[Federal Register Volume 87, Number 10 (Friday, January 14, 2022)]
[Notices]
[Pages 2466-2475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-00642]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93937; File No. SR-MEMX-2021-22]


Self-Regulatory Organizations; MEMX LLC; Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend the 
Exchange's Fee Schedule To Adopt Connectivity Fees

January 10, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 30, 2021, MEMX LLC (``MEMX'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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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 with the Commission a proposed rule change 
to amend the Exchange's fee schedule applicable to Members \3\ and non-
Members (the ``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and 
(c). The Exchange proposes to implement the changes to the Fee Schedule 
pursuant to this proposal on January 3, 2022. The text of the proposed 
rule change is provided in Exhibit 5.
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    \3\ See Exchange Rule 1.5(p).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
Background
    The purpose of the proposed rule change is to amend the Fee 
Schedule to adopt fees the Exchange will charge to Members and non-
Members for physical connectivity to the Exchange and for application 
sessions (otherwise known as ``logical ports'') that a Member utilizes 
in connection with their participation on the Exchange (together with 
physical connectivity, collectively referred to in this proposal as 
``connectivity services,'' as described in greater detail below and in 
Exhibit 5).
    The Exchange has not previously imposed any fees for connectivity 
services necessary to access and participate on its market. In general, 
the Exchange believes that exchanges, in setting fees of all types, 
should meet very high standards of transparency to demonstrate why each 
new fee or fee increase meets the Exchange Act requirements that fees 
be reasonable, equitably allocated, not unfairly discriminatory, and 
not create an undue burden on competition among members and markets. In 
particular, the Exchange believes that each exchange should take extra 
care to be able to demonstrate that these fees are based on its costs 
and reasonable business needs. The Exchange is proposing to implement 
the proposed fee on January 3, 2022.
    In proposing to charge fees for connectivity services, the Exchange 
has sought to be especially diligent in assessing those fees in a 
transparent way against its own aggregate costs of providing the 
related service, and also carefully and transparently assessing the 
impact on Members--both generally and in relation to other Members, 
i.e., to assure the fee will not create a financial burden on any 
participant and will not

[[Page 2467]]

have an undue impact in particular on smaller Members and competition 
among Members in general. The Exchange believes that this level of 
diligence and transparency is called for by the requirements of Section 
19(b)(1) under the Act,\4\ and Rule 19b-4 thereunder,\5\ with respect 
to the types of information self-regulatory organizations (``SROs'') 
should provide when filing fee changes, and Section 6(b) of the Act,\6\ 
which requires, among other things, that exchange fees be reasonable 
and equitably allocated,\7\ not designed to permit unfair 
discrimination,\8\ and that they not impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.\9\ 
This rule change proposal addresses those requirements, and the 
analysis and data in each of the sections that follow are designed to 
clearly and comprehensively show how they are met.\10\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(4).
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b)(8).
    \10\ In 2019, Commission staff published guidance suggesting the 
types of information that SROs may use to demonstrate that their fee 
filings comply with the standards of the Exchange Act (``Fee 
Guidance''). While MEMX understands that the Fee Guidance does not 
create new legal obligations on SROs, the Fee Guidance is consistent 
with MEMX's view about the type and level of transparency that 
exchanges should meet to demonstrate compliance with their existing 
obligations when they seek to charge new fees. See Staff Guidance on 
SRO Rule Filings Relating to Fees (May 21, 2019) available at 
https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees.
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    As noted above, MEMX currently does not charge fees for 
connectivity to the Exchange, including fees for physical connections 
or application sessions for order entry purposes or receipt of drop 
copies. The objective of this approach was to eliminate any fee-based 
barriers to connectivity for Members when MEMX launched as a national 
securities exchange in 2020, and it was successful in achieving this 
objective in that a significant number of Members are directly or 
indirectly connected to the Exchange. As detailed below, MEMX recently 
calculated its aggregate monthly costs for providing physical 
connectivity to the Exchange at $795,789 and its aggregate monthly 
costs for providing application sessions at $347,936. Because MEMX has 
to date offered all connectivity free of charge, MEMX has borne 100% of 
all connectivity costs. In order to cover the aggregate costs of 
providing connectivity to its Users (both Members and non-Members) \11\ 
and to recoup some of the costs already borne by the Exchange to create 
and offer its services, the Exchange is proposing to modify its Fee 
Schedule, pursuant to MEMX Rules 15.1(a) and (c), to charge a fee of 
$6,000 per month for each physical connection in the data center where 
the Exchange primarily operates under normal market conditions 
(``Primary Data Center'') and a fee of $3,000 per month for each 
physical connection in the Exchange's geographically diverse data 
center, which is operated for backup and disaster recovery purposes 
(``Secondary Data Center''), each as further described below. The 
Exchange also proposes to modify its Fee Schedule, pursuant to MEMX 
Rules 15.1(a) and (c), to charge a fee of $450 per month for each 
application session used for order entry (``Order Entry Port'') and 
application session for receipt of drop copies (``Drop Copy Port'') in 
the Exchange's Primary Data Center, as further described below.\12\
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    \11\ Types of market participants that obtain connectivity 
services from the Exchange but are not Members include service 
bureaus and extranets. Service bureaus offer technology-based 
services to other companies for a fee, including order entry 
services to Members, and thus, may access application sessions on 
behalf of one or more Members. Extranets offer physical connectivity 
services to Members and non-Members.
    \12\ As proposed, fees for connectivity services would be 
assessed based on each active connectivity service product at the 
close of business on the first day of each month. If a product is 
cancelled by a Member's submission of a written request or via the 
MEMX User Portal prior to such fee being assessed then the Member 
will not be obligated to pay the applicable product fee. In order to 
provide an opportunity for Users to disconnect any of their assigned 
connectivity services, if they choose to do so, thereby reducing the 
fee to be charged, the Exchange proposes to allow such Users to 
discontinue use of any connectivity service product without charge 
if they provide notice of intent to cancel use of such product 
within two weeks of receipt of the first bill for connectivity 
services in the first month in which the Exchange will commence 
charging for such services and discontinue use of the product before 
the beginning of the next month. As proposed, after the first month 
of billing, MEMX will not return pro-rated fees even if a product is 
not used for an entire month.
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Cost Analysis
    In October 2021, MEMX completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis''). The Cost 
Analysis required a detailed analysis of MEMX's aggregate baseline 
costs, including a determination and allocation of costs for core 
services provided by the Exchange--transaction execution, market data, 
membership services, physical connectivity, and application sessions 
(which provide order entry, cancellation and modification 
functionality, risk functionality, ability to receive drop copies, and 
other functionality).\13\ MEMX separately divided its costs between 
those costs necessary to deliver each of these core services, including 
infrastructure, software, human resources (i.e., personnel), and 
selling, general and administrative expenses (``cost drivers''). Next, 
MEMX applied an estimated allocation of each cost driver to each core 
service. By allocating segmented costs to each core service, MEMX was 
able to estimate by core service the potential margin it might earn 
based on different fee models. The Exchange notes that as a non-listing 
venue it has four primary sources of revenue that it can potentially 
use to fund its operations: Transaction fees, fees for connectivity 
services, membership and regulatory fees, and market data fees. 
Accordingly, the Exchange must cover its expenses from these four 
primary sources of revenue.
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    \13\ The Exchange is not proposing to adopt fees for market data 
at this time and has proposed noting in Exhibit 5 that the Exchange 
does not charge for market data. MEMX notes that it has separately 
filed proposals to adopt membership fees and to modify transaction 
pricing (though such changes are not directly related to the costs 
described in this filing). Each of these changes, as proposed, is 
also to be effective January 3, 2022.
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    Based on the analysis described above, MEMX estimates that the cost 
drivers to provide connectivity services, including both physical 
connections and application sessions, result in an aggregate monthly 
cost of $1,143,715. MEMX currently does not charge fees for 
connectivity services and therefore generates no revenue in connection 
with such services.
    The following chart details the individual line-item costs 
considered by MEMX to be related to offering physical connectivity.

------------------------------------------------------------------------
                        Costs drivers                            Costs
------------------------------------------------------------------------
Human Resources..............................................   $262,129
Infrastructure and Connectivity Technology (servers,             162,000
 switches, etc.).............................................
Data Center Costs............................................    219,000
Hardware and Software Licenses...............................      4,507
Monthly Depreciation.........................................     99,328
Allocated Shared Expenses....................................     48,826
                                                              ----------
    Total....................................................    795,789
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    For personnel costs (Human Resources), MEMX calculated an 
allocation of employee time for employees whose functions include 
providing and maintaining physical connectivity and performance thereof 
(primarily the MEMX network infrastructure team, which spends most of 
their time performing functions necessary to provide physical 
connectivity) as well as a limited subset of personnel with ancillary 
functions

[[Page 2468]]

related to establishing and maintaining such connectivity (such as 
information security and finance personnel). The Human Resources cost 
was calculated using a blended rate of compensation reflecting salary, 
equity and bonus compensation, benefits, payroll taxes, and 401(k) 
matching contributions. The Infrastructure and Connectivity Technology 
cost includes servers, switches and related hardware required to 
provide physical access to the Exchange, some of which is owned by the 
Exchange and some of which is leased by the Exchange in order to allow 
efficient periodic technology refreshes. Data Center costs includes an 
allocation of the costs the Exchange incurs to provide physical 
connectivity in the third party data centers where it maintains its 
equipment as well as related costs (the Exchange does not own the 
Primary Data Center or the Secondary Data Center, but instead, leases 
space in data centers operated by third parties). Hardware and Software 
Licenses includes hardware and software licenses used to operate and 
monitor physical assets necessary to offer physical connectivity to the 
Exchange. All physical assets and software, which also includes assets 
used for testing and monitoring of Exchange infrastructure, were valued 
at cost, depreciated or leased over periods ranging from three to five 
years. Finally, a limited portion of general shared expenses was 
allocated to overall physical connectivity costs as without these 
general shared costs the Exchange would not be able to operate in the 
manner that it does and provide physical connectivity. The costs 
included in general shared expenses include general expenses of the 
Exchange, including office space and office expenses, utilities, 
recruiting and training, marketing and advertising costs, professional 
fees for legal, tax and accounting services, and telecommunications 
costs. The total monthly cost of $795,789 was divided by the number of 
physical connections the Exchange maintains (143), to arrive at a cost 
of approximately $5,565 per month, per physical connection.
    The following chart details the individual line-item costs 
considered by MEMX to be related to offering application sessions.

------------------------------------------------------------------------
                        Costs drivers                            Costs
------------------------------------------------------------------------
Human Resources..............................................   $147,029
Infrastructure and Connectivity Technology (servers,              33,358
 switches, etc.).............................................
Data Center Costs............................................        n/a
Hardware and Software Licenses...............................    108,138
Monthly Depreciation.........................................        n/a
Allocated Shared Expenses....................................     59,400
                                                              ----------
    Total....................................................    347,926
------------------------------------------------------------------------

    With respect to application sessions, MEMX calculated Human 
Resources cost by taking an allocation of employee time for employees 
whose functions include providing application sessions and maintaining 
performance thereof (including a broader range of employees such as 
technical operations personnel, market operations personnel, and 
software engineering personnel) as well as a limited subset of 
personnel with ancillary functions related to maintaining such 
connectivity (such as sales, membership, and finance personnel). The 
Human Resources cost was again calculated using a blended rate of 
compensation reflecting salary, equity and bonus compensation, 
benefits, payroll taxes, and 401(k) matching contributions. The 
Infrastructure and Connectivity Technology cost includes servers and 
switches, and related hardware, and the allocation of cost was limited 
to those specifically supporting the provision of application sessions. 
Hardware and Software Licenses includes hardware and software licenses 
used to monitor the health of the order entry services provided by the 
Exchange. All physical assets and software, which also includes assets 
used for testing and monitoring of order entry infrastructure, were 
valued at cost, depreciated or leased over periods ranging from three 
to five years. Finally, a limited portion of general shared expenses 
was allocated to overall application session costs as without these 
general shared costs the Exchange would not be able to operate in the 
manner that it does and provide application sessions. The costs 
included in general shared expenses include general expenses of the 
Exchange, including office space and office expenses, utilities, 
recruiting and training, marketing and advertising costs, professional 
fees for legal, tax and accounting services, and telecommunications 
costs. The total monthly cost of $347,926 was divided by the number of 
application sessions the Exchange maintains (835), to arrive at a cost 
of approximately $417 per month, per application session.
    As discussed above, the Exchange conducted an extensive Cost 
Analysis in which the Exchange analyzed every expense item in the 
Exchange's general expense ledger to determine whether each such 
expense relates to the provision of connectivity services, and, if such 
expense did so relate, what portion (or percentage) of such expense 
actually supports the provision of connectivity services, and thus 
bears a relationship that is, ``in nature and closeness,'' directly 
related to network connectivity services. In turn, the Exchange 
allocated certain costs more to physical connectivity and others to 
applications, while certain costs were only allocated to such services 
at a very low percentage or not at all. The sum of all such portions of 
expenses represents the total actual baseline cost of the Exchange to 
provide connectivity services, or a monthly expense of $1,143,715.
    In conducting its Cost Analysis, the Exchange did not allocate any 
of its expenses in full to either physical connectivity or application 
sessions and did not double-count any expenses. Instead, as described 
above, the Exchange allocated applicable cost drivers across its core 
services. For instance, in calculating the Human Resources expenses to 
be allocated to physical connections, the Exchange allocated network 
infrastructure personnel with a high percentage of the cost of such 
personnel (75%) given their focus on functions necessary to provide 
physical connections. The Exchange did not allocate any other Human 
Resources expense for providing physical connections to any other 
employee group outside of a smaller allocation (19%) of the cost 
associated with certain specified personnel who work closely with and 
support network infrastructure personnel. In contrast, the Exchange 
allocated much smaller percentages of costs (11% or less) across a 
wider range of personnel groups in order to allocate Human Resources 
costs to providing application sessions. This is because a much wider 
range of personnel are involved in functions necessary to offer, 
monitor and maintain application sessions but the tasks necessary to do 
so are not a primary or full-time function. In total, the Exchange 
allocated 13.8% of its personnel costs to providing physical 
connections and 7.7% of its personnel costs to providing application 
sessions, for a total allocation of 21.5% Human Resources expense to 
provide connectivity services.
    As another example, the Exchange allocated depreciation expense to 
both physical connections and application sessions but in different 
amounts. The Exchange believes it is reasonable to allocate the 
identified portion of such expense because such expense includes the 
actual cost of the computer equipment, such as dedicated servers, 
computers, laptops, monitors, information security appliances and 
storage, and network switching infrastructure equipment, including 
switches and taps that were purchased

[[Page 2469]]

to operate and support the network. Without this equipment, the 
Exchange would not be able to operate the network and provide 
connectivity services to its Members and non-Members and their 
customers. However, the Exchange did not allocate all of the 
depreciation and amortization expense toward the cost of providing 
connectivity services, but instead allocated approximately 27% of the 
Exchange's overall depreciation and amortization expense to 
connectivity services (19% attributed to physical connections and 8% to 
application sessions).
    The Exchange notes that the Cost Analysis was based on the 
Exchange's first year of operations and projections for the next year. 
As such, the Exchange believes that its costs will remain relatively 
similar in future years. It is possible however that such costs will 
either decrease or increase. To the extent the Exchange sees growth in 
use of connectivity services it will receive additional revenue to 
offset future cost increases. However, if use of connectivity services 
is static or decreases, the Exchange might not realize the revenue that 
it anticipates or needs in order to cover applicable costs. 
Accordingly, the Exchange commits to periodically review the costs 
applicable to providing connectivity services and to propose changes to 
its fees as appropriate.
Physical Connectivity Fees
    MEMX offers its Members the ability to connect to the Exchange in 
order to transmit orders to and receive information from the Exchange. 
Members can also choose to connect to MEMX indirectly through physical 
connectivity maintained by a third-party extranet. Extranet physical 
connections may provide access to one or multiple Members on a single 
connection. Users of MEMX physical connectivity services (both Members 
and non-Members) \14\ seeking to establish one or more connections with 
the Exchange submit a request to the Exchange via the MEMX User Portal 
or directly to Exchange personnel. Upon receipt of the completed 
instructions, MEMX establishes the physical connections requested by 
the User. The number of physical connections assigned to each User as 
of November 30, 2021, ranges from one to ten, depending on the scope 
and scale of the Member's trading activity on the Exchange as 
determined by the Member, including the Member's determination of the 
need for redundant connectivity. The Exchange notes that 44% of its 
Members do not maintain a physical connection directly with the 
Exchange in the Primary Data Center (though many such Members have 
connectivity through a third party provider) and another 44% have 
either one or two physical ports to connect to the Exchange in the 
Primary Data Center. Thus, only a limited number of Members, 12%, 
maintain three or more physical ports to connect to the Exchange in the 
Primary Data Center.
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    \14\ See supra note 11.
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    As described above, in order to cover the aggregate costs of 
providing physical connectivity to Users and to recoup some of the 
costs already borne by the Exchange to provide physical connectivity, 
the Exchange is proposing to charge a fee of $6,000 per month for each 
physical connection in the Primary Data Center and a fee of $3,000 per 
month for each physical connection in the Secondary Data Center. There 
is no requirement that any Member maintain a specific number of 
physical connections and a Member may choose to maintain as many or as 
few of such connections as each Member deems appropriate. The Exchange 
notes, however, that pursuant to Rule 2.4 (Mandatory Participation in 
Testing of Backup Systems), the Exchange does require a small number of 
Members to connect and participate in functional and performance 
testing as announced by the Exchange, which occurs at least once every 
12 months. Specifically, Members that have been determined by the 
Exchange to contribute a meaningful percentage of the Exchange's 
overall volume must participate in mandatory testing of the Exchange's 
backup systems (i.e., such Members must connect to the Secondary Data 
Center). The Exchange notes that Members that have been designated are 
still able to use third party providers of connectivity to access the 
Exchange at its Secondary Data Center. Nonetheless, because some 
Members are required to connect to the Secondary Data Center pursuant 
to Rule 2.4 and to encourage Exchange Members to connect to the 
Secondary Data Center generally, the Exchange has proposed to charge 
one-half of the fee for a physical connection in the Primary Data 
Center.
    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
physical connections a User requests, based upon factors deemed 
relevant by each User (either a Member, service bureau or extranet). 
The Exchange believes these factors include the costs to maintain 
connectivity, business model and choices Members make in how to 
participate on the Exchange, as further described below.
    The proposed fee of $6,000 per month for physical connections at 
the Primary Data Center is designed to permit the Exchange to cover the 
costs allocated to providing connectivity services with a modest markup 
(approximately 8%), which would also account for costs the Exchange has 
previously borne completely on its own and help fund future 
expenditures (increased costs, improvements, etc.). The Exchange 
believes it is appropriate to charge fees that represent a reasonable 
markup over cost given the other factors discussed above, including the 
lack of other costs to participate on the Exchange and the need for the 
Exchange to maintain a highly performant and stable platform to allow 
Members to transact with determinism. The Exchange also reiterates that 
the Exchange has not previously charged any fees for connectivity 
services and its allocation of costs to physical connections was part 
of a holistic allocation that also allocated costs to other core 
services without double-counting any expenses. As such, the proposal 
only truly constitutes a ``markup'' to the extent the Exchange recovers 
the initial costs of building the network and infrastructure necessary 
to offer physical connectivity and operating the Exchange for over a 
year without connectivity fees.
    As noted above, the Exchange proposes a discounted rate of $3,000 
per month for physical connections at its Secondary Data Center. The 
Exchange has proposed this discounted rate for Secondary Data Center 
connectivity in order to encourage Members to establish and maintain 
such connections. Also, as noted above, a small number of Members are 
required pursuant to Rule 2.4 to connect and participate in testing of 
the Exchange's backup systems, and the Exchange believes it is 
appropriate to provide a discounted rate for physical connections at 
the Secondary Data Center given this requirement.
    The Exchange notes that this rate is well below the cost of 
providing such services and the Exchange will operate its network and 
systems at the Secondary Data Center without recouping the full amount 
of such cost through connectivity services.
    The proposed fee for physical connections is effective on filing 
and will become operative on January 3, 2021[sic]. The Exchange is not 
proposing to assess any fees for market data at this time, has 
separately proposed a fee for membership and has also separately 
proposed to make certain changes to Exchange transaction fees.

[[Page 2470]]

Application Session Fees
    Similar to other exchanges, MEMX offers its Members application 
sessions, also known as logical ports, for order entry and receipt of 
trade execution reports and order messages. Members can also choose to 
connect to MEMX indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one 
or multiple Members on a single session. Users of MEMX connectivity 
services (both Members and non-Members) \15\ seeking to establish one 
or more application sessions with the Exchange submit a request to the 
Exchange via the MEMX User Portal or directly to Exchange personnel. 
Upon receipt of the completed instructions, MEMX assigns the User the 
number of sessions requested by the User. The number of sessions 
assigned to each User as of November 30, 2021, ranges from one to more 
than 100, depending on the scope and scale of the Member's trading 
activity on the Exchange (either through a direct connection or through 
a service bureau) as determined by the Member. For example, by using 
multiple sessions, Members can segregate order flow from different 
internal desks, business lines, or customers. The Exchange does not 
impose any minimum or maximum requirements for how many application 
sessions a Member or service bureau can maintain, and it is not 
proposing to impose any minimum or maximum session requirements for its 
Members or their service bureaus.
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    \15\ See supra note 11.
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    As described above, in order to cover the aggregate costs of 
providing application sessions to Users and to recoup some of the costs 
already borne by the Exchange to provide application sessions, the 
Exchange is proposing to charge a fee of $450 per month for each Order 
Entry Port and Drop Copy Port in the Primary Data Center. The Exchange 
notes that it does not propose to charge for: (1) Order Entry Ports or 
Drop Copy Ports in the Secondary Data Center, or (2) any Test Facility 
Ports or MEMOIR Gap Fill Ports. The Exchange has proposed to provide 
Order Entry Ports and Drop Copy Ports in the Secondary Data Center free 
of charge in order to encourage Members to connect to the Exchange's 
backup trading systems. Similarly, because the Exchange wishes to 
encourage Members to conduct appropriate testing of their use of the 
Exchange, the Exchange has not proposed to charge for Test Facility 
Ports. With respect to MEMOIR Gap Fill ports, such ports are 
exclusively used in order to receive information when a market data 
recipient has temporarily lost its view of MEMX market data. The 
Exchange has not proposed charging for such ports because the costs of 
providing and maintaining such ports is more directly related to 
producing market data, and the Exchange is not proposing to charge for 
market data at this time.
    The proposed fee of $450 per month for each Order Entry Port and 
Drop Copy Port in the Primary Data Center is designed to permit the 
Exchange to cover the costs allocated to providing application sessions 
with a modest markup (approximately 8%), which would also account for 
costs the Exchange has previously borne completely on its own and help 
fund future expenditures (increased costs, improvements, etc.). The 
Exchange also reiterates that the Exchange has not previously charged 
any fees for connectivity services and its allocation of costs to 
application sessions was part of a holistic allocation that also 
allocated costs to other core services without double-counting any 
expenses. As such, the proposal only truly constitutes a ``markup'' to 
the extent the Exchange recovers the initial costs of building the 
network and infrastructure necessary to offer application sessions and 
operating the Exchange for over a year without connectivity fees.
    The proposed fee is also designed to encourage Users to be 
efficient with their application session usage, thereby resulting in a 
corresponding increase in the efficiency that the Exchange would be 
able to realize in managing its aggregate costs for providing 
connectivity services. There is no requirement that any Member maintain 
a specific number of application sessions and a Member may choose to 
maintain as many or as few of such ports as each Member deems 
appropriate. The Exchange has designed its platform such that Order 
Entry Ports can handle a significant amount of message traffic (i.e., 
over 50,000 orders per second), and has no application flow control or 
order throttling. As such, while several Members maintain a relatively 
high number of ports because that is consistent with their usage on 
other exchanges and is preferable for their own reasons, the Exchange 
believes that it has designed a system capable of allowing such Members 
to significantly reduce the number of application sessions maintained.
    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
application sessions a User requests, based upon factors deemed 
relevant by each User (either a Member or service bureau on behalf of a 
Member). The Exchange believes these factors include the costs to 
maintain connectivity and choices Members make in how to segment or 
allocate their order flow.\16\
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    \16\ The Exchange understands that some Members (or service 
bureaus) may also request more Order Entry Ports to enable the 
ability to send a greater number of simultaneous order messages to 
the Exchange by spreading orders over more Order Entry Ports, 
thereby increasing throughput (i.e., the potential for more orders 
to be processed in the same amount of time). The degree to which 
this usage of Order Entry Ports provides any throughput advantage is 
based on how a particular Member sends order messages to MEMX, 
however the Exchange notes that its architecture reduces the impact 
or necessity of such a strategy. All Order Entry Ports on MEMX 
provide the same throughput, and as noted above, the throughput is 
likely adequate even for a Member sending a significant amount of 
volume at a fast pace, and is not artificially throttled or limited 
in any way by the Exchange.
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    The proposed fee for application sessions is effective on filing 
and will become operative on January 3, 2021[sic]. The Exchange is not 
proposing to assess any fees for market data at this time, has 
separately proposed a fee for membership and has also separately 
proposed to make certain changes to Exchange transaction fees.
Additional Discussion
    As discussed above, the proposed fees for connectivity services do 
not by design apply differently to different types or sizes of Members. 
As discussed in more detail in the Statutory Basis section, the 
Exchange believes that the likelihood of higher fees for certain 
Members subscribing to connectivity services usage than others is not 
unfairly discriminatory because it is based on objective differences in 
usage of connectivity services among different Members. The Exchange's 
incremental aggregate costs for all connectivity services are 
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the 
Exchange, as such Members: (1) Consume the most bandwidth and resources 
of the network; (2) transact the vast majority of the volume on the 
Exchange; and (3) require the high-touch network support services 
provided by the Exchange and its staff, including network monitoring, 
reporting and support services, resulting in a much higher cost to the 
Exchange to provide such connectivity services. For these reasons, MEMX 
believes it is not unfairly discriminatory for the Members with higher 
message traffic and/or Members with more complicated connections to pay 
a higher share of the

[[Page 2471]]

total connectivity services fees. While Members with a business model 
that results in higher relative inbound message activity or more 
complicated connections are projected to pay higher fees, the level of 
such fees is based solely on the number of physical connections and/or 
application sessions deemed necessary by the Member and not on the 
Member's business model or type of Member. The Exchange notes that the 
correlation between message traffic and usage of connectivity services 
is not completely aligned because Members individually determine how 
many physical connections and application sessions to request, and 
Members may make different decisions on the appropriate ways based on 
facts unique to their individual businesses. Based on the Exchange's 
architecture, as described above, the Exchange believes that a Member 
even with high message traffic would be able to conduct business on the 
Exchange with a relatively small connectivity services footprint.
    Finally, the fees for connectivity services will help to encourage 
connectivity services usage in a way that aligns with the Exchange's 
regulatory obligations. As a national securities exchange, the Exchange 
is subject to Regulation Systems Compliance and Integrity (``Reg 
SCI'').\17\ Reg SCI Rule 1001(a) requires that the Exchange establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure (among other things) that its Reg SCI systems have 
levels of capacity adequate to maintain the Exchange's operational 
capability and promote the maintenance of fair and orderly markets.\18\ 
By encouraging Users to be efficient with their usage of connectivity 
services, the proposed fee will support the Exchange's Reg SCI 
obligations in this regard by ensuring that unused application sessions 
are available to be allocated based on individual User needs and as the 
Exchange's overall order and trade volumes increase. Additionally, 
because the Exchange will charge a lower rate for a physical connection 
to the Secondary Data Center and will not charge any fees for 
application sessions at the Secondary Data Center or its Test Facility, 
the proposed fee structure will further support the Exchange's Reg SCI 
compliance by reducing the potential impact of a disruption should the 
Exchange be required to switch to its Disaster Recovery Facility and 
encouraging Members to engage in any necessary system testing with low 
or no cost imposed by the Exchange.\19\
---------------------------------------------------------------------------

    \17\ 17 CFR 242.1000-1007.
    \18\ 17 CFR 242.1001(a).
    \19\ While some Members might directly connect to the Secondary 
Data Center and incur the proposed $3,000 per month fee, there are 
other ways to connect to the Exchange, such as through a service 
bureau or extranet, and because the Exchange is not imposing fees 
for application sessions in the Secondary Data Center, a Member 
connecting through another method would not incur any fees charged 
directly by the Exchange. However, the Exchange notes that a third 
party service provider providing connectivity to the Exchange likely 
would charge a fee for providing such connectivity; such fees are 
not set by or shared in by the Exchange.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) \20\ of the Act in general, and 
furthers the objectives of Section 6(b)(4) \21\ of the Act, in 
particular, in that it is designed to provide for the equitable 
allocation of reasonable dues, fees and other charges among its Members 
and other persons using its facilities. Additionally, the Exchange 
believes that the proposed fees are consistent with the objectives of 
Section 6(b)(5) \22\ of the Act in that they are designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to a free and open market and 
national market system, and, in general, to protect investors and the 
public interest, and, particularly, are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f.
    \21\ 15 U.S.C. 78f(b)(4).
    \22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. In Regulation NMS, 
the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and also recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \23\ One of the primary 
objectives of MEMX is to provide competition and to reduce fixed costs 
imposed upon the industry. Consistent with this objective, the Exchange 
believes that this proposal reflects a simple, competitive, reasonable, 
and equitable pricing structure designed to permit the Exchange to 
cover certain fixed costs that it incurs for providing connectivity 
services, which are discounted when compared to products and services 
offered by competitors.\24\
---------------------------------------------------------------------------

    \23\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \24\ See infra notes 30-34 and accompanying text.
---------------------------------------------------------------------------

    Commission staff noted in its Fee Guidance that, as an initial step 
in assessing the reasonableness of a fee, staff considers whether the 
fee is constrained by significant competitive forces. To determine 
whether a proposed fee is constrained by significant competitive 
forces, staff has said that it considers whether the evidence 
demonstrates that there are reasonable substitutes for the product or 
service that is the subject of a proposed fee. There is no regulatory 
requirement that any market participant connect to the Exchange, that 
any participant connect in a particular manner, or that any participant 
maintain a certain number of connections to the Exchange. The Exchange 
reiterates that a small number of Members are required to connect to 
the Exchange for participation in mandatory testing of backup systems 
but such connectivity does not have to be obtained directly from the 
Exchange but instead can be through a third party provider that 
provides connectivity to the Exchange.
    The Exchange also acknowledges that certain market participants 
operate businesses that do, in fact, require them to be connected to 
all U.S. equity exchanges. For instance, certain Members operate as 
routing brokers for other market participants. As an equities exchange 
with 4% volume, these routing brokers likely need to maintain a 
connection to the Exchange on behalf of their clients. However, it is 
connectivity services provided by the Exchange that allow such 
participants to offer their clients a service for which they can be 
compensated (and allowing their clients not to directly connect but 
still to access the Exchange), and, as such, the Exchange believes it 
is reasonable, equitably allocated and not unfairly discriminatory to 
charge such Members for connectivity services.
    As a new entrant to the equities market, the Exchange does not have 
as Members many market participants that actively trade equities on 
other exchanges nor are such market participants directly connected to 
the Exchange. There are also a number of the Exchange's Members that do 
not connect directly to MEMX. For instance, of the number of Members 
that maintain application sessions to participate directly on the 
Exchange, many such Members do not maintain physical connectivity but 
instead access the

[[Page 2472]]

Exchange through a service bureau or extranet. In addition, of the 
Members that are directly connected to MEMX, it is generally the 
individual needs of the Member that require whether they need one or 
multiple physical connections to the Exchange as well as the number of 
application sessions that they will maintain. It is all driven by the 
business needs of the Member, and as described above, the Exchange 
believes it offers technology that will enable Members to maintain a 
smaller connectivity services footprint than they do on other markets.
    The potential argument that all broker-dealers are required to 
connect to all exchanges is not true given the Exchange's experience as 
a new entrant to the market over the past year. Instead, many market 
participants awaited the Exchange growing to a certain percentage of 
market share before they would join as a Member or connect to the 
Exchange. In addition, many market participants still have not 
connected despite the Exchange's growth in one year to more than 4% of 
the overall equities market share. Thus, the Exchange recognizes that 
the decision of whether to connect to the Exchange is separate and 
distinct from the decision of whether and how to trade on the Exchange. 
This is because there are multiple alternatives to directly 
participating on the Exchange (such as use of a third-party routing 
broker to access the Exchange) or directly connecting to the Exchange 
(such as use of an extranet or service bureau). The Exchange 
acknowledges that many firms may choose to connect to the Exchange, but 
ultimately not trade on it, based on their particular business needs. 
The decision of which type of connectivity to purchase, or whether to 
purchase connectivity at all, is based on the business needs of each 
individual firm.
    There is also competition for connectivity to the Exchange. For 
instance, the Exchange competes with certain non-Members who provide 
connectivity and access to the Exchange, namely extranets and service 
bureaus. These are resellers of MEMX connectivity--they are not 
arrangements between broker-dealers to share connectivity costs. Those 
non-Members resell that connectivity to multiple market participants 
over the same connection. When physical connectivity is re-sold by a 
third-party, the Exchange will not receive any connectivity revenue 
from that sale, and without connectivity fees for the past year, such 
third parties have been able to re-sell something they receive for 
free. Such arrangements are entirely between the third-party and the 
purchaser, thus constraining the ability of MEMX to set its 
connectivity pricing as indirect connectivity is a substitute for 
direct connectivity. Indirect connectivity is a viable alternative that 
is already being used by Members and non-Members of MEMX, constraining 
the price that the Exchange is able to charge for connectivity to its 
Exchange. As set forth above, nearly half of the Exchange's Members do 
not have a physical connection provided by the Exchange and instead 
must use a third party provider. Members who have not established any 
connectivity to the Exchange are still able to trade on the Exchange 
indirectly through other Members or non-Member extranets or service 
bureaus that are connected. These Members will not be forced or 
compelled to purchase physical connectivity services, and they retain 
all of the other benefits of membership with the Exchange. Accordingly, 
Members have the choice to purchase physical connectivity and are not 
compelled to do so. The Exchange notes that without an application 
session, specifically an Order Entry Port, a Member could not submit 
orders to the Exchange. As such, while application sessions too can be 
obtained from a third party reseller (i.e., a service bureau) the 
Exchange will receive revenue either from the Member or the third party 
service bureau for each application session. However, as noted 
elsewhere, the Exchange has designed its platform such that Order Entry 
Ports can handle a significant amount of message traffic (i.e., over 
50,000 orders per second), and has no application flow control or order 
throttling. As such, the Exchange believes that it has designed a 
system capable of allowing such Members to significantly reduce the 
number of application sessions maintained.
    The Exchange believes that the proposed fees for connectivity 
services are reasonable, equitable and not unfairly discriminatory 
because, as described above, the proposed pricing for connectivity 
services is directly related to the relative costs to the Exchange to 
provide those respective services, and does not impose a barrier to 
entry to smaller participants. Accordingly, the Exchange offers direct 
connectivity alternatives and various indirect connectivity (via third-
party) alternatives, as described above.
    The Exchange recognizes that there are various business models and 
varying sizes of market participants conducting business on the 
Exchange. The Exchange's incremental aggregate costs for all 
connectivity services are disproportionately related to Members with 
higher message traffic and/or Members with more complicated connections 
established with the Exchange, as such Members: (1) Consume the most 
bandwidth and resources of the network; (2) transact the vast majority 
of the volume on the Exchange; and (3) require the high-touch network 
support services provided by the Exchange and its staff, including 
network monitoring, reporting and support services, resulting in a much 
higher cost to the Exchange to provide such connectivity services. 
Accordingly, the Exchange believes the allocation of the proposed fees 
that increase based on the number of physical connections or 
application sessions is reasonable based on the resources consumed by 
the respective type of market participant (i.e., lowest resource 
consuming Members will pay the least, and highest resource consuming 
Members will pay the most), particularly since higher resource 
consumption translates directly to higher costs to the Exchange.
    With respect to equities trading, the Exchange had a 4.16% market 
share of the U.S. equities industry in November 2021.\25\ The Exchange 
is not aware of any evidence that a market share of approximately 4% 
provides the Exchange with anti-competitive pricing power because, as 
shown above, market participants that choose to connect to the Exchange 
have various choices in determining how to do so, including third party 
alternatives. This, in addition to the fact that not all broker-dealers 
are required to connect to the Exchange, supports the Exchange's 
conclusion that its pricing is constrained by competition.
---------------------------------------------------------------------------

    \25\ Market share percentage calculated as of November 30, 2021. 
The Exchange receives and processes data made available through 
consolidated data feeds (i.e., CTS and UTDF).
---------------------------------------------------------------------------

    Several market participants choose not to be Members of the 
Exchange and choose not to access the Exchange, and several market 
participants also access the Exchange indirectly through another market 
participant. To illustrate, the Exchange currently has 66 Members. 
However, based on publicly available information regarding a sample of 
the Exchange's competitors, the New York Stock Exchange LLC (``NYSE'') 
has 142 members, Cboe BZX Exchange, Inc. (``BZX'') has 140 members, and 
Investors Exchange LLC (``IEX'') has 133 members.\26\ If all market 
participants were required to be Members of the

[[Page 2473]]

Exchange and connect directly to the Exchange, the Exchange would have 
over 130 Members, in line with these other exchanges. But it does not. 
The Exchange currently has approximately half of the number of members 
as compared to these other exchanges.
---------------------------------------------------------------------------

    \26\ See NYSE Membership Directory, available at: https://www.nyse.com/markets/nyse/membership; BZX Form 1 filed November 19, 
2021, available at: https://www.sec.gov/Archives/edgar/vprr/2100/21009368.pdf; IEX Current Members list, available at: https://exchange.iex.io/resources/trading/current-membership/.
---------------------------------------------------------------------------

    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
Members of the Exchange if the Exchange were to establish unreasonable 
and uncompetitive prices for its connectivity services. Market 
participants choose to connect to a particular exchange and because it 
is a choice, MEMX must set reasonable pricing for connectivity 
services, otherwise prospective Members would not connect and existing 
Members would disconnect, connect through a third-party reseller of 
connectivity, or otherwise access the Exchange indirectly. No market 
participant is required by rule or regulation to be a Member of or 
connect directly to the Exchange, though again, the Exchange 
acknowledges that certain types of broker-dealers might be compelled by 
their business model to connect and also notes that pursuant to Rule 
2.4, certain Members with significant volume on the Exchange are 
required to connect to the Exchange's backup systems for testing on at 
least an annual basis.
    With regard to reasonableness, the Exchange understands that the 
Commission has traditionally taken a market-based approach to examine 
whether the SRO making the proposal was subject to significant 
competitive forces in setting the terms of the proposal. In looking at 
this question, the Commission considers whether the SRO has 
demonstrated in its filing that: (i) There are reasonable substitutes 
for the product or service; (ii) ``platform'' competition constrains 
the ability to set the fee; and/or (iii) revenue and cost analysis 
shows the fee would not result in the SRO taking supracompetitive 
profits. If the SRO demonstrates that the fee is subject to significant 
competitive forces, the Commission will next consider whether there is 
any substantial countervailing basis to suggest the fee's terms fail to 
meet one or more standards under the Exchange Act. If the filing fails 
to demonstrate that the fee is constrained by competitive forces, the 
SRO must provide a substantial basis, other than competition, to show 
that it is consistent with the Exchange Act, which may include 
production of relevant revenue and cost data pertaining to the product 
or service. The Exchange has not previously charged fees for 
connectivity services, so it does not have MEMX-specific data to 
support whether or not competitive forces would constrain its ability 
to set fees for connectivity services. However, as described above, the 
Exchange believes that competitive forces are in effect and that if the 
proposed fees for connectivity services were unreasonable that the 
Exchange would lose current or prospective Members and market share. 
The Exchange does not yet have comprehensive data of the impact of the 
proposed fees and will not have such data until the fees are actually 
imposed but the Exchange is aware of several Members that are 
considering modifying the way that they connect to the Exchange given 
the Exchange's pricing proposal. Further, the Exchange has conducted a 
comprehensive Cost Analysis in order to determine the reasonability of 
its proposed fees, including that the Exchange will not take 
supracompetitive profits.
    MEMX believes the proposed fees for connectivity services are fair 
and reasonable as a form of cost recovery for the Exchange's aggregate 
costs of offering connectivity services to Members and non-Members. The 
proposed fees are expected to generate monthly revenue of $1,233,750 
providing cost recovery to the Exchange for the aggregate costs of 
offering connectivity services, based on a methodology that narrowly 
limits the aggregate cost elements considered to those closely and 
directly related to the particular product offering. In addition, this 
revenue will allow the Exchange to continue to offer, to enhance, and 
to continually refresh its infrastructure as necessary to offer a 
state-of-the-art trading platform. The Exchange believes that, 
consistent with the Act, it is appropriate to charge fees that 
represent a reasonable markup over cost given the other factors 
discussed above, including the lack of other costs to participate on 
the Exchange and the need for the Exchange to maintain a highly 
performant and stable platform to allow Members to transact with 
determinism. The Exchange also believes the proposed fee is a 
reasonable means of encouraging Users to be efficient in the 
connectivity services they reserve for use, with the benefits to 
overall system efficiency to the extent Members and non-Members 
consolidate their usage of connectivity services or discontinue 
subscriptions to unused physical connectivity.
    The Exchange further believes that the proposed fees, as they 
pertain to purchasers of each type of connectivity alternative, 
constitute an equitable allocation of reasonable fees charged to the 
Exchange's Members and non-Members and are allocated fairly amongst the 
types of market participants using the facilities of the Exchange.
    As described above, the Exchange believes the proposed fees are 
equitably allocated because the Exchange's incremental aggregate costs 
for all connectivity services are disproportionately related to Members 
with higher message traffic and/or Members with more complicated 
connections established with the Exchange, as such Members: (1) Consume 
the most bandwidth and resources of the network; (2) transact the vast 
majority of the volume on the Exchange; and (3) require the high-touch 
network support services provided by the Exchange and its staff, 
including network monitoring, reporting and support services, resulting 
in a much higher cost to the Exchange to provide such connectivity 
services.
    Commission staff previously noted that the generation of 
supracompetitive profits is one of several potential factors in 
considering whether an exchange's proposed fees are consistent with the 
Act.\27\ As described in the Fee Guidance, the term ``supracompetitive 
profits'' refers to profits that exceed the profits that can be 
obtained in a competitive market. The proposed fee structure would not 
result in excessive pricing or supracompetitive profits for the 
Exchange. The proposed fee structure is merely designed to permit the 
Exchange to cover the costs allocated to providing connectivity 
services with a modest markup (approximately 8%), which would also 
account for costs the Exchange has previously borne completely on its 
own and help fund future expenditures (increased costs, improvements, 
etc.). The Exchange believes that this is fair, reasonable, and 
equitable. Accordingly, the Exchange believes that its proposal is 
consistent with Section 6(b)(4) \28\ of the Act because the proposed 
fees will permit recovery of the Exchange's costs and will not result 
in excessive pricing or supracompetitive profit. The proposed fees for 
connectivity services will allow the Exchange to cover certain costs 
incurred by the Exchange associated with providing and maintaining 
necessary hardware and other network infrastructure as well as network 
monitoring and support services; without such hardware, infrastructure, 
monitoring and support the Exchange would be unable to provide the 
connectivity services. The Exchange routinely works to improve

[[Page 2474]]

the performance of the network's hardware and software. The costs 
associated with maintaining and enhancing a state-of-the-art exchange 
network is a significant expense for the Exchange, and thus the 
Exchange believes that it is reasonable and appropriate to help offset 
those costs by adopting fees for connectivity services. As detailed 
above, the Exchange has four primary sources of revenue that it can 
potentially use to fund its operations: Transaction fees, fees for 
connectivity services, membership and regulatory fees, and market data 
fees. Accordingly, the Exchange must cover its expenses from these four 
primary sources of revenue. The Exchange's Cost Analysis estimates the 
costs to provide connectivity services at $1,143,715. Based on current 
connectivity services usage, the Exchange would generate monthly 
revenues of approximately $1,233,750. This represents a modest profit 
when compared to the cost of providing connectivity services. However, 
the Exchange does anticipate (and encourages) Members and non-Members 
to more closely evaluate their connectivity services usage once such 
services are no longer free, and thus, it is possible that the revenue 
actually received by the Exchange will be less than $1,233,750. Even if 
the Exchange earns that amount or incrementally more, the Exchange 
believes the proposed fees for connectivity services are fair and 
reasonable because they will not result in excessive pricing or 
supracompetitive profit, when comparing the total expense of MEMX 
associated with providing connectivity services versus the total 
projected revenue of the Exchange associated with network connectivity 
services.
---------------------------------------------------------------------------

    \27\ See Fee Guidance, supra note 10.
    \28\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Exchange notes that other exchanges offer similar connectivity 
options to market participants and that the Exchange's fees are a 
discount as compared to the majority of such fees.\29\ With respect to 
physical connections, each of the Nasdaq Stock Market LLC (``Nasdaq''), 
NYSE, NYSE Arca, Inc. (``Arca''), BZX and Cboe EDGX Exchange, Inc. 
(``EDGX'') charges between $7,500-$22,000 per month for physical 
connectivity at their primary data centers that is comparable to that 
offered by the Exchange.\30\ Nasdaq, NYSE and Arca also charge 
installation fees, which are not proposed to be charged by the 
Exchange. With respect to application sessions, each of Nasdaq, NYSE, 
Arca, BZX and EDGX charges between $500-$575 per month for order entry 
and drop ports.\31\ The Exchange further notes that several of these 
exchanges each charge for other logical ports that the Exchange will 
continue to provide for free, such as application sessions for testing 
and disaster recovery purposes.\32\ While the Exchange's proposed 
connectivity fees are lower than the fees charged by Nasdaq, NYSE, 
Arca, BZX and EDGX, MEMX believes that it offers significant value to 
Members over these other exchanges in terms of bandwidth available over 
such connectivity services, which the Exchanges believes is a 
competitive advantage, and differentiates its connectivity versus 
connectivity to other exchanges.\33\ Additionally, the Exchange's 
proposed connectivity fees to its disaster recovery facility are within 
the range of the fees charged by other exchanges for similar 
connectivity alternatives.\34\ The Exchange believes that its proposal 
to offer certain application sessions free of charge is reasonable, 
equitably allocated and not unfairly discriminatory because such 
proposal is intended to encourage Member connections and use of backup 
and testing facilities of the Exchange, and, with respect to MEMOIR Gap 
Fill ports, such ports are used exclusively in connection with the 
receipt and processing of market data from the Exchange, and the 
Exchange is not proposing market data fees at this time.
---------------------------------------------------------------------------

    \29\ One significant differentiation between the Exchanges is 
that while it offers different types of physical connections, 
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does 
not propose to charge different prices for such connections. In 
contrast, most of the Exchange's competitors provide scaled pricing 
that increases depending on the size of the physical connection. The 
Exchange does not believe that its costs increase incrementally 
based on the size of a physical connection but instead, that 
individual connections and the number of such separate and disparate 
connections are the primary drivers of cost for the Exchange.
    \30\ See the Nasdaq equities fee schedule, available at: http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2; the NYSE fee 
schedule, available at: https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf; the NYSE Arca equities fee 
schedule, available at: https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf; the BZX equities 
fee schedule, available at: https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/; the EDGX equities fee schedule, 
available at: https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/. This range is based on a review of the fees 
charged for 10-40Gb connections at each of these exchanges and 
relates solely to the physical port fee or connection charge, 
excluding co-location fees and other fees assessed by these 
exchanges. The Exchange notes that it does not offer physical 
connections with lower bandwidth than 10Gb and that Members and non-
Members with lower bandwidth requirements typically access the 
Exchange through third-party extranets or service bureaus.
    \31\ See id.
    \32\ See id.
    \33\ As noted above, all physical connections offered by MEMX 
are at least 10Gb capable and physical connections provided with 
larger bandwidth capabilities will be provided at the same rate as 
such connections. MEMX application sessions are capable of handling 
significant amount of message traffic (i.e., over 50,000 orders per 
second), and have no application flow control or order throttling.
    \34\ See supra note 30.
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    In conclusion, the Exchange submits that its proposed fee structure 
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act 
\35\ for the reasons discussed above in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
its Members and other persons using its facilities, does not permit 
unfair discrimination between customers, issuers, brokers, or dealers, 
and 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, particularly as the proposal neither targets 
nor will it have a disparate impact on any particular category of 
market participant. As described more fully below in the Exchange's 
statement regarding the burden on competition, the Exchange believes 
that it is subject to significant competitive forces, and that the 
proposed fee structure is an appropriate effort to address such forces.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\36\ the Exchange 
does not believe that the proposed rule change would impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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. In particular, while 
the Exchange has not officially proposed fees until now, Exchange 
personnel have been informally discussing potential fees for 
connectivity services with a diverse group of market participants that 
are connected to the Exchange (including large and small firms, firms 
with large connectivity service footprints and small connectivity 
service footprints, as well as extranets and service bureaus). The 
Exchange has received no official complaints from Members, non-Members 
(extranets or service bureaus),

[[Page 2475]]

third-parties that purchase the Exchange's connectivity and resell it, 
and customers of those resellers, that the Exchange's fees or the 
proposed fees for connectivity services would negatively impact their 
abilities to compete with other market participants or that they are 
placed at a disadvantage. The Exchange does not believe that the 
proposed fees for connectivity services place certain market 
participants at a relative disadvantage to other market participants 
because the proposed connectivity pricing is associated with relative 
usage of the Exchange by each market participant and does not impose a 
barrier to entry to smaller participants. As described above, the 
connectivity services purchased by market participants typically 
increase based on their additional message traffic and/or the 
complexity of their operations. The market participants that utilize 
more connectivity services typically utilize the most bandwidth, and 
those are the participants that consume the most resources from the 
network. Accordingly, the proposed fees for connectivity services do 
not favor certain categories of market participants in a manner that 
would impose a burden on competition; rather, the allocation of the 
proposed connectivity fees reflects the network resources consumed by 
the various size of market participants and the costs to the Exchange 
of providing such connectivity services.
Inter-Market Competition
    The Exchange does not believes the proposed fees place an undue 
burden on competition on other SROs that is not necessary or 
appropriate. In particular, market participants are not forced to 
connect to all exchanges, as shown by the number of Members of the 
Exchange as compared to the much greater number of members at other 
exchanges, as described above. Not only does MEMX have less than half 
the number of members as certain other exchanges, but there are also a 
number of the Exchange's Members that do not connect directly to the 
Exchange. Additionally, other exchanges have similar connectivity 
alternatives for their participants, but with higher rates to 
connect.\37\ The Exchange is also unaware of any assertion that the 
proposed fees for connectivity services would somehow unduly impair its 
competition with other exchanges. To the contrary, if the fees charged 
are deemed too high by market participants, they can simply disconnect.
---------------------------------------------------------------------------

    \37\ See supra notes 30-34 and accompanying text.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

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 \38\ and Rule 19b-4(f)(2) \39\ thereunder.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \39\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    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 change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MEMX-2021-22 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-MEMX-2021-22. 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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MEMX-2021-22 and should be 
submitted on or before February 4, 2022.
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    \40\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00642 Filed 1-13-22; 8:45 am]
BILLING CODE 8011-01-P


