[Federal Register Volume 87, Number 35 (Tuesday, February 22, 2022)]
[Notices]
[Pages 9678-9695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03652]



[[Page 9678]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94257; File No. SR-EMERALD-2022-04]


Self-Regulatory Organizations; MIAX Emerald LLC; Notice of Filing 
of a Proposed Rule Change To Amend the MIAX Emerald Fee Schedule To 
Adopt a Tiered-Pricing Structure for Certain Connectivity Fees; 
Suspension of and Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove the Proposed Rule Change

February 15, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 1, 2022, MIAX Emerald, LLC (``MIAX Emerald'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I and II 
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 and is, pursuant to Section 19(b)(3)(C) 
of the Act, hereby: (i) Temporarily suspending the rule change; and 
(ii) instituting proceedings to determine whether to approve or 
disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the MIAX Emerald Fee 
Schedule (the ``Fee Schedule'') to amend certain connectivity fees.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings, at MIAX's principal 
office, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule to adopt a tiered-
pricing structure for the 10 gigabit (``Gb'') ultra-low latency 
(``ULL'') fiber connection available to Members \3\ and non-Members. 
The Exchange initially filed this proposal on July 30, 2021, with the 
proposed fee changes effective beginning August 1, 2021 (``First 
Proposed Rule Change'').\4\ The First Proposed Rule Change was 
published for comment in the Federal Register on August 17, 2021.\5\ 
The Commission received one comment letter on the First Proposed Rule 
Change.\6\ The Exchange withdrew the First Proposed Rule Change on 
September 24, 2021 and re-submitted the proposal on September 24, 2021, 
with the proposed fee changes being immediately effective (``Second 
Proposed Rule Change'').\7\ The Second Proposed Rule Change was 
published for comment in the Federal Register on October 4, 2021.\8\ 
The Second Proposed Rule Change provided additional justification for 
the proposed fee changes and addressed certain points raised in the 
single comment letter that was submitted on the First Proposed Rule 
Change. The Commission received four comment letters from three 
separate commenters on the Second Proposed Rule Change.\9\ The 
Commission suspended the Second Proposed Rule Change on November 22, 
2021.\10\ The Exchange withdrew the Second Proposed Rule Change on 
December 1, 2021 and submitted a revised proposal for immediate 
effectiveness (``Third Proposed Rule Change'').\11\ The Third Proposed 
Rule Change meaningfully attempted to address issues or questions that 
have been raised by providing additional justification and explanation 
for the proposed fee changes and directly respond to the points raised 
in SIG Letters 1, 2, and 3, as well as the SIFMA Letter submitted on 
the First and Second Proposed Rule Changes,\12\ and feedback provided 
by Commission Staff during a telephone conversation on November 18, 
2021 relating to the Second Proposed Rule Change. The Third Proposed 
Rule Change was published for comment in the Federal Register on 
December 20, 2021.\13\ The Exchange receive no comment letters on the 
Third Proposed Rule Change. The Commission suspended the Third Proposed 
Rule Change on January 27, 2022.\14\ The Exchange withdrew the Third 
Proposed Rule Change on February 1, 2022 and now submits this proposal 
for immediate effectiveness (``Fourth Proposed Rule Change''). This 
Fourth Proposed Rule Change provides additional justification and 
explanation for the proposed fee changes.
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    \3\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \4\ See Securities Exchange Act Release No. 92645 (August 11, 
2021), 86 FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
    \5\ Id.
    \6\ See Letter from Richard J. McDonald, Susquehanna 
International Group, LLC (``SIG''), to Vanessa Countryman, 
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
    \7\ See Securities Exchange Act Release No. 93166 (September 28, 
2021), 86 FR 54760 (October 4, 2021) (SR-EMERALD-2021-29).
    \8\ Id.
    \9\ See letters from Richard J. McDonald, SIG, to Vanessa 
Countryman, Secretary, Commission, dated October 1, 2021 (``SIG 
Letter 2'') and October 26, 2021 (``SIG Letter 3''). See also letter 
from Tyler Gellasch, Executive Director, Healthy Markets Association 
(``HMA''), to Hon. Gary Gensler, Chair, Commission, dated October 
29, 2021 (commenting on SR-CboeEDGA-2021-017, SR-CboeBYX-2021-020, 
SR-Cboe-BZX-2021-047, SR-CboeEDGX-2021-030, SR-MIAX-2021-41, SR-
PEARL-2021-45, and SR-EMERALD-2021-29 and stating that ``MIAX has 
repeatedly filed to change its connectivity fees in a way that will 
materially lower costs for many users, while increasing the costs 
for some of its heaviest of users. These filings have been withdrawn 
and repeatedly refiled. Each time, however, the filings contain 
significantly greater information about who is impacted and how than 
other filings that have been permitted to take effect without 
suspension'') (emphasis added) (``HMA Letter''); and Ellen Green, 
Managing Director, Equity and Options Market Structure, Securities 
Industry and Financial Markets Association (``SIFMA''), to Vanessa 
Countryman, Secretary, Commission, dated November 26, 2021 (``SIFMA 
Letter'').
    \10\ See Securities Exchange Act Release No. 93644 (November 22, 
2021), 86 FR 67750 (November 29, 2021).
    \11\ See Securities Exchange Act Release No. 93776 (December 14, 
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42).
    \12\ The Exchange notes that while the HMA Letter applauds the 
level of disclosure the Exchange included in the First and Second 
Proposed Rule Changes, the HMA Letter does not raise specific issues 
with the First or Second Proposed Rule Changes. Rather, it 
references the Exchange's proposals by way of comparison to show the 
varying levels of transparency in exchange fees filings and 
recommends changes to the Commission's review process of exchange 
fee filings generally. Therefore, the Exchange does not feel it is 
necessary to address the issues raised in the HMA Letter.
    \13\ See supra note 11.
    \14\ See Securities Exchange Act Release No. 94089 (January 27, 
2022) (Suspension of and Order Instituting Proceedings to Determine 
Whether to Approve or Disapprove Proposed Rule Change to Amend the 
MIAX Emerald Fee Schedule to Adopt a Tiered Pricing Structure for 
Certain Connectivity Fees).
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10Gb ULL Tiered-Pricing Structure
    The Exchange proposes to amend Sections 5)a)-b) of the Fee Schedule 
to

[[Page 9679]]

provide for a tiered-pricing structure for 10Gb ULL connections for 
Members and non-Members. Prior to the First Proposed Rule Change, the 
Exchange assessed Members and non-Members a flat monthly fee of $10,000 
per 10Gb ULL connection for access to the Exchange's primary and 
secondary facilities.
    The Exchange now proposes to move from a flat monthly fee per 
connection to a tiered-pricing structure under which the monthly fee 
would vary depending on the number of 10Gb ULL connections each Member 
or non-Member elects to purchase per exchange. Specifically, the 
Exchange proposes to decrease the fee for the first and second 10Gb ULL 
connections for each Member and non-Member from the current flat 
monthly fee of $10,000 to $9,000 per connection. To encourage more 
efficient connectivity usage, the Exchange proposes to increase the per 
connection fee for Members and non-Members that purchase more than two 
10Gb ULL connections. In particular, (i) the third and fourth 10Gb ULL 
connections for each Member or non-Member will increase from the 
current flat monthly fee of $10,000 to $11,000 per connection; and (ii) 
for the fifth 10Gb ULL connection, and each 10Gb ULL connection 
purchased by Members and non-Members thereafter, the fee will increase 
from the flat monthly fee of $10,000 to $13,000 per connection. The 
proposed 10Gb ULL tiered-pricing structure and fees are collectively 
referred to herein as the ``Proposed Access Fees.''
    The Exchange believes the other exchanges' connectivity fees are a 
useful example of alternative approaches to providing and charging for 
connectivity and provides the below table for comparison purposes only 
to show how its proposed fees compare to fees currently charged by 
other options exchanges for similar connectivity. As shown by the below 
table, the Exchange's proposed highest tier is still less than fees 
charged for similar connectivity provided by other options exchanges.
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    \15\ See NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
    \16\ See PHLX Rules, General 8: Connectivity.
    \17\ See ISE Rules, General 8: Connectivity.
    \18\ See NYSE American Options Fee Schedule, Section IV.

------------------------------------------------------------------------
          Exchange                Type of port           Monthly fee
------------------------------------------------------------------------
MIAX Emerald (as proposed)..  10Gb ULL............  1-2 connection.
                                                     $9,000.00 3-4
                                                     connections.
                                                     $11,000.00 5 or
                                                     more. $13,000.00.
The NASDAQ Stock Market LLC   10Gb Ultra fiber....  $15,000.00
 (``NASDAQ'') \15\.
Nasdaq ISE LLC (``ISE'')      10Gb Ultra fiber....  $15,000.00
 \16\.
Nasdaq PHLX LLC (``PHLX'')    10Gb Ultra Fiber....  $15,000.00
 \17\.
NYSE American LLC (``Amex'')  10Gb LX LCN.........  $22,000.00
 \18\.
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    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the Exchange APIs or market data feeds in the production 
environment. The Exchange proposes to pro-rate the fees when a Member 
or non-Member makes a change to the connectivity (by adding or deleting 
connections) with such pro-rated fees based on the number of trading 
days that the Member or non-Member has been credentialed to utilize any 
of the Exchange APIs or market data feeds in the production environment 
through such connection, divided by the total number of trading days in 
such month multiplied by the applicable monthly rate. The Exchange will 
continue to assess monthly Member and non-Member network connectivity 
fees for connectivity to the disaster recovery facility in each month 
during which the Member or non-Member has established connectivity with 
the disaster recovery facility.
2. Statutory Basis
    The Exchange believes that the Proposed Access Fees are consistent 
with Section 6(b) of the Act \19\ in general, and furthers the 
objectives of Section 6(b)(4) of the Act \20\ in particular, in that 
they provide for the equitable allocation of reasonable dues, fees and 
other charges among Members and other persons using any facility or 
system which the Exchange operates or controls. The Exchange also 
believes the Proposed Access Fees further the objectives of Section 
6(b)(5) of the Act \21\ in that they are designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general protect investors and the public interest and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers and dealers.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 15 U.S.C. 78f(b)(5).
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    On March 29, 2019, the Commission issued an Order disapproving a 
proposed fee change by the BOX Market LLC Options Facility to establish 
connectivity fees for its BOX Network (the ``BOX Order'').\22\ On May 
21, 2019, the Commission Staff issued guidance ``to assist the national 
securities exchanges and FINRA . . . in preparing Fee Filings that meet 
their burden to demonstrate that proposed fees are consistent with the 
requirements of the Securities Exchange Act.'' \23\ Based on both the 
BOX Order and the Guidance, the Exchange believes that the Proposed 
Access Fees are consistent with the Act because they (i) are 
reasonable, equitably allocated, not unfairly discriminatory, and not 
an undue burden on competition; (ii) comply with the BOX Order and the 
Guidance; (iii) are supported by evidence (including comprehensive 
revenue and cost data and analysis) that they are fair and reasonable 
because they will not result in excessive pricing or supra-competitive 
profit; and (iv) utilize a cost-based justification framework that is 
substantially similar to a framework previously used by the Exchange, 
and its affiliates Miami International Securities Exchange, LLC 
(``MIAX'') and MIAX PEARL, LLC (``MIAX Pearl''), to amend other non-
transaction fees.\24\
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    \22\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to 
Amend the Fee Schedule on the BOX Market LLC Options Facility to 
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network).
    \23\ See Staff Guidance on SRO Rule Filings Relating to Fees 
(May 21, 2019), at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Guidance'').
    \24\ See Securities Exchange Act Release Nos. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01) (proposal to 
increase connectivity fees); 90980 (January 25, 2021), 86 FR 7602 
(January 29, 2021) (SR-MIAX-2021-02) (proposal to increase 
connectivity fees).

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[[Page 9680]]

The Proposed Access Fees Will Not Result in a Supra-Competitive Profit
    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 amendment meets the requirements of the Act that fees be 
reasonable, equitably allocated, not unfairly discriminatory, and not 
create an undue burden on competition among market participants. The 
Exchange believes this high standard is especially important when an 
exchange imposes various access fees for market participants to access 
an exchange's marketplace. The Exchange deems connectivity to be access 
fees. It records these fees as part of its ``Access Fees'' revenue in 
its financial statements.
    In Guidance, the Commission Staff stated that, ``[a]s an initial 
step in assessing the reasonableness of a fee, staff considers whether 
the fee is constrained by significant competitive forces.'' \25\ The 
Guidance further states that, ``. . . even where an SRO cannot 
demonstrate, or does not assert, that significant competitive forces 
constrain the fee at issue, a cost-based discussion may be an 
alternative basis upon which to show consistency with the Exchange 
Act.'' \26\ In its Guidance, the Commission Staff further states that, 
``[i]f an SRO seeks to support its claims that a proposed fee is fair 
and reasonable because it will permit recovery of the SRO's costs, or 
will not result in excessive pricing or supra-competitive profit, 
specific information, including quantitative information, should be 
provided to support that argument.'' \27\ The Exchange does not assert 
that the Proposed Access Fees are constrained by competitive forces. 
Rather, the Exchange asserts that the Proposed Access Fees are 
reasonable because they will permit recovery of the Exchange's costs in 
providing access services to supply 10Gb ULL connectivity and will not 
result in the Exchange generating a supra-competitive profit.
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    \25\ See Guidance, supra note 23.
    \26\ Id.
    \27\ Id.
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    The Guidance defines ``supra-competitive profit'' as ``profits that 
exceed the profits that can be obtained in a competitive market.'' \28\ 
The Commission Staff further states in the Guidance that ``the SRO 
should provide an analysis of the SRO's baseline revenues, costs, and 
profitability (before the proposed fee change) and the SRO's expected 
revenues, costs, and profitability (following the proposed fee change) 
for the product or service in question.'' \29\ The Exchange provides 
this analysis below.
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    \28\ Id.
    \29\ Id.
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    Based on this analysis, the Exchange believes the Proposed Access 
Fees are reasonable and do not result in a ``supra-competitive'' \30\ 
profit. The Exchange believes that it is important to demonstrate that 
the Proposed Access Fees are based on its costs and reasonable business 
needs. The Exchange believes the Proposed Access Fees will allow the 
Exchange to offset expenses the Exchange has and will incur, and that 
the Exchange provides sufficient transparency (described below) into 
the costs and revenue underlying the Proposed Access Fees. Accordingly, 
the Exchange provides an analysis of its revenues, costs, and 
profitability associated with the Proposed Access Fees. This analysis 
includes information regarding its methodology for determining the 
costs and revenues associated with the Proposed Access Fees. As a 
result of this analysis, the Exchange believes the Proposed Access Fees 
are fair and reasonable as a form of cost recovery plus present the 
possibility of a reasonable return for the Exchange's aggregate costs 
of offering connectivity to the Exchange.
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    \30\ Id.
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    The Proposed Access Fees are based on a cost-plus model. In 
determining the appropriate fees to charge, the Exchange considered its 
costs to provide connectivity, using what it believes to be a 
conservative methodology (i.e., 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,\31\ as 
well as the relative costs of providing and maintaining 10Gb ULL 
connectivity, and set fees that are designed to cover its costs with a 
limited return in excess of such costs. However, as discussed more 
fully below, such fees may also result in the Exchange recouping less 
than all of its costs of providing and maintaining 10Gb ULL 
connectivity because of the uncertainty of forecasting subscriber 
decision making with respect to firms' connectivity needs and the 
likely potential for increased costs to procure the third-party 
services described below.
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    \31\ For example, the Exchange only included the costs 
associated with providing and supporting connectivity and excluded 
from its connectivity cost calculations any cost not directly 
associated with providing and maintaining such connectivity. Thus, 
the Exchange notes that this methodology underestimates the total 
costs of providing and maintaining connectivity.
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    To determine the Exchange's costs to provide access services 
associated with the Proposed Access Fees, the Exchange conducted an 
extensive cost review in which the Exchange analyzed nearly every 
expense item in the Exchange's general expense ledger to determine 
whether each such expense relates to the Proposed Access Fees, and, if 
such expense did so relate, what portion (or percentage) of such 
expense actually supports access services associated with the Proposed 
Access Fees.
    The Exchange also provides detailed information regarding the 
Exchange's cost allocation methodology--namely, information that 
explains the Exchange's rationale for determining that it was 
reasonable to allocate certain expenses described in this filing 
towards the cost to the Exchange to provide the access services 
associated with the Proposed Access Fees. The Exchange conducted a 
thorough internal analysis to determine the portion (or percentage) of 
each expense to allocate to the support of access services associated 
with the Proposed Access Fees. This analysis \32\ included discussions 
with each Exchange department head to determine the expenses that 
support access services associated with the Proposed Access Fees. This 
included numerous meetings between the Exchange's Chief Information 
Officer, Chief Financial Officer, Head of Strategic Planning and 
Operations, Chief Technology Officer, various members of the Legal 
Department, and other group leaders. The Exchange reviewed each 
individual expense to determine if such expense was related to the 
Proposed Access Fees. Once the expenses were identified, the Exchange 
department heads, with the assistance of our internal finance 
department, reviewed such expenses holistically on an Exchange-wide 
level to determine what portion of that expense supports providing 
access services for the Proposed Access Fees. The sum of all such 
portions of expenses represents the total cost to the Exchange to 
provide access services associated with the Proposed Access Fees. For 
the avoidance of doubt, no expense amount was allocated twice.
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    \32\ A description of the Exchange's methodology for determining 
the portion (or percentage) of each expense to allocate to the 
Proposed Access Fee is being provide in response to comments from 
SIG and SIFMA. See SIG Letter 3 and SIFMA Letter, supra note 9.
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    The internal cost analysis conducted by the Exchange is a 
proprietary process that is designed to make a fair and

[[Page 9681]]

reasonable assessment of costs and resources allocated to support the 
provision of access services associated with the Proposed Access Fees. 
The Exchange acknowledges that this assessment can only capture a 
moment in time and that costs and resource allocations may change. That 
is why the Exchange has historically, and on an ongoing basis, 
periodically revisits its costs and resource allocations to ensure it 
is appropriately allocating resources to properly provide services to 
the Exchange's constituents. Any requirement that an exchange should 
conduct a periodic re-evaluation on a set timeline of its cost 
justification and amend its fees accordingly should be established by 
the Commission holistically, applied to all exchanges and not just 
through pending fee proposals, such as this filing. In order to be 
fairly applied, such a mandate should be applied to existing access 
fees as well.
    In accordance with the Guidance, the Exchange has provided 
sufficient detail to support a finding that the proposed fees are 
consistent with the Exchange Act. The proposal includes a detailed 
description of the Exchange's costs and how the Exchange determined to 
allocate those costs related to the proposed fees. In fact, the detail 
and analysis provided in this proposed rule change far exceed the level 
of disclosure provided in other exchange fee filings that have not been 
suspended by the Commission during its 60-day suspension period. A 
finding that this proposed rule change is inconsistent with the 
Exchange Act would run contrary to the Commission Staff's treatment of 
other recent exchange fee proposals that have not been suspended and 
remain in effect today.\33\ For example, a proposed fee filing that 
closely resembles the Exchange's current filing was submitted in 2020 
by the Cboe Exchange, Inc. (``Cboe'') and increased fees for Cboe's 
10Gb connections.\34\ This filing was submitted on September 2, 2020, 
nearly 15 months after the Staff's Guidance was issued. In that filing, 
the Cboe stated that the ``proposed changes were not designed with the 
objective to generate an overall increase in access fee revenue.'' \35\ 
This filing provided no cost based data to support its assertion that 
the proposal was intended to be revenue neutral. Among other things, 
Cboe did not provide a description of the costs underlying its 
provision of 10Gb connections to show that this particular fee did not 
generate a supra-competitive profit or describe how any potential 
profit may be offset by increased costs associated with another fee 
included in its proposal. This filing, nonetheless, was not suspended 
by the Commission and remains in effect today.
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    \33\ See, e.g., Securities Exchange Act Release Nos. 91339 
(March 17, 2021), 86 FR 15524 (March 23, 2021) (SR-CboeBZX-2021-020) 
(increasing fees for a market data product while not providing a 
cost based justification for the increase); 93293 (October 21, 
2021), 86 FR 57716 (October 18, 2021) (SR-PHLX-2021-058) (increasing 
fees for historical market data while not providing a cost based 
justification for the increase); 92970 (September 14, 2021), 86 FR 
52261 (September 20, 2021) (SR-CboeBZX-2021-047) (adopting fees for 
a market data related product while not providing a cost based 
justification for the fees); and 89826 (September 10, 2021), 85 FR 
57900 (September 16, 2021) (SR-CBOE-2020-086) (increasing 
connectivity fees without including a cost based justification).
    \34\ See Securities Exchange Act Release No. 89826 (September 
10, 2020), 85 FR 57900 (September 16, 2020) (SR-CBOE-2020-086) 
(increasing connectivity fees without including a cost based 
justification).
    \35\ See id. at 57909.
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    The Exchange believes exchanges, like all businesses, should be 
provided flexibility when allocating costs and resources they deem 
necessary to operate their business, including providing market data 
and access services. The Exchange notes that costs and resource 
allocations may vary from business to business and, likewise, costs and 
resource allocations may differ from exchange to exchange when it comes 
to providing market data and access services. It is a business decision 
that must be evaluated by each exchange as to how to allocate internal 
resources and what costs to incur internally or via third parties that 
it may deem necessary to support its business and its provision of 
market data and access services to market participants. An exchange's 
costs may also vary based on fees charged by third parties and periodic 
increases to those fees that may be outside of the control of an 
exchange.\36\
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    \36\ See supra note 32.
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    To determine the Exchange's projected revenue associated with the 
Proposed Access Fees, the Exchange analyzed the number of Members and 
non-Members currently utilizing the 10Gb ULL fiber connection and used 
a recent monthly billing cycle representative of 2021 monthly revenue. 
The Exchange also provided its baseline by analyzing July 2021, the 
monthly billing cycle prior to the Proposed Access Fees going into 
effect, and compared it to its expenses for that month.\37\ As 
discussed below, the Exchange does not believe it is appropriate to 
factor into its analysis future revenue growth or decline into its 
projections for purposes of these calculations, given the uncertainty 
of such projections due to the continually changing access needs of 
market participants and potential increase in internal and third party 
expenses. The Exchange is presenting its revenue and expense associated 
with the Proposed Access Fees in this filing in a manner that is 
consistent with how the Exchange presents its revenue and expense in 
its Audited Unconsolidated Financial Statements. The Exchange's most 
recent Audited Unconsolidated Financial Statement is for 2020. However, 
since the revenue and expense associated with the Proposed Access Fees 
were not in place in 2020 or for the first seven months of 2021, the 
Exchange believes its 2020 Audited Unconsolidated Financial Statement 
is not representative of its current total annualized revenue and costs 
associated with the Proposed Access Fees. Accordingly, the Exchange 
believes it is more appropriate to analyze the Proposed Access Fees 
utilizing its 2021 revenue and costs, as described herein, which 
utilize the same presentation methodology as set forth in the 
Exchange's previously-issued Audited Unconsolidated Financial 
Statements. Based on this analysis, the Exchange believes that the 
Proposed Access Fees are reasonable because they will allow the 
Exchange to recover its costs associated with providing access services 
related to the Proposed Access Fees and not result in excessive pricing 
or supra-competitive profit.
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    \37\ Id.
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    As outlined in more detail below, the Exchange projects that the 
final annualized expense for 2021 to provide network connectivity 
services (all connectivity alternatives) to be approximately $7.2 
million per annum or an average of $600,000 per month. The Exchange 
implemented the Proposed Access Fees on August 1, 2021 in the First 
Proposed Rule Change. For July 2021, prior to the Proposed Access Fees, 
the Exchange Members and non-Members purchased a total of 98 10Gb ULL 
connections for which the Exchange charged approximately $971,905 (this 
includes Members and non-Members dropping or adding connections mid-
month, resulting a pro-rated charge at times). This resulted in a 
profit of $371,905 for that month (a profit margin of 38%). For the 
month of October 2021, which includes the varying rates for 10Gb ULL 
connectivity for the Proposed Access Fees, Exchange Members and non-
Members purchased a total of 100 10Gb ULL connections for which the 
Exchange charged approximately $1,146,714 for that

[[Page 9682]]

month (also including pro-rated connection charges). This resulted in a 
profit of $546,714 for that month (a modest 9% profit margin increase 
from July 2021 to October 2021 from 38% to 47%). The Exchange believes 
that the Proposed Access Fees are reasonable because they only generate 
an additional 9% of profit margin per-month (reflecting a 47% profit 
margin). The Exchange cautions that this profit margin is likely to 
fluctuate from month to month based on the uncertainty of predicting 
how many connections may be purchased from month to month as Members 
and non-Members are able to add and drop connections at any time based 
on their own business decisions. This profit margin may also decrease 
due to the significant inflationary pressure on capital items that the 
Exchange needs to purchase to maintain the Exchange's technology and 
systems.\38\ The Exchange has been subject to price increases upwards 
of 30% during the past year on network equipment due to supply chain 
shortages. This, in turn, results in higher overall costs for ongoing 
system maintenance, but also to purchase the items necessary to ensure 
ongoing system resiliency, performance, and determinism. These costs 
are expected to continue to go up as the U.S. economy continues to 
struggle with supply chain and inflation related issues.
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    \38\ See ``Supply chain chaos is already hitting global growth. 
And it's about to get worse'', by Holly Ellyatt, CNBC, available at 
https://www.cnbc.com/2021/10/18/supply-chain-chaos-is-hitting-global-growth-and-could-get-worse.html (October 18, 2021); and 
``There will be things that people can't get, at Christmas, White 
House warns'' by Jarrett Renshaw and Trevor Hunnicutt, Reuters, 
available at https://www.reuters.com/world/us/americans-may-not-get-some-christmas-treats-white-house-officials-warn-2021-10-12/ 
(October 12, 2021).
---------------------------------------------------------------------------

    As mentioned above, the Exchange projects that its annualized 
expense for 2021 to provide network connectivity services (all 
connectivity alternatives) to be approximately $7.2 million per annum 
or an average of $600,000 per month and that these costs are expected 
to increase not only due to anticipated significant inflationary 
pressure, but also periodic fee increases by third parties.\39\ The 
Exchange notes that there are material costs associated with providing 
the infrastructure and headcount to fully-support access to the 
Exchange. The Exchange incurs technology expense related to 
establishing and maintaining Information Security services, enhanced 
network monitoring and customer reporting, as well as Regulation SCI 
mandated processes, associated with its network technology. While some 
of the expense is fixed, much of the expense is not fixed, and thus 
increases the cost to the Exchange to provide access services 
associated with the Proposed Access Fees. For example, new Members to 
the Exchange may require the purchase of additional hardware to support 
those Members as well as enhanced monitoring and reporting of customer 
performance that the Exchange and its affiliates provide. Further, as 
the total number Members increases, the Exchange and its affiliates may 
need to increase their data center footprint and consume more power, 
resulting in increased costs charged by their third-party data center 
provider. Accordingly, the cost to the Exchange and its affiliates to 
provide access to its Members is not fixed. The Exchange believes the 
Proposed Access Fees are a reasonable attempt to offset a portion of 
the costs to the Exchange associated with providing access to its 
network infrastructure.
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    \39\ For example, on October 20, 2021, ICE Data Services 
announced a 3.5% price increase effective January 1, 2022 for most 
services. The price increase by ICE Data Services includes their 
SFTI network, which is relied on by a majority of market 
participants, including the Exchange. See email from ICE Data 
Services to the Exchange, dated October 20, 2021. The Exchange 
further notes that on October 22, 2019, the Exchange was notified by 
ICE Data Services that it was raising its fees charged to the 
Exchange by approximately 11% for the SFTI network.
---------------------------------------------------------------------------

    The Exchange only has four primary sources of revenue and cost 
recovery mechanisms to fund all of its operations: Transaction fees, 
access fees (which includes the Proposed Access Fees), regulatory fees, 
and market data fees. Accordingly, the Exchange must cover all of its 
expenses from these four primary sources of revenue and cost recovery 
mechanisms. Until recently, the Exchange has operated at a cumulative 
net annual loss since it launched operations in 2019.\40\ This is a 
result of providing a low cost alternative to attract order flow and 
encourage market participants to experience the high determinism and 
resiliency of the Exchange's trading Systems.\41\ To do so, the 
Exchange chose to waive the fees for some non-transaction related 
services or provide them at a very marginal cost, which was not 
profitable to the Exchange. This resulted in the Exchange forgoing 
revenue it could have generated from assessing higher fees.
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    \40\ The Exchange has incurred a cumulative loss of $22 million 
since its inception in 2019 to 2020, the last year for which the 
Exchange's Form 1 data is available. See Exchange's Form 1/A, 
Application for Registration or Exemption from Registration as a 
National Securities Exchange, filed July 28, 2021, available at 
https://sec.report/Document/9999999997-21-004557/.
    \41\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
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    The Exchange believes that the Proposed Access Fees are fair and 
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the 
Exchange projects to incur in connection with providing these access 
services versus the total annual revenue that the Exchange projects to 
collect in connection with services associated with the Proposed Access 
Fees. As mentioned above, for 2021,\42\ the total annual expense for 
providing the access services associated with the Proposed Access Fees 
is projected to be approximately $7.2 million, or approximately 
$600,000 per month. This projected total annual expense is comprised of 
the following, all of which are directly related to the access services 
associated with the Proposed Access Fees: (1) Third-party expense, 
relating to fees paid by the Exchange to third parties for certain 
products and services; and (2) internal expense, relating to the 
internal costs of the Exchange to provide the services associated with 
the Proposed Access Fees.\43\ As noted above, the Exchange believes it 
is more appropriate to analyze the Proposed Access Fees utilizing its 
2021 revenue and costs, which utilize the same presentation methodology 
as set forth in the Exchange's previously-issued Audited Unconsolidated 
Financial Statements.\44\ The $7.2 million projected total annual 
expense is directly related to the access services associated with the 
Proposed Access Fees, and not any other product or service offered by 
the Exchange. It does not include general costs of operating matching 
engines and other trading

[[Page 9683]]

technology. No expense amount was allocated twice.
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    \42\ The Exchange has not yet finalized its 2021 year end 
results.
    \43\ The percentage allocations used in this proposed rule 
change may differ from past filings from the Exchange or its 
affiliates due to, among other things, changes in expenses charged 
by third-parties, adjustments to internal resource allocations, and 
different system architecture of the Exchange as compared to its 
affiliates.
    \44\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the 
information technology and communication costs line item under the 
section titled ``Operating Expenses Incurred Directly or Allocated 
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing 
its financial statements for 2018. See Securities Exchange Act 
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020) 
(SR-EMERALD-2019-39). Accordingly, the third-party expense described 
in this filing is attributed to the same line item for the 
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
---------------------------------------------------------------------------

    As discussed above, the Exchange conducted an extensive cost review 
in which the Exchange analyzed nearly every expense item in the 
Exchange's general expense ledger (this includes over 150 separate and 
distinct expense items) to determine whether each such expense relates 
to the access services associated with the Proposed Access Fees, and, 
if such expense did so relate, what portion (or percentage) of such 
expense actually supports those services, and thus bears a relationship 
that is, ``in nature and closeness,'' directly related to those 
services. In performing this calculation, the Exchange considered other 
services and to which the expense may be applied and how much of the 
expense is directly and/or indirectly utilized in providing those other 
services. The sum of all such portions of expenses represents the total 
cost of the Exchange to provide access services associated with the 
Proposed Access Fees.
External Expense Allocations
    For 2021, expenses relating to fees paid by the Exchange to third-
parties for products and services necessary to provide the access 
services associated with the Proposed Access Fees is projected to be 
$1.7 million. This includes, but is not limited to, a portion of the 
fees paid to: (1) Equinix for data center services, including for the 
primary, secondary, and disaster recovery locations of the Exchange's 
trading system infrastructure; (2) Zayo Group Holdings, Inc. (``Zayo'') 
for network services (fiber and bandwidth products and services) 
linking the Exchange's and its affiliates' office locations in 
Princeton, New Jersey and Miami, Florida, to all data center locations; 
(3) Secure Financial Transaction Infrastructure (``SFTI''),\45\ which 
supports connectivity and feeds for the entire U.S. options industry; 
(4) various other services providers (including Thompson Reuters, NYSE, 
Nasdaq, and Internap), which provide content, connectivity services, 
and infrastructure services for critical components of options 
connectivity and network services; and (5) various other hardware and 
software providers (including Dell and Cisco, which support the 
production environment in which Members connect to the network to 
trade, receive market data, etc.).
---------------------------------------------------------------------------

    \45\ See supra note 39.
---------------------------------------------------------------------------

    For clarity, the Exchange took a conservative approach in 
determining the expense and the percentage of that expense to be 
allocated to providing access services in connection with the Proposed 
Access Fees. Only a portion of all fees paid to such third-parties is 
included in the third-party expenses described herein, and no expense 
amount is allocated twice. Accordingly, the Exchange does not allocate 
its entire information technology and communication costs to the access 
services associated with the Proposed Access Fees. This may result in 
the Exchange under allocating an expense to the provision of access 
services in connection with the Proposed Access Fees and such expenses 
may actually be higher or increase above what the Exchange utilizes 
within this proposal. Further, the Exchange notes that expenses 
associated with its affiliates, MIAX and MIAX Pearl (the options and 
equities markets), are accounted for separately and are not included 
within the scope of this filing. Further, as part its ongoing 
assessment of costs and expenses (described above), the Exchange 
recently conducted a periodic thorough review of its expenses and 
resource allocations which, in turn, resulted in revised percentage 
allocations in this filing. Therefore, the percentage allocations used 
in this proposed rule change may differ from past filings from the 
Exchange or its affiliates due to, among other things, changes in 
expenses charged by third-parties, adjustments to internal resource 
allocations, and different system architecture of the Exchange as 
compared to its affiliates. The Exchange notes that the expense 
allocations differ from the Exchange's filing earlier this year, SR-
EMERALD-2021-11, because that prior filing pertained to several 
different access fees, which the Exchange had not been charging for 
since the Exchange launched operations in March 2019.\46\ In SR-
EMERALD-2021-11, the Exchange sought to adopt fees for FIX Ports, MEI 
Ports, Purge Ports, Clearing Trade Drop Ports, and FIX Drop Copy Ports, 
all of which had been free for market participants for over two years.
---------------------------------------------------------------------------

    \46\ See Securities Exchange Act Release No. 91460 (April 2, 
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11).
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to allocate such third-party 
expense described above towards the total cost to the Exchange to 
provide the access services associated with the Proposed Access Fees. 
In particular, the Exchange believes it is reasonable to allocate the 
identified portion of the Equinix expense because Equinix operates the 
data centers (primary, secondary, and disaster recovery) that host the 
Exchange's network infrastructure. This includes, among other things, 
the necessary storage space, which continues to expand and increase in 
cost, power to operate the network infrastructure, and cooling 
apparatuses to ensure the Exchange's network infrastructure maintains 
stability. Without these services from Equinix, the Exchange would not 
be able to operate and support the network and provide the access 
services associated with the Proposed Access Fees to its Members and 
their customers. The Exchange did not allocate all of the Equinix 
expense toward the cost of providing the access services associated 
with the Proposed Access Fees, only that portion which the Exchange 
identified as being specifically mapped to providing the access 
services associated with the Proposed Access Fees. According to the 
Exchange's calculations, it allocated approximately 62% of the total 
applicable Equinix expense to providing the access services associated 
with the Proposed Access Fees. The Exchange believes this allocation is 
reasonable because it represents the Exchange's actual cost to provide 
the access services associated with the Proposed Access Fees, and not 
any other service, as supported by its cost review.\47\
---------------------------------------------------------------------------

    \47\ As noted above, the percentage allocations used in this 
proposed rule change may differ from past filings from the Exchange 
or its affiliates due to, among other things, changes in expenses 
charged by third-parties, adjustments to internal resource 
allocations, and different system architecture of the Exchange as 
compared to its affiliates. Again, as part its ongoing assessment of 
costs and expenses, the Exchange recently conducted a periodic 
thorough review of its expenses and resource allocations which, in 
turn, resulted in a revised percentage allocations in this filing.
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to allocate the identified 
portion of the Zayo expense because Zayo provides the internet, fiber 
and bandwidth connections with respect to the network, linking the 
Exchange with its affiliates, MIAX Pearl and MIAX, as well as the data 
center and disaster recovery locations. As such, all of the trade data, 
including the billions of messages each day per exchange, flow through 
Zayo's infrastructure over the Exchange's network. Without these 
services from Zayo, the Exchange would not be able to operate and 
support the network and provide the access services associated with the 
Proposed Access Fees. The Exchange did not allocate all of the Zayo 
expense toward the cost of providing the access services associated 
with the Proposed Access Fees, only the portion which the Exchange 
identified as being specifically mapped to providing the Proposed 
Access Fees. According to the Exchange's

[[Page 9684]]

calculations, it allocated approximately 62% of the total applicable 
Zayo expense to providing the access services associated with the 
Proposed Access Fees. The Exchange believes this allocation is 
reasonable because it represents the Exchange's actual cost to provide 
the access services associated with the Proposed Access Fees, and not 
any other service, as supported by its cost review.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to allocate the identified 
portions of the SFTI expense and various other service providers' 
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense 
because those entities provide connectivity and feeds for the entire 
U.S. options industry, as well as the content, connectivity services, 
and infrastructure services for critical components of the network. 
Without these services from SFTI and various other service providers, 
the Exchange would not be able to operate and support the network and 
provide access to its Members and their customers. The Exchange did not 
allocate all of the SFTI and other service providers' expense toward 
the cost of providing the access services associated with the Proposed 
Access Fees, only the portions which the Exchange identified as being 
specifically mapped to providing the access services associated with 
the Proposed Access Fees. According to the Exchange's calculations, it 
allocated approximately 89% of the total applicable SFTI and other 
service providers' expense to providing the access services associated 
with the Proposed Access Fees. The Exchange believes this allocation is 
reasonable because it represents the Exchange's actual cost to provide 
the access services associated with the Proposed Access Fees.\49\
---------------------------------------------------------------------------

    \49\ Id. See also supra note 39 (regarding SFTI's announced fee 
increases).
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to allocate the identified 
portion of the other hardware and software provider expense because 
this includes costs for dedicated hardware licenses for switches and 
servers, as well as dedicated software licenses for security monitoring 
and reporting across the network. Without this hardware and software, 
the Exchange would not be able to operate and support the network and 
provide access to its Members and their customers. The Exchange did not 
allocate all of the hardware and software provider expense toward the 
cost of providing the access services associated with the Proposed 
Access Fees, only the portions which the Exchange identified as being 
specifically mapped to providing the access services associated with 
the Proposed Access Fees. According to the Exchange's calculations, it 
allocated approximately 51% of the total applicable hardware and 
software provider expense to providing the access services associated 
with the Proposed Access Fees. The Exchange believes this allocation is 
reasonable because it represents the Exchange's actual cost to provide 
the access services associated with the Proposed Access Fees.\50\
---------------------------------------------------------------------------

    \50\ See supra note 47.
---------------------------------------------------------------------------

Internal Expense Allocations
    For 2021, total projected internal expenses relating to the 
Exchange providing the access services associated with the Proposed 
Access Fees are projected to be approximately $5.5 million. This 
includes, but is not limited to, costs associated with: (1) Employee 
compensation and benefits for full-time employees that support the 
access services associated with the Proposed Access Fees, including 
staff in network operations, trading operations, development, system 
operations, business, as well as staff in general corporate departments 
(such as legal, regulatory, and finance) that support those employees 
and functions (including an increase as a result of the higher 
determinism project); (2) depreciation and amortization of hardware and 
software used to provide the access services associated with the 
Proposed Access Fees, including equipment, servers, cabling, purchased 
software and internally developed software used in the production 
environment to support the network for trading; and (3) occupancy costs 
for leased office space for staff that provide the access services 
associated with the Proposed Access Fees. The breakdown of these costs 
is more fully-described below.
    For clarity, and as stated above, the Exchange took a conservative 
approach in determining the expense and the percentage of that expense 
to be allocated to providing access services in connection with the 
Proposed Access Fees. Only a portion of all such internal expenses are 
included in the internal expense herein, and no expense amount is 
allocated twice. Accordingly, the Exchange does not allocate its entire 
costs contained in those items to the access services associated with 
the Proposed Access Fees. This may result in the Exchange under 
allocating an expense to the provision of access services in connection 
with the Proposed Access Fees and such expenses may actually be higher 
or increase above what the Exchange utilizes within this proposal. 
Further, as part its ongoing assessment of costs and expenses 
(described above), the Exchange recently conducted a periodic thorough 
review of its expenses and resource allocations which, in turn, 
resulted in a revised percentage allocations in this filing.
    The Exchange believes it is reasonable to allocate such internal 
expense described above towards the total cost to the Exchange to 
provide the access services associated with the Proposed Access Fees. 
In particular, the Exchange's employee compensation and benefits 
expense relating to providing the access services associated with the 
Proposed Access Fees is projected to be approximately $3.2 million, 
which is only a portion of the approximately $9.7 million total 
projected expense for employee compensation and benefits. The Exchange 
believes it is reasonable to allocate the identified portion of such 
expense because this includes the time spent by employees of several 
departments, including Technology, Back Office, Systems Operations, 
Networking, Business Strategy Development (who create the business 
requirement documents that the Technology staff use to develop network 
features and enhancements), Trade Operations, Finance (who provide 
billing and accounting services relating to the network), and Legal 
(who provide legal services relating to the network, such as rule 
filings and various license agreements and other contracts). As part of 
the extensive cost review conducted by the Exchange, the Exchange 
reviewed the amount of time spent by employees on matters relating to 
the provision of access services associated with the Proposed Access 
Fees. Without these employees, the Exchange would not be able to 
provide the access services associated with the Proposed Access Fees to 
its Members and their customers. The Exchange did not allocate all of 
the employee compensation and benefits expense toward the cost of the 
access services associated with the Proposed Access Fees, only the 
portions which the Exchange identified as being specifically mapped to 
providing the access services associated with the Proposed Access Fees. 
According to the Exchange's calculations, it allocated approximately 
33% of the total applicable employee compensation and benefits expense 
to providing the access services associated with the Proposed Access 
Fees. The Exchange believes this allocation is reasonable because it

[[Page 9685]]

represents the Exchange's actual cost to provide the access services 
associated with the Proposed Access Fees, and not any other service, as 
supported by its cost review.\51\
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

    The Exchange's depreciation and amortization expense relating to 
providing the services associated with the Proposed Access Fees is 
projected to be $2 million, which is only a portion of the $3.1 million 
total projected expense for depreciation and amortization. The Exchange 
believes it is reasonable to allocate the identified portion of such 
expense because such expense includes the actual cost of the computer 
equipment, such as dedicated servers, computers, laptops, monitors, 
information security appliances and storage, and network switching 
infrastructure equipment, including switches and taps that were 
purchased to operate and support the network and provide the access 
services associated with the Proposed Access Fees. Without this 
equipment, the Exchange would not be able to operate the network and 
provide the access services associated with the Proposed Access Fees to 
its Members and their customers. The Exchange did not allocate all of 
the depreciation and amortization expense toward the cost of providing 
the access services associated with the Proposed Access Fees, only the 
portion which the Exchange identified as being specifically mapped to 
providing the access services associated with the Proposed Access Fees. 
According to the Exchange's calculations, it allocated approximately 
63% of the total applicable depreciation and amortization expense to 
providing the access services associated with the Proposed Access Fees, 
as these access services would not be possible without relying on such. 
The Exchange believes this allocation is reasonable because it 
represents the Exchange's actual cost to provide the access services 
associated with the Proposed Access Fees, and not any other service, as 
supported by its cost review.\52\
---------------------------------------------------------------------------

    \52\ Id.
---------------------------------------------------------------------------

    The Exchange's occupancy expense relating to providing the services 
associated with the Proposed Access Fees is projected to be 
approximately $0.3 million, which is only a portion of the $0.5 million 
total projected expense for occupancy. The Exchange believes it is 
reasonable to allocate the identified portion of such expense because 
such expense represents the portion of the Exchange's cost to rent and 
maintain a physical location for the Exchange's staff who operate and 
support the network, including providing the access services associated 
with the Proposed Access Fees. This amount consists primarily of rent 
for the Exchange's Princeton, New Jersey office, as well as various 
related costs, such as physical security, property management fees, 
property taxes, and utilities. The Exchange operates its Network 
Operations Center (``NOC'') and Security Operations Center (``SOC'') 
from its Princeton, New Jersey office location. A centralized office 
space is required to house the staff that operates and supports the 
network. The Exchange currently has approximately 200 employees. 
Approximately two-thirds of the Exchange's staff are in the Technology 
department, and the majority of those staff have some role in the 
operation and performance of the access services associated with the 
Proposed Access Fees. Accordingly, the Exchange believes it is 
reasonable to allocate the identified portion of its occupancy expense 
because such amount represents the Exchange's actual cost to house the 
equipment and personnel who operate and support the Exchange's network 
infrastructure and the access services associated with the Proposed 
Access Fees. The Exchange did not allocate all of the occupancy expense 
toward the cost of providing the access services associated with the 
Proposed Access Fees, only the portion which the Exchange identified as 
being specifically mapped to operating and supporting the network. 
According to the Exchange's calculations, it allocated approximately 
53% of the total applicable occupancy expense to providing the access 
services associated with the Proposed Access Fees. The Exchange 
believes this allocation is reasonable because it represents the 
Exchange's cost to provide the access services associated with the 
Proposed Access Fees, and not any other service, as supported by its 
cost review.\53\
---------------------------------------------------------------------------

    \53\ Id.
---------------------------------------------------------------------------

    The Exchange notes that a material portion of its total overall 
expense is allocated to the provision of access services (including 
connectivity, ports, and trading permits). The Exchange believes this 
is reasonable and in line, as the Exchange operates a technology-based 
business that differentiates itself from its competitors based on its 
more deterministic and resilient trading systems that rely on access to 
a high performance network, resulting in significant technology 
expense. Over two-thirds of Exchange staff are technology-related 
employees. The majority of the Exchange's expense is technology-based. 
As described above, the Exchange has only four primary sources of fees 
to recover their costs; thus, the Exchange believes it is reasonable to 
allocate a material portion of its total overall expense towards access 
fees.
    Based on the above, the Exchange believes that its provision of 
access services associated with the Proposed Access Fees will not 
result in excessive pricing or supra-competitive profit. As discussed 
above, the Exchange projects that its annualized expense for 2021 to 
provide network connectivity services (all connectivity alternatives) 
to be approximately $7.2 million per annum or an average of $600,000 
per month. The Exchange implemented the Proposed Access Fees on August 
1, 2021. For July 2021, prior to the Proposed Access Fees, Exchange 
Members and non-Members purchased a total of 98 10Gb ULL connections 
for which the Exchange charged approximately $971,905. This resulted in 
a profit of $371,905 (a profit margin of 38%) for that month (including 
pro-rated charges). For the month of October 2021, which includes the 
varying 10Gb ULL connectivity fees pursuant to the Proposed Access 
Fees, the Exchange had Members and non-Members purchasing a total of 
100 10Gb ULL connections for which the Exchange charged approximately 
$1,146,714 (including pro-rated charges). This resulted in a profit of 
$546,714 for that month (a modest 9% profit margin increase from July 
2021 to October 2021 from 38% to 47%). The Exchange believes that the 
Proposed Access Fees are reasonable because they only generate an 
additional 9% of profit margin per month (reflecting a 47% profit 
margin). The Exchange believes this modest increase in profit margin 
will allow it to continue to recoup its expenses and continue to invest 
in its technology infrastructure. Therefore, the Exchange also believes 
that this proposed profit margin increase is reasonable because it 
represents a reasonable rate of return.
    Again, the Exchange cautions that this profit margin may fluctuate 
from month to month based in the uncertainty of predicting how many 
connections may be purchased from month to month as Members and non-
Members are free to add and drop connections at any time based on their 
own business decisions. Notwithstanding that the revenue (and profit 
margin) may vary from month to month due to changes in connections and 
to changes to the Exchange's expenses, the number of connections has 
not materially changed over the prior months. Consequently, the 
Exchange believes that the months it has

[[Page 9686]]

used as a baseline to perform its assessment are representative of 
reasonably anticipated costs and expenses. This profit margin may also 
decrease due to the significant inflationary pressure on capital items 
that it needs to purchase to maintain the Exchange's technology and 
systems.\54\ Accordingly, the Exchange believes its total projected 
revenue for the providing the access services associated with the 
Proposed Access Fees will not result in excessive pricing or supra-
competitive profit.
---------------------------------------------------------------------------

    \54\ See supra note 38.
---------------------------------------------------------------------------

    The Exchange believes that conducting the above analysis on a per 
month basis is reasonable as the revenue generated from access services 
subject to the proposed fee generally remains static from month to 
month. The Exchange also conducted the above analysis on a per month 
basis to comply with the Commission Staff's Guidance, which requires a 
baseline analysis to assist in determining whether the proposal 
generates a supra-competitive profit. This monthly analysis was also 
provided in response to comment received on prior submissions of this 
proposed rule change.
    The Exchange reiterates that it only has four primary sources of 
revenue and cost recovery mechanisms: Transaction fees, access fees 
(which includes the Proposed Access Fees), regulatory fees, and market 
data fees. Accordingly, the Exchange must cover all of its expenses 
from these four primary sources of revenue and cost recovery 
mechanisms. As a result, each of these fees cannot be ``flat'' and 
cover only the expenses directly related to the fee that is charged. 
The above revenue and associated profit margin therefore are not solely 
intended to cover the costs associated with providing access services 
subject to the Proposed Access Fees.
    The Exchange believes it is reasonable, equitable and not unfairly 
discriminatory to allocate the respective percentages of each expense 
category described above towards the total cost to the Exchange of 
operating and supporting the network, including providing the access 
services associated with the Proposed Access Fees because the Exchange 
performed a line-by-line item analysis of nearly every expense of the 
Exchange, and has determined the expenses that directly relate to 
providing access to the Exchange. Further, the Exchange notes that, 
without the specific third-party and internal expense items listed 
above, the Exchange would not be able to provide the access services 
associated with the Proposed Access Fees to its Members and their 
customers. Each of these expense items, including physical hardware, 
software, employee compensation and benefits, occupancy costs, and the 
depreciation and amortization of equipment, have been identified 
through a line-by-line item analysis to be integral to providing access 
services. The Proposed Access Fees are intended to recover the costs of 
providing access to the Exchange's System. Accordingly, the Exchange 
believes that the Proposed Access Fees are fair and reasonable because 
they do not result in excessive pricing or supra-competitive profit, 
when comparing the actual costs to the Exchange versus the projected 
annual revenue from the Proposed Access Fees.
The Proposed Tiered-Pricing Structure Is Not Unfairly Discriminatory 
and Provides for the Equitable Allocation of Fees, Dues, and Other 
Charges
    The Exchange believes the proposed tiered-pricing structure is 
reasonable, fair, equitable, and not unfairly discriminatory because it 
will apply to all 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. All similarly 
situated Members and non-Members would be subject to the same fees. The 
fees do not depend on any distinction between Members and non-Members 
because they are solely determined by the individual Members' or non-
Members' business needs and its impact on Exchange resources.
    The proposed tiered-pricing structure is not unfairly 
discriminatory and provides for the equitable allocation of fees, dues, 
and other charges because it is designed to encourage Members and non-
Members to be more efficient and economical when determining how to 
connect to the Exchange and the amount of the fees are based on the 
number of connections a Member or non-Member utilizes. Charging an 
incrementally 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. The proposed tiered pricing structure should also enable 
the Exchange to better monitor and provide access to the Exchange's 
network to ensure sufficient capacity and headroom in the System.
    The Exchange believes that the proposal to move to a tiered-pricing 
structure for its 10Gb ULL connections is reasonable, equitably 
allocated and not unfairly discriminatory because the majority of 
Members and non-Members that purchase 10Gb ULL connections will either 
save money or pay the same amount after the tiered-pricing structure is 
implemented. After the effective date of the First Proposed Rule Change 
on August 1, 2021, approximately 60% of the firms that purchased at 
least one 10Gb ULL connection experienced a decrease in their monthly 
connectivity fees while only approximately 40% 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. To illustrate, firms that purchase only one 10Gb ULL 
connection per month used to pay the flat rate of $10,000 per month for 
that one 10Gb ULL connection. Pursuant to the proposed tiered-pricing 
structure, these firms now pay $9,000 per month for that same one 10Gb 
ULL connection, saving $1,000 per month or $12,000 annually. Further, 
firms that purchase two 10Gb ULL connections per month previously paid 
a flat rate of $20,000 per month ($10,000 x 2) for those two 10Gb ULL 
connections. Pursuant to the proposed tiered-pricing structure, these 
firms now pay $18,000 per month ($9,000 x 2) for those two 10Gb ULL 
connections, saving $2,000 per month or $24,000 annually.
    To achieve a consistent, premium network performance, the Exchange 
must build out and continue to maintain a network that has the capacity 
to handle the message rate requirements of not only firms that consume 
minimal Exchange connectivity resources, but also those firms that most 
heavily consume Exchange connectivity resources, network consumers, and 
purchasers of 10Gb ULL connectivity. 10Gb ULL connectivity is not an 
unlimited resource as the Exchange needs to purchase additional 
equipment to satisfy requests for additional connections. The Exchange 
also needs to provide personnel to set up new connections, service 
requests related to adding new and/or deleting existing connections, 
respond to performance queries from, and to maintain those connections 
on behalf of Members and non-Members. Also, those firms that utilize 
10Gb ULL connectivity typically generate a disproportionate amount of 
messages and order traffic, usually billions per day across the 
Exchange. These billions of messages per day consume the Exchange's 
resources and significantly contribute to the overall network 
connectivity expense for storage and network transport capabilities. 
The Exchange also has to purchase additional storage capacity on

[[Page 9687]]

an ongoing basis to ensure it has sufficient capacity to store these 
messages as part of it surveillance program and to satisfy its record 
keeping requirements under the Exchange Act.\55\ Thus, as the number of 
connections an entity has increases, certain other costs incurred by 
the Exchange that are correlated to, though not directly affected by, 
connection costs (e.g., storage costs, surveillance costs, service 
expenses) also increase.
---------------------------------------------------------------------------

    \55\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    The Exchange sought to design the proposed tiered-pricing structure 
to set the amount of the fees to relate to the number of connections a 
firm purchases. The more connections purchased by a firm likely results 
in greater expenditure of Exchange resources and increased cost to the 
Exchange. With this in mind, the Exchange proposes to decrease the 
monthly fees for those firms who connect to the Exchange as part of 
their best execution obligations and generally tend to send the least 
amount of orders and messages over those connections. The Exchange 
notes that firms that primarily route orders seeking best-execution 
generally only purchase a limited number of connections. Those firms 
also generally send fewer orders and messages over those connections, 
resulting in less strain on Exchange resources. Therefore, the 
connectivity costs will likely be lower for these firms based on the 
proposed tiered-pricing structure.
    On a similar note, the Exchange proposes to increase the fee for 
those firms that purchase more connections resulting in greater 
expenditure of Exchange resources and increased cost to the Exchange. 
The Exchange notes that these firms that purchase more than two to four 
10Gb ULL connections 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. 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. For instance, a Member may have just sent 
numerous messages and/or orders over one of their 10Gb ULL connections 
that are in queue to be processed. That same Member then seeks to enter 
an order to remove liquidity from the Exchange's Book. That Member may 
choose to send that order over one or more of their other 10Gb ULL 
connections with less message and/or order traffic to ensure that their 
liquidity taking order accesses the Exchange quicker because that 
connection's queue is shorter. These firms also tend to frequently add 
and drop connections mid-month to determine which connections have the 
least latency, which results in increased costs to the Exchange to 
frequently make changes in the data center and provide the additional 
technical and personnel support necessary to satisfy these requests.
    The firms that engage in the above-described liquidity removing and 
advanced trading strategies typically require multiple connections and, 
therefore, generate higher costs by utilizing more of the Exchange's 
resources. Those firms may also conduct other latency measurements over 
their connections and drop and simultaneously add connections mid-month 
based on their own assessment of their performance. This results in 
Exchange staff processing such requests, potentially purchasing 
additional equipment, and performing the necessary network engineering 
to replace those connections in the data center. Therefore, the 
Exchange believes it is equitable for these firms to experience 
increased connectivity costs based on their disproportionate pull on 
Exchange resources to provide the additional connectivity.
    In addition, the proposed tiered-pricing structure is equitable 
because it is designed to encourage Members and non-Members to be more 
efficient and economical when determining how to connect to the 
Exchange. Section 6(b)(5) of the Exchange Act requires the Exchange to 
provide access on terms that are not unfairly discriminatory.\56\ As 
stated above, 10Gb ULL connectivity is not an unlimited resource and 
the Exchange's network is limited in the amount of connections it can 
provide. However, the Exchange must accommodate requests for additional 
connectivity and access to the Exchange's System to ensure that the 
Exchange is able to provide access on non-discriminatory terms and 
ensure sufficient capacity and headroom in the System. To accommodate 
requests for additional connectivity on top of current network capacity 
constraints, requires that the Exchange purchase additional equipment 
to satisfy these requests. The Exchange also needs to provide personnel 
to set up new connections and to maintain those connections on behalf 
of Members and non-Members. The proposed tiered-pricing structure is 
equitable because it is designed to encourage Members and non-Members 
to be more efficient and economical in selecting the amount of 
connectivity they request while balancing that against the Exchange's 
increased expenses when expanding its network to accommodate additional 
connectivity.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Proposed Fees Are Reasonable When Compared to the Fees of Other 
Options Exchanges With Similar Market Share
    The Exchange does not have visibility into other equities 
exchanges' costs to provide connectivity or their fee markup over those 
costs, and therefore cannot use other exchange's connectivity fees as a 
benchmark to determine a reasonable markup over the costs of providing 
connectivity. Nevertheless, the Exchange believes the other exchange's 
connectivity fees are a useful example of alternative approaches to 
providing and charging for connectivity. To that end, the Exchange 
believes the proposed tiered-pricing structure for 10Gb ULL connections 
is reasonable because the proposed highest tier is still less than fees 
charged for similar connectivity provided by other options exchanges 
with comparable market shares. For example, NASDAQ (equity options 
market share of 8.88% as of November 26, 2021 for the month of 
November) \57\ charges a monthly fee of $10,000 per 10Gb fiber 
connection and $15,000 per 10Gb Ultra fiber connection.\58\ The highest 
tier of the Exchange's proposed fee structure for a 10Gb ULL connection 
is $13,000 for the fifth and subsequent connections, which is $2,000 
per month less than NASDAQ and, unlike NASDAQ, the Exchange does not 
charge installation fees. For market participants with fewer 
connections, the difference is even more stark. For a market 
participant with two connections to the Exchange and two connections to 
NASDAQ, the difference in connection fees would be $12,000 per month. 
The Exchange notes that the same connectivity fees described above for 
NASDAQ also apply to its affiliates, ISE \59\ (equity options market 
share of 7.96% as of November 26, 2021 for the month of November) \60\ 
and PHLX (equity options market share of 9.31% as of November 26, 2021 
for the month

[[Page 9688]]

of November).\61\ Amex (equity options market share of 5.05% as of 
November 26, 2021 for the month of November) \62\ charges $15,000 per 
connection initially plus $22,000 monthly per 10Gb LX LCN circuit 
connection.\63\ Again, the highest tier of the Exchange's proposed fee 
structure for a 10Gb ULL connection is $9,000 per month lower than the 
Amex connectivity fee after the first month.
---------------------------------------------------------------------------

    \57\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited November 26, 2021).
    \58\ See NASDAQ Rules, General 8: Connectivity, Section 1. Co-
Location Services.
    \59\ See ISE Rules, General 8: Connectivity.
    \60\ See supra note 57.
    \61\ See id. See also PHLX Rules, General 8: Connectivity.
    \62\ See supra note 57.
    \63\ See Amex Fee Schedule, Section IV.
---------------------------------------------------------------------------

    In the each of the above cases, the Exchange's highest tier in the 
proposed tiered-pricing structure only applies to the fifth and 
additional connections and is still significantly lower than that of 
competing options exchanges with similar market share. Despite 
proposing lower or similar fees to that of competing options exchanges 
with similar market share, the Exchange believes that it provides a 
premium network experience to its Members and non-Members via a highly 
deterministic System, enhanced network monitoring and customer 
reporting, and a superior network infrastructure than markets with 
higher market shares and more expensive connectivity alternatives. Each 
of the connectivity rates in place at competing options exchanges were 
filed with the Commission for immediate effectiveness and remain in 
place today.
    The Exchange further believes that the Proposed Access Fees are 
reasonable, equitably allocated and not unfairly discriminatory 
because, for one 10Gb ULL connection, the Exchange provides each Member 
or non-Member access to all twelve (12) matching engines on MIAX 
Emerald and a vast majority choose to connect to all twelve (12) 
matching engines. The Exchange believes that other exchanges require 
firms to connect to multiple matching engines.\64\
---------------------------------------------------------------------------

    \64\ See Specialized Quote Interface Specification, Nasdaq PHLX, 
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2, 
Architecture (revised August 16, 2019), available at http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is 
unclear whether the NASDAQ exchanges include connectivity to each 
matching engine for the single fee or charge per connection, per 
matching engine. See also NYSE Technology FAQ and Best Practices: 
Options, Section 5.1 (How many matching engines are used by each 
exchange?) (September 2020). The Exchange notes that NYSE provides a 
link to an Excel file detailing the number of matching engines per 
options exchange, with Arca and Amex having 19 and 17 matching 
engines, respectively.
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    With respect to intra-market competition, the Exchange does not 
believe that the proposed rule change would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants or affect the ability of such market 
participants to compete. As stated above, the Exchange does not believe 
its proposed pricing will impose a barrier to entry to smaller 
participants and notes that its proposed connectivity pricing structure 
for its 10Gb ULL connections is associated with relative usage of the 
various market participants. Further, the majority of firms that 
purchase 10Gb ULL connections may either save money or pay the same 
amount after the tiered-pricing structure is implemented. While total 
cost may be increased for market participants with larger capacity 
needs or for business/technical preferences, such options provide far 
more capacity and are purchased by those that consume more resources 
from the network. Accordingly, the proposed tiered-pricing structure 
does not favor certain categories of market participants in a manner 
that would impose an undue burden on competition; rather, the 
allocation reflects the network resources consumed by the various usage 
of market participants--lowest bandwidth consuming members pay the 
least, and highest bandwidth consuming members pay the most, 
particularly since higher bandwidth consumption translates to higher 
costs to the Exchange.
    The Exchange also does not believe that the proposed rule change 
will result in any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, options market participants are not forced to connect 
to all options exchanges. The Exchange operates in a highly competitive 
environment, and as discussed above, its ability to price access and 
connectivity is constrained by competition among exchanges and third 
parties. There are other options markets of which market participants 
may connect to trade options. There is also a possible range of 
alternative strategies, including routing to the exchange through 
another participant or market center or accessing the Exchange 
indirectly. For example, there are 15 other U.S. options exchanges, 
which the Exchange must consider in its pricing discipline in order to 
compete for market participants. In this competitive environment, 
market participants are free to choose which competing exchange or 
reseller to use to satisfy their business needs. As a result, the 
Exchange believes this proposed rule change permits fair competition 
among national securities exchanges. Accordingly, the Exchange does not 
believe its proposed fee changes impose any burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Act.
    Regrettably, the Exchange believes that the application of the 
Guidance to date has adversely affected inter-market competition by 
impeding the ability of smaller, low cost exchanges to adopt or 
increase fees for their market data and access services (including 
connectivity and port products and services). Since the adoption of the 
Guidance, and even more so recently, it has become harder, particularly 
for smaller, low cost exchanges, to adopt or increase fees to generate 
revenue necessary to invest in systems, provide innovative trading 
products and solutions, and improve competitive standing to the benefit 
of the affected exchanges' market participants. Although the Staff 
Guidance has served an important policy goal of improving disclosures 
and requiring exchanges to justify that their market data and access 
fee proposals are fair and reasonable, it has also negatively impacted 
exchanges, and particularly many smaller, low cost exchanges, that seek 
to adopt or increase fees despite providing enhanced disclosures and 
rationale to support their proposed fee changes.

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

    As described above, the Exchange received one comment letter on the 
First Proposed Rule Change and four comment letters on the Second 
Proposed Rule Change.\65\ The Exchange responded to the comment letters 
in the Third Proposed Rule Change and repeats its response in is 
filing. No comment letters were received in response to the Third 
Proposed Rule Change.
---------------------------------------------------------------------------

    \65\ See supra note 9.
---------------------------------------------------------------------------

HMA Letter
    The HMA Letter does not raise specific issues with the First or 
Second Proposed Rule Changes. Instead the HMA Letter is generally 
critical of the exchange fee filing process contained in Section 
19(b)(3)(A)(ii) of the Act,\66\ and Rule 19b-4(f)(2) thereunder,\67\ 
and other exchanges' fee filings in recent years.

[[Page 9689]]

The HMA Letter, however, applauds the level of disclosure the Exchange 
included in the First and Second Proposed Rule Changes and was 
supportive of the efforts made by the Exchange and its affiliates to 
provide transparency and justify their proposed fees. The HMA Letter 
specifically notes that:
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \67\ 17 CFR 240.19b-4.

    ``MIAX has repeatedly filed to change its connectivity fees in a 
way that will materially lower costs for many users, while 
increasing the costs for some of its heaviest of users. These 
filings have been withdrawn and repeatedly refiled. Each time, 
however, the filings contain significantly greater information about 
who is impacted and how than other filings that have been permitted 
to take effect without suspension. For example, MIAX detailed the 
associated projected revenues generated from the connectivity fees 
by user class, again in a clear attempt to comply with the SRO Fee 
Filing Guidance.'' \68\
---------------------------------------------------------------------------

    \68\ See HMA Letter, supra note 9.

    As the HMA Letter notes, the Exchange refiled its same fee 
proposals to include significantly greater information about who is 
impacted and how, primarily at the request of the Commission Staff and 
in response to comments. The Exchange is again refiling its proposal to 
include more information surrounding the proposed fees and to respond 
to commenters.
SIG Letter 2
    SIG Letter 2 argues that the Exchange, in withdrawing the First 
Proposed Rule Change and refiling the Second Proposed Rule Change, 
``improperly circumvent[ed] the procedural protections embedded in 
Exchange Act Section 19(b)(3)(C), and subvert[ed] the balance of 
interests upheld therein.'' \69\ SIG's assertion that the Exchange's 
entire reason for withdrawing and refiling was to subvert the 
protections of the Exchange Act are entirely without merit. The 
Exchange withdrew the First Proposed Rule Change and replaced it with 
the Second Proposed Rule Change in good faith to provide additional 
justification and explanation for the proposed fee changes and did so 
in compliance with the Exchange Act. The same is true in this filing, 
where the Exchange withdrew the Second Proposed Rule Change and 
submitted this filing to provide additional justification and 
explanation for the proposed fee changes and directly responds to 
certain points raised in SIG Letters 1, 2, and 3, as well as the SIFMA 
Letter submitted on the First and Second Proposed Rule Changes.
---------------------------------------------------------------------------

    \69\ See SIG Letter 2, supra note 9.
---------------------------------------------------------------------------

    As SIG well knows, exchanges are able withdraw and refile various 
proposals (including fee changes and other rule changes) with the 
Commission for a multitude of reasons, not the least of which is to 
address feedback and comments from market participants and Commission 
Staff. The Exchange is well within the bounds of the Act and the rules 
and regulations thereunder to withdraw a proposed rule change and 
replace it with a new proposed rule change in good faith and to enhance 
the filing to ensure it complies with the requirements of the Act.
SIG Letters 1 and 3
    As an initial matter, SIG Letter 1 cites Rule 700(b)(3) of the 
Commission's Rules of Fair Practice which places ``the burden to 
demonstrate that a proposed rule change is consistent with the Act on 
the self-regulatory organization that proposed the rule change'' and 
states that a ``mere assertion that the proposed rule change is 
consistent with those requirements . . . is not sufficient.'' \70\ SIG 
Letter 1's assertion that the Exchange has not met this burden is 
without merit, especially considering the overwhelming amounts of 
revenue and cost information the Exchange included in the First and 
Second Proposed Rule Changes and this filing.
---------------------------------------------------------------------------

    \70\ 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------

    Until recently, the Exchange operated at a net annual loss since it 
launched operations in 2019.\71\ As stated above, the Exchange believes 
that exchanges in setting fees of all types should meet very high 
standards of transparency to demonstrate why each new fee or fee 
increase meets the requirements of the Act that fees be reasonable, 
equitably allocated, not unfairly discriminatory, and not create an 
undue burden on competition among market participants. The Exchange 
believes this high standard is especially important when an exchange 
imposes various access fees for market participants to access an 
exchange's marketplace. The Exchange believes it has achieved this 
standard in this filing and in the First Proposed Rule Change, Second 
Proposed Rule Change. Similar justifications for the proposed fee 
change included in the First and Second Proposed Rule Changes, but also 
in this filing, were previously included in similar fee changes filed 
by the Exchange and its affiliates, MIAX and MIAX Pearl Options, and 
SIG did not submit a comment letter on those filings.\72\ Those filings 
were not suspended by the Commission and continue to remain in effect. 
The justification included in each of the prior filings was the result 
of numerous withdrawals and re-filings of the proposals to address 
comments received from Commission Staff over many months. The Exchange 
and its affiliates have worked diligently with Commission Staff on 
ensuring the justification included in past fee filings fully support 
an assertion that those fee changes are consistent with the Act.\73\ 
The Exchange leveraged its past work with Commission Staff to ensure 
the justification provided herein and in the First and Second Proposed 
Rule Changes include the same level of detail (or more) as the prior 
fee changes that survived Commission scrutiny. The Exchange's detailed 
disclosures in fee filings have also been applauded by one industry 
group which noted, ``[the Exchange's] filings contain significantly 
greater information about who is impacted and how than other filings

[[Page 9690]]

that have been permitted to take effect without suspension.'' \74\ That 
same commenter also noted their ``worry that the Commission's process 
for reviewing and evaluating exchange filings may be inconsistently 
applied.'' \75\
---------------------------------------------------------------------------

    \71\ See supra note 40.
    \72\ See Securities Exchange Act Release Nos. 91858 (May 12, 
2021), 86 FR 26967 (May 18, 2021) (SR-PEARL-2021-23) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change to 
Amend the MIAX Pearl Fee Schedule to Remove the Cap on the Number of 
Additional Limited Service Ports Available to Market Makers); 91460 
(April 2, 2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend Its Fee Schedule To Adopt Port Fees, Increase 
Certain Network Connectivity Fees, and Increase the Number of 
Additional Limited Service MIAX Emerald Express Interface Ports 
Available to Market Makers); and 91857 (May 12, 2021), 86 FR 26973 
(May 18, 2021) (SR-MIAX-2021-19) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To 
Remove the Cap on the Number of Additional Limited Service Ports 
Available to Market Makers).
    \73\ See, e.g., Securities Exchange Act Release No. 90196 
(October 15, 2020), 85 FR 67064 (October 21, 2020) (SR-EMERALD-2020-
11) (Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend Its Fee Schedule To Adopt One-Time Membership 
Application Fees and Monthly Trading Permit Fees). See Securities 
Exchange Act Release Nos. 90601 (December 8, 2020), 85 FR 80864 
(December 14, 2020) (SR-EMERALD-2020-18) (re-filing with more detail 
added in response to Commission Staff's feedback and after 
withdrawing SR-EMERALD-2020-11); and 91033 (February 1, 2021), 86 FR 
8455 (February 5, 2021) (SR-EMERALD-2021-03) (re-filing with more 
detail added in response to Commission Staff's feedback and after 
withdrawing SR-EMERALD-2020-18). The Exchange initially filed a 
proposal to remove the cap on the number of additional Limited 
Service MEO Ports available to Members on April 9, 2021. See SR-
PEARL-2021-17. On April 22, 2021, the Exchange withdrew SR-PEARL-
2021-17 and refiled that proposal (without increasing the actual fee 
amounts) to provide further clarification regarding the Exchange's 
revenues, costs, and profitability any time more Limited Service MEO 
Ports become available, in general, (including information regarding 
the Exchange's methodology for determining the costs and revenues 
for additional Limited Service MEO Ports). See SR-PEARL-2021-20. On 
May 3, 2021, the Exchange withdrew SR-PEARL-2021-20 and refiled that 
proposal to further clarify its cost methodology. See SR-PEARL-2021-
22. On May 10, 2021, the Exchange withdrew SR-PEARL-2021-22 and 
refiled SR-PEARL-2021-23. See Securities Exchange Act Release No. 
91858 (May 12, 2021), 86 FR 26967 (May 18, 2021) (SR-PEARL-2021-23).
    \74\ See HMA Letter, supra note 9.
    \75\ Id. (providing examples where non-transaction fee filings 
by other exchanges have been permitted to remain effective and not 
suspended by the Commission despite less disclosure and 
justification).
---------------------------------------------------------------------------

    Therefore, a finding by the Commission that the Exchange has not 
met its burden to show that the proposed fee change is consistent with 
the Act would be different than the Commission's treatment of similar 
past filings, would create further ambiguity regarding the standards 
exchange fee filings should satisfy, and is not warranted here.
    In addition, the arguments in SIG Letter 1 do not support their 
claim that the Exchange has not met its burden to show the proposed 
rule change is consistent with the Act. Prior to, and after submitting 
the First Proposed Rule Change, the Exchange solicited feedback from 
its Members, including SIG. SIG relayed their concerns regarding the 
proposed change. The Exchange then sought to work with SIG to address 
their concerns and gain a better understanding of the access/
connectivity/quoting infrastructure of other exchanges. In response, 
SIG provided no substantive suggestions on how to amend the First 
Proposed Rule Change to address their concerns and instead chose to 
submit three comment letters. One could argue that SIG is using the 
comment letter process not to raise legitimate regulatory concerns 
regarding the proposal, but to inhibit or delay proposed fee changes by 
the Exchange.
    Nonetheless, the Exchange has enhanced its cost and revenue 
analysis and data in this Third [sic] Proposed Rule Change to further 
justify that the Proposed Access Fees are reasonable in accordance with 
the Commission Staff's Guidance. Among other things, these enhancements 
include providing baseline information in the form of data from the 
month before the Proposed Access Fees became effective.
    The Exchange now responds to SIG remaining claims below. SIG Letter 
3 first summarizes its arguments made in SIG Letters 1 and 2 and 
incorporates those arguments by reference. The Exchange responded to 
the arguments in SIG Letter 2 above. SIG Letter 3 incorporates the 
following arguments from SIG Letter 1, which the Exchange will first 
respond to in turn, below:

    ``(1) The prospect that a member may withdraw from the Exchanges 
if a fee is too costly is not a basis for asserting that the fee is 
reasonable; (2) profit margin comparisons do not support the 
Exchanges' claims that they will not realize a supracompetitive 
profit, the Exchanges' respective profit margins of 30% (for MIAX 
and Pearl) and 51% (for Emerald) in relation to connectivity fees 
are high in any event, and comparisons to competing exchanges' 
overall operating profit margins are an inapt ``apples-to-oranges'' 
comparison; (3) the Exchanges provide no support for their claim 
that their proposed tiered pricing structure is needed to encourage 
efficiency in connectivity usage; (4) the Exchanges provided no 
support for their claim that the tiered pricing structure allows 
them to better monitor connectivity usage, nor that this is an 
appropriate basis for the pricing structure in any event; (5) the 
Exchanges' claim that firms who purchase more 10Gb ULL lines 
generate ``higher'' costs is misleading, and they offered no support 
for this claim in any event; (6) no other exchange has tiered 
connectivity pricing; (7) the recoupment of investment for exchange 
infrastructure has no supporting nexus with the claim that the 
proposed fees are reasonable, equitably allocated, and not unfairly 
discriminatory; and (8) the recoupment of investment claim belies 
the Exchanges' claim of encouraging efficiency in connectivity 
usage.'' \76\
---------------------------------------------------------------------------

    \76\ See SIG Letter 3, supra note 9.

The Exchange's Examples of Members Terminating Their Exchange Access 
Shows That Members Have Choice Whether To Connect to an Exchange Based 
on Fees
    SIG asserts that ``the prospect that a member may withdraw from the 
Exchanges if a fee is too costly is not a basis for asserting that the 
fee is reasonable.'' \77\ SIG misinterprets the Exchange's argument 
here. The Exchange provided the examples of firms terminating access to 
certain markets due to fees to support its assertion that firms, 
including market makers, are not required to connect to all markets and 
may drop access if fees become too costly for their business models and 
alternative or substitute forms of connectivity are available to those 
firms who choose to terminate access. The Commission Staff Guidance 
also provides that ``[a] statement that substitute products or services 
are available to market participants in the relevant market (e.g., 
equities or options) can demonstrate competitive forces if supported by 
evidence that substitute products or services exist.'' \78\ 
Nonetheless, the Third [sic] Proposed Rule Change no longer makes this 
assertion as a basis for the proposed fee change and, therefore, the 
Exchange believes it is not necessary to respond to this portion of SIG 
Letters 1 and 3.
---------------------------------------------------------------------------

    \77\ Id.
    \78\ See Guidance, supra note 23.
---------------------------------------------------------------------------

The Proposed Fees Will Not Result in Excessive Pricing or Supra-
Competitive Profit
    Next, SIG asserts that the Exchange's ``profit margin comparisons 
do not support the Exchange's claims that they will not realize a 
supracompetitive profit,'' that ``the Exchanges' respective profit 
margins of 30% (for MIAX and Pearl) and 51% (for Emerald) in relation 
to connectivity fees are high in any event,'' and ``comparisons to 
competing exchanges' overall operating profit margins are an inapt 
`apples-to-oranges' comparison.''
    The Exchange has provided ample data that the proposed fees would 
not result in excessive pricing or a supra-competitive profit. In this 
Third [sic] Proposed Rule Change, the Exchange no longer utilizes a 
comparison of its profit margin to that of other options exchanges as a 
basis that the Proposed Access Fees are reasonable. Rather, the 
Exchange has enhanced its cost and revenue analysis and data in this 
Third [sic] Proposed Rule Change to further justify that the Proposed 
Access Fees are reasonable in accordance with the Commission Staff's 
Guidance. Therefore, the Exchange believes it is no longer necessary to 
respond to this portion of SIG Letters 1 and 3.
The Proposed Tiered Pricing Structure Is Not Unfairly Discriminatory
    SIG challenges the proposed fees by arguing that ``the Exchange[ ] 
provide[s] no support for [its] claim that [the] proposed tiered 
pricing structure is needed to encourage efficiency in connectivity 
usage and the Exchange[ ] provided no support for [the] claim that the 
tiered pricing structure allows them to better monitor connectivity 
usage, nor that this is an appropriate basis for the pricing structure 
in any event.'' The Exchange provided additional justification to 
support that the Proposed Access Fees are equitable and not unfairly 
discriminatory above in response to SIG's assertions.
Firms That Purchase More 10Gb ULL Generate Higher Exchange Costs
    SIG argues that ``the Exchanges' claim that firms who purchase more 
10Gb ULL lines generate `higher' costs is misleading,'' and that the 
Exchange has ``offered no support for this claim in any event.'' As 
described above, the Exchange sought to design the proposed tiered-
pricing structure to set the amount of the fees to relate to the number 
of connections a firm purchases and the Exchange believes it provided

[[Page 9691]]

ample justification for the proposed tiered-pricing structure in the 
First and Second Proposed Rule Changes. Nonetheless, the Exchange 
provides additional justification to support that the Proposed Access 
Fees are equitable and not unfairly discriminatory above in response to 
SIG's assertions.
The Proposed Tiered-Pricing Structure for 10Gb ULL Connectivity Will 
Provide Cost Savings for the Majority of Exchange Members
    The SIG Letter incorrectly asserts that no other exchange has 
tiered connectivity pricing. Numerous other exchanges provide tiered 
fee structures for various other types of access to their platforms, 
including trading permits and ports.\79\ The Exchange provided adequate 
evidence that most firms would incur cost savings under the Proposed 
Access Fees in the First and Second Proposed Rule Changes and this 
filing. Nonetheless, the Exchange believes it provided additional 
justification to support that the Proposed Access Fees are equitable 
and not unfairly discriminatory above in response to SIG's assertions.
---------------------------------------------------------------------------

    \79\ See Cboe Exchange, Inc. Fee Schedule, Logical Connectivity 
Fees ($750 per port per month for the first 5 BOE/FIX Logical Ports 
and $800 per port per month for each port over 5; $1,500 per port 
per month for the first 5 BOE Bulk Logical Ports, $2,500 per port 
per month for ports 6-30, and $3,000 per port per month for each 
port over 30); Cboe BXZ Exchange, Inc. Options Fee Schedule, Options 
Logical Port Fees, Ports with Bulk Quoting Capabilities ($1,500 per 
port per month for the first and second ports, $2,500 per port per 
month for three or more); Nasdaq Stock Market LLC, Options 7, 
Pricing Schedule, Section 3 ($1,500 per port per month for the first 
5 SQF ports; $1,000 per port per month for SQF ports 15-20; and $500 
per port per month for all SQF ports over 21); NYSE American Options 
Fee Schedule, Section V.A., Port Fees and NYSE Arca Options Fee 
Schedule, Port Fees (both charging $450 per port for order/quote 
entry ports 1-40 and $150 per port for ports 41 and greater).
---------------------------------------------------------------------------

Recoupment of Exchange Infrastructure Costs
    Nowhere in this proposal or in the First Proposed Fee change did 
the Exchange assert that it benefits competition to allow a new 
exchange entrant to recoup their infrastructure costs. Rather, the 
Exchange asserts above that its ``proposed fees are reasonable, 
equitably allocated and not unfairly discriminatory because the 
Exchange, and its affiliates, are still recouping the initial 
expenditures from building out their systems while the legacy exchanges 
have already paid for and built their systems.'' The Exchange no longer 
makes this assertion in this filing and, therefore, does not believe is 
it necessary to respond to SIG's assertion here.
SIFMA Letter
    In sum, the SIFMA Letter asserts that the Exchange has failed to 
demonstrate that the Proposed Access Fees are reasonable for three 
reasons:

    (i) ``The Exchanges' ``platform competition'' argument that 
competition for order flow constrains pricing for market data or 
other products and services exclusively offered by an exchange does 
not demonstrate that the fees are reasonable.''
    (ii) ``. . . order flow competition alone between exchanges does 
not demonstrate that the fees for the products and services subject 
to the Proposal are reasonable.''
    (iii) ``the Exchanges' argument that the products and services 
subject to the Proposals are optional does not reflect marketplace 
reality, nor does it demonstrate that the proposed fees are 
reasonable.''

    The Exchange responds to each of SIFMA's challenges in turn below.
The Exchange Never Set Forth a ``Platform Competition'' Argument
    The SIFMA Letter asserts that the Exchange's ``platform 
competition'' argument that competition for order flow constrains 
pricing for market data or other products and services exclusively 
offered by an exchange does not demonstrate that the fees are 
reasonable.'' \80\ The Exchange does not believe it is necessary to 
respond to this assertion because it has never set forth a ``platform 
competition'' \81\ argument to justify the Proposed Access Fees in the 
First or Second Proposed Rule Change nor does it do so in this filing.
---------------------------------------------------------------------------

    \80\ See SIFMA Letter, supra note 9.
    \81\ Pursuant to the Guidance, ``platform theory generally 
asserts that when a business offers facilities that bring together 
two or more distinct types of customers, it is the overall return of 
the platform, rather than the return of any particular fees charged 
to a type of customer, that should be used to assess the 
competitiveness of the platform's market.'' See Guidance, supra note 
23.
---------------------------------------------------------------------------

The Exchange Is Not Arguing That Order Flow Competition Alone 
Demonstrates That the Proposed Fees Are Reasonable
    The SIFMA Letter asserts that ``order flow competition alone 
between exchanges does not demonstrate that the fees for the products 
and services subject to the Proposal are reasonable.'' \82\ The 
Exchange never directly asserted in the First or Second Proposed Rule 
Changes, nor does it do so in this filing, that order flow competition, 
alone, demonstrated that the Proposed Access Fees are reasonable and 
has removed any language that could imply this argument from this 
filing.
---------------------------------------------------------------------------

    \82\ See SIFMA Letter, supra note 9.
---------------------------------------------------------------------------

Other SIFMA Assertions
    SIFMA also challenges or asserts: (i) The substitutability or 
optionality of 10Gb ULL connections, (ii) whether the Exchange has 
shown that the fees are equitable and non-discriminatory; (iii) that a 
tiered pricing structure will impose higher cost on all market 
participants; (iv) that a tiered pricing structure will encourage 
market participants to be more economical with the usage; (v) greater 
number of connections use greater Exchange resources; and (vi) that the 
Exchange has not provided extensive information regarding its cost data 
and how it determined it cost analysis. The Exchange believes that 
these assertions by SIFMA basically echo assertions made in SIG Letters 
1 and 3 and that it provided a response to these assertions under its 
response to SIG above or in provided enhanced transparency and 
justification in this filing.

III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\83\ at any time within 
60 days of the date of filing of a proposed rule change pursuant to 
Section 19(b)(1) of the Act,\84\ 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 change is necessary and appropriate to allow for 
additional analysis of the proposed rule change's consistency with the 
Act and the rules thereunder.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78s(b)(3)(C).
    \84\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    As the Exchange further details above, the Exchange first filed a 
proposed rule change proposing fee changes as proposed herein on July 
30, 2021, with the proposed fee changes effective beginning August 1, 
2021. That proposal, SR-EMERALD-2021-23, was published for comment in 
the Federal Register on August 17, 2021.\85\ On September 24, 2021 the 
Exchange withdrew SR-EMERALD-2021-23 and filed a proposed rule change 
proposing fee changes as proposed herein. That proposal, SR-EMERALD-
2021-29, was

[[Page 9692]]

published for comment in the Federal Register on October 4, 2021.\86\ 
The Commission received four comment letters from three separate 
commenters on SR-EMERALD-2021-29.\87\ On November 22, 2021, pursuant to 
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily 
suspended the proposed rule change; and (2) instituted proceedings to 
determine whether to approve or disapprove the proposed rule 
change.\88\ On December 1, 2021, the Exchange withdrew SR-EMERALD-2021-
29 and filed a proposed rule change proposing fee changes as proposed 
herein. That filing, SR-EMERALD-2021-42,\89\ was published for comment 
in the Federal Register on December 20, 2021.\90\ On January 27, 2022, 
pursuant to Section 19(b)(3)(C) of the Act, the Commission: (1) 
Temporarily suspended the proposed rule change (SR-EMERALD-2021-42) and 
(2) instituted proceedings to determine whether to approve or 
disapprove the proposal.\91\ On February 1, 2022, the Exchange withdrew 
SR-EMERALD-2021-42 and filed the instant filing, which is substantially 
similar.
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    \85\ See Securities Exchange Act Release No. 92645 (August 11, 
2021), 86 FR 46048 (August 17, 2021) (SR-EMERALD-2021-23). The 
Commission received one comment letter on that proposal. Comment for 
SR-EMERALD-2021-23 can be found at: https://www.sec.gov/comments/sr-emerald-2021-23/sremerald202123.htm.
    \86\ See Securities Exchange Act Release No. 93166 (September 
28, 2021), 86 FR 54760 (October 4, 2021) (SR-EMERALD-2021-29).
    \87\ Comment on SR-EMERALD-2021-29 can be found at: https://www.sec.gov/comments/sr-emerald-2021-29/sremerald202129.htm.
    \88\ See Securities Exchange Act Release No. 93644 (November 22, 
2021), 86 FR 67750 (November 29, 2021).
    \89\ See text accompanying supra note 12.
    \90\ See Securities Exchange Act Release No. 93776 (December 14, 
2021), 86 FR 71983 (December 20, 2021).
    \91\ See Securities Exchange Act Release No. 94089 (January 27, 
2022), 87 FR 5910 (February 2, 2022).
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    When exchanges file their proposed rule changes with the 
Commission, including fee filings like the Exchange's 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.\92\ 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.'' \93\
---------------------------------------------------------------------------

    \92\ 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'').
    \93\ Id.
---------------------------------------------------------------------------

    Among other things, exchange proposed rule changes are subject to 
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which 
requires 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; \94\ (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; \95\ 
and (3) not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\96\
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78f(b)(4).
    \95\ 15 U.S.C. 78f(b)(5).
    \96\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    In temporarily suspending the Exchange's fee change, the Commission 
intends to further consider whether the proposal 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 change satisfies 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.\97\
---------------------------------------------------------------------------

    \97\ Se 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
---------------------------------------------------------------------------

    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 change.\98\
---------------------------------------------------------------------------

    \98\ For purposes of temporarily suspending the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change

    The Commission is instituting proceedings pursuant to Sections 
19(b)(3)(C) \99\ and 19(b)(2)(B) \100\ of the Act to determine whether 
the Exchange's proposed rule change 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 change. 
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 change to 
inform the Commission's analysis of whether to approve or disapprove 
the proposed rule change.
---------------------------------------------------------------------------

    \99\ 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.
    \100\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\101\ 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 Exchange has sufficiently 
demonstrated how the proposed rule change is consistent with Sections 
6(b)(4),\102\ 6(b)(5),\103\ and 6(b)(8) \104\ 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 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.
---------------------------------------------------------------------------

    \101\ 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.
    \102\ 15 U.S.C. 78f(b)(4).
    \103\ 15 U.S.C. 78f(b)(5).
    \104\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, in addition to any 
other comments they may wish to submit about the proposed rule change. 
In particular, the Commission seeks comment on the following aspects of 
the proposal and asks commenters to submit data where appropriate to 
support their views:


[[Page 9693]]


    1. Cost Estimates and Allocation. The Exchange states that it is 
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.'' \105\ Setting forth its costs in providing 10Gb ULL 
connectivity, and as summarized in greater detail above, the 
Exchange projects $7.2 million in aggregate annual estimated costs 
for 2021 as the sum of: (1) $1.7 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 (89% 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) $5.5 million in internal expenses, 
allocated to (a) employee compensation and benefit costs ($3.2 
million, approximately 33% of the Exchange's total applicable 
employee compensation and benefits expense); (b) depreciation and 
amortization ($2 million, approximately 63% of the Exchange's total 
applicable depreciation and amortization expense); and (c) occupancy 
costs ($0.3 million, approximately 53% of the Exchange's total 
applicable occupancy expense). Do commenters believe that the 
Exchange has provided sufficient detail about how it determined 
which costs are most clearly directly associated with providing and 
maintaining 10Gb ULL connectivity? The Exchange describes a 
``proprietary'' process involving all Exchange department heads, 
including the finance department and numerous meetings between the 
Exchange's Chief Information Officer, Chief Financial Officer, Head 
of Strategic Planning and Operations, Chief Technology Officer, 
various members of the Legal Department, and other group leaders, 
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 Exchange 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 Exchange has provided sufficient 
detail on the identity and nature of services provided by third 
parties? Across all of the Exchange's projected costs, what are 
commenters' views on whether the Exchange has 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 Exchange 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 37% of applicable depreciation and amortization 
expenses the Exchange does 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? Should the Exchange use cost projections or actual 
costs estimated for 2021 in a filing made in 2022, or make cost 
projections for 2022?
---------------------------------------------------------------------------

    \105\ See supra Section II.A.2.
---------------------------------------------------------------------------

    2. Revenue Estimates and Profit Margin Range. The Exchange 
provides a single monthly revenue figure as the basis for 
calculating the profit margin of 47%. Do commenters believe this is 
reasonable? If not, why not? The Exchange states that their proposed 
fee structure is ``designed to cover its costs with a limited return 
in excess of such costs,'' and that ``revenue and associated profit 
margin [ ] are not solely intended to cover the costs associated 
with providing access services subject to the Proposed Access 
Fees,'' and believes that a 47% margin is a limited return over such 
costs.\106\ 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 Exchange acknowledges that this margin may 
fluctuate from month to month due to changes in the number of 
connections purchased, and that costs may increase. They also state 
that the number of connections has not materially changed over the 
prior months and so the months that the Exchange has used as a 
baseline to perform its assessment are representative of reasonably 
anticipated costs and expenses.\107\ The Exchange does 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 
Exchange's methodology for estimating the profit margin is 
reasonable? Should the Exchange provide a range of profit margins 
that they believe are reasonably possible, and the reasons therefor?
---------------------------------------------------------------------------

    \106\ See supra Section II.A.2.
    \107\ See id.
---------------------------------------------------------------------------

    3. Reasonable Rate of Return. Do commenters agree with the 
Exchange that its expected 47% 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 Exchange's proposed fees for 
10Gb ULL connections, even at the highest tier, are lower than those 
of other options exchanges to which the Exchange has compared the 
Proposed Access Fees? What are commenters' views regarding the 
difference in profit margins between the Exchange, at 47%, and that 
of its affiliates (MIAX and PEARL Options), at 21.3%? Do commenters 
believe that this profit margin difference between affiliates for 
the same Proposed Access Fees is appropriate given the Exchange's 
Proposed Access Fees are not for shared 10Gb ULL connectivity; why 
or why not? 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 Exchange has addressed whether it 
believes 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, 
stating that ``[a]ny requirement that an exchange should conduct a 
periodic re-evaluation on a set timeline of its cost justification 
and amend its fees accordingly should be established by the 
Commission holistically, applied to all exchanges and not just 
through pending fee proposals, such as this filing,'' and that 
``[i]n order to be fairly applied, such a mandate should be applied 
to existing access fees as well.'' \108\ In light of the impact that 
the number of subscribers has on connectivity 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 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?
---------------------------------------------------------------------------

    \108\ See supra Section II.A.2.
---------------------------------------------------------------------------

    5. Tiered Structure for 10Gb ULL Connections. The Exchange 
states that the proposed tiered fee structure is designed to 
decrease the monthly fees for those firms that connect to the 
Exchange 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

[[Page 9694]]

connections, and also ``generally send fewer orders and messages 
over those connections, resulting in less strain on Exchange 
resources.'' \109\ According to the Exchange, 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 Exchange has not asserted that it is 30% 
more costly for the Exchange to offer such connections to these 
firms, but instead argues generally that these firms are ``likely'' 
to result in greater expenditure of Exchange resources and increased 
cost to the Exchange and that as the number of connections an entity 
has increases, certain other costs incurred by the Exchange that are 
correlated to, though not directly affected by, connection costs 
(e.g., storage costs, surveillance costs, service expenses) also 
increase.\110\ Do commenters believe that the price differences 
between the tiers are supported by the Exchange's 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 Exchange 
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 Exchange should provide 
more detail about the costs that firms purchasing three or more or 
five or more 10Gb ULL connections impose on the Exchange, to permit 
an assessment of the Exchange's statement that the Proposed Access 
Fees ``do not depend on any distinction between Members and non-
Members because they are solely determined by the individual 
Members' or non-Members' business needs and its impact on Exchange 
resources?'' \111\
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    \109\ See id.
    \110\ See id.
    \111\ See id.

    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.'' \112\ 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,\113\ 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.\114\ 
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.\115\
---------------------------------------------------------------------------

    \112\ 17 CFR 201.700(b)(3).
    \113\ See id.
    \114\ See id.
    \115\ 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).
---------------------------------------------------------------------------

    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 proposal is consistent with the 
Act, any potential comments or supplemental information provided by the 
Exchange, and any additional independent analysis by the Commission.

V. Commission's Solicitation of 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 Exchange's 
statements in support of the proposal, in addition to any other 
comments they may wish to submit about the proposed rule change. 
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.\116\
---------------------------------------------------------------------------

    \116\ 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).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by March 15, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by March 29, 
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 No. SR-EMERALD-2022-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-EMERALD-2022-04. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-EMERALD-2022-04 and should be submitted 
on or before March 15, 2022. Rebuttal comments should be submitted by 
March 29, 2022.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\117\ that File Numbers SR-EMERALD-2022-04 be, and hereby is, 
temporarily suspended. In addition, the Commission is instituting 
proceedings to determine whether the proposed rule change should be 
approved or disapproved.
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78s(b)(3)(C).


[[Page 9695]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\118\
---------------------------------------------------------------------------

    \118\ 17 CFR 200.30-3(a)(12), (57) and (58).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03652 Filed 2-18-22; 8:45 am]
BILLING CODE 8011-01-P


