[Federal Register Volume 87, Number 38 (Friday, February 25, 2022)]
[Notices]
[Pages 10860-10878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03964]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94286; File No. SR-PEARL-2022-04]


Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing 
of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule 
To Increase the Monthly Fees for MIAX Express Network Full Service 
Port; Suspension of and Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove the Proposed Rule Change

February 18, 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 15, 2022, MIAX PEARL, LLC (``MIAX Pearl'' 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 Pearl Options 
Fee Schedule (the ``Fee Schedule'') to amend the fees for the 
Exchange's MIAX

[[Page 10861]]

Express Network Full Service (``MEO'') \3\ Ports.
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    \3\ ``MEO Interface'' or ``MEO'' means a binary order interface 
for certain order types as set forth in Rule 516 into the MIAX Pearl 
System. See the Definitions Section of the Fee Schedule and Exchange 
Rule 100.
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    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
Pearl's principal office, and at the Commission's Public Reference 
Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV [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 increase the 
fees for its Full Service MEO Ports, Bulk and Single (the ``Proposed 
Access Fees''), which allow Members \4\ to submit electronic orders in 
all products to the Exchange. The Exchange initially filed this 
proposal on July 1, 2021, with the proposed fee changes being 
immediately effective (``First Proposed Rule Change'').\5\ The First 
Proposed Rule Change was published for comment in the Federal Register 
on July 15, 2021.\6\ The Commission received one comment letter on the 
First Proposed Rule Change \7\ and subsequently suspended the Frist 
[sic] Proposed Rule Change on August 27, 2021.\8\ The Exchange withdrew 
First Proposed Rule Change on October 12, 2021 and re-submitted the 
proposal on November 1, 2021, with the proposed fee changes being 
immediately effective (``Second Proposed Rule Change'').\9\ 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 Second 
Proposed Rule Change was published for comment in the Federal Register 
on November 17, 2021.\10\ The Commission received no comment letters on 
the Second Proposed Rule Change. Nonetheless, the Exchange withdrew the 
Second Proposed Rule Change on December 20, 2021 and submitted a 
revised proposal for immediate effectiveness (``Third Proposed Rule 
Change'').\11\ The Third Proposed Rule Change was published for comment 
in the Federal Register on January 10, 2022.\12\ The Third Proposed 
Rule Change meaningfully attempted to provide additional justification 
and explanation for the proposed fee changes, directly respond to the 
points raised in the single comment letter submitted on the First 
Proposed Rule Change, and respond to feedback provided by Commission 
Staff during a telephone conversation on November 18, 2021 relating to 
the Second Proposed Rule Change. Although the Commission again did not 
receive any comment letters on the Third Proposed Rule Change, the 
Exchange withdrew the Third Proposed Rule Change on February 15, 2022 
and now submits this revised 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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    \4\ ``Member'' means an individual or organization that is 
registered with the Exchange pursuant to Chapter II of Exchange 
Rules for purposes of trading on the Exchange as an ``Electronic 
Exchange Member'' or ``Market Maker.'' Members are deemed 
``members'' under the Exchange Act. See the Definitions Section of 
the Fee Schedule and Exchange Rule 100.
    \5\ See Securities Exchange Act Release No. 92365 (July 9, 
2021), 86 FR 37347 (July 15, 2021) (SR-PEARL-2021-33).
    \6\ See id.
    \7\ See Letter from Richard J. McDonald, Susquehanna 
International Group, LLC (``SIG''), to Vanessa Countryman, 
Secretary, Commission, dated September 7, 2021 (``SIG Letter'').
    \8\ See Securities Exchange Act Release No. 92798 (August 27, 
2021), 86 FR 49360 (September 2, 2021).
    \9\ See Securities Exchange Act Release No. 93556 (November 10, 
2021), 86 FR 64235 (November 17, 2021) (SR-PEARL-2021-53).
    \10\ See id.
    \11\ Securities Exchange Act Release No. 93894 (January 4, 
2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58).
    \12\ Id.
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Full Service MEO Port Fee Changes
    The Exchange currently offers different types of MEO Ports 
depending on the services required by the Member, including a Full 
Service MEO Port-Bulk,\13\ a Full Service MEO Port-Single,\14\ and a 
Limited Service MEO Port.\15\ For one monthly price, a Member may be 
allocated two (2) Full-Service MEO Ports of either type per matching 
engine \16\ and may request Limited Service MEO Ports for which MIAX 
Pearl will assess Members Limited Service MEO Port fees per matching 
engine based on a sliding scale for the number of Limited Service MEO 
Ports utilized each month. The two (2) Full-Service MEO Ports that may 
be allocated per matching engine to a Member may consist of: (a) Two 
(2) Full Service MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--
Single; or (c) one (1) Full Service MEO Port--Bulk and one (1) Full 
Service MEO Port--Single.
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    \13\ ``Full Service MEO Port--Bulk'' means an MEO port that 
supports all MEO input message types and binary bulk order entry. 
See the Definitions Section of the Fee Schedule.
    \14\ ``Full Service MEO Port--Single'' means an MEO port that 
supports all MEO input message types and binary order entry on a 
single order-by-order basis, but not bulk orders. See the 
Definitions Section of the Fee Schedule.
    \15\ ``Limited Service MEO Port'' means an MEO port that 
supports all MEO input message types, but does not support bulk 
order entry and only supports limited order types, as specified by 
the Exchange via Regulatory Circular. See the Definitions Section of 
the Fee Schedule.
    \16\ A ``Matching Engine'' is a part of the MIAX Pearl 
electronic system that processes options orders and trades on a 
symbol-by-symbol basis. Some Matching Engines will process option 
classes with multiple root symbols, and other Matching Engines may 
be dedicated to one single option root symbol. A particular root 
symbol may only be assigned to a single designated Matching Engine. 
A particular root symbol may not be assigned to multiple Matching 
Engines. See the Definitions Section of the Fee Schedule.
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    Unlike other options exchanges that provide similar port 
functionality and charge fees on a per port basis,\17\ the

[[Page 10862]]

Exchange offers Full Service MEO Ports as a package and provides 
Members with the option to receive up to two Full Service MEO Ports 
(described above) per matching engine to which that Member connects. 
The Exchange currently has twelve (12) matching engines, which means 
Members may receive up to twenty-four (24) Full Service MEO Ports for a 
single monthly fee, that can vary based on certain volume percentages, 
as described below. For illustrative purposes and as described in more 
detail below, the Exchange currently assesses a fee of $5,000 per month 
for Members that reach the highest Full Service MEO Port--Bulk Tier, 
regardless of the number of Full Service MEO Ports allocated to the 
Member. For example, assuming a Member connects to all twelve (12) 
matching engines during a month, with two Full Service MEO Ports per 
matching engine, this results in a cost of $208.33 per Full Service MEO 
Port ($5,000 divided by 24) for the month. This fee had been unchanged 
since the Exchange adopted Full Service MEO Port fees in 2018.\18\ 
Beginning with the First Proposed Rule Change, the Exchange proposes to 
increase Full Service MEO Port fees as further described below, with 
the highest monthly fee of $10,000 for the Full Service MEO Port--Bulk. 
Members will continue to receive two (2) Full Service MEO Ports to each 
matching engine to which they connect for the single flat monthly fee. 
Assuming a Member connects to all twelve (12) matching engines during 
the month, with two Full Service MEO Ports per matching engine, this 
would result in a cost of $416.67 per Full Service MEO Port ($10,000 
divided by 24).
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    \17\ See NYSE American Options Fee Schedule, Section V.A., Port 
Fees (each port charged on a per matching engine basis, with NYSE 
American having 17 match engines). See NYSE Technology FAQ and Best 
Practices: Options, Section 5.1 (How many matching engines are used 
by each exchange?) (September 2020) (providing a link to an Excel 
file detailing the number of matching engines per options exchange); 
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a 
per matching engine basis, NYSE Arca having 19 match engines); and 
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How 
many matching engines are used by each exchange?) (September 2020) 
(providing a link to an Excel file detailing the number of matching 
engines per options exchange). See NASDAQ Fee Schedule, Nasdaq 
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports 
and Other Services (each port charged on a per matching engine 
basis, with Nasdaq having multiple matching engines). See Nasdaq 
Specialized Quote Interface (SQF) Specification, Version 6.5b 
(updated February 13, 2020), Section 2, Architecture, available at 
https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface Specification''). The 
NASDAQ SQF Interface Specification also provides that NASDAQ's 
affiliates, Nasdaq PHLX LLC (``Nasdaq Phlx'') and Nasdaq BX, Inc. 
(``Nasdaq BX''), have trading infrastructures that may consist of 
multiple matching engines with each matching engine trading only a 
range of option underlyings. Further, the NASDAQ SQF Interface 
Specification provides that the SQF infrastructure is such that the 
firms connect to one or more servers residing directly on the 
matching engine infrastructure. Since there may be multiple matching 
engines, firms will need to connect to each engine's infrastructure 
in order to establish the ability to quote the symbols handled by 
that engine.
    \18\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
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    The Exchange assesses Members Full Service MEO Port Fees, either 
for a Full Service MEO Port--Bulk and/or for a Full Service MEO Port--
Single, based upon the monthly total volume executed by a Member and 
its Affiliates \19\ on the Exchange across all origin types, not 
including Excluded Contracts,\20\ as compared to the Total Consolidated 
Volume (``TCV''),\21\ in all MIAX Pearl-listed options. The Exchange 
adopted a tier-based fee structure based upon the volume-based tiers 
detailed in the definition of ``Non-Transaction Fees Volume-Based 
Tiers'' described in the Definitions section of the Fee Schedule. The 
Exchange assesses these and other monthly Port fees on Members in each 
month the market participant is credentialed to use a Port in the 
production environment.
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    \19\ ``Affiliate'' means (i) an affiliate of a Member of at 
least 75% common ownership between the firms as reflected on each 
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an 
Appointed EEM (or, conversely, the Appointed EEM of an Appointed 
Market Maker). An ``Appointed Market Maker'' is a MIAX Pearl Market 
Maker (who does not otherwise have a corporate affiliation based 
upon common ownership with an EEM) that has been appointed by an EEM 
and an ``Appointed EEM'' is an EEM (who does not otherwise have a 
corporate affiliation based upon common ownership with a MIAX Pearl 
Market Maker) that has been appointed by a MIAX Pearl Market Maker, 
pursuant to the following process. A MIAX Pearl Market Maker 
appoints an EEM and an EEM appoints a MIAX Pearl Market Maker, for 
the purposes of the Fee Schedule, by each completing and sending an 
executed Volume Aggregation Request Form by email to 
[email protected] no later than 2 business days prior to 
the first business day of the month in which the designation is to 
become effective. Transmittal of a validly completed and executed 
form to the Exchange along with the Exchange's acknowledgement of 
the effective designation to each of the Market Maker and EEM will 
be viewed as acceptance of the appointment. The Exchange will only 
recognize one designation per Member. A Member may make a 
designation not more than once every 12 months (from the date of its 
most recent designation), which designation shall remain in effect 
unless or until the Exchange receives written notice submitted 2 
business days prior to the first business day of the month from 
either Member indicating that the appointment has been terminated. 
Designations will become operative on the first business day of the 
effective month and may not be terminated prior to the end of the 
month. Execution data and reports will be provided to both parties. 
See the Definitions Section of the Fee Schedule.
    \20\ ``Excluded Contracts'' means any contracts routed to an 
away market for execution. See the Definitions Section of the Fee 
Schedule.
    \21\ ``TCV'' means total consolidated volume calculated as the 
total national volume in those classes listed on MIAX Pearl for the 
month for which the fees apply, excluding consolidated volume 
executed during the period of time in which the Exchange experiences 
an Exchange System Disruption (solely in the option classes of the 
affected Matching Engine). See the Definitions Section of the Fee 
Schedule.
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    Current Full Service MEO Port--Bulk Fees. Prior to the First 
Proposed Rule Change, the Exchange assessed Members monthly Full 
Service MEO Port--Bulk fees as follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $4,500; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
    Proposed Full Service MEO Port--Bulk Fees. Since the First Proposed 
Rule Change, the Exchange proposes to assess Members monthly Full 
Service MEO Port--Bulk fees as follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $5,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $7,500; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $10,000.
    Current Full Service MEO Port--Single Fees. Prior to the First 
Proposed Rule Change, the Exchange assessed Members monthly Full 
Service MEO Port--Single fees as follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $3,375; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
    Proposed Full Service MEO Port--Single Fees. Since the First 
Proposed Rule Change, the Exchange proposes to assess Members monthly 
Full Service MEO Port--Single fees as follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,500;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $3,500; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $4,500.
    The Exchange offers various types of ports with differing prices 
because each port accomplishes different tasks, are suited to different 
types of Members, and consume varying capacity amounts of the network. 
For instance, MEO ports allow for a higher throughput and can handle 
much higher quote/order rates than FIX ports. Members that are Market 
Makers \22\ or high frequency trading

[[Page 10863]]

firms utilize these ports (typically coupled with 10Gb ULL 
connectivity) because they transact in significantly higher amounts of 
messages being sent to and from the Exchange, versus FIX port users, 
who are traditionally customers sending only orders to the Exchange 
(typically coupled with 1Gb connectivity). The different types of ports 
cater to the different types of Exchange Memberships and different 
capabilities of the various Exchange Members. Certain Members need 
ports and connections that can handle using far more of the network's 
capacity for message throughput, risk protections, and the amount of 
information that the System has to assess. Those Members may account 
for the vast majority of network capacity utilization and volume 
executed on the Exchange, as discussed throughout.
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    \22\ The term ``Market Maker'' means a Member registered with 
the Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in Chapter VI of Exchange Rules. See the 
Definitions Section of the Fee Schedule and Exchange Rule 100.
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    The Exchange proposes to increase its monthly Full Service MEO Port 
fees since it has not done so since the fees were adopted in 2018 
(prior to the First Proposed Rule Change),\23\ which are designed to 
recover a portion of the costs associated with directly accessing the 
Exchange. The Exchange notes that its affiliates, Miami International 
Securities Exchange, LLC (``MIAX'') and MIAX Emerald, LLC (``MIAX 
Emerald''), charge fees for their high throughput, low latency MIAX 
Express Interface (``MEI'') Ports in a similar fashion as the Exchange 
charges for its MEO Ports--generally, the more active user the Member 
(i.e., the greater number/greater national ADV of classes assigned to 
quote on MIAX and MIAX Emerald), the higher the MEI Port fee.\24\ This 
concept is not new or novel. The Exchange also notes that the proposed 
increased fees for the Exchange's Full Service MEO Ports are in line 
with, or cheaper than, the similar port fees for similar membership 
fees charged by other options exchanges.\25\
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    \23\ See supra note 18.
    \24\ See MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee 
Schedule, Section 5)d)ii).
    \25\ See NYSE American Options Fee Schedule, Section V.A., Port 
Fees; NYSE Arca Options Fee Schedule, Port Fees; Nasdaq Stock Market 
LLC (``NASDAQ''), Options 7, Pricing Schedule, Section 3.
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    The Exchange has historically undercharged for Full Service MEO 
Ports as compared to other options exchanges \26\ because the Exchange 
provides Full Service MEO Ports as a package for a single monthly fee. 
As described above, this package includes two Full Service MEO Ports 
for each of the Exchange's twelve (12) matching engines. The Exchange 
understands other options exchanges charge fees on a per port basis. 
The Exchange believes other exchanges' port fees are a useful example 
of alternative approaches to providing and charging for port access 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 port access.
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    \26\ See id.

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           Exchange                Type of port                             Monthly fee
----------------------------------------------------------------------------------------------------------------
MIAX Pearl (as proposed)......  MEO Full Service-- Tier 1: $5,000 (or $208.33 per Matching Engine).
                                 Bulk.
                                                   Tier 2: $7,500 (or $312.50 per Matching Engine).
                                                   Tier 3: $10,000 (or $416.66 per Matching Engine).
                                MEO Full Service-- Tier 1: $2,500 (or $104.16 per Matching Engine).
                                 Single.
                                                   Tier 2: $3,500 (or $145.83 per Matching Engine).
                                                   Tier 3: $4,500 (or $187.50 per Matching Engine).
NYSE American, LLC (``NYSE      Order/Quote Entry  Ports 1-40: $450 each.
 American'') \27\.                                 Ports 41 or more: $150 each.
NYSE Arca, Inc. (``NYSE         Order/Quote Entry  Ports 1-40: $450 each.
 Arca'') \28\.                                     Ports 41 or more: $150 each.
NASDAQ \29\...................  Specialized Quote  Ports 1-5: $1,500 each.
                                 Interface.        Ports 6-20: $1,000 each.
                                                   Ports 21 or more: $500.
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Implementation
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    \27\ See id.
    \28\ See id.
    \29\ See id.
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    The proposed fees are immediately effective.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \30\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \31\ in 
particular, in that it is an equitable allocation of reasonable dues, 
fees and other charges among its members and issuers and other persons 
using its facilities. The Exchange also believes the proposal furthers 
the objectives of Section 6(b)(5) of the Act in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest and is not designed to permit unfair discrimination between 
customers, issuers, brokers and dealers.
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    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(4) and (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'').\32\ 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.'' \33\ Based on both the 
BOX Order and the Guidance, the Exchange believes that it has clearly 
met its burden to demonstrate that the proposed 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

[[Page 10864]]

reasonable because they will not result in excessive pricing or supra-
competitive profit; and (iv) utilize a cost-based justification 
framework that is substantially similar to a framework previously used 
by the Exchange, and its affiliates MIAX and MIAX Emerald, to adopt or 
amend non-transaction fees (including port and connectivity fees) and 
market data fees.\34\
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    \32\ 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).
    \33\ 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'').
    \34\ See Securities Exchange Act Release Nos. 91145 (February 
17, 2021), 86 FR 11033 (February 23, 2021) (SR-EMERALD-2021-05) 
(proposal to establish market data fees for MIAX Emerald ToM, 
Administrative Information Subscriber feed, and MIAX Emerald Order 
Feed); 90981 (January 25, 2021), 86 FR 7582 (January 29, 2021) (SR-
PEARL-2021-01) (proposal to increase connectivity fees); 91460 
(April 2, 2021), 86 FR 18349 (SR-EMERALD-2021-11) (proposal to adopt 
port fees, increase connectivity fees, and increase additional 
limited service ports); 91033 (February 1, 2021), 86 FR 8455 
(February 5, 2021) (SR-EMERALD-2021-03) (proposal to adopt trading 
permit fees).
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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 
are 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 the Full Service 
MEO Port fees to be access fees. It records these fees as part of its 
``Access Fees'' revenue in its financial statements.
    In the 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.'' 
\35\ 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.'' \36\ In the 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.'' \37\ 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 via Full Service MEO Ports and will not result in the 
Exchange generating a supra-competitive profit.
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    \35\ See Guidance, supra note 33.
    \36\ Id.
    \37\ 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.'' \38\ 
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.'' \39\ The Exchange provides 
this analysis below.
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    \38\ Id.
    \39\ 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'' \40\ 
profit. The Exchange believes that it is important to demonstrate that 
these fees are based on its costs and reasonable business needs. The 
Exchange believes the Proposed Access Fees will allow the Exchange to 
offset expense the Exchange has and will incur, and that the Exchange 
is providing sufficient transparency (as described below) into how the 
Exchange determined to charge such fees. Accordingly, the Exchange is 
providing an analysis of its revenues, costs, and profitability 
associated with the Proposed Access Fees. This analysis includes 
information regarding its methodology for determining the costs and 
revenues associated with the Proposed Access Fees. 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 Full 
Service MEO Port access to the Exchange.
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    \40\ 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 Full Service MEO Ports, 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 Full Service MEO Ports) to estimate such costs,\41\ as 
well as the relative costs of providing and maintaining Full Service 
MEO Ports, 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 Full Service MEO 
Ports because of the uncertainty of forecasting subscriber decision 
making with respect to firms' port needs and the likely potential for 
increased costs to procure the third-party services described below.
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    \41\ For example, the Exchange only included the costs 
associated with providing and supporting Full Service MEO Ports and 
excluded from its cost calculations any cost not directly associated 
with providing and maintaining such ports. Thus, the Exchange notes 
that this methodology underestimates the total costs of providing 
and maintaining Full Service MEO Port access.
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    To determine the Exchange's costs to provide the access services 
associated with the Proposed Access Fees, the Exchange conducted an 
extensive cost review in which the Exchange analyzed nearly every 
expense item in the Exchange's general expense ledger to determine 
whether each such expense relates to the Proposed Access Fees, and, if 
such expense did so relate, what portion (or percentage) of such 
expense actually supports the access services. The sum of all such 
portions of expenses represents the total cost of the Exchange to 
provide the 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 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

[[Page 10865]]

determine if such expense was related to the proposed fees. Once the 
expenses were identified, the Exchange department heads, with the 
assistance of the Exchange's 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.
    The internal cost analysis conducted by the Exchange is a 
proprietary process that is designed to make a fair and reasonable 
assessment of costs and resources allocated to support the provision of 
services associated with the proposed 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 pending fee proposals such as 
this filing. In order to be fairly applied, such a mandate should be 
applied to existing market data 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 
Commission determination that it is unable to make a finding that this 
proposed rule change is consistent 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.\42\ 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, an access fee.\43\ 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.'' \44\ 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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    \42\ See, e.g., Securities Exchange Act Release Nos. 93293 
(October 12, 2021), 86 FR 57716 (October 18, 2021) (SR-PHLX-2021-58) 
(increasing several market data fees and adopting new market data 
fee without providing a cost based justification); 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).
    \43\ 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).
    \44\ See id. at 57909.
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    The Exchange notes that the Investors Exchange, Inc. (``IEX'') 
recently submitted a proposed rule change to adopt fees for two real-
time proprietary market data feeds, TOPS and DEEP (``IEX Fee 
Proposal''). IEX previously provided its TOP and DEEP market data feeds 
for free and proposed to adopt modest, below market fees. The IEX Fee 
Proposal included a detailed subscriber data and cost-based analysis in 
compliance with the Guidance. Nonetheless, on December 30, 2021, the 
Commission suspended the IEX Fee Proposal and instituted proceedings to 
determine whether to approve or disapprove the IEX Fee Proposal.\45\
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    \45\ See Securities Exchange Act Release No. 93883 (December 30, 
2021), 87 FR 523 (January 5, 2021) (SR-IEX-2021-14) (the ``IEX 
Order'').
---------------------------------------------------------------------------

    The Commission received three comment letters on the IEX Order.\46\ 
The Virtu Letter and HMA Letter 2 specifically applaud the amount of 
detail included in the IEX Fee Proposal. Specifically, the Virtu Letter 
states that ``[i]n significant detail, IEX provides data about three 
cost components: `(1) direct costs, such as servers, infrastructure, 
and monitoring; (2) enhancement initiative costs (e.g., new 
functionality for IEX Data and increased capacity for the proprietary 
market data feeds); and (3) personnel costs.' '' \47\ HMA Letter 2 
similarly commends the level of detail included in the IEX Fee Proposal 
and also highlights the disparate treatment by Commission Staff of 
exchange fee filings.\48\ HMA Letter 2 provides three examples to 
support this assertion.\49\ The Nasdaq Letter urges the Commission to 
approve the IEX Fee Proposal promptly and raises concern the questions 
asked by the Commission in the IEX Order imply that they are exercising 
rate making authority that they clearly do not possess. The Nasdaq 
Letter states that ``[i]f the Commission believes it has authority to 
conduct cost-plus ratemaking, the Administrative Procedure Act dictates 
that it must propose a rule for notice and comment and that its final 
rule must be prepared

[[Page 10866]]

to withstand judicial scrutiny.'' \50\ The Exchange agrees.
---------------------------------------------------------------------------

    \46\ See letters to Ms. Venessa A. Countryman, Secretary, 
Commission, from Douglas A. Cifu, Chief Executive Officer, Virtu 
Financial, Inc., dated January 26, 2022 (the ``Virtu Letter''), 
Tyler Gellasch, Executive Director, Healthy Markets Association 
(``HMA''), dated January 26, 2022 (the ``HMA Letter 2''), and Erika 
Moore, Vice President and Corporate Secretary, The Nasdaq Stock 
Market LLC, dated January 27, 2022 (the ``Nasdaq Letter'').
    \47\ See Virtu Letter at page 3, id.
    \48\ HMA previously expressed their ``worry that the 
Commission's process for reviewing and evaluating exchange filings 
may be inconsistently applied.'' See letter from Tyler Gellasch, 
Executive Director, 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 
1'').
    \49\ See HMA Letter 2 at 2-3. The Exchange has provided further 
examples to support HMA's assertion above. See supra note 39 and 
accompanying text.
    \50\ See Nasdaq Letter at page 13, id.
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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.
    To determine the Exchange's projected revenues associated with the 
Proposed Access Fees in the instant filing, the Exchange analyzed the 
number of Members currently utilizing Full Service MEO Ports, and, 
utilizing a recent monthly billing cycle representative of 2021 monthly 
revenue, extrapolated annualized revenue on a going-forward basis. The 
Exchange does not believe it is appropriate to factor into its analysis 
projected or estimated future revenue growth or decline 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 majority of 2021, the Exchange believes its 2020 Audited 
Unconsolidated Financial Statement is not representative of its current 
total annualized revenue and costs associated with the Proposed Access 
Fees. Accordingly, the Exchange believes it is more appropriate to 
analyze the Proposed Access Fees utilizing its 2021 revenue and costs, 
as described herein, which utilize the same presentation methodology as 
set forth in the Exchange's previously-issued Audited Unconsolidated 
Financial Statements. Based on this analysis, the Exchange believes 
that the Proposed Access Fees are fair and reasonable because they will 
not result in excessive pricing or supra-competitive profit when 
comparing the Exchange's total annual expense associated with providing 
the services associated with the Proposed Access Fees versus the total 
projected annual revenue the Exchange will collect for providing those 
services. The Exchange notes that this is the same justification 
process utilized by the Exchange's affiliate, MIAX Emerald, in a filing 
recently noticed and not suspended by the Commission when MIAX Emerald 
adopted MEI Port fees.\51\
---------------------------------------------------------------------------

    \51\ See Securities Exchange Act Release No. 91460 (April 2, 
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network 
Connectivity Fees, and Increase the Number of Additional Limited 
Service MIAX Emerald Express Interface Ports Available to Market 
Makers) (adopting tiered MEI Port fee structure ranging from $5,000 
to $20,500 per month).
---------------------------------------------------------------------------

    As outlined in more detail below, the Exchange projects that the 
final annualized expense for 2021 to provide Full Service MEO Ports to 
be approximately $897,084 per annum or an average of $74,757 per month. 
The Exchange implemented the Proposed Access Fees on July 1, 2021 in 
the First Proposed Rule Change. For June 2021, prior to the Proposed 
Access Fees, Members and non-Members purchased a total of 20 Full 
Service MEO Ports, for which the Exchange charged a total of 
approximately $71,625. This resulted in a loss of $3,132 for that month 
(a margin of -4.37%). For the month of November 2021, which includes 
the Proposed Access Fees, Members and non-Members purchased a total of 
19 Full Service MEO Ports,\52\ for which the Exchange charged a total 
of approximately $122,000 for that month. This resulted in a profit of 
$47,243 for that month, representing a profit margin of approximately 
38%. The Exchange believes that the Proposed Access Fees are reasonable 
because they are designed to approximately generate a modest profit 
margin of 38% per-month.\53\ The Exchange cautions that this profit 
margin is likely to fluctuate from month to month based on the 
uncertainty of predicting how many Full Service MEO Ports may be 
purchased from month to month as Members and non-Members are able to 
add and drop ports at any time based on their own business decisions, 
which they frequently do. 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.\54\ 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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    \52\ The Exchange notes that one Member dropped one Full Service 
MEO Port-Bulk between June 2021 and November 2021, as a result of 
the Proposed Access Fees.
    \53\ The Exchange notes that this profit margin differs from the 
First and Second Proposed Rule Changes because the Exchange now has 
the benefit of using a more recent billing cycle under the Proposed 
Access Fees (November 2021) and comparing it to a baseline month 
(June 2021) from before the Proposed Access Fees were in effect.
    \54\ 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 the final annualized 
expense for 2021 to provide the services associated with the Proposed 
Access Fees to be approximately $897,084 per annum or an average of 
$74,757 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.\55\ 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

[[Page 10867]]

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 of 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 and indeed is likely to increase rather than 
decrease over time. 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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    \55\ 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 2017.\56\ 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.\57\ 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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    \56\ The Exchange has incurred a cumulative loss of $86 million 
since its inception in 2017 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://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
    \57\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
---------------------------------------------------------------------------

    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. For 2021,\58\ the total annual expense for providing the access 
services associated with the Proposed Access Fees for the Exchange is 
projected to be approximately $897,084, or approximately $74,757 per 
month. The $897,084 in projected total annual expense is comprised of 
the following, all of which are directly related to the access services 
associated with the Proposed Access Fees: (1) Third-party expense, 
relating to fees paid by the Exchange to third-parties for certain 
products and services; and (2) internal expense, relating to the 
internal costs of the Exchange to provide the services associated with 
the Proposed Access Fees.\59\ 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.\60\ The $897,084 in projected total annual 
expense is directly related to the access services associated with the 
Proposed Access Fees, and not any other product or service offered by 
the Exchange. It does not include general costs of operating matching 
systems and other trading technology, and no expense amount was 
allocated twice.
---------------------------------------------------------------------------

    \58\ The Exchange has not yet finalized its 2021 year end 
results.
    \59\ 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.
    \60\ 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. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020) 
(SR-PEARL-2019-36). Accordingly, the third-party expense described 
in this filing is attributed to the same line item for the 
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
---------------------------------------------------------------------------

    As discussed, the Exchange conducted an extensive cost review in 
which the Exchange analyzed 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 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, total third-party expense, relating to fees paid by the 
Exchange to third-parties for certain products and services for the 
Exchange to be able to provide the access services associated with the 
Proposed Access Fees, is projected to be $40,166. This includes, but is 
not limited to, a portion of the fees paid to: (1) Equinix, for data 
center services, for the primary, secondary, and disaster recovery 
locations of the Exchange's trading system infrastructure; (2) Zayo 
Group Holdings, Inc. (``Zayo'') for network services (fiber and 
bandwidth products and services) linking the Exchange's office 
locations in Princeton, New Jersey and Miami, Florida, to all data 
center locations; (3) Secure Financial Transaction Infrastructure 
(``SFTI''),\61\ 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

[[Page 10868]]

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.).
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    \61\ In fact, 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. This fee increase by ICE data services, 
while not subject to Commission review, has material impact on cost 
to exchanges and other market participants that provide downstream 
access to other market participants. The Exchange 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, without having to show that 
such fee change complies with the Act by being reasonable, equitably 
allocated, and not unfairly discriminatory. It is unfathomable to 
the Exchange that, given the critical nature of the infrastructure 
services provided by SFTI, that its fees are not required to be 
rule-filed with the Commission pursuant to Section 19(b)(1) of the 
Act and Rule 19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 
240.19b-4, respectively.
---------------------------------------------------------------------------

    For clarity, the Exchange took a conservative approach in 
determining the expense and the percentage of that expense to be 
allocated to the 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 expense 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, with respect to 
the MIAX Pearl expenses included herein, those expenses only cover the 
MIAX Pearl options market; expenses associated with the MIAX Pearl 
equities market are accounted for separately and are not included 
within the scope of this filing. As noted above, the percentage 
allocations used in this proposed rule change may differ from past 
filings from the Exchange or its affiliates due to, among other things, 
changes in expenses charged by third-parties, adjustments to internal 
resource allocations, and different system architecture of the Exchange 
as compared to its affiliates. Further, as part its ongoing assessment 
of costs and expenses, the Exchange recently conducted a periodic 
thorough review of its expenses and resource allocations which, in 
turn, resulted in a revised percentage allocations in this filing. 
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 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 1.80% of the total 
applicable Equinix expense to providing the services associated with 
the proposed 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.\62\
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    \62\ As noted above, the percentage allocations used in this 
proposed rule change may differ from past filings from the Exchange 
or its affiliates due to, among other things, changes in expenses 
charged by third-parties, adjustments to internal resource 
allocations, and different system architecture of the Exchange as 
compared to its affiliates. Again, as part its ongoing assessment of 
costs and expenses, the Exchange recently conducted a periodic 
thorough review of its expenses and resource allocations which, in 
turn, resulted in a revised percentage allocations in this filing.
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to allocate the identified 
portion of the Zayo expense because Zayo provides the internet, fiber 
and bandwidth connections with respect to the network, linking the 
Exchange with its affiliates, MIAX and MIAX Emerald, as well as the 
data center and disaster recovery locations. As such, all of the trade 
data, including the billions of messages each day per exchange, flow 
through Zayo's infrastructure over the Exchange's network. Without 
these services from Zayo, the Exchange would not be able to operate and 
support the network and provide the access services associated with the 
Proposed Access Fees. The Exchange did not allocate all of the Zayo 
expense toward the cost of providing the access services associated 
with the Proposed Access Fees, only the portion which the Exchange 
identified as being specifically mapped to providing the Proposed 
Access Fees. According to the Exchange's calculations, it allocated 
approximately 0.90% of the total applicable Zayo expense to providing 
the services associated with the proposed 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.\63\
---------------------------------------------------------------------------

    \63\ 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 0.90% of the total applicable SFTI and other 
service providers' expense to providing the services associated with 
the proposed 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.\64\
---------------------------------------------------------------------------

    \64\ Id.
---------------------------------------------------------------------------

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

[[Page 10869]]

providing the access services associated with the Proposed Access Fees. 
According to the Exchange's calculations, it allocated approximately 
0.90% of the total applicable hardware and software provider expense to 
providing the services associated with the proposed 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.\65\
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

Internal Expense Allocations
    For 2021, total projected internal expenses relating to the 
Exchange providing the access services associated with the Proposed 
Access Fees, is projected to be $856,918. 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; (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 the 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 $783,513, which is only a 
portion of the $9,163,894 total projected expense for employee 
compensation and benefits. The Exchange believes it is reasonable to 
allocate the identified portion of such expense because this includes 
the time spent by employees of several departments, including 
Technology, Back Office, Systems Operations, Networking, Business 
Strategy Development (who create the business requirement documents 
that the Technology staff use to develop network features and 
enhancements), Trade Operations, Finance (who provide billing and 
accounting services relating to the network), and Legal (who provide 
legal services relating to the network, such as rule filings and 
various license agreements and other contracts). As part of the 
extensive cost review conducted by the Exchange, the Exchange reviewed 
the amount of time spent by each employee on matters relating to the 
provision of access services associated with the Proposed Access Fees. 
Without these employees, the Exchange would not be able to provide the 
access services associated with the Proposed Access Fees to its Members 
and their customers. The Exchange did not allocate all of the employee 
compensation and benefits expense toward the cost of the access 
services associated with the Proposed Access Fees, only the portions 
which the Exchange identified as being specifically mapped to providing 
the access services associated with the Proposed Access Fees. According 
to the Exchange's calculations, it allocated approximately 8.55% of the 
total applicable employee compensation and benefits expense to 
providing the services associated with the proposed 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.\66\
---------------------------------------------------------------------------

    \66\ Id.
---------------------------------------------------------------------------

    The Exchange's depreciation and amortization expense relating to 
providing the access services associated with the Proposed Access Fees 
is projected to be $64,456, which is only a portion of the $2,864,716 
\67\ 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 
2.25% of the total applicable depreciation and amortization expense to 
providing the services associated with the proposed 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.\68\
---------------------------------------------------------------------------

    \67\ The Exchange notes that the total depreciation expense is 
different from the total for the Exchange's filing relating to 
Trading Permits because the Exchange factors in the depreciation of 
its own internally developed software when assessing costs for Full 
Service MEO Ports, resulting in a higher depreciation expense number 
in this filing.
    \68\ Id.
---------------------------------------------------------------------------

    The Exchange's occupancy expense relating to providing the access 
services associated with the Proposed Access Fees is projected to be 
$8,949, which is only a portion of the $497,180 total projected expense 
for occupancy. The Exchange believes it is reasonable to allocate the 
identified portion of such expense because such expense

[[Page 10870]]

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. Without this office space, the Exchange would not be able to 
operate and support the network and provide the access services 
associated with the Proposed Access Fees to its Members and their 
customers. Accordingly, the Exchange believes it is reasonable to 
allocate the identified portion of its occupancy expense because such 
amount represents the Exchange's actual cost to house the equipment and 
personnel who operate and support the Exchange's network infrastructure 
and the access services associated with the Proposed Access Fees. The 
Exchange did not allocate all of the occupancy expense toward the cost 
of providing the access services associated with the Proposed Access 
Fees, only the portion which the Exchange identified as being 
specifically mapped to operating and supporting the network. According 
to the Exchange's calculations, it allocated approximately 1.80% of the 
total applicable occupancy expense to providing the services associated 
with the proposed 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.\69\
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

    The Exchange notes that a material portion of its total overall 
expense is allocated to the provision of access services (including 
connectivity, ports, and trading permits). The Exchange believes this 
is reasonable and in line, as the Exchange operates a technology-based 
business that differentiates itself from its competitors based on its 
trading systems that rely on access to a high performance network, 
resulting in significant technology expense. Over two-thirds of 
Exchange staff are technology-related employees. The majority of the 
Exchange's expense is technology-based. As described above, the 
Exchange has only four primary sources of fees in to recover its 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 the annualized expense for 2021 to 
provide Full Service MEO Ports to be approximately $897,084 per annum 
or an average of $74,757 per month. The Exchange implemented the 
Proposed Access Fees on July 1, 2021 in the First Proposed Rule Change. 
For June 2021, prior to the Proposed Access Fees, Members and non-
Members purchased a total of 20 Full Service MEO Ports, for which the 
Exchange charged a total of approximately $71,625. This resulted in a 
loss of $3,132 for that month (a margin of -4.37%). For the month of 
November 2021, which includes the Proposed Access Fees, Members and 
non-Members purchased a total of 19 Full Service MEO Ports, for which 
the Exchange charged a total of approximately $122,000 for that month. 
This resulted in a profit of $47,243 for that month, representing a 
profit margin of 38%. The Exchange believes that the Proposed Access 
Fees are reasonable because they are designed to generate an 
approximate profit margin of 38% per-month. The Exchange believes this 
modest 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 is likely to 
fluctuate from month to month based in the uncertainty of predicting 
how many Full Service MEO Ports may be purchased from month to month as 
Members and non-Members are free to add and drop ports 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 the 
number of ports utilized and volume conducted on the Exchange, as well 
as changes to the Exchange's expenses, the number of ports utilized has 
not materially changed over previous months. Consequently, the Exchange 
believes that the months it has 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.\70\ Accordingly, the 
Exchange believes its total projected revenue for providing the access 
services associated with the Proposed Access Fees will not result in 
excessive pricing or supra-competitive profit.
---------------------------------------------------------------------------

    \70\ See supra note 54.
---------------------------------------------------------------------------

    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 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, 
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 
services subject to the proposed 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 items listed above, the 
Exchange would not be able to provide

[[Page 10871]]

the access services associated with the Proposed Access Fees to its 
Members and their customers. Each of these expense items, including 
physical hardware, software, employee compensation and benefits, 
occupancy costs, and the depreciation and amortization of equipment, 
have been identified through a line-by-line item analysis to be 
integral to providing access services. The Proposed Access Fees are 
intended to recover the Exchange's costs of providing access to 
Exchange Systems. Accordingly, the Exchange believes that the Proposed 
Access Fees are fair and reasonable because they do not result in 
excessive pricing or supra-competitive profit, when comparing the 
actual costs to the Exchange versus the projected annual revenue from 
the Proposed Access Fees.
The 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 
is the model adopted by the Exchange when it launched operations for 
its Full Service MEO Port fees. Moreover, the tiered pricing structure 
for Full Service MEO Ports is not a new proposal and has been in place 
since 2018, well prior to the filing of the First Proposed Rule Change. 
The proposed tiers of Full Service MEO Port fees will continue to apply 
to all Members and non-Members in the same manner based upon the 
monthly total volume executed by a Member and its Affiliates on the 
Exchange across all origin types, not including Excluded Contracts, as 
compared to the TCV in all MIAX Pearl-listed options. Members and non-
Members may choose to purchase more than the two Full Service MEO Ports 
the Exchange currently provides upfront based on their own business 
decisions and needs. 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 their 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 
access the Exchange and the amount of the fees are based on the number 
of Full Service MEO Ports utilized, in addition to the amount of volume 
conducted on the Exchange. 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 proposed tiered-pricing structure is not unfairly 
discriminatory and provides for the equitable allocation of fees, dues, 
and other charges because the amount of the fee is directly related to 
the Member or non-Member's TCV resulting in higher fees for greater 
TCV. The higher the volume, the greater pull on Exchange resources. The 
Exchange's high performance network solutions and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput and the capacity to handle approximately 10.7 million 
order messages per second. On an average day, the Exchange handles over 
approximately 2.7 billion total messages. However, in order to achieve 
a consistent, premium network performance, the Exchange must build out 
and maintain a network that has the capacity to handle the message rate 
requirements of its most heavy network consumers. These billions of 
messages per day consume the Exchange's resources and significantly 
contribute to the overall expense for storage and network transport 
capabilities.
    There are material costs associated with providing the 
infrastructure and headcount to fully-support access to the Exchange. 
The Exchange incurs technology expense related to establishing and 
maintaining Information Security services, enhanced network monitoring 
and customer reporting, as well as Regulation SCI mandated processes, 
associated with its network technology. While some of the expense is 
fixed, much of the expense is not fixed, and thus increases as the 
services associated with the Proposed Access Fees increase. For 
example, new Members to the Exchange may require the purchase of 
additional hardware to support those Members as well as enhanced 
monitoring and reporting of customer performance that the Exchange and 
its affiliates provide. Further, as the total number of 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 reasonable in order to offset a portion of the costs to the 
Exchange associated with providing access to its network 
infrastructure.
    The Exchange notes that the firms that purchase more than two Full 
Service MEO Ports that the Exchange initially provides essentially do 
so for competitive reasons amongst themselves and choose to utilize 
numerous ports based on their business needs and desire to attempt to 
access the market quicker by using the port with the least amount of 
latency. These firms are generally engaged in sending liquidity 
removing orders to the Exchange and seek to add more ports 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 Full Service MEO Ports 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 Full Service MEO Ports with less message and/or 
order traffic to ensure that their liquidity taking order accesses the 
Exchange quicker because that port's queue is shorter. These firms also 
tend to frequently add and drop ports mid-month to determine which have 
the least latency, which results in increased costs to the Exchange to 
constantly make changes in the data center.
    The firms that engage in the above-described liquidity removing and 
advanced trading strategies typically require more than two Full 
Service MEO Ports and, therefore, generate higher costs by utilizing 
more of the Exchange's resources. Those firms may also conduct other 
latency measurements over their ports and drop and simultaneously add 
ports 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 ports in the data center. Therefore, the 
Exchange believes it is equitable for these firms to experience 
increased port costs based on their disproportionate pull on Exchange 
resources to provide the additional ports.
    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

[[Page 10872]]

that are not unfairly discriminatory.\71\ As stated above, Full Service 
MEO Ports are not an unlimited resource and the Exchange's network is 
limited in the amount of ports it can provide. However, the Exchange 
must accommodate requests for additional ports 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 ports 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 ports and to maintain 
those ports 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 ports they request while balancing that against 
the Exchange's increased expenses when expanding its network to 
accommodate additional port access.
---------------------------------------------------------------------------

    \71\ 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 ports and port access or their fee markup 
over those costs, and therefore cannot use other exchanges' port fees 
as a benchmark to determine a reasonable markup over the costs of 
providing port access. Nevertheless, the Exchange believes the other 
exchanges' port fees are a useful example of alternative approaches to 
providing and charging for port access. To that end, the Exchange 
believes the proposed tiered-pricing structure for its Full Service MEO 
Ports is reasonable because the proposed highest tier is still less 
than or similar to fees charged for similar port access provided by 
other options exchanges with comparable market shares. For example, 
NASDAQ (equity options market share of 8.38% as of December 15, 2021 
for the month of December) \72\ charges $1,500 per port for SQF ports 
1-5, $1,000 per SQF port for ports 6-20, and $500 per SQF port for 
ports 21 and greater,\73\ all on a per matching engine basis, with 
NASDAQ having multiple matching engines.\74\ NYSE American (equity 
options market share of 6.74% as of December 15, 2021 for the month of 
December) \75\ charges $450 per port for order/quote entry ports 1-40 
and $150 per port for ports 41 and greater,\76\ all on a per matching 
engine basis, with NYSE American having 17 match engines.\77\ The below 
table further illustrates this comparison.
---------------------------------------------------------------------------

    \72\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited December 15, 2021).
    \73\ See supra note 25.
    \74\ See supra note 17.
    \75\ See supra note 72.
    \76\ See supra note 25.
    \77\ See supra note 17.

----------------------------------------------------------------------------------------------------------------
           Exchange                Type of port                             Monthly fee
----------------------------------------------------------------------------------------------------------------
MIAX Pearl (as proposed)......  MEO Full Service-- Tier 1: $5,000 (or $208.33 per Matching Engine).
                                 Bulk.
                                                   Tier 2: $7,500 (or $312.50 per Matching Engine).
                                                   Tier 3: $10,000 (or $416.66 per Matching Engine).
                                MEO Full Service-- Tier 1: $2,500 (or $104.16 per Matching Engine).
                                 Single.
                                                   Tier 2: $3,500 (or $145.83 per Matching Engine).
                                                   Tier 3: $4,500 (or $187.50 per Matching Engine).
NYSE American.................  Order/Quote Entry  Ports 1-40: $450 each.
                                                   Ports 41 or more: $150 each.
NYSE Arca.....................  Order/Quote Entry  Ports 1-40: $450 each.
                                                   Ports 41 or more: $150 each.
NASDAQ........................  Specialized Quote  Ports 1-5: $1,500 each.
                                 Interface.        Ports 6-20: $1,000 each.
                                                   Ports 21 or more: $500.
----------------------------------------------------------------------------------------------------------------

    In the each of the above cases, the Exchange's highest tiered port 
fee, as proposed, is similar to or less than the port fees of competing 
options exchanges with like market share. Further, as described in more 
detail below, many competing exchanges generate higher overall 
operating profit margins and higher ``access fees'' than the Exchange, 
inclusive of the projected revenues associated with the proposed fees. 
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 access fees. Each of the port fee 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 fees are 
reasonable, equitably allocated and not unfairly discriminatory 
because, for the flat fee, the Exchange provides each Member two (2) 
Full Service MEO Ports for each matching engine to which that Member is 
connected. Unlike other options exchanges that provide similar port 
functionality and charge fees on a per port basis,\78\ the Exchange 
offers Full Service MEO Ports as a package and provides Members with 
the option to receive up to two Full Service MEO Ports per matching 
engine to which it connects. The Exchange currently has twelve (12) 
matching engines, which means Members may receive up to twenty-four 
(24) Full Service MEO Ports for a single monthly fee, that can vary 
based on certain volume percentages. The Exchange currently assesses 
Members a fee of $5,000 per month in the highest Full Service MEO 
Port--Bulk Tier, regardless of the number of Full Service MEO Ports 
allocated to the Member. Assuming a Member connects to all twelve (12) 
matching engines during a month, with two Full Service MEO Ports per 
matching engine, this results in a cost of $208.33 per Full Service MEO 
Port--Bulk ($5,000 divided by 24) for the month. This fee has been 
unchanged since the Exchange adopted Full Service MEO Port fees in 
2018.\79\ The Exchange now proposes to increase the Full Service MEO 
Port fees, with the highest Tier fee for a Full Service MEO Port--Bulk 
of $10,000 per month. Members will continue to receive two (2) Full 
Service MEO Ports to each matching engine to which they are connected 
for the single flat monthly fee. Assuming a Member connects to all

[[Page 10873]]

twelve (12) matching engines during the month, and achieves the highest 
Tier for that month, with two Full Service MEO Ports--Bulk per matching 
engine, this would result in a cost of $416.67 per Full Service MEO 
Port ($10,000 divided by 24).
---------------------------------------------------------------------------

    \78\ See supra note 17.
    \79\ See supra note 18.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on 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.
Intra-Market Competition
    The Exchange believes that the Proposed Access Fees do not place 
certain market participants at a relative disadvantage to other market 
participants because the Proposed Access Fees do not favor certain 
categories of market participants in a manner that would impose a 
burden on competition; rather, the allocation of the Proposed Access 
Fees reflects the network resources consumed by the various size of 
market participants--lowest bandwidth consuming members pay the least, 
and highest bandwidth consuming members pays the most, particularly 
since higher bandwidth consumption translates to higher costs to the 
Exchange.
Inter-Market Competition
    The Exchange believes the Proposed Access Fees do not place an 
undue burden on competition on other options exchanges that is not 
necessary or appropriate. In particular, options market participants 
are not forced to connect to (and purchase MEO Ports from) all options 
exchanges. The Exchange also notes that it has far less Members as 
compared to the much greater number of members at other options 
exchanges. Not only does MIAX Pearl have less than half the number of 
members as certain other options exchanges, but there are also a number 
of the Exchange's Members that do not connect directly to MIAX Pearl. 
There are a number of large users of the MEO Interface and broker-
dealers that are members of other options exchange but not Members of 
MIAX Pearl. The Exchange is also unaware of any assertion that its 
existing fee levels or the Proposed Access Fees would somehow unduly 
impair its competition with other options exchanges. To the contrary, 
if the fees charged are deemed too high by market participants, they 
can simply disconnect.
    The Exchange operates in a highly competitive market in which 
market participants can readily favor one of the 15 competing options 
venues if they deem fee levels at a particular venue to be excessive. 
Based on publicly-available information, and excluding index-based 
options, no single exchange has more than approximately 16% market 
share. Therefore, no exchange possesses significant pricing power in 
the execution of multiply-listed equity and ETF options order flow. 
Over the course of 2021, the Exchange's market share has fluctuated 
between approximately 3-6% of the U.S. equity options industry.\80\ The 
Exchange is not aware of any evidence that a market share of 
approximately 3-6% provides the Exchange with anti-competitive pricing 
power. If the Exchange were to attempt to establish unreasonable 
pricing, then no market participant would join or connect, and existing 
market participants would disconnect. The Exchange believes that the 
ever-shifting market share among exchanges from month to month 
demonstrates that market participants can discontinue or reduce use of 
certain categories of products, or shift order flow, in response to fee 
changes. In such an environment, the Exchange must continually adjust 
its fees and fee waivers to remain competitive with other exchanges and 
to attract order flow to the Exchange.
---------------------------------------------------------------------------

    \80\ See supra note 72.
---------------------------------------------------------------------------

    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 Guidance 
has served an important policy goal of improving disclosures in 
proposed rule changes and requiring exchanges to more clearly justify 
that their market data and access fee proposals are fair and 
reasonable, it has also been inconsistently applied and therefore 
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 \81\ and no comment letters on the Second or 
Third Proposed Rule Changes. The Exchange now responds to the one 
comment letter in this filing. The SIG Letter 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.'' \82\ The 
SIG Letter'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.
---------------------------------------------------------------------------

    \81\ See supra note 7.
    \82\ 17 CFR 201.700(b)(3).
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    Until recently, the Exchange has operated at a net annual loss 
since it launched operations in 2017.\83\ 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 and Second Proposed Rules 
Changes. 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 Emerald and MIAX, and SIG did not submit a 
comment letter on those filings.\84\ Those filings

[[Page 10874]]

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 supported 
an assertion that those proposed fee changes were consistent with the 
Act.\85\ The Exchange leveraged its past work with Commission Staff to 
ensure the justification provided herein and in the First, Second and 
Third Proposed Rule Changes included 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 that have been permitted to take effect without 
suspension.'' \86\ That same industry group also noted their ``worry 
that the Commission's process for reviewing and evaluating exchange 
filings may be inconsistently applied.'' \87\
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    \83\ See supra note 56.
    \84\ 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).
    \85\ 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 that proposal as SR-PEARL-2021-23. See Securities Exchange 
Act Release No. 91858 (May 12, 2021), 86 FR 26967 (May 18, 2021) 
(SR-PEARL-2021-23).
    \86\ See letter from Tyler Gellasch, Executive Director, Healthy 
Markets Association, to Hon. Gary Gensler, Chair, Commission, dated 
October 29, 2021.
    \87\ 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 changes should satisfy, and is not warranted here.
    In addition, the arguments in the SIG Letter 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 a comment letter. 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.
General
    First, the SIG Letter states that 10Gb ULL ``lines are critical to 
Exchange members to be competitive and to provide essential protection 
from adverse market events'' (emphasis added).\88\ The Exchange notes 
that this statement is generally not true for Full Service MEO Ports as 
those ports are used primarily for order entry and not risk protection 
activities like purging quotes resting on the MIAX Pearl Options Book. 
Full Service MEO Ports are essentially used for competitive reasons and 
Members may choose to utilize one or two Full Service MEO Ports \89\ 
based on their business needs and desire to attempt to access the 
market quicker by using one port that may have less latency. For 
instance, a Member may have just sent numerous messages and/or orders 
over one of their Full Service MEO Ports 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 of their other Full Service MEO Ports with less message 
and/or order traffic or any of their optional additional Limit Service 
MEO Ports \90\ to ensure that their liquidity taking order accesses the 
Exchange quicker because that port's queue is shorter.
---------------------------------------------------------------------------

    \88\ See SIG Letter, supra note 7.
    \89\ The rates set forth for Full Service MEO Ports under 
Section 5)d) of the Exchange's Fee Schedule entitle a Member to two 
(2) Full Service MEO Ports for each Matching Engine for a single 
monthly fee.
    \90\ Members may be allocated two (2) Full-Service MEO Ports per 
Matching Engine and may request Limited Service MEO Ports for which 
the Exchange will assess no fee for the first two Limited Service 
MEO Ports requested by the Member. See Fee Schedule, Section 5)d).
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The Tiered Pricing Structure for Full Service MEO Ports Provides for 
the Equitable Allocation of Reasonable Dues, Fees, and Other Charges
    The SIG Letter challenges the below two bases the Exchange set 
forth in its Initial Proposed Fee Change and herein to support the 
assertion that the proposal provides for the equitable allocation of 
reasonable dues, fees, and other charges:
     ``If the Exchanges were to attempt to establish 
unreasonable pricing, then no market participant would join or connect 
to the Exchanges, and existing market participants would disconnect.
     The fees will not result in excessive pricing or supra-
competitive profit.'' \91\
---------------------------------------------------------------------------

    \91\ See SIG Letter, supra note 7.
---------------------------------------------------------------------------

    The Exchange responds to each of SIG's challenges in turn below.
If the Exchanges Were To Attempt To Establish Unreasonable Pricing, 
Then No Market Participant Would Join or Connect to the Exchange, and 
Existing Market Participants Would Disconnect
    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

[[Page 10875]]

reasonable.'' \92\ 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.'' \93\ 
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 the 
SIG Letter.
---------------------------------------------------------------------------

    \92\ Id.
    \93\ See Guidance, supra note 33.
---------------------------------------------------------------------------

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 the SIG Letter.
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 tiered pricing structure for Full Service MEO Ports 
is not a new proposal and has been in place since 2018, well prior to 
the filing of the First Proposed Rule Change. Nonetheless, 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.
Recoupment of Exchange Infrastructure Costs
    Nowhere in this proposal or in the First Proposed Rule 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 it 
is necessary to respond to SIG's assertion here.
    Nonetheless, the Exchange notes that until recently it has operated 
at a net annual loss since it launched operations in 2017.\94\ This is 
a result of providing a low cost alternative to attract order flow and 
encourage market participants to experience the determinism and 
resiliency of the Exchange's trading systems. To do so, the Exchange 
chose to offer some non-transaction related services for little to no 
cost. This resulted in the Exchange forgoing revenue it could have 
generated from assessing higher fees. Further, a vast majority of the 
Exchange's Members, if not all, benefited from these lower fees. The 
Exchange could have sought to charge higher fees at the outset, but 
that could have served to discourage participation on the Exchange. 
Instead, the Exchange chose to provide a low cost exchange alternative 
to the options industry which resulted in lower initial revenues. The 
SIG Letter chose to ignore this reality and instead criticize the 
Exchange for initially charging lower fees or providing a moratorium on 
certain non-transaction fees to the benefit of all market participants. 
The Exchange is now trying to amend its fee structure to enable it to 
continue to maintain and improve its overall market and systems while 
also providing a highly reliable and deterministic trading system to 
the marketplace.
---------------------------------------------------------------------------

    \94\ See supra note 56.
---------------------------------------------------------------------------

III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\95\ 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,\96\ 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.
---------------------------------------------------------------------------

    \95\ 15 U.S.C. 78s(b)(3)(C).
    \96\ 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 
1, 2021, with the proposed fee changes being immediately effective. 
That proposal, SR-PEARL-2021-33, was published for comment in the 
Federal Register on July 15, 2021.\97\ On August 27, 2021, pursuant to 
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily 
suspended the proposed rule change (SR-PEARL-2021-33) and (2) 
instituted proceedings to determine whether to approve or disapprove 
the proposed rule change.\98\ On October 12, 2021, the Exchange 
withdrew SR-PEARL-2021-33. On November 1, 2021, the Exchange filed a 
proposed rule change proposing fee changes as proposed herein. That 
proposal, SR-PEARL-2021-53, was published for comment in the Federal 
Register on November 17, 2021.\99\ On December 20, 2021, the Exchange 
withdrew SR-PEARL-2021-53 and filed a proposed rule change proposing 
fee

[[Page 10876]]

changes as proposed herein on December 20, 2021. That filing, SR-PEARL-
2021-58,\100\ was published for comment in the Federal Register on 
January 10, 2022.\101\ On February 15, 2022, the Exchange withdrew SR-
PEARL-2021-58 and filed the instant filing, which is substantially 
similar.
---------------------------------------------------------------------------

    \97\ See Securities Exchange Act Release No. 92365 (July 9, 
2021), 86 FR 37347 (July 15, 2021) (SR-PEARL-2021-33). The 
Commission received one comment letter on that proposal. Comment for 
SR-PEARL-2021-33 can be found at: https://www.sec.gov/comments/sr-pearl-2021-33/srpearl202133-9208443-250011.pdf.
    \98\ See Securities Exchange Act Release No. 93556 (August 27, 
2021), 86 FR 49360 (September 2, 2021).
    \99\ See Securities Exchange Act Release No. 93556 (November 19, 
2021), 86 FR 64235 (November 17, 2021) (SR-PEARL-2021-53).
    \100\ See text accompanying supra note 12.
    \101\ See Securities Exchange Act Release No. 93894 (January 4, 
2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58).
---------------------------------------------------------------------------

    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.\102\ 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.'' \103\
---------------------------------------------------------------------------

    \102\ 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'').
    \103\ 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; \104\ (2) perfect the mechanism of a 
free and open market and a national market system, protect investors 
and the public interest, and not permit unfair discrimination between 
customers, issuers, brokers, or dealers; \105\ and (3) not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\106\
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78f(b)(4).
    \105\ 15 U.S.C. 78f(b)(5).
    \106\ 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 increase the 
monthly fees for MIAX Express Network Full Service Ports 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 be designed to permit unfair discrimination between customers, 
issuers, brokers or dealers; and not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Act.\107\
---------------------------------------------------------------------------

    \107\ See 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.\108\
---------------------------------------------------------------------------

    \108\ 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) \109\ and 19(b)(2)(B) \110\ 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.
---------------------------------------------------------------------------

    \109\ 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.
    \110\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\111\ 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),\112\ 6(b)(5),\113\ and 6(b)(8) \114\ 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.
---------------------------------------------------------------------------

    \111\ 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.
    \112\ 15 U.S.C. 78f(b)(4).
    \113\ 15 U.S.C. 78f(b)(5).
    \114\ 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:
    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 the Full Service MEO Ports.'' \115\ Setting forth its 
costs in providing the Proposed Access Fees, and as summarized in 
greater detail above, the Exchange projects $897,084 in aggregate 
annual estimated costs for 2021 as the sum of: (1) $40,166 in third-
party expenses paid in total to Equinix (1.80% of the total applicable 
expense) for data center services; Zayo Group Holdings, for network 
services (0.90% of the total applicable expense); SFTI for connectivity 
support, Thompson Reuters, NYSE, Nasdaq, and Internap and others (0.90% 
of the total applicable expense) for content, connectivity services, 
and infrastructure services; and various other hardware and software 
providers (0.90% of the total

[[Page 10877]]

applicable expense) supporting the production environment, and (2) 
$856,918 in internal expenses, allocated to (a) employee compensation 
and benefit costs ($783,513, approximately 8.55% of the Exchange's 
total applicable employee compensation and benefits expense); (b) 
depreciation and amortization ($64,456, approximately 2.25% of the 
Exchange's total applicable depreciation and amortization expense); and 
(c) occupancy costs ($8,949, approximately 1.80% 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 the Proposed Access Fees? 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 Full Service 
MEO Port costs, including how shared costs are allocated and attributed 
to Full Service MEO Port 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? 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?
---------------------------------------------------------------------------

    \115\ 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 38%. 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 services 
subject to the proposed fees,'' and believes that a 38% margin is a 
limited return over such costs.\116\ 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 ports 
purchased, and that costs may increase. They also state that the number 
of ports 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.\117\ 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?
---------------------------------------------------------------------------

    \116\ See supra Section II.A.2.
    \117\ See id.
---------------------------------------------------------------------------

    3. Reasonable Rate of Return. Do commenters agree with the Exchange 
that its expected 38% profit margin would constitute a reasonable rate 
of return over cost for Full Service MEO Ports? If not, what would 
commenters consider to be a reasonable rate of return and/or what 
methodology would they consider to be appropriate for determining a 
reasonable rate of return? What are commenters' views regarding what 
factors should be considered in determining what constitutes a 
reasonable rate of return for Full Service MEO Ports? Do commenters 
believe it relevant to an assessment of reasonableness that the 
Exchange's proposed fees for Full Service MEO Ports, even at the 
highest tier, are still less than or similar to those of other options 
exchanges to which the Exchange has compared the Proposed Access Fees? 
Should an assessment of reasonable rate of return include consideration 
of factors other than costs; and if so, what factors should be 
considered, and why?
    4. Periodic Reevaluation. The 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 pending fee proposals, such as this filing,'' 
and that ``[i]n order to be fairly applied, such a mandate should be 
applied to existing market data fees as well.'' \118\ In light of the 
impact that the number of subscribers has on Full Service MEO Port 
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 Full Service MEO Port 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 Full 
Service MEO Port 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 Full Service MEO Port fee is implemented? 60 days? 90 
days? Some other period?
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    \118\ See supra Section II.A.2.
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    5. Tiered Structure for Full Service MEO Ports Fees. The Exchange 
states that proposed tiered-pricing structure is reasonable, fair, 
equitable, and not unfairly discriminatory because it is the model 
adopted by the Exchange when it

[[Page 10878]]

launched operations for its Full Service MEO Port fees, and further, 
that the amount of the fee is directly related to the Member or non-
Member's TCV resulting in higher fees for greater TCV.\119\ What are 
commenters' views on the adequacy of the information the Exchange 
provides regarding the proposed differentials in fees? Do commenters 
believe that the proposed price differences are supported by the 
Exchange's assertions that it set the level of each proposed new fee in 
a manner that it equitable and not unfairly discriminatory?
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    \119\ See id.
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
[SRO] that proposed the rule change.'' \120\ 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,\121\ 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.\122\ 
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.\123\
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    \120\ 17 CFR 201.700(b)(3).
    \121\ See id.
    \122\ See id.
    \123\ See Susquehanna Int'l Group, LLP v. Securities and 
Exchange Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) 
(rejecting the Commission's reliance on an SRO's own determinations 
without sufficient evidence of the basis for such determinations).
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    The Commission believes it is appropriate to institute proceedings 
to allow for additional consideration and comment on the issues raised 
herein, including as to whether the 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.\124\
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    \124\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by an SRO. 
See Securities Acts Amendments of 1975, Report of the Senate 
Committee on Banking, Housing and Urban Affairs to Accompany S. 249, 
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by March 18, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 1, 
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-PEARL-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-PEARL-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-PEARL-2022-04 and should be submitted on 
or before March 18, 2022. Rebuttal comments should be submitted by 
April 1, 2022.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\125\ that File Numbers SR-PEARL-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.
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    \125\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\126\
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    \126\ 17 CFR 200.30-3(a)(12), (57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03964 Filed 2-24-22; 8:45 am]
BILLING CODE 8011-01-P


