[Federal Register Volume 87, Number 22 (Wednesday, February 2, 2022)]
[Notices]
[Pages 5901-5906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02083]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94088; File Nos. SR-MIAX-2021-59, SR-PEARL-2021-57]


Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC, MIAX PEARL, LLC; Suspension of and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove Proposed Rule 
Changes To Amend the Fee Schedules To Adopt a Tiered-Pricing Structure 
for Certain Connectivity Fees

January 27, 2022.

I. Introduction

    On December 1, 2021, Miami International Securities Exchange LLC, 
LLC (``MIAX'') and MIAX PEARL, LLC (``MIAX Pearl'') (collectively, the 
``Exchanges'') each filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (File Numbers SR-MIAX-2021-59 and 
SR-PEARL-2021-57) to amend the MIAX Fee Schedule and MIAX Pearl Options 
Fee Schedule (collectively, the ``Fee Schedules'') to adopt a tiered 
pricing structure for certain connectivity fees. The proposed rule 
changes were immediately effective upon filing with the Commission 
pursuant to Section 19(b)(3)(A) of the Act.\3\ The proposed rule 
changes were published for comment in the Federal Register on December 
20, 2021.\4\ Under Section 19(b)(3)(C) of the Act,\5\ the Commission is 
hereby: (i) Temporarily suspending File Numbers SR-MIAX-2021-59 and SR-
PEARL-2021-57; and (ii) instituting proceedings to determine whether to 
approve or disapprove File Numbers SR-MIAX-2021-59 and SR-PEARL-2021-
57.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take 
effect upon filing with the Commission if it is designated by the 
exchange as ``establishing or changing a due, fee, or other charge 
imposed by the self-regulatory organization on any person, whether 
or not the person is a member of the self-regulatory organization.'' 
15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ See Securities Exchange Act Release Nos. 93775 (December 14, 
2021), 86 FR 71996 (``MIAX Notice''); 93774 (December 14, 2021), 86 
FR 71952 (``Pearl Notice''). For ease of reference, citations to 
statements generally applicable to both notices are to the MIAX 
Notice.
    \5\ 15 U.S.C. 78s(b)(3)(C).
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II. Background and Description of the Proposed Rule Changes

    MIAX and the MIAX Pearl options facility have a shared connectivity 
infrastructure that permits Members and non-Members to connect directly 
to either or both of the Exchanges, and thereby access the associated 
Exchanges' trading platforms, market data systems, test systems, and 
disaster recovery facilities via a single, shared connection.\6\ Prior 
to implementation of the proposed rule changes, a market participant 
connecting to the primary or secondary facility of either or both of 
the Exchanges options platforms via a 10 gigabit ultra-low latency 
(``10Gb ULL'') fiber connection was assessed a monthly fee of $10,000 
per connection.\7\ The Exchanges proposes to modify their respective 
Fee Schedules to adopt a tiered pricing structure for 10Gb ULL fiber 
connections as follows:
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    \6\ See MIAX Notice, supra note 4 at 71998.
    \7\ See id. 1Gb connections to the primary/secondary facility, 
and 1Gb and 10Gb connections to the disaster recovery facility are 
subject to separate monthly charges that are not affected by the 
proposed rule changes. As the MIAX Pearl filing relates only the 
MIAX Pearl Options Fee Schedule, fees for the MIAX Pearl Equities 
facility also are outside the scope of the proposed rule changes.
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     $9,000 each for the 1st and 2nd 10Gb ULL connections;
     $11,000 each for the 3rd and 4th 10Gb ULL connections; and
     $13,000 for each additional connection 10Gb ULL 
connection.\8\
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    \8\ The Exchanges initially filed the proposed fee changes on 
July 30, 2021. See Securities Exchange Act Release Nos. 92643 
(August 11, 2021), 86 FR 46034 (August 17, 2021) (SR-MIAX-2021-35), 
92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-
2021-36). These filings were withdrawn by the Exchanges. The 
Exchanges filed new proposed fee changes with additional 
justification (SR-MIAX-2021-41 and SR-PEARL-2021-45), which were the 
subject of a Suspension of and Order Instituting Proceedings. See 
Securities Exchange Act Release No. 93639 (November 22, 2021), 86 FR 
67758 (November 29, 2021). The Exchanges subsequently withdrew those 
filings and replaced them with the instant filings to provide 
additional information and a revised justification for the proposal, 
which is discussed herein. See Securities Exchange Act Release No. 
93733 (December 7, 2021), 86 FR 71108 (December 14, 2021) (Notice of 
Withdrawal); see also MIAX Notice and Pearl Notice, supra note 4 at 
71997, 71984, respectively.
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    These fees (the ``Proposed Access Fees'') are assessed in any month 
the Member or non-Member is credentialed to use any of the Exchanges' 
APIs or market data feeds in the Exchanges' production environment, 
pro-rated when a Member or non-Member adds or deletes a connection.\9\
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    \9\ See MIAX Notice, supra note 4, at 71998. The Exchanges state 
that they deem connectivity fees to be access fees, and records 
these fees as part of its ``Access Fees'' revenue in its financial 
statements. Id. at 71999.
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III. Suspension of the Proposed Rule Changes

    Pursuant to Section 19(b)(3)(C) of the Act,\10\ at any time within 
60 days of the date of filing of an immediately effective proposed rule 
change pursuant to Section 19(b)(1) of the Act,\11\ the Commission 
summarily may temporarily suspend the change in the rules of a self-
regulatory organization (``SRO'') 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. As discussed below, the Commission believes a temporary 
suspension of the proposed rule changes is necessary and appropriate to 
allow for additional analysis of the proposed rule changes' consistency 
with the Act and the rules thereunder.
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    \10\ 15 U.S.C. 78s(b)(3)(C).
    \11\ 15 U.S.C. 78s(b)(1).
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    In support of the proposals, the Exchanges argue that the proposed 
tiered pricing structure for 10Gb ULL connections is reasonable, 
equitable, and not unfairly discriminatory because the new tiers result 
in a majority of 10Gb ULL purchasers either saving money or paying the 
same amount.\12\ As discussed further below, the Exchanges state that 
``a higher fee to a Member or non-Member that utilizes numerous 
connections is directly related to the increased costs the Exchange 
incurs in providing and maintaining those additional connections.'' 
\13\ The Exchanges also maintain that the tiered pricing structure will 
encourage Members and non-Members to be more efficient and economical 
when determining how to connect to the Exchanges and should better 
enable the Exchanges to monitor and provide access to the Exchanges' 
network to ensure sufficient capacity and headroom in the System.\14\
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    \12\ See MIAX Notice, supra note 4, at 72004. The Exchanges 
state that approximately 80% of the firms that purchased at least 
one 10Gb ULL connection experienced a decrease in their monthly 
connectivity fees, while approximately 20% of firms experienced an 
increase in their monthly connectivity fees. See id.
    \13\ See id.
    \14\ See MIAX Notice, supra note 4, at 72004.
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    In further support of the proposals, the Exchanges argue that the 
Proposed Access Fees are reasonable because they will permit recovery 
of the Exchange's costs in providing the associated services and will 
not result in the Exchange generating a supra-

[[Page 5902]]

competitive profit.\15\ Specifically, the Exchanges state that the 
Proposed Access Fees are based on a ``cost-plus model,'' designed to 
result in ``cost recovery plus present the possibility of a reasonable 
return.'' \16\ According to the Exchanges, employing a ``conservative 
methodology'' that ``strictly considers only those costs that are most 
clearly directly related to the provision and maintenance of 10Gb ULL 
connectivity,'' they estimate the total projected 2021 cost to offer 
10Gb ULL connections at $15.9 million, representing $3.9 in third-party 
cost and $12 million in internal cost.\17\ To arrive at these figures, 
the Exchanges state that they undertook a thorough internal analysis of 
nearly every expense on each Exchanges' general expense ledger to 
determine whether each such expense related to the Proposed Access 
Fees, and, if such expense did so relate, to determine what portion (or 
percentage) of such expense supported the access services.\18\ They 
state that this process entailed discussions with each Exchange 
department head to identify the expenses that support the access 
services associated with the Proposed Access Fees, review of the 
expenses holistically on an Exchange-wide level with assistance from 
the internal finance department, and then assessment of the total 
expense, with no expense allocated twice.\19\
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    \15\ See id. at 71998, 72003.
    \16\ See id. at 71999.
    \17\ See id. at 72001. The 2021 costs are projected because each 
Exchange's most recent Audited Unconsolidated Financial Statement is 
for 2020, with projections utilizing the same presentation 
methodology as used in their previously-filed Audited Financial 
Statements. See id. at 72000.
    \18\ See id. at 72001. The Exchanges also state that expenses 
associated with the MIAX Pearl equities market are accounted for 
separately. See id.; Pearl Notice at 71957.
    \19\ See id. The Exchanges also state that the $15.9 million in 
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 or MIAX Pearl, and does not include general 
costs of operating matching engines and other trading technology. 
Id. at 72001.
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    The Exchanges state that the $3.9 million projected 2021 third-
party expense is the sum of fees paid to: (1) Equinix, for data center 
services (approximately 62% of the Exchanges' total applicable Equinix 
expense); (2) Zayo Group Holdings, Inc. for network services 
(approximately 62%); (3) various other services providers, including 
``Secure Financial Transaction Infrastructure'' (``SFTI'') 
(approximately 75%); and (4) various other hardware and software 
providers (approximately 51%).\20\ Likewise, the Exchanges state that 
the $12 million projected 2021 internal expense, is the sum of: (1) 
Employee compensation and benefits expense allocated to the Proposed 
Access Fees ($6.1 million, which is 28% of the total projected expense 
of $12.6 million for MIAX and $9.2 million for MIAX Pearl for employee 
compensation and benefits); \21\ (2) depreciation and amortization 
expense allocated to the Proposed Access Fees ($5.3 million, which the 
Exchanges estimated as 70% of the total projected expense of $4.8 
million for MIAX and $2.9 million for MIAX Pearl for depreciation and 
amortization); and (3) occupancy expense ($0.6 million, which the 
Exchanges estimated as 53% of the Exchanges' total projected expense of 
$0.6 million for MIAX and $0.5 million for MIAX Pearl for occupancy). 
Converting the projected annualized expense figure to a monthly figure, 
the Exchanges estimate an average monthly cost of offering the services 
associated with the Proposed Access Fees at $1,325,000.\22\
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    \20\ See id. at 72001.
    \21\ For employee compensation and benefit costs, for example, 
the Exchanges included 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). 
See id. at 72002.
    \22\ See id. at 72003.
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    Regarding revenue, the Exchanges represent that revenue for the 
month of October 2021 was approximately $1,684,000 (including pro-rated 
charges), attributable to the purchase of 154 10Gb ULL connections at 
the proposed tiered rates. Accordingly, the Exchanges calculated a 
$359,000 monthly profit for October 2021 and a profit margin of 21.3%. 
As a baseline, the Exchanges used revenue for July 2021 before 
introduction of the Proposed Access Fees, which they represented was 
$1,547,620, attributable to the purchases of a total of 156 10Gb ULL 
connections, to calculate the baseline monthly profit margin of 14.4%.
    The Exchanges maintain that a 6.9% profit margin increase from July 
2021 (before introduction of the Proposed Access Fees) to October 2021 
(after the introduction of the Proposed Access Fees) is reasonable.\23\ 
They also argue that a 21.3% rate of return is reasonable because it 
will allow them to ``to continue to recoup [their] expenses and 
continue to invest in [their] technology infrastructure.'' \24\ They 
add that this profit margin does not take into account: (i) 
Fluctuations in revenue as a result of Members and non-Members adding 
and dropping connections at any time based on their own business 
decisions, which they frequently do; (ii) future price increases from 
third parties; and (iv) inflationary pressure on capital items that 
they need to purchase to maintain the Exchanges' technology and 
systems, which have resulted in price increases upwards of 30% on 
network equipment due to supply chain shortages, and in turn result in 
higher overall costs associated with ongoing system maintenance.\25\ In 
addition, although they do not assert that competitive forces constrain 
the Proposed Access Fees, they maintain that the Proposed Access Fees 
are reasonable when compared to the fees of other options exchanges, as 
the Exchanges' proposed fees for 10Gb ULL connections even at the 
proposed highest tier are lower than those of other options exchanges 
with similar market share.\26\
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    \23\ See id. at 72003.
    \24\ Id.
    \25\ Id. at 72000.
    \26\ Id. at 72005. The Exchanges assert that when compared to 
fees charged by and market shares (for the month of November 2021, 
as of November 26, 2021) for The NASDAQ Stock Market LLC 
(``Nasdaq''), Nasdaq ISE LLC (``ISE''), Nasdaq PHLX LLC (``Phlx''), 
and NYSE American LLC, that the Exchanges' proposed tiered-pricing 
structure is ``significantly lower'' than these competing options 
exchanges with similar market share. Id. For example, the Exchanges 
state that the affiliated exchanges Nasdaq, ISE and Phlx charge a 
monthly fee of $10,000 per 10Gb fiber connection and $15,000 per 
10Gb Ultra fiber connection, while the highest tier of the 
Exchanges' proposed fee structure is $2,000 less per month. Id.
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    As noted above, the Exchanges also argue that the tiered structure 
of the Proposed Access Fees results in an equitable allocation of fees 
that are not unfairly discriminatory, noting that after implementation 
of the Proposed Access Fees, a majority of 10Gb ULL purchasers either 
were saving money or paying the same amount.\27\ They further explain 
that firms that primarily route orders for best execution generally 
only need a limited number of connections to fulfill that obligation 
and connectivity costs will likely to be lower for these firms.\28\ 
Addressing the fee increases experienced by some 10Gb ULL purchasers, 
the Exchanges urge that the increases for these firms are justified 
because the new fees ``apply to all

[[Page 5903]]

Members and non-Members in the same manner based on the amount of 10Gb 
ULL connectivity they require based on their own business decisions and 
usage of Exchange resources.'' \29\ They explain that the firms 
experiencing higher fees are those engaged in advanced trading 
strategies that typically require multiple connections and generate 
higher costs for the Exchanges by utilizing more of the Exchanges' 
resources.\30\ Responding to prior comment that the Exchanges had not 
demonstrated that a firm purchasing more than two or four 10Gb ULL 
connections would use Exchange resources at a greater rate per 
connection than those purchasing fewer, the Exchanges state that ``more 
connections purchased by a firm likely results in greater expenditure 
of Exchange resources and increased cost to the Exchange.'' \31\ The 
Exchanges describe firms that primarily route orders seeking best-
execution and purchase only a limited number of connections as those 
that ``also generally send less orders and messages over those 
connections, resulting in less strain on Exchange resources.'' \32\ In 
contrast the Exchanges describe firms that purchase more than two to 
four 10Gb ULL connections as those that ``essentially do so for 
competitive reasons amongst themselves and choose to utilize numerous 
connections based on their business needs and desire to attempt to 
access the market quicker by using the connection with the least amount 
of latency.'' \33\ According to the Exchanges, these firms are 
generally engaged in sending liquidity-removing orders to the Exchange 
and seek to add more connections so they can access resting liquidity 
ahead of their competitors, and this type of usage of the 10Gb ULL 
connections is more costly to the Exchange, as a result of, among other 
things, frequently adding and dropping connections mid-month to 
determine which connections have the least latency, which results in 
increased costs to the Exchange to constantly make changes in the data 
center which results in ``disproportionate pull on Exchange resources 
to provide the additional connectivity.'' \34\
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    \27\ See MIAX Notice, supra note 4, at 72004. The Exchanges 
state that approximately 80% of the firms that purchased at least 
one 10Gb ULL connection experienced a decrease in their monthly 
connectivity fees, while approximately 20% of firms experienced an 
increase in their monthly connectivity fees as a result of the 
proposed tiered-pricing structure when compared to the flat monthly 
fee structure. See id.
    \28\ See id. at 72004.
    \29\ See id.
    \30\ See id. at 72004, 72006.
    \31\ See id. at 72004, 72008.
    \32\ See id. at 72004.
    \33\ See id.
    \34\ See id. at 72005.
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    To date, the Commission has not received any comment letters on the 
revised justifications for the Proposed Access Fees.
    When exchanges file their proposed rule changes with the 
Commission, including fee filings like the Exchanges' present proposal, 
they are required to provide a statement supporting the proposal's 
basis under the Act and the rules and regulations thereunder applicable 
to the exchange.\35\ The instructions to Form 19b-4, on which exchanges 
file their proposed rule changes, specify that such statement ``should 
be sufficiently detailed and specific to support a finding that the 
proposed rule change is consistent with [those] requirements.'' \36\
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    \35\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory 
Organization's Statement of the Purpose of, and Statutory Basis for, 
the Proposed Rule Change'').
    \36\ Id.
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    Section 6 of the Act, including Sections 6(b)(4), (5), and (8), 
require the rules of an exchange to (1) provide for the equitable 
allocation of reasonable fees among members, issuers, and other persons 
using the exchange's facilities; \37\ (2) perfect the mechanism of a 
free and open market and a national market system, protect investors 
and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; \38\ 
and (3) not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\39\
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    \37\ 15 U.S.C. 78f(b)(4).
    \38\ 15 U.S.C. 78f(b)(5).
    \39\ 15 U.S.C. 78f(b)(8).
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    In temporarily suspending the Exchanges' fee changes, the 
Commission intends to further consider whether the proposals to modify 
fees for certain connectivity options and implement a tiered pricing 
fee structure is consistent with the statutory requirements applicable 
to a national securities exchange under the Act. In particular, the 
Commission will consider whether the proposed rule changes satisfy the 
standards under the Act and the rules thereunder requiring, among other 
things, that an exchange's rules provide for the equitable allocation 
of reasonable fees among members, issuers, and other persons using its 
facilities; not permit unfair discrimination between customers, 
issuers, brokers or dealers; and do not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\40\
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    \40\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule changes.\41\
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    \41\ For purposes of temporarily suspending the proposed rule 
changes, the Commission has considered the proposed rules' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Changes

    In addition to temporarily suspending the proposals, the Commission 
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C) 
\42\ and 19(b)(2)(B) \43\ of the Act to determine whether the 
Exchanges' proposed rule changes should be approved or disapproved. 
Institution of such proceedings is appropriate at this time in view of 
the legal and policy issues raised by the proposed rule changes. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described below, the Commission seeks and encourages 
interested persons to provide comments on the proposed rule changes to 
inform the Commission's analysis of whether to approve or disapprove 
the proposed rule changes.
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    \42\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \43\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\44\ the Commission is 
providing notice of the grounds for possible disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of whether the Exchanges have sufficiently 
demonstrated how the proposed rule changes are consistent with Sections 
6(b)(4),\45\ 6(b)(5),\46\ and 6(b)(8) \47\ of the Act. Section 6(b)(4) 
of the Act requires that the rules of a national securities exchange 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using its 
facilities. Section 6(b)(5) of the Act requires that the rules of a 
national securities exchange be designed, among

[[Page 5904]]

other things, to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. Section 
6(b)(8) of the Act requires that the rules of a national securities 
exchange not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \44\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
See id. The time for conclusion of the proceedings may be extended 
for up to 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding, or if the 
exchange consents to the longer period. See id.
    \45\ 15 U.S.C. 78f(b)(4).
    \46\ 15 U.S.C. 78f(b)(5).
    \47\ 15 U.S.C. 78f(b)(8).
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    The Commission asks that commenters address the sufficiency of the 
Exchanges' statements in support of the proposals, which are set forth 
in the MIAX Notice and the Pearl Notice, in addition to any other 
comments they may wish to submit about the proposed rule changes. In 
particular, the Commission seeks comment on the following aspects of 
the proposals and asks commenters to submit data where appropriate to 
support their views:
    1. Cost Estimates and Allocation. The Exchanges state that they are 
not asserting that the Proposed Access Fees are constrained by 
competitive forces, but rather set forth a ``cost-plus model,'' 
employing a ``conservative methodology'' that ``strictly considers only 
those costs that are most clearly directly related to the provision and 
maintenance of 10Gb ULL connectivity to estimate such costs.'' \48\ 
Setting forth their costs in providing 10Gb ULL connectivity, and as 
summarized in greater detail above, the Exchanges project $15.9 million 
in aggregate annual estimated costs for 2021 as the sum of: (1) $3.9 
million in third-party expenses paid in total to Equinix (62% of the 
total applicable expense) for data center services; Zayo Group 
Holdings, for network services (62% of the total applicable expense); 
SFTI for connectivity support, Thompson Reuters, NYSE, Nasdaq, and 
Internap and others (75% of the total applicable expense) for content, 
connectivity services, and infrastructure services; and various other 
hardware and software providers (51% of the total applicable expense) 
supporting the production environment, and (2) $12 million in internal 
expenses, allocated to (a) employee compensation and benefit costs 
($6.1 million, approximately 28% of the Exchanges' total applicable 
employee compensation and benefits expense); (b) depreciation and 
amortization ($5.3 million, approximately 70% of the Exchanges' total 
applicable depreciation and amortization expense); and (c) occupancy 
costs ($0.6 million, approximately 53% of the Exchanges' total 
applicable occupancy expense). Do commenters believe that the Exchanges 
have provided sufficient detail about how they determined which costs 
are most clearly directly associated with providing and maintaining 
10Gb ULL connectivity? The Exchanges describe a process involving all 
Exchange department heads, including the finance department, but do not 
specify further what principles were applied in making these 
determinations or arriving at particular allocations. Do commenters 
believe further explanation is necessary? For employee compensation and 
benefit costs, for example, the Exchanges calculated an allocation of 
employee time in several departments, including Technology, Back 
Office, Systems Operations, Networking, Business Strategy Development, 
Trade Operations, Finance, and Legal, but do not provide the job titles 
and salaries of persons whose time was accounted for, or explain the 
methodology used to determine how much of an employee's time is devoted 
to that specific activity. What are commenters' views on whether the 
Exchanges have provided sufficient detail on the identity and nature of 
services provided by third parties? Across all of the Exchanges' 
projected costs, what are commenters' views on whether the Exchanges 
have provided sufficient detail on the elements that go into 
connectivity costs, including how shared costs are allocated and 
attributed to connectivity expenses, to permit an independent review 
and assessment of the reasonableness of purported cost-based fees and 
the corresponding profit margin thereon? Should the Exchanges be 
required to identify for what services or fees the remaining percentage 
of un-allocated expenses are attributable to (e.g., what services or 
fees are associated with the 30% of applicable depreciation and 
amortization expenses the Exchanges do not allocate to the Proposed 
Access Fees)? Do commenters believe that the costs projected for 2021 
are generally representative of expected costs going forward (to the 
extent commenters consider 2021 to be a typical or atypical year), or 
should an exchange present an estimated range of costs with an 
explanation of how profit margins could vary along the range of 
estimated costs?
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    \48\ See MIAX Notice, supra note 4, at 71999 and n.28.
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    2. Revenue Estimates and Profit Margin Range. The Exchanges provide 
a single monthly revenue figure as the basis for calculating the profit 
margin of 21.3%. Do commenters believe this is reasonable? If not, why 
not? The Exchanges state that their proposed fee structure is 
``designed to cover [their] costs with a limited return in excess of 
such costs,'' and believes that a 21.3% margin is such a limited return 
over such costs.\49\ The profit margin is also dependent on the 
accuracy of the cost projections which, if inflated (intentionally or 
unintentionally), may render the projected profit margin meaningless. 
The Exchanges acknowledge that this margin may fluctuate from month to 
month due to changes in the number of connections purchased, and that 
costs may increase.\50\ The Exchanges do not account for the 
possibility of cost decreases, however. What are commenters' views on 
the extent to which actual costs (or revenues) deviate from projected 
costs (or revenues)? Do commenters believe that the Exchanges' 
methodology for estimating the profit margin is reasonable? Should the 
Exchanges provide a range of profit margins that they believe are 
reasonably possible, and the reasons therefor?
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    \49\ See MIAX Notice, supra note 4, at 71999, 72000.
    \50\ See id.
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    3. Reasonable Rate of Return. Do commenters agree with the 
Exchanges that their expected 21.3% profit margin would constitute a 
reasonable rate of return over cost for 10GB ULL connectivity? If not, 
what would commenters consider to be a reasonable rate of return and/or 
what methodology would they consider to be appropriate for determining 
a reasonable rate of return? What are commenters' views regarding what 
factors should be considered in determining what constitutes a 
reasonable rate of return for 10Gb ULL connectivity fees? Do commenters 
believe it relevant to an assessment of reasonableness that the 
Exchanges' proposed fees for 10Gb ULL connections, even at the highest 
tier, are lower than those of other options exchanges to which the 
Exchanges have compared the Proposed Access Fees? Should an assessment 
of reasonable rate of return include consideration of factors other 
than costs; and if so, what factors should be considered, and why?
    4. Periodic Reevaluation. The Exchanges have not addressed whether 
they believe a material deviation from the anticipated profit margin 
would warrant the need to make a rule filing pursuant to Section 19(b) 
of the Act to increase or decrease the fees accordingly. In light of 
the impact that the number of subscribers has on connectivity profit 
margins, and the

[[Page 5905]]

potential for costs to decrease (or increase) over time, what are 
commenters' views on the need for exchanges to commit to reevaluate, on 
an ongoing and periodic basis, their cost-based connectivity fees to 
ensure that they stay in line with their stated profitability target 
and do not become unreasonable over time, for example, by failing to 
adjust for efficiency gains, cost increases or decreases, and changes 
in subscribers? How formal should that process be, how often should 
that reevaluation occur, and what metrics and thresholds should be 
considered? How soon after a new connectivity fee change is implemented 
should an exchange assess whether its subscriber estimates were 
accurate and at what threshold should an exchange commit to file a fee 
change if its estimates were inaccurate? Should an initial review take 
place within the first 30 days after a connectivity fee is implemented? 
60 days? 90 days? Some other period?
    5. Tiered Structure for 10Gb ULL Connections. The Exchanges state 
that the proposed tiered fee structure is designed to decrease the 
monthly fees for those firms that connect to the Exchange(s) as part of 
their best execution obligations and generally tend to send the least 
amount of orders and messages over those connections, because such 
firms generally only purchase a limited number of connections, and also 
``generally send less orders and messages over those connections, 
resulting in less strain on Exchange resources.'' \51\ According to the 
Exchanges, 80% of firms have not experienced a fee increase as a result 
of the tiered structure. However, firms that purchase five or more 
connections will see a 30% increase in their fees for each connection 
above the fourth. Regarding these firms, the Exchanges have not 
asserted that it is 30% more costly for the Exchanges to offer such 
connections to these firms, but instead argue generally that these 
firms are ``likely'' to result in greater expenditure of Exchange 
resources and increased cost to the Exchange.\52\ Do commenters believe 
that the price differences between the tiers are supported by the 
Exchanges' assertions that it set the level of its proposed fees in a 
manner that it is equitable and not unfairly discriminatory? Do 
commenters believes the Exchanges should demonstrate how the proposed 
tiered fee levels correlate with tiered costs (e.g., by providing cost 
information broken down by tier, messaging and order volumes through 
the additional 10Gb ULL connections by tier, and/or mid-month add/drop 
of connection rates by tier)? Do commenters believe that the Exchanges 
should provide more detail about the costs that firms purchasing three 
or more or five or more 10Gb ULL connections impose on the Exchanges, 
to permit an assessment of the Exchanges' statement that the Proposed 
Access Fees ``do not depend on any distinctions between Members, 
customers, broker-dealers, or any other entity, because they are solely 
determined by the individual Member's or non-Member's business needs 
and its impact on the Exchanges resources?'' \53\
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    \51\ See MIAX Notice, supra note 4, at 72004.
    \52\ See id.
    \53\ See id.
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
[SRO] that proposed the rule change.'' \54\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\55\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Act and the applicable rules and regulations.\56\ 
Moreover, ``unquestioning reliance'' on an SRO's representations in a 
proposed rule change would not be sufficient to justify Commission 
approval of a proposed rule change.\57\
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    \54\ 17 CFR 201.700(b)(3).
    \55\ See id.
    \56\ See id.
    \57\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
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    The Commission believes it is appropriate to institute proceedings 
to allow for additional consideration and comment on the issues raised 
herein, including as to whether the proposals are consistent with the 
Act, any potential comments or supplemental information provided by the 
Exchanges, and any additional independent analysis by the Commission.

V. Request for Written Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. In particular, the Commission invites the written views of 
interested persons concerning whether the proposal is consistent with 
Sections 6(b)(4), 6(b)(5), and 6(b)(8), or any other provision of the 
Act, or the rules and regulations thereunder. The Commission asks that 
commenters address the sufficiency and merit of the Exchanges' 
statements in support of the proposals, in addition to any other 
comments they may wish to submit about the proposed rule changes. 
Although there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\58\
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    \58\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by an SRO. See Securities 
Acts Amendments of 1975, Report of the Senate Committee on Banking, 
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposals should be approved or 
disapproved by February 23, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
March 9, 2022.
    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 Nos. SR-MIAX-2021-59 and SR-PEARL-2021-57 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 Numbers SR-MIAX-2021-59 and SR-
PEARL-2021-57. These file numbers 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 
changes that are filed with the Commission, and all written 
communications relating to the proposed rule changes between the

[[Page 5906]]

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 filings also will be available for inspection and copying at the 
principal office of each 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 Numbers SR-
MIAX-2021-59 and SR-PEARL-2021-57 and should be submitted on or before 
February 23, 2022. Rebuttal comments should be submitted by March 9, 
2022.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\59\ that File Numbers SR-MIAX-2021-59 and SR-PEARL-2021-57 be, and 
hereby are, temporarily suspended. In addition, the Commission is 
instituting proceedings to determine whether the proposed rule changes 
should be approved or disapproved.
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    \59\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\60\
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    \60\ 17 CFR 200.30-3(a)(57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02083 Filed 2-1-22; 8:45 am]
BILLING CODE 8011-01-P


