanges with similar market share, 
the Exchange believes that it provides a premium network experience to 
its Members and non-Members via a highly deterministic system, enhanced 
network monitoring and customer reporting, and a superior network 
infrastructure than markets with higher market shares and more 
expensive connectivity alternatives. Each of the connectivity rates in 
place at competing options exchanges were filed with the Commission for 
immediate effectiveness and remain in place today.
    The Exchange also notes that the higher connectivity fees described 
above for competing exchanges have been in place for years (over 8 
years in some cases), allowing those exchanges to derive significantly 
more revenue from their access fees. For example, in 2013, Amex adopted 
the pricing for its 10Gb LX LCN connection of $15,000 as an initial 
charge per connection and then a monthly fee of $20,000 per connection. 
The initial fee per connection is higher than the Exchange's highest 
proposed tier of $13,000 per connection, notwithstanding the fact that 
the monthly fee is $7,000 more than the Exchange's highest proposed 
tier and Amex's fees have been in place for nearly 8 years.\21\ NYSE 
Arca, Inc. (``Arca'') also adopted the exact same fees as Amex in 2013 
and has been collecting higher fees than the Exchange's current 
proposal for nearly 8 years as well (initial charge of $15,000 per 
connection and then a monthly fee of $20,000 per connection).\22\ Not 
only were the fees that Amex and Arca adopted in 2013 significantly 
higher than the fees the Exchange currently proposes, in 2016, Amex and 
Arca raised the monthly fees even higher to $22,000 per connection.\23\ 
Similarly, in 2013, NASDAQ adopted the pricing for its 10Gb Ultra 
connection of $1,500 per connection as a one-time installation fee and 
then a monthly fee of $15,000 per

[[Page 54743]]

connection.\24\ The Exchange's current proposal does not contemplate 
any sort of installation fee or one-time fee and the monthly fee for 
the Exchange's highest connectivity tier ($13,000) is $2,000 lower than 
the fees adopted 8 years ago by Amex, Arca and NASDAQ.
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    \21\ See Securities Exchange Act Release No. 70982 (December 4, 
2013), 78 FR 74197 (December 10, 2013) (SR-NYSEMKT-2013-97).
    \22\ See Securities Exchange Act Release No. 70981 (December 4, 
2013), 78 FR 74203 (December 10, 2013) (SR-NYSEARCA-2013-131).
    \23\ See Securities Exchange Act Release Nos. 79729 (January 4, 
2017), 82 FR 3061 (January 10, 2017) (SR-NYSEARCA-2016-172); 79728 
(January 4, 2017), 82 FR 3035 (January 10, 2017) (SR-NYSEMKT-2016-
126).
    \24\ See Securities Exchange Act Release No. 70129 (August 7, 
2013), 78 FR 49308 (August 13, 2013 (SR-NASDAQ-2013-099).
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    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's 
affiliate, MIAX Emerald, noted in a recent filing that once MIAX 
Emerald issued a notice that it was instituting MEI Port fees, among 
other non-transaction fees, one MIAX Emerald Member dropped its access 
to MIAX Emerald as a result of those fees.\25\ Accordingly, these 
examples show that if a market participant believes, based on its 
business model, that an exchange charges too high of a fee for 
connectivity and/or other non-transaction fees for its relevant 
marketplace, market participants can choose to drop their access to 
such exchange.
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    \25\ 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).
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    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 Members is not fixed. The Exchange believes the Proposed 
Access Fees are a reasonable attempt 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 and MIAX project 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,\26\ the total annual expense for 
providing the access services associated with the Proposed Access Fees 
(that is, the shared network connectivity of the Exchange and MIAX, but 
excluding MIAX Emerald) is projected to be approximately $15.9 million. 
The approximately $15.9 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 and MIAX to provide the services 
associated with the Proposed Access Fees.\27\ 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.\28\ The $15.9 
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.
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    \26\ The Exchange has not yet finalized its 2021 year end 
results.
    \27\ 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.
    \28\ 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 87876 (December 31, 2019), 85 
FR 757 (January 7, 2020) (SR-PEARL-2019-36). 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 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 
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 and MIAX 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 $3.9 million.

[[Page 54744]]

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 and MIAX's office locations in Princeton, New Jersey and 
Miami, Florida, to all data center locations; (3) Secure Financial 
Transaction Infrastructure (``SFTI''),\29\ which supports connectivity 
and feeds for the entire U.S. options industry; (4) various other 
services providers (including Thomson 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.).
---------------------------------------------------------------------------

    \29\ 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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    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 and MIAX do not allocate 
their entire information technology and communication costs to the 
access services associated with the Proposed Access Fees. Further, the 
Exchange notes that, with respect to the MIAX Pearl expenses included 
herein, those expenses only cover the MIAX Pearl options market; 
expenses associated with MIAX Pearl Equities are accounted for 
separately and are not included within the scope of this filing. As 
noted above, 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. 
Further, as part its ongoing assessment of costs and expenses, the 
Exchange recently conducted a periodic thorough review of its expenses 
and resource allocations which, in turn, resulted in a revised 
percentage allocations in this filing.
    The Exchange believes it is reasonable to allocate such third-party 
expense described above towards the total cost to the Exchange and MIAX 
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 62% 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.\30\
---------------------------------------------------------------------------

    \30\ As noted above, 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. Again, as part its ongoing assessment of 
costs and expenses, the Exchange recently conducted a periodic 
thorough review of its expenses and resource allocations which, in 
turn, resulted in a revised percentage allocations in this filing.
---------------------------------------------------------------------------

    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 and MIAX Emerald, 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 62% 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.\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    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 75% 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.\32\
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

    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

[[Page 54745]]

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 51% 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.\33\
---------------------------------------------------------------------------

    \33\ Id.
---------------------------------------------------------------------------

    For 2021, total projected internal expense, relating to the 
internal costs of the Exchange and MIAX to provide the access services 
associated with the Proposed Access Fees, is projected to be 
approximately $12 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, business, as well as staff in general 
corporate departments (such as legal, regulatory, and finance) 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 and MIAX do not allocate their 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 and MIAX's combined employee compensation 
and benefits expense relating to providing the access services 
associated with the Proposed Access Fees is projected to be 
approximately $6.1 million, which is only a portion of the 
approximately $12.6 million (for MIAX) and $9.2 million (for MIAX 
Pearl) 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), Trade Operations, 
Finance (who provide billing and accounting services relating to the 
network), and Legal (who provide legal services relating to the 
network, such as rule filings and various license agreements and other 
contracts). 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, 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 28% 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.\34\
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

    The Exchange's and MIAX's combined depreciation and amortization 
expense relating to providing the services associated with the Proposed 
Access Fees is projected to be $5.3 million, which is only a portion of 
the $4.8 million (for MIAX) and $2.9 million (for MIAX Pearl) 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 70% 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.\35\
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

    The Exchange's and MIAX's combined occupancy expense relating to 
providing the services associated with the Proposed Access Fees is 
projected to be approximately $0.6 million, which is only a portion of 
the $0.6 million (for MIAX) and $0.5 million (for MIAX Pearl) 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

[[Page 54746]]

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 53% 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.\36\
---------------------------------------------------------------------------

    \36\ Id.
---------------------------------------------------------------------------

    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 and MIAX have only four primary sources of fees to recover 
their costs; thus, the Exchange and MIAX believe 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 and MIAX project that annualized revenue 
for providing the access services associated with the Proposed Access 
Fees would be approximately $22 million per annum, based on a recent 
billing cycle.\37\ The Exchange and MIAX project that their annualized 
revenue for providing network connectivity services (all connectivity 
alternatives) to be approximately $22.8 million per annum. The Exchange 
and MIAX project that their annualized expense for providing network 
connectivity services (all connectivity alternatives) to be 
approximately $15.9 million per annum. Accordingly, on a fully-
annualized basis, the Exchange and MIAX believe their total projected 
revenue for the providing the access services associated with the 
Proposed Access Fees will not result in excessive pricing or supra-
competitive profit, as the Exchange and MIAX will make a profit margin 
of only approximately 30% inclusive of the Proposed Access Fees and all 
other connectivity alternatives ($22.8 million in total connectivity 
revenue minus $15.9 million in expense = $6.9 million in profit per 
annum). Additionally, this profit margin does not take into account the 
cost of capital expenditures (``CapEx'') the Exchange and MIAX 
historically spent or are projected to spend each year on CapEx going 
forward.
---------------------------------------------------------------------------

    \37\ The Exchange and MIAX also continue to project 
approximately $69,550 in monthly revenue through 1Gb connections; 
however, the Exchange and MIAX do not propose to adjust the fees for 
those connections at this time.
---------------------------------------------------------------------------

    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 MIAX. Stated differently, no expense amount of the Exchange 
is allocated twice. The Exchange notes that, with respect to the MIAX 
Pearl expenses included herein, those expenses only cover the MIAX 
Pearl options market; expenses associated with the MIAX Pearl equities 
market and the Exchange's affiliate, MIAX Emerald, 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 Equities or MIAX Emerald.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to allocate the respective 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 nearly every expenses of the 
Exchange, and has determined the expenses that directly relate to 
providing access to the Exchange and MIAX. 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 and MIAX's costs of providing access to their Systems. 
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'' \38\ profit. Of note, the Guidance defines 
``supra-competitive profit'' as profits that exceed the profits that 
can be obtained in a competitive market.\39\ With the proposed changes, 
the Exchange and MIAX anticipate that their collective connectivity 
profit margin will be approximately 30%, inclusive of the Proposed 
Access Fees and all other connectivity alternatives. In order to 
achieve a consistent, premium network performance, the Exchange must 
build out and continue to maintain a network that has the capacity to 
handle the message rate requirements of not only firms that consume 
minimal Exchange connectivity resources, but also those firms that most 
heavily consume Exchange connectivity resources, network consumers, and 
purchasers of 10Gb ULL connectivity, which generate billions of 
messages per day across the Exchange and MIAX Pearl. These billions of 
messages per day consume the Exchange's resources and significantly 
contribute to the overall network connectivity expense for storage and 
network transport capabilities. Given that 10Gb ULL purchasers utilize 
the most resources across the network, the Exchange believes that it is 
reasonable to operate at a profit margin of approximately 30% for 
connectivity, inclusive of the Proposed Access Fees and all other

[[Page 54747]]

connectivity alternatives. Such profit margin should enable the 
Exchange to continue to invest in its network and systems, maintain its 
current infrastructure, support future enhancements to network 
connectivity, and continue to offer enhanced customer reporting and 
monitoring services.
---------------------------------------------------------------------------

    \38\ See supra note 12.
    \39\ See id.
---------------------------------------------------------------------------

    While the proposed fees are similar to or less than that of other 
options exchanges,\40\ as discussed above, the incremental increase in 
revenue generated from the 30% profit margin for connectivity will 
allow the Exchange and MIAX Pearl to further invest in their system 
architecture and matching engine functionality to the benefit of all 
market participants. The ability to continue to invest in technology 
and systems will also enable the Exchange to improve the determinism 
and overall performance of not only its system connectivity, but 
overall performance including the resiliency and efficiency of its 
matching engines. The revenue generated under the proposed rule change 
would also provide the exchange with the resources necessary to further 
innovate and enhance its systems and seek additional improvements or 
functionality to offer market participants generally. The Exchange 
believes that these investments, in turn, will benefit all investors by 
encouraging other exchanges to further invest, innovate, and improve 
their own systems in response.
---------------------------------------------------------------------------

    \40\ See supra notes 16, 18 and 20.
---------------------------------------------------------------------------

    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 revenue that is derived from its 
access fees is in line with the revenue that is derived from access 
fees of competing exchanges. For example, the total revenue from 
``access fees'' \41\ for 2020 for MIAX was $15,805,000. MIAX projects 
that the total revenue from ``access fees'' for 2021 for MIAX will be 
$21,727,396, inclusive of the Proposed Access Fees described herein. 
Similarly, the total revenue from ``access fees'' \42\ for 2020 for 
MIAX Pearl was $11,422,000. MIAX Pearl projects that the total revenue 
from ``access fees'' for 2021 for MIAX Pearl will be $20,001,243, 
inclusive of the Proposed Access Fees described herein.
---------------------------------------------------------------------------

    \41\ As described in MIAX's Audited Financial Statements, fees 
for ``access services'' are assessed to exchange members for the 
opportunity to trade and use other related functions of the 
exchanges. See https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
    \42\ As described in MIAX Pearl's Audited Financial Statements, 
fees for ``access services'' are assessed to exchange members for 
the opportunity to trade and use other related functions of the 
exchanges. See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2100/21000460.pdf.
---------------------------------------------------------------------------

    The Exchange's projected revenue from access fees is still less 
than, or similar to, the access fee revenues generated by access fees 
charged by other U.S. options exchanges. For example, the Cboe 
Exchange, Inc. (``Cboe'') reported $70,893,000 in ``access and capacity 
fee'' \43\ revenue for 2020. Cboe C2 Exchange, Inc. (``C2'') reported 
$19,016,000 in ``access and capacity fee'' revenue for 2020.\44\ Cboe 
BZX Exchange, Inc. (``BZX'') reported $38,387,000 in ``access and 
capacity fee'' revenue for 2020.\45\ Cboe EDGX Exchange, Inc. 
(``EDGX'') reported $26,126,000 in ``access and capacity fee'' revenue 
for 2020.\46\ PHLX reported $20,817,000 in ``Trade Management 
Services'' revenue for 2019.\47\ The Exchange notes it is unable to 
compare ``access fee'' revenues with PHLX (or other affiliated NASDAQ 
exchanges) because after 2019, the ``Trade Management Services'' line 
item was bundled into a much larger line item in PHLX's Form 1, simply 
titled ``Market services.'' \48\
---------------------------------------------------------------------------

    \43\ According to Cboe, access and capacity fees represent fees 
assessed for the opportunity to trade, including fees for trading-
related functionality. See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \44\ See id.
    \45\ See id.
    \46\ See id.
    \47\ According to PHLX, ``Trade Management Services'' includes 
``a wide variety of alternatives for connectivity to and accessing 
[the PHLX] markets for a fee. These participants are charged monthly 
fees for connectivity and support in accordance with [PHLX's] 
published fee schedules.'' See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
    \48\ See Form 1 Amendment, at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf.
---------------------------------------------------------------------------

    The Exchange also believes that, based on the 2020 Audited 
Financial Statements of competing options exchanges, the Exchange's 
overall operating margin is in line with or less than the operating 
margins of competing options exchanges, including the revenue and 
expense associated with the Proposed Access Fees. For example, the 2020 
operating margin for MIAX was 46%. The 2020 operating margin for MIAX 
Pearl was -18%.\49\ Based on competing exchanges' Form 1 Amendments, 
ISE's operating profit margin for 2020 was approximately 85%; PHLX's 
operating profit margin for 2020 was approximately 49%; NASDAQ's 
operating profit margin for 2020 was approximately 62%; Arca's 
operating profit margin for 2020 was approximately 55%; Amex's 
operating profit margin for 2020 was approximately 59%; Cboe's 
operating profit margin for 2020 was approximately 74%; and BZX's 
operating profit margin for 2020 was approximately 52%.
---------------------------------------------------------------------------

    \49\ This information is provided in response to the SIG Comment 
Letter. See supra note 7.
---------------------------------------------------------------------------

    The Exchange believes that the Proposed Access Fees are reasonable, 
equitably allocated and not unfairly discriminatory because, for one 
10Gb ULL connection, the Exchange provides each Member or non-Member 
access to all twelve (12) matching engines on MIAX Pearl and a vast 
majority choose to connect to all twelve (12) matching engines. The 
Exchange believes that other exchanges require firms to connect to 
multiple matching engines.\50\ Further, the Exchange notes that no 
Member or non-Member has altered its use of 10Gb ULL connectivity since 
the proposed fee changes went into effect on August 1, 2021 via the 
First Proposed Rule Change.
---------------------------------------------------------------------------

    \50\ See Specialized Quote Interface Specification, Nasdaq PHLX, 
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2, 
Architecture (revised August 16, 2019), available at http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is 
unclear whether the NASDAQ exchanges include connectivity to each 
matching engine for the single fee or charge per connection, per 
matching engine. See also NYSE Technology FAQ and Best Practices: 
Options, Section 5.1 (How many matching engines are used by each 
exchange?) (September 2020). The Exchange notes that NYSE provides a 
link to an Excel file detailing the number of matching engines per 
options exchange, with Arca and Amex having 19 and 17 matching 
engines, respectively.
---------------------------------------------------------------------------

    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 and MIAX Emerald, 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, and the proposed tiered-pricing structure will help make the 
rates consistent with other exchanges while not raising costs for a 
majority of the Exchange's Members and non-Members.
    The Guidance provides that in determining whether a proposed fee is 
constrained by significant competitive forces, the Commission will 
consider whether there are reasonable substitutes

[[Page 54748]]

for the product or service that is the subject of a proposed fee. As 
described below, the Exchange believes substitute products and services 
are available to market participants, including, among other things, 
other options exchanges that market participants may connect to in lieu 
of the Exchange, indirect connectivity to the Exchange via a third-
party reseller.
    There is also no regulatory requirement that any market participant 
connect to any one options exchange, that any market participant 
connect at a particular connection speed or act in a particular 
capacity on the Exchange, or trade any particular product offered on an 
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.\51\ Indeed, the Exchange is unaware of any one 
options exchange whose membership includes every registered broker-
dealer. Based on a recent analysis conducted by the Cboe Exchange, Inc. 
(``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.\52\ 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.\53\
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    \51\ 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.
    \52\ 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.
    \53\ Id.
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    The Exchange notes that non-Member third-parties, such as Service 
Bureaus and Extranets, resell the Exchange's connectivity. This 
indirect connectivity is another viable alternative for market 
participants to trade on the Exchange without connecting directly to 
the Exchange (and thus not pay the Exchange's connectivity fees), which 
alternative is already being used by non-Members and further constrains 
the price that the Exchange is able to charge for connectivity and 
other access fees to its market. The Exchange notes that it could, but 
chooses not to, preclude market participants from reselling its 
connectivity. The Exchange also chooses not to adopt fees that would be 
assessed to third-party resellers on a per customer basis (i.e., fees 
based on the number of firms that connect to the Exchange indirectly 
via the third-party). Indeed, the Exchange does not receive any 
connectivity revenue when connectivity is resold by a third-party, 
which often is resold to multiple customers, some of whom are agency 
broker-dealers that have numerous customers of their own.\54\ In sum, 
the Exchange believes this creates and fosters a competitive 
environment and subjects the Exchange to competitive forces in pricing 
its connectivity and access fees. Particularly, in the event that a 
market participant views the Exchange's direct connectivity and access 
fees as more or less attractive than competing markets, that market 
participant can choose to connect to the Exchange indirectly or may 
choose not to connect to the Exchange and connect instead to one or 
more of the other 15 options markets. Accordingly, the Exchange 
believes that the Proposed Access Fees are fair and reasonable and do 
not result in excessive pricing or supra-competitive profit.
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    \54\ The Exchange notes that resellers are not required to 
publicize, let alone justify or file with the Commission their fees, 
and as such could charge the market participant any fees it deems 
appropriate (including connectivity fees higher than the Exchange's 
connectivity fees), even if such fees would otherwise be considered 
potentially unreasonable or uncompetitive fees.
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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 a barrier to entry to smaller 
participants and notes that its proposed connectivity pricing structure 
for its 10Gb ULL connections is associated with relative usage of the 
various market participants. Further, the majority of firms that 
purchase 10Gb ULL connections may either save money or pay the same 
amount after the tiered-pricing structure is implemented. While total 
cost may be increased for market participants with larger capacity 
needs or for business/technical preferences, such options provide far 
more capacity and are purchased by those that consume more resources 
from the network. Accordingly, the proposed tiered-pricing structure 
does not favor certain categories of market participants in a manner 
that would impose a burden on competition; rather, the allocation 
reflects the network resources consumed by the various usage 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.
    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 connect 
to all options exchanges. The Exchange operates in a highly competitive 
environment, and as discussed above, its ability to price access and 
connectivity is constrained by competition among exchanges and third 
parties. There are other options markets of which market participants 
may connect 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 or 
reseller 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

    The Exchange received one comment on the proposed rule change.\55\ 
The Exchange notes that the Exchange, and its affiliates MIAX and MIAX 
Emerald, justified similar fee changes in the past with similar, if not 
identical,

[[Page 54749]]

justifications in previous filings that have been noticed by the 
Commission for public comment and are currently in effect.\56\ 
Nonetheless, the Exchange has sought to address the commenters concerns 
via the enhanced justification and additional information included in 
this proposal.
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    \55\ See the SIG Comment Letter, supra note 7.
    \56\ See Securities Exchange Act Release Nos. 90980 (January 25, 
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02); 90981 
(January 25, 2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-
01); 91033 (February 1, 2021), 86 FR 8455 (February 5, 2021) (SR-
EMERALD-2021-03); 91460 (April 2, 2021), 86 FR 18349 (April 8, 2021) 
(SR-EMERALD-2021-11).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\57\ and Rule 19b-4(f)(2) \58\ 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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    \57\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \58\ 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-PEARL-2021-45 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-PEARL-2021-45. 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-PEARL-2021-45 and should be submitted on 
or before October 25, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
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    \59\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21490 Filed 10-1-21; 8:45 am]
BILLING CODE 8011-01-P


