[Federal Register Volume 87, Number 22 (Wednesday, February 2, 2022)]
[Notices]
[Pages 5918-5923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02082]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94087; File Nos. SR-MIAX-2021-60, SR-EMERALD-2021-43]


Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC, MIAX Emerald, LLC; Suspension of and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove Proposed Rule 
Changes To Amend Fee Schedules To Adopt Tiered-Pricing Structures for 
Additional Limited Service MIAX and MIAX Emerald Express Interface 
Ports

January 27, 2022.

I. Introduction

    On December 1, 2021, Miami International Securities Exchange, LLC 
(``MIAX'') and MIAX Emerald, LLC (``MIAX Emerald'') (each an 
``Exchange''; 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 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change (File Numbers SR-
MIAX-2021-60 and SR-EMERALD-2021-43) to amend the MIAX Options Fee 
Schedule and MIAX Emerald Fee Schedule (collectively, the ``Fee 
Schedules'') to adopt a tiered-pricing structure for additional limited 
service express interface ports. Each proposed rule change was 
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-2021-60 and SR-EMERALD-
2021-43; and (ii) instituting proceedings to determine whether to 
approve or disapprove File Numbers SR-MIAX-2021-60 and SR-EMERALD-2021-
43.
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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. 93771 (December 14, 
2021), 86 FR 71940 (December 20, 2021) (SR-MIAX-2021-60) (``MIAX 
Notice''); 93772 (December 14, 2021), 86 FR 71965 (December 20, 
2021) (SR-EMERALD-2021-43) (``MIAX Emerald 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

    Limited Service MIAX Express Interface Ports and Limited Service 
MIAX Emerald Express Interface Ports (collectively, ``Limited Service 
MEI Ports'') provide Market Makers \6\ with the ability to send eQuotes 
and quote purge messages, and are also capable of receiving 
administrative information.\7\ Currently, each Exchange allocates two 
Limited Service MEI Ports, free of charge, per matching engine to which 
a Market Maker connects. Market Makers may request additional Limited 
Service MEI Ports for each matching engine to which they connect for an 
additional monthly fee for each such additional port. Prior to the 
proposed rule changes, each Exchange charged a flat $100 monthly fee 
for each such additional port. Each Exchange has proposed to adopt a 
tiered-pricing structure.\8\ For both MIAX and MIAX Emerald, the first 
and second Limited Service MEI Ports for each matching engine would 
remain free of charge. For MIAX, the additional Limited Service MEI 
Port fees for each matching engine would increase from $100 to: (i) 
$150 for the third and fourth Limited Service MEI Ports; (ii) $200 for 
the fifth and sixth Limited Service MEI Ports; and (iii) $250 for the 
seventh or more Limited Service MEI Ports.\9\ For MIAX Emerald, the 
additional Limited Service MEI Port fees for each matching engine would 
increase from $100 to: (i) $200 for the third and fourth Limited 
Service MEI Ports; (ii) $300 for the fifth and sixth Limited Service 
MEI Ports; and (iii) $400 for the seventh to fourteenth Limited Service 
MEI Ports.\10\
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    \6\ Defined at MIAX Rule 100 and MIAX Emerald Rule 100.
    \7\ See, e.g., MIAX Notice, supra note 4, at 71941 n.15.
    \8\ The Exchanges initially filed the proposed fee changes on 
August 2, 2021. See Securities Exchange Act Release Nos. 92661 
(August 13, 2021), 86 FR 46737 (August 19, 2021) (SR-MIAX-2021-37); 
92662 (August 13, 2021), 86 FR 46726 (August 19, 2021) (SR-EMERALD-
2021-25). These filings were withdrawn by the Exchanges. The 
Exchanges filed new proposed fee changes with additional 
justification (SR-MIAX-2021-43 and SR-EMERALD-2021-31, which were 
the subject of a Suspension of and Order Instituting Proceedings. 
See Securities Exchange Act Release No. 93640 (November 22, 2021), 
86 FR 67745 (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 
proposals, which are discussed herein. See also Securities Exchange 
Act Release No. 91857 (May 12, 2021), 86 FR 26973 (May 18, 2021) 
(MIAX-2021-19) (allowing purchase of any number of additional 
Limited Service MEI Ports and stating that, at a continued monthly 
fee of $100 for each additional port, the Exchange anticipates 
generating an annual loss from the provision).
    \9\ See MIAX Notice, supra note 4, at 71941.
    \10\ See MIAX Emerald Notice, supra note 4, at 71966-67. The 
MIAX Emerald Fee Schedule states that Market Makers are limited to 
twelve additional Limited Service MEI Ports per matching engine, for 
a total of fourteen per matching engine. See MIAX Emerald Fee 
Schedule 5.d.ii.
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III. Suspension of the Proposed Rule Changes

    Pursuant to Section 19(b)(3)(C) of the Act,\11\ 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,\12\ 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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    \11\ 15 U.S.C. 78s(b)(3)(C).
    \12\ 15 U.S.C. 78s(b)(1).
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    In support of the proposed tiered-pricing structures and associated 
fee increases, the Exchanges state that such fees (which they refer to 
as ``Proposed Access Fees'') are reasonable because

[[Page 5919]]

they will permit recovery of the Exchanges' costs in providing access 
services to supply additional Limited Service MEI Ports and will not 
result in the Exchanges generating a supra-competitive profit.\13\ 
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.'' \14\ Each 
Exchange provides an analysis of its revenues, costs, and profitability 
associated with the Proposed Access Fees, which they argue employs a 
``conservative methodology'' that ``strictly considers only those costs 
that are most clearly directly related to the provision and maintenance 
of additional Limited Service MEI Ports.'' \15\ The Exchanges state 
that this analysis reflects an extensive cost review in which the 
Exchanges analyzed nearly every expense item in the Exchanges' general 
expense ledgers to determine whether each such expense relates to the 
Proposed Access Fees, and, if such expense did so relate, what portion 
(or percentage) of such expense actually supports the access services 
associated with the Proposed Access Fees.\16\ 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.\17\
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    \13\ See, e.g., MIAX Notice, supra note 4, at 71942.
    \14\ See, e.g., id.
    \15\ See, e.g., id.
    \16\ See, e.g., id. at 71943. Each Exchange also states that no 
expense amount is allocated twice; and the expenses in each 
Exchange's analysis only cover its own options market, not those of 
any affiliate. See, e.g., id. at 71945.
    \17\ See, e.g., id. at 71943. Each Exchange also states that its 
projected total annual expense is ``directly related to the access 
services associated with the Proposed Access Fees, and not any other 
product or service offered by the Exchange,'' and does not include 
general costs of operating matching engines and other trading 
technology. See, e.g., id. at 71944.
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    For 2021, the total annual cost for providing the access services 
associated with the Proposed Access Fees is projected by the Exchanges 
to be approximately $1.32 million for MIAX (or approximately $110,000 
per month on average) and $0.88 million for MIAX Emerald (or 
approximately $73,333.33 per month on average).\18\ As described in 
more detail in the MIAX Notice and MIAX Emerald Notice, the total 
annual cost for each Exchange is comprised of the following, all of 
which the Exchanges state are directly related to the access services 
associated with the Proposed Access Fees: \19\
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    \18\ See MIAX Notice, supra note 4, at 71943; MIAX Emerald 
Notice, supra note 4, at 71969.
    \19\ See, e.g., MIAX Notice, supra note 4, at 71944-47.
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     Third-party expense, relating to fees paid by the 
Exchanges to third-parties for certain products and services. This 
included allocating a portion of fees paid to: (1) Equinix for data 
center services; (2) Zayo Group Holdings, Inc. for network services; 
(3) Secure Financial Transaction Infrastructure, which supports 
connectivity and feeds; (4) various other service providers for 
content, connectivity, and infrastructure services; and (5) various 
other hardware and software providers; and
     internal expense, relating to the internal costs of the 
Exchanges to provide the access services associated with the Proposed 
Access Fees. This included allocating a portion of the Exchanges': (1) 
Employee compensation and benefits expenses for full-time employees 
that support the access services associated with the Proposed Access 
Fees; (2) depreciation and amortization of hardware and software used 
to provide the access services associated with the Proposed Access 
Fees; and (3) occupancy expenses for leased office space for staff that 
provide the access services associated with the Proposed Access Fees.
    MIAX estimated its baseline revenues from additional Limited 
Service MEI Ports in July 2021 (the month prior to the implementation 
of the Proposed Access Fees) to be approximately $124,800 (for a 
baseline profit margin of approximately 12 percent); and estimated its 
revenues from additional Limited Service MEI Ports in November 2021 to 
be approximately $248,950 (a profit margin of approximately 56 
percent).\20\ MIAX Emerald estimated its baseline revenues from 
additional Limited Services MEI Ports in July 2021 to be approximately 
$62,500 (for a baseline loss margin of approximately 17.3 percent); and 
estimated its revenues from additional Limited Service MEI Ports in 
November 2021 to be approximately $216,600 (a profit margin of 
approximately 66 percent).\21\ Each Exchange believes its profit margin 
will allow it to begin to recoup its expenses and continue to invest in 
its technology infrastructure, and believes that the proposed profit 
margin increase (44 percent increase for MIAX, 83.3 percent increase 
for MIAX Emerald) is reasonable because it represents a reasonable rate 
of return.\22\ The Exchanges add that the profit margin: (i) May 
fluctuate from month to month based on the uncertainty of predicting 
how many ports may be purchased as Members and non-Members add and drop 
ports at any time based on their own business decisions, which they 
frequently do; (ii) may decrease due to future increased costs to 
procure the third-party services; and (iii) may decrease due to 
inflationary pressure on capital items that the Exchanges need to 
purchase to maintain their technology and systems, which have resulted 
in price increases upwards of 30 percent on network equipment due to 
supply chain shortages, and in turn resulted in higher overall costs 
associated with ongoing system maintenance.\23\
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    \20\ See MIAX Notice, supra note 4, at 71943.
    \21\ See MIAX Emerald Notice, supra note 4, at 71969.
    \22\ See, e.g., MIAX Notice, supra note 4, at 71947.
    \23\ See, e.g., id. at 71943.
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    In addition, although the Exchanges 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. The Exchanges provide port fees for competing 
exchanges which, according to the Exchanges, demonstrate that the 
Proposed Access Fees are similar to or significantly lower than fees 
charged by competing options exchanges with similar market share.\24\
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    \24\ See, e.g., id. at 71948-49.
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    The Exchanges also argue that the proposed tiered-pricing 
structures result in an equitable allocation of fees that are not 
unfairly discriminatory. The Exchanges state that they sought to design 
their proposed tiered-pricing structures to set the amount of the fee 
to relate to the number of ports a firm purchases.\25\ The Exchanges 
state that the fees will ``apply to all Members and non-Members in the 
same manner based on the amount of additional Limited Service MEI Ports 
they require based on their own business decisions and usage of 
Exchange resources.'' \26\ The Exchanges states that firms that 
primarily route orders seeking best-execution generally do not utilize 
additional Limited Service MEI Ports and ``also generally send less 
orders and messages over those connections, resulting in less strain on 
Exchange resources.'' \27\ By contrast, the Exchanges contend that 
those firms that purchase higher amounts of Limited Service MEI Ports 
are primarily those that engage in advanced trading strategies, rather 
than order-routing

[[Page 5920]]

firms seeking best execution; \28\ that such firms ``essentially do so 
for competitive reasons amongst themselves and choose to utilize 
numerous ports based on their business needs and desire to attempt to 
access the market quicker by using the connection with the least amount 
of latency;'' \29\ that such firms typically generate a 
disproportionate amount of messages and order traffic, usually billions 
per day across the Exchanges, which consume the Exchanges' resources 
and significantly contribute to the overall network access expense for 
storage and network transport capabilities; \30\ that such firms tend 
to frequently add and drop ports mid-month to determine which ports 
have the least latency, which results in increased costs to the 
Exchanges to constantly make changes in their data centers and a 
``disproportionate pull'' on Exchange resources to provide the 
additional port access; \31\ and that the more ports purchased by a 
Market Maker ``likely results in greater expenditures of Exchange 
resources and increased cost to the Exchange.'' \32\
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    \25\ See, e.g., id. at 71948.
    \26\ See, e.g., id. at 71947.
    \27\ See, e.g., id. at 71948.
    \28\ See, e.g., id.
    \29\ See, e.g., id.
    \30\ See, e.g., id. at 71947-48.
    \31\ See, e.g., id. at 71948.
    \32\ See, e.g., id.
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    In addition, the Exchanges state that the proposed tiered-pricing 
structures result in an equitable allocation of fees that are not 
unfairly discriminatory because they are designed to encourage Members 
and non-Members to be more efficient and economical when determining 
how to connect to the Exchanges and would enable the Exchanges to 
better monitor and provide access to the Exchanges' networks to ensure 
sufficient capacity and headroom in their systems.\33\
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    \33\ See, e.g., id. at 71947.
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    To date, the Commission has not received any comment letters on the 
revised justifications for the Proposed Access Fees.\34\
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    \34\ Comments received on the previous filings are available on 
the Commission's website at: https://www.sec.gov/comments/sr-miax-2021-37/srmiax202137.htm (SR-MIAX-2021-37); https://www.sec.gov/comments/sr-emerald-2021-25/sremerald202125.htm (SR-EMERALD-2021-
25); https://www.sec.gov/comments/sr-miax-2021-43/srmiax202143.htm 
(SR-MIAX-2021-43); https://www.sec.gov/comments/sr-emerald-2021-31/sremerald202131.htm (SR-EMERALD-2021-31).
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    When exchanges file their proposed rule changes with the 
Commission, including fee filings like the Exchanges' present 
proposals, they are required to provide a statement supporting the 
proposals' basis under the Act and the rules and regulations thereunder 
applicable to the exchanges.\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 (General Instructions for Form 19b-4--
Information to be Included in the Complete Form--Item 3 entitled 
``Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change'').
    \36\ See id.
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    Section 6 of the Act, including Sections 6(b)(4), (5), and (8), 
require, among other things, that the rules of an exchange: (1) Provide 
for the equitable allocation of reasonable fees among members, issuers, 
and other persons using the exchange's facilities; \37\ (2) be designed 
to perfect the mechanism of a free and open market and a national 
market system and to 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' proposed rule changes, the 
Commission intends to further consider whether the proposed additional 
Limited Service MEI Port fees are 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 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

[[Page 5921]]

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 MIAX Emerald 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 additional Limited Service MEI Ports.'' \48\ As 
summarized in greater detail above, MIAX and MIAX Emerald project $1.32 
million and $0.88 million, respectively, in aggregate annual estimated 
costs for 2021 for additional Limited Service MEI Ports. Do commenters 
believe that the Exchanges have provided sufficient detail about how 
they determined (a) which categories and sub-categories of third-party 
and internal expenses are most clearly directly associated with 
providing and maintaining additional Limited Service MEI Ports, (b) the 
total annual expenses associated with such categories/sub-categories, 
and (c) what percentage of each such expense should be allocated as 
actually supporting the additional Limited Service MEI Ports (as 
opposed to, for example, allocated to the first two ``free'' Limited 
Service MEI Ports or other types of ports or connectivity services 
offered by the Exchanges)? 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, 
and Trade Operations, 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 providing and 
maintaining additional Limited Service MEI Ports. 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 categories and sub-categories of third-party and internal 
expenses that the Exchanges identified as being clearly directly 
associated with providing and maintaining additional Limited Service 
MEI Ports, what are commenters' views on whether the Exchanges have 
provided sufficient detail on how they selected such categories/sub-
categories and how shared costs within or among such categories/sub-
categories are allocated to additional Limited Service MEI Ports, 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 the categories/sub-
categories of expenses that they deemed not to be clearly directly 
associated with additional Limited Service MEI Ports, and/or what 
Exchange products or services account for the un-allocated percentage 
of those categories/sub-categories of expenses that were deemed to be 
associated with additional Limited Service MEI Ports (e.g., what 
products or services are associated with the approximately 95 percent 
and 98 percent, respectively, of applicable depreciation and 
amortization expenses that MIAX and MIAX Emerald 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, e.g., MIAX Notice, supra note 4, at 71942.
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    2. Revenue Estimates and Profit Margin Range. MIAX and MIAX Emerald 
use a single monthly revenue figure (November 2021) as the basis for 
calculating their projected profit margins of 56 percent and 66 
percent, respectively. Yet the Exchanges acknowledge that the number of 
ports purchased fluctuates from month to month as Members and non-
Members add and drop ports.\49\ Do commenters believe a single month 
provides a reasonable basis for a revenue projection? If not, why not? 
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 the profit margin may decrease if costs increase,\50\ 
but they do not account for the possibility of cost decreases. 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, e.g., id. at 71943.
    \50\ See, e.g., id.
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    3. Reasonable Rate of Return. The Exchanges state that their 
Proposed Access Fees are ``designed to cover [their] costs with a 
limited return in excess of such costs,'' and believe that their 56 
percent and 66 percent profit margins are such a limited return over 
such costs.\51\ Do commenters agree with the Exchanges that their 
expected 56 percent and 66 percent profit margins would constitute 
reasonable rates of return over costs for additional Limited Service 
MEI Ports? 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? The Exchanges 
state that they chose to initially provide additional Limited Service 
MEI Ports at a discounted price and to forego revenue that they 
otherwise could have generated from assessing higher fees.\52\ Do 
commenters believe that this should be considered in the 
``reasonableness'' assessment? Do commenters believe it relevant to an 
assessment of reasonableness that, according to the Exchanges, the 
Exchanges' Proposed Access Fees are similar to or lower than fees 
charged by competing options exchanges with similar market share? 
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?
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    \51\ See, e.g., id. at 71943, 71947.
    \52\ See, e.g., id. at 71943-44.
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    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

[[Page 5922]]

the number of ports purchased has on profit margins, and the 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 
the fees stay in line with their stated profitability projections 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 revenue and/or cost 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 Additional Limited Service MEI Ports. The 
Exchanges state that the proposed tiered fee structures are designed to 
set the amount of the fees to relate to the number of ports a firm 
purchases \53\ and that ``[c]harging a higher fee to a Market Maker 
that utilizes numerous ports is directly related to the increased costs 
the [Exchanges incur] in providing and maintaining those additional 
ports.'' \54\ According to the Exchanges, firms that purchase numerous 
Limited Service MEI Ports are primarily those that engage in advanced 
trading strategies, typically generate a disproportionate amount of 
messages and order traffic, and frequently add or drop ports mid-month, 
and thus that ``it is equitable for these firms to experience increased 
port costs based on their disproportionate pull on Exchange resources 
to provide the additional port access.'' \55\ The Proposed Access Fees 
would not just increase the previous $100 per additional Limited 
Service MEI Port fee, but would progressively increase the fee up to 
2.5-fold on MIAX (up to $250 per port for seven or more ports), and up 
to four-fold on MIAX Emerald (up to $400 per port for seven or more 
ports). However, the Exchanges have not specifically asserted that it 
is, for example, 2.5 times more costly for MIAX, or four times more 
costly for MIAX Emerald, to provide the seventh or more ports. Instead, 
the Exchanges argue generally that the more ports purchased by a Market 
Maker ``likely'' results in greater expenditure of Exchange resources 
and increased cost to the Exchange.\56\ Do commenters believe that the 
fees for each tier, as well as the fee differences between the tiers, 
are supported by the Exchanges' assertions that they set the tiered-
pricing structure in a manner that is equitable and not unfairly 
discriminatory? Do commenters believe that 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 volumes through the additional Limited Service MEI Ports by 
tier, and/or mid-month add/drop rates by tier) to better substantiate, 
by tier, the ``disproportionate pull'' on the Exchanges' resources as a 
firm increases the number of additional Limited Service MEI Ports that 
it purchases and to permit an assessment of the Exchanges' statement 
that the Proposed Access Fees ``are solely determined by the individual 
Member's or non-Member's business needs and its impact on the Exchanges 
resources''? \57\
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    \53\ See, e.g., id. at 71948.
    \54\ See, e.g., id. at 71947.
    \55\ See, e.g., id. at 71947-48.
    \56\ See, e.g., id. at 71948.
    \57\ See, e.g., id. at 71947.
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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.'' \58\ 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,\59\ 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.\60\ 
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.\61\
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    \58\ 17 CFR 201.700(b)(3).
    \59\ See id.
    \60\ See id.
    \61\ 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.\62\
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    \62\ 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Nos. SR-MIAX-2021-60 and SR-EMERALD-2021-43 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-2021-60 and SR-
EMERALD-2021-43. These file numbers should be included on the

[[Page 5923]]

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 
(https://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 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-2021-60 and SR-EMERALD-2021-43 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,\63\ that File Numbers SR-MIAX-2021-60 and SR-EMERALD-2021-43 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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    \63\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\64\
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    \64\ 17 CFR 200.30-3(a)(57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02082 Filed 2-1-22; 8:45 am]
BILLING CODE 8011-01-P


