[Federal Register Volume 87, Number 76 (Wednesday, April 20, 2022)]
[Notices]
[Pages 23633-23647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-08382]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94718; File No. SR-EMERALD-2022-15]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing of a Proposed Rule Change To Amend Its Fee Schedule To Adopt a 
Tiered-Pricing Structure for Additional Limited Service MIAX Emerald 
Express Interface Ports; Suspension of and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove the Proposed 
Rule Change

April 14, 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 April 1, 2022, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons and is, pursuant to Section 19(b)(3)(C) of the Act, hereby: (i) 
Temporarily suspending the proposed rule change; and (ii) instituting 
proceedings to determine whether to approve or disapprove the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

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

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

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

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule to adopt a tiered-
pricing structure for additional Limited Service MIAX Emerald Express 
Interface (``MEI'') Ports \3\ available to Market Makers.\4\ The 
Exchange believes a tiered-pricing structure will encourage Market 
Makers to be more efficient and economical when determining how to 
connect to the Exchange. This 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.\5\
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    \3\ The MIAX Emerald Express Interface (``MEI'') is a connection 
to the MIAX Emerald System that enables Market Makers to submit 
simple and complex electronic quotes to MIAX Emerald. See the 
Definitions Section of the Fee Schedule.
    \4\ The term ``Market Makers'' refers to Lead Market Makers 
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered 
Market Makers (``RMMs'') collectively. See the Definitions Section 
of the Fee Schedule and Exchange Rule 100.
    \5\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See the Definitions 
Section of the Fee Schedule and Exchange Rule 100.
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    The Exchange initially filed the proposed fee changes on August 2, 
2021, with the changes being immediately effective (``First Proposed 
Rule Change'').\6\ The First Proposed Rule Change was published for 
comment in the Federal Register on August 19, 2021.\7\ The Commission 
received one comment letter on the First Proposed Rule Change.\8\ The 
Exchange withdrew the First Proposed Rule Change on September 27, 2021 
and resubmitted its proposal (``Second Proposed Rule Change'').\9\ On 
September 28, 2021, the Exchange withdrew the Second Proposed Rule 
Change and re-submitted the proposal on September 28, 2021, with the 
proposed fee changes being immediately effective (``Third Proposed Rule 
Change'').\10\ The Third Proposed Rule Change was published for comment 
in the Federal Register on October 5,

[[Page 23634]]

2021.\11\ The Third Proposed Rule Change provided additional 
justification for the proposed fee changes and addressed certain points 
raised in the single comment letter that was submitted on the First 
Proposed Rule Change. The Commission received four comment letters from 
three separate commenters on the Third Proposed Rule Change.\12\ The 
Commission suspended the Third Proposed Rule Change on November 22, 
2021.\13\ The Exchange withdrew the Third Proposed Rule Change on 
December 1, 2021 and submitted a revised proposal for immediate 
effectiveness (``Fourth Proposed Rule Change'').\14\ The Fourth 
Proposed Rule Change meaningfully attempted to address issues or 
questions that have been raised by providing additional justification 
and explanation for the proposed fee changes and directly respond to 
the points raised in SIG Letters 1, 2, and 3, as well as the SIFMA 
Letter submitted on the First and Second [sic] Proposed Rule 
Changes,\15\ and feedback provided by Commission Staff during a 
telephone conversation on November 18, 2021 relating to the Third 
Proposed Rule Change. The Fourth Proposed Rule Change was published for 
comment in the Federal Register on December 20, 2021.\16\ Although the 
Commission did not receive any comment letters on the Fourth Proposed 
Rule Change, the Commission suspended the Fourth Proposed Rule Change 
on January 27, 2022.\17\ The Exchange withdrew the Fourth Proposed Rule 
Change on February 1, 2022 and submitted a revised proposal for 
immediate effectiveness, which was noticed and immediately suspended by 
the Commission on February 15, 2022 (``Fifth Proposed Rule 
Change'').\18\ The Commission received one comment letter on the Fifth 
Proposed Rule Change.\19\ The Exchange withdrew the Fifth Proposed Rule 
Change on March 30, 2022 and submits this revised proposal to be 
effective April 1, 2022 (``Sixth Proposed Rule Change'').
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    \6\ See Securities Exchange Act Release No. 92662 (August 13, 
2021), 86 FR 46726 (August 19, 2021) (SR-EMERALD-2021-25).
    \7\ Id.
    \8\ See Letter from Richard J. McDonald, Susquehanna 
International Group, LLC (``SIG''), to Vanessa Countryman, 
Secretary, Commission, dated September 7, 2021 (``SIG Letter 1'').
    \9\ See SR-EMERALD-2021-30.
    \10\ See Securities Exchange Act Release No. 93188 (September 
29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-2021-31).
    \11\ Id.
    \12\ See letters from Richard J. McDonald, SIG, to Vanessa 
Countryman, Secretary, Commission, dated October 1, 2021 (``SIG 
Letter 2'') and October 26, 2021 (``SIG Letter 3''); and Ellen 
Green, Managing Director, Equity and Options Market Structure, 
Securities Industry and Financial Markets Association (``SIFMA''), 
to Vanessa Countryman, Secretary, Commission, dated November 26, 
2021 (``SIFMA Letter'').
    The Exchange notes that the Healthy Markets Association 
(``HMA'') submitted a comment letter on a related filing to amend 
fees for 10Gb ULL connections, on which SIG Letters 1, 2, and 3 as 
well as the SIFMA Letter also commented. See letter from Tyler 
Gellasch, Executive Director, HMA (``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'').
    \13\ See Securities Exchange Act Release No. 93644 (November 22, 
2021), 86 FR 67745 (November 29, 2021).
    \14\ See Securities Exchange Act Release No. 93772 (December 14, 
2021), 86 FR 71965 (December 20, 2021) (SR-EMERALD-2021-43).
    \15\ The Exchange notes that while the HMA Letter applauds the 
level of disclosure the Exchange included in the First and Second 
Proposed Rule Changes, the HMA Letter does not raise specific issues 
with the First or Second Proposed Rule Changes. Rather, it 
references the Exchange's proposals by way of comparison to show the 
varying levels of transparency in exchange fees filings and 
recommends changes to the Commission's review process of exchange 
fee filings generally. Therefore, the Exchange does not feel it is 
necessary to address the issues raised in the HMA Letter.
    \16\ See supra note 14.
    \17\ See Securities Exchange Act Release No. 94087 (January 27, 
2022), 87 FR 5918 (February 2, 2022) (SR-MIAX-2021-60, SR-EMERALD-
2021-43) (Suspension of and Order Instituting Proceedings to 
Determine Whether to Approve or Disapprove Proposed Rule Changes to 
Amend Fee Schedules to Adopt Tiered-Pricing Structures for 
Additional Limited Service MIAX and MIAX Emerald Express Interface 
Ports).
    \18\ See Securities Exchange Act Release No. 94260 (February 15, 
2022), 87 FR 9695 (February 22, 2022) (SR-EMERALD-2022-05) (Notice 
of Filing of a Proposed Rule Change to Amend Its Fee Schedule to 
Adopt a Tiered-Pricing Structure for Additional Limited Service MIAX 
Emerald Express Interface Ports; Suspension of and Order Instituting 
Proceedings to Determine Whether to Approve or Disapprove the 
Proposed Rule Change).
    \19\ See Letter from Richard J. McDonald, SIG, to Vanessa 
Countryman, Secretary, Commission, dated March 15, 2022 (``SIG 
Letter 4'').
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Additional Limited Service MEI Port Tiered-Pricing Structure
    The Exchange proposes to amend the fees for additional Limited 
Service MEI Ports. Currently, the Exchange allocates two (2) Full 
Service MEI Ports \20\ and two (2) Limited Service MEI Ports \21\ per 
matching engine \22\ to which each Market Maker connects. Market Makers 
may also request additional Limited Service MEI Ports for each matching 
engine to which they connect. The Full Service MEI Ports, Limited 
Service MEI Ports and the additional Limited Service MEI Ports all 
include access to the Exchange's primary and secondary data centers and 
its disaster recovery center. Market Makers may request additional 
Limited Service MEI Ports. Prior to the First Proposed Rule Change, 
Market Makers were assessed a $100 monthly fee for each additional 
Limited Service MEI Port for each matching engine.
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    \20\ ``Full Service MEI Ports'' means a port which provides 
Market Makers with the ability to send Market Maker simple and 
complex quotes, eQuotes, and quote purge messages to the MIAX 
Emerald System. Full Service MEI Ports are also capable of receiving 
administrative information. Market Makers are limited to two Full 
Service MEI Ports per Matching Engine. See the Definitions Section 
of the Fee Schedule.
    \21\ ``Limited Service MEI Ports'' means a port which provides 
Market Makers with the ability to send simple and complex eQuotes 
and quote purge messages only, but not Market Maker Quotes, to the 
MIAX Emerald System. Limited Service MEI Ports are also capable of 
receiving administrative information. Market Makers initially 
receive two Limited Service MEI Ports per Matching Engine. See the 
Definitions Section of the Fee Schedule.
    \22\ ``Matching Engine'' means a part of the MIAX Emerald 
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 (for example, options 
on SPY may be processed by one single Matching Engine that is 
dedicated only to SPY). 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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    The Exchange now proposes to move from a flat monthly fee per 
additional Limited Service MEI Port for each matching engine to a 
tiered-pricing structure for additional Limited Service MEI Ports for 
each matching engine under which the monthly fee would vary depending 
on the number of additional Limited Service MEI Ports the Market Maker 
elects to purchase. Specifically, the Exchange will continue to provide 
the first and second additional [sic] Limited Service MEI Ports for 
each matching engine free of charge, as described above, per the 
initial allocation of Limited Service MEI Ports that Market Makers 
receive. The Exchange now proposes the following tiered-pricing 
structure: (i) The third and fourth additional [sic] Limited Service 
MEI Ports for each matching engine will increase from the current flat 
monthly fee of $100 to $200 per port; (ii) the fifth and sixth 
additional [sic] Limited Service MEI Ports for each matching engine 
will increase from the current flat monthly fee of $100 to $300 per 
port; and (iii) the seventh to the twelfth [sic] additional [sic] 
Limited Service MEI Ports will increase from the current monthly flat 
fee of $100 to $400 per port.
    The Exchange believes the other exchanges' port fees are useful 
examples 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. As shown by the below

[[Page 23635]]

table, the Exchange's proposed highest tier is still less than fees 
charged for similar port access provided by other options exchanges.

------------------------------------------------------------------------
                                                       Monthly fee (per
            Exchange                 Type of port            port)
------------------------------------------------------------------------
MIAX Emerald (as proposed)        Limited Service     1-2 ports. FREE
 (equity options market share of   MEI Port.           (not changed in
 3.95% as of March 29, 2022 for                        this proposal).
 the month of March) \23\.                            3-4 ports. $200.
                                                      5-6 ports. $300.
                                                      7-12 [sic]. $400.
NYSE American, LLC (``Amex'')     Order/Quote Entry   $450.
 \24\ (equity options market       Port.
 share of 7.15% as of March 29,
 2022 for the month of March)
 \25\.
The NASDAQ Stock Market LLC       SQF Port..........  1-5 ports.
 (``NASDAQ'') \26\ (equity                             $1,500.00.
 options market share of 8.62%                        6-20 ports.
 as of March 29, 2022 for the                          $1,000.00.
 month of March) \27\.                                21 or more ports.
                                                       $500.
------------------------------------------------------------------------

2. Statutory Basis
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    \23\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited March 29, 2022).
    \24\ See NYSE American Options Fee Schedule, Section V.A., Port 
Fees.
    \25\ See supra note 23.
    \26\ See Nasdaq Stock Market, Nasdaq Options 7 Pricing Schedule, 
Section 3, Nasdaq Options Market--Ports and Other Services.
    \27\ See supra note 23.
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    The Exchange believes that the proposed fees are consistent with 
Section 6(b) of the Act \28\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \29\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among Members and other persons using any facility or system that the 
Exchange operates or controls. The Exchange also believes the proposal 
furthers the objectives of Section 6(b)(5) of the Act \30\ in that it 
is designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, protect investors and the 
public interest and are not designed to permit unfair discrimination 
between customers, issuers, brokers and dealers.
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    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(4).
    \30\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the information provided to justify the 
proposed fees meets or exceeds the amount of detail required in respect 
of proposed fee changes as set forth in recent Commission and 
Commission Staff guidance. 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'').\31\ 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.'' \32\ Based on both the BOX Order and the Guidance, the 
Exchange believes that the proposed fees are consistent with the Act 
because they are (i) reasonable, equitably allocated, not unfairly 
discriminatory, and not an undue burden on competition; (ii) comply 
with the BOX Order and the Guidance; and (iii) supported by evidence 
(including comprehensive revenue and cost data and analysis) that the 
proposed fees are fair and reasonable and will not result in excessive 
pricing or supra-competitive profit.
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    \31\ 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).
    \32\ 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'').
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The Proposed Fees Will Not Result in a Supra-Competitive Profit
    The Exchange believes that exchanges, in setting fees of all types, 
should meet very high standards of transparency to demonstrate why each 
new fee or fee amendment meets the requirements of the Act that fees be 
reasonable, equitably allocated, not unfairly discriminatory, and not 
create an undue burden on competition among market participants. The 
Exchange believes this high standard is especially important when an 
exchange imposes various fees for market participants to access an 
exchange's marketplace.
    In the Guidance, the Commission Staff states that, ``[a]s an 
initial step in assessing the reasonableness of a fee, staff considers 
whether the fee is constrained by significant competitive forces.'' 
\33\ 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.'' \34\ 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.'' \35\ The Exchange does not assert 
that the proposed fees are constrained by competitive forces. Rather, 
the Exchange asserts that the proposed fees are reasonable because they 
will permit recovery of the Exchange's costs in providing access 
services to supply Limited Service MEI Ports and will not result in the 
Exchange generating a supra-competitive profit.
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    \33\ Id.
    \34\ Id.
    \35\ 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.'' \36\ 
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.'' \37\ The Exchange provides 
this analysis below.
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    \36\ Id.
    \37\ Id.
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    The proposed fees are based on a cost-plus model. A Limited Service 
MEI Port provides access to each of the three Exchange networks, 
extranet, internal

[[Page 23636]]

network, and external network, all of which are necessary for Exchange 
operations. The Exchange's extranet provides the means by which the 
Exchange communicates with market participants and includes access to 
the Member portal and the ability to send and receive daily 
communications and reports. The internal network connects the extranet 
to the rest of the Exchange's systems and includes trading systems, 
market data systems, and network monitoring. The external network 
includes connectivity between the Exchange and other national 
securities exchanges, market data providers, and between the Exchange's 
locations in Princeton, New Jersey, Secaucus, New Jersey (NY4), Miami, 
Florida, and Chicago, Illinois (CH4). In determining the appropriate 
fees to charge Members and non-Members to access the Exchange's System 
Networks via Limited Service MEI Ports, the Exchange considered its 
costs to provide and maintain its System Networks and connectivity to 
those System Networks, using costs that are related to providing and 
maintaining access the Exchange's System Networks via Limited Service 
MEI Ports to estimate such costs, and set fees that are designed to 
cover its costs with a limited return in excess of such costs. The 
Exchange believes that it is important to demonstrate that the proposed 
fees are based on the Exchange's costs and reasonable business needs 
and believes the proposed fees will allow the Exchange to continue to 
offset expenses. 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 access to the Exchange's System Networks via 
Limited Service MEI Ports because of the uncertainty of forecasting 
subscriber decision making with respect to firms' port and access 
needs. The Exchange believes that the proposed fees will not result in 
excessive pricing or supra-competitive profit based on the total 
expenses the Exchange incurs versus the total revenue the Exchange 
projects to collect, and therefore meets the standards in the Act as 
interpreted by the Commission and the Commission Staff in the BOX Order 
and the Guidance.
    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 
Limited Service MEI Ports, and, if such expense did so relate, what 
portion (or percentage) of such expense actually supports access to the 
Exchange's System Networks via Limited Service MEI Ports. In 
determining what portion (or percentage) to allocate to access 
services, each Exchange department head, in coordination with other 
Exchange personnel, determined the expenses that support access 
services and System Networks associated with Limited Service MEI Ports. 
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 analysis also 
included each department head meeting with the divisions of teams 
within each department to determine the amount of time and resources 
allocated by employees within each division towards the access services 
and System Networks associated with Limited Service MEI Ports. The 
Exchange reviewed each individual expense to determine if such expense 
was related to Limited Service MEI Ports. Once the expenses were 
identified, the Exchange department heads, with the assistance of our 
internal finance department, reviewed such expenses holistically on an 
Exchange-wide level to determine what portion of that expense supports 
providing access services and the System Networks. The sum of all such 
portions of expenses represents the total cost to the Exchange to 
provide access services associated with Limited Service MEI Ports. For 
the avoidance of doubt, no expense amount is allocated twice.
    The 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 access services 
associated with Limited Service MEI Ports. 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 
historically, and on an ongoing annual basis, reviews its costs and 
resource allocations to ensure it appropriately allocates resources to 
properly provide services to the Exchange's constituents.
    The Exchange believes exchanges, like all businesses, should be 
provided flexibility when developing and applying a methodology to 
allocate 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.
    The Exchange notes that there are material costs associated with 
providing the infrastructure and headcount to fully support access to 
the Exchange and its System Networks via Limited Service MEI Ports. 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. Both fixed and variable 
expenses have significant impact on the Exchange's overall costs to 
provide and maintain access to the Exchange's System Networks via 
Limited Service MEI Ports. For example, to accommodate new Members, the 
Exchange may need to purchase additional hardware to support those 
Members as well as provide enhanced monitoring and reporting of 
customer performance that the Exchange and its affiliates currently 
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 fees are a reasonable attempt 
to offset a portion of those costs associated with providing access to 
and maintaining its System Networks' infrastructure and related Limited 
Service MEI Ports.
    The Exchange estimated its total annual expense to provide and 
maintain access to the Exchange's System Networks via Limited Service 
MEI Ports based on the following general expense categories: (1) 
External expenses, which include fees paid to third parties for certain 
products and services; (2) internal expenses relating to the internal 
costs to provide the services associated with Limited Service MEI 
Ports; and (3) general shared expenses.\38\ The

[[Page 23637]]

Guidance does not include any information regarding the methodology 
that an exchange should use to determine its cost associated with a 
proposed fee change. The Exchange utilized a methodology in this 
proposed fee change that it believes is reasonable because the Exchange 
analyzed its entire cost structure, allocated a percentage of each cost 
attributable to maintaining its System Networks, then divided those 
costs according to the cost methodology outlined below.
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    \38\ 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.
    \39\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the 
information technology and communication costs line item under the 
section titled ``Operating Expenses Incurred Directly or Allocated 
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing 
its financial statements for 2018. See Securities Exchange Act 
Release No. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020) 
(SR-EMERALD-2019-39). Accordingly, the third-party expense described 
in this filing is attributed to the same line item for the 
Exchange's 2022 Form 1 Amendment, which will be filed in 2023. In 
its Suspension Order, the Commission also asked should the Exchange 
to use cost projections or actual costs estimated for 2021 in a 
filing made in 2022, or make cost projections for 2022. The Exchange 
utilized expenses from its most recent audited financial statement 
as those numbers are more reliable than more recent unaudited 
numbers, which may be subject to change.
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    For 2022, the total annual expense for providing the access 
services associated with the Limited Service MEI Ports is estimated to 
be $1,394,961, or $116,246 per month. The Exchange believes it is more 
appropriate to analyze the proposed fees utilizing its estimated 2022 
revenue and costs, which utilize the same presentation methodology as 
set forth in the Exchange's previously-issued Audited Unconsolidated 
Financial Statements.\39\ The $1,394,961 estimated total annual expense 
is directly related to the access to the Exchange's System Networks via 
Limited Service MEI Ports and not any other product or service offered 
by the Exchange. For example, it does not include general costs of 
operating matching engines and other trading technology. No expense 
amount was allocated twice. Each of the categories of expenses are set 
forth in the following table and details of the individual line-item 
costs considered by the Exchange for each category are described 
further below.

------------------------------------------------------------------------
                            External expenses
-------------------------------------------------------------------------
                                                         Percentage of
                      Category                           total expense
                                                       amount allocated
------------------------------------------------------------------------
Data Center Provider................................               4.95%
Fiber Connectivity Provider.........................               2.64%
Security Financial Transaction Infrastructure                      4.95%
 (``SFTI''), and Other Connectivity and Content
 Service Providers..................................
Hardware and Software Providers.....................               4.95%
                                                     -------------------
Total of External Expenses..........................        \40\ $64,417
------------------------------------------------------------------------
                            Internal Expenses
------------------------------------------------------------------------
                      Category                          Expense amount
                                                           allocated
------------------------------------------------------------------------
Employee Compensation...............................            $916,303
Depreciation and Amortization.......................              81,932
Occupancy...........................................              10,501
                                                     -------------------
    Total of Internal Expenses......................           1,008,736
------------------------------------------------------------------------
Allocated Shared Expenses...........................             321,808
------------------------------------------------------------------------

    The Exchange notes that it only has two primary sources of revenue, 
connectivity and port fees, to recover those costs associated with 
providing and maintaining access to the Exchange's System Networks. The 
Exchange notes that, without the specific third party and internal 
expense items, the Exchange would not be able to provide and maintain 
the System Networks and access to the System Networks via Limited 
Service MEI Ports to Members. Each of these expense items, including 
physical hardware, software, employee compensation and benefits, 
occupancy costs, and the depreciation and amortization of equipment, 
has been identified through a line-by-line item analysis to be integral 
to providing and maintaining the System Networks and access to System 
Networks via Limited Service MEI Ports.
---------------------------------------------------------------------------

    \40\ The Exchange does not believe it is appropriate to disclose 
the actual amount it pays to each individual third-party provider as 
those fee arrangements are competitive or the Exchange is 
contractually prohibited from disclosing that number.
---------------------------------------------------------------------------

    For clarity, the Exchange took a conservative approach in 
determining the expense and the percentage of that expense to be 
allocated to providing and maintaining the System Networks and access 
to System Networks in connection with Limited Service MEI Ports. The 
Exchange describes the analysis conducted for each expense and the 
resources or determinations that were considered when determining the 
amount necessary to allocate to each expense. Only a portion of all 
fees paid to such third-parties is included in the third-party expenses 
described herein, and no expense amount is allocated twice. 
Accordingly, the Exchange does not allocate its entire information 
technology and communication costs to providing and maintaining the 
System Networks and access to Exchange's System Networks via Limited 
Service MEI Ports. This may result in the Exchange under allocating an 
expense to provide and maintain its System Networks and access to the 
System Networks via Limited Service MEI Ports, and such expenses may 
actually be higher than what the Exchange allocated as part of this 
proposal. The Exchange notes that expenses associated with its 
affiliates, MIAX Pearl and MIAX, are accounted for separately and are 
not included within the scope of this filing.
    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 resulted in revised percentage 
allocations in this

[[Page 23638]]

filing. The revised percentages are, among other things, the result of 
the shuffling of internal resources in response to business objectives 
and changes to fees charged and services provided by third parties. 
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.
External Expense Allocations
    For 2022, expenses relating to fees paid by the Exchange to third 
parties for products and services necessary to provide and maintain the 
System Networks and access to the System Networks via Limited Service 
MEI Ports are estimated to be $64,417. This includes, but is not 
limited to, a portion of the fees paid to: (1) A third party data 
center provider, including for the primary, secondary, and disaster 
recovery locations of the Exchange's trading system infrastructure; (2) 
a fiber connectivity provider for network services (fiber and bandwidth 
products and services) linking the Exchange's and its affiliates' 
office locations in Princeton, New Jersey and Miami, Florida, to all 
data center locations; (3) SFTI, which supports connectivity feeds for 
the entire U.S. options industry; (4) various other content and 
connectivity service providers, which provide content, connectivity 
services, and infrastructure services for critical components of 
options connectivity and network services; and (5) various other 
hardware and software providers that support the production environment 
in which Members and non-Members connect to the network to trade and 
receive market data.
Data Center Space and Operations Provider
    The Exchange does not own the primary data center or the secondary 
data center, but instead leases space in data centers operated by third 
parties where the Exchange houses servers, switches and related 
equipment. Data center costs include an allocation of the costs the 
Exchange incurs to provide physical connectivity in the third-party 
data centers where it maintains its equipment as well as related costs. 
The data center provider operates the data centers (primary, secondary, 
and disaster recovery) that host the Exchange's network infrastructure. 
Without the retention of a third-party data center, the Exchange would 
not be able to operate its systems and provide a trading platform for 
market participants. The Exchange does not employ a separate fee to 
cover its data center expense and recoups that expense, in part, by 
charging for Limited Service MEI Ports.
    The Exchange reviewed its data center footprint, including its 
total rack space, cage usage, number of servers, switches, cabling 
within the data center, heating and cooling of physical space, storage 
space, and monitoring and divided its data center expenses among 
providing transaction services, market data, and connectivity. Based on 
this review, the Exchange determined that 4.95% of the total applicable 
data center provider expense is applicable to providing and maintaining 
access services and System Networks associated with Limited Service MEI 
Ports. The Exchange believes this allocation is reasonable because 
Limited Service MEI Ports are a core means of access to the Exchange's 
network, providing one method for market participants to send and 
receive order and trade messages, as well as receive market data. A 
large portion of the Exchange's data center expense is due to providing 
and maintaining port access and connectivity to the Exchange's System 
Networks, including providing cabling within the data center between 
market participants and the Exchange. The Exchange excluded from this 
allocation servers that are dedicated to market data. The Exchange also 
did not allocate the remainder of the data center expense because it 
pertains to other areas of the Exchange's operations, such as other 
ports, market data, and transaction services.
Fiber Connectivity Provider
    The Exchange engages a third-party service provider that provides 
the internet, fiber and bandwidth connections between the Exchange's 
networks, primary and secondary data center, and office locations in 
Princeton and Miami. Fiber connectivity is necessary for the Exchange 
to switch to its secondary data center in the case of an outage in its 
primary data center. Fiber connectivity also allows the Exchange's 
National Operations & Control Center (``NOCC'') and Security Operations 
Center (``SOC'') in Princeton to communicate with the Exchange's 
primary and secondary data centers. As such, all trade data, including 
the billions of messages each day, flow through this third-party 
provider's infrastructure over the Exchange's network. Without these 
services, the Exchange would not be able to operate and support the 
network and provide and maintain access services and System Networks 
associated with the Limited Service MEI Ports to its Members and their 
customers. Without the retention of a third-party fiber connectivity 
provider, the Exchange would not be able to communicate between its 
data centers and office locations. The Exchange does not employ a 
separate fee to cover its fiber connectivity expense and recoups that 
expense, in part, by charging for Limited Service MEI Ports.
    The Exchange reviewed its costs to retain fiber connectivity from a 
third party, including the ongoing costs to support fiber connectivity, 
ensuring adequate bandwidth and infrastructure maintenance to support 
exchange operations, and ongoing network monitoring and maintenance and 
determined that 2.64% of the total fiber connectivity expense was 
applicable to providing and maintaining access services and System 
Networks associated with Limited Service MEI Ports. The Exchange 
believes this allocation is reasonable because Limited Service MEI 
Ports are a core means of access to the Exchange's network, providing 
one method for market participants to send and receive order and trade 
messages, as well as receive market data. A large portion of the 
Exchange's fiber connectivity expense is due to providing and 
maintaining connectivity between the Exchange's System Networks, data 
centers, and office locations and is core to the daily operation of the 
Exchange. Fiber connectivity is a necessary integral means to 
disseminate information from the Exchange's primary data center to 
other Exchange locations. The Exchange excluded from this allocation 
fiber connectivity usage related to market data or other business 
lines. The Exchange also did not allocate the remainder of this expense 
because it pertains to other areas of the Exchange's operations and 
does not directly relate to providing and maintaining access services 
and System Networks associated with Limited Service MEI Ports. The 
Exchange believes this allocation is reasonable because it represents 
the Exchange's actual cost to retain fiber connectivity and maintain 
and provide access to its System Networks via Limited Service MEI 
Ports.
Connectivity and Content Services Provided by SFTI and Other Providers
    The Exchange relies on SFTI and various other connectivity and 
content service providers for connectivity and data feeds for the 
entire U.S. options industry, as well as content, connectivity, and 
infrastructure services for critical components of the network

[[Page 23639]]

that are necessary to provide and maintain its System Networks and 
access to its System Networks via Limited Service MEI Ports. 
Specifically, the Exchange utilizes SFTI and other content service 
provider to connect to other national securities exchanges, the Options 
Price Reporting Authority (``OPRA''), and to receive market data from 
other exchanges and market data providers. SFTI is operated by the 
Intercontinental Exchange, the parent company of five registered 
exchanges, and has become integral to the U.S. markets. The Exchange 
understands SFTI provides services to most, if not all, of the other 
U.S. exchanges and other market participants. Without services from 
SFTI and various other service providers, the Exchange would not be 
able to connect to other national securities exchanges, market data 
providers, or OPRA and, therefore, would not be able to operate and 
support its System Networks. The Exchange does not employ a separate 
fee to cover its SFTI and content service provider expense and recoups 
that expense, in part, by charging for Limited Service MEI Ports.
    The Exchange reviewed it costs to retain SFTI and other content 
service providers, including network monitoring and maintenance, 
remediation of connectivity related issues, and ongoing administrative 
activities related to connectivity management and determined that 4.95% 
of the total applicable SFTI and other service provider expense is 
allocated to providing the access services associated with Limited 
Service MEI Ports. SFTI and other content service providers are key 
vendors and necessary components in providing connectivity to the 
Exchange. The primary service SFTI provides for the Exchange is 
connectivity to other national securities exchanges and their disaster 
recovery facilities and, therefore, a vast portion of this expense is 
allocated to providing access to the System Networks via Limited 
Service MEI Ports. Connectivity via SFTI is necessary for purposes of 
order routing and accessing disaster recovery facilities in the case of 
a system outage. Engaging SFTI and other like vendors provides 
purchasers of Limited Service MEI Ports connectivity to other national 
securities exchanges for purposes of order routing and disaster 
recovery. The Exchange did not allocate a portion of this expense that 
relates to the receipt of market data from other national securities 
exchange and OPRA. The Exchange also did not allocate the remainder of 
this expense because it pertains to other areas of the Exchange's 
operations and does not directly relate to providing and maintaining 
the System Networks or access to its System Networks via Limited 
Service MEI Ports. The Exchange believes this allocation is reasonable 
because it represents the Exchange's actual cost to provide and 
maintain its System Networks and access to its System Networks via 
Limited Service MEI Ports, and not any other service, as supported by 
its cost review.
Hardware and Software Providers
    The Exchange relies on dozens of third-party hardware and software 
providers for equipment necessary to operate its System Networks. This 
includes either the purchase or licensing of physical equipment, such 
as servers, switches, cabling, and monitoring devices. It also includes 
the purchase or license of software necessary for security monitoring, 
data analysis and Exchange operations. Hardware and software providers 
are necessary to maintain its System Networks and provide access to its 
System Networks via Limited Service MEI Ports. Hardware and software 
equipment and licenses for that equipment are also necessary to operate 
and monitor physical assets necessary to offer physical connectivity to 
the Exchange. Hardware and software equipment and licenses are key to 
the operation of the Exchange and, without them, the Exchange would not 
be able to operate and support its System Networks and provide access 
to its Members and their customers. The Exchange does not employ a 
separate fee to cover its hardware and software expense and recoups 
that expense, in part, by charging for Limited Service MEI Ports.
    The Exchange reviewed it hardware and software related costs, 
including software patch management, vulnerability management, 
administrative activities related to equipment and software management, 
professional services for selection, installation and configuration of 
equipment and software supporting exchange operations and determined 
that 4.95% of the total applicable hardware and software expense is 
allocated to providing and maintaining access services and System 
Networks associated with Limited Service MEI Ports. Hardware and 
software equipment and licenses are key to the operation of the 
Exchange and its System Networks. Without them, market participants 
would not be able to access the System Networks via Limited Service MEI 
Ports. The Exchange only allocated the portion of this expense to the 
hardware and software that is related to a market participant's use of 
Limited Service MEI Ports, such as operating its matching engines. The 
Exchange, therefore, did not allocate portions of its hardware and 
software expense that related to other areas of the Exchange's 
business, such as hardware and software used for market data or 
unrelated administrative services. The Exchange also did not allocate 
the remainder of this expense because it pertains to other areas of the 
Exchange's operations, such as ports or transaction services, and does 
not directly relate to providing and maintaining its System Networks 
and access to its System Networks via Limited Service MEI Ports. The 
Exchange believes this allocation is reasonable because it represents 
the Exchange's cost to provide and maintain its System Networks and 
access to its System Networks via Limited Service MEI Ports, and not 
any other service, as supported by its cost review.
Internal Expense Allocations
    For 2022, total internal expenses relating to the Exchange 
providing and maintaining its System Networks and access to its System 
Networks via Limited Service MEI Ports is estimated to be $1,008,736. 
This includes, but is not limited to, costs associated with: (1) 
Employee compensation and benefits for full-time employees that support 
the System Networks and access to System Networks via Limited Service 
MEI Ports, 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 as well as important system 
upgrades; (2) depreciation and amortization of hardware and software 
used to provide and maintain access services and System Networks 
associated with Limited Service MEI Ports, 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 
and maintain the System Networks and access to System Networks via 
Limited Service MEI Ports. The breakdown of these costs is more fully 
described below.
Employee Compensation and Benefits
    Human personnel are key to exchange operations and supporting the 
Exchange's ongoing provision and maintenance of the System Networks and 
access to System Networks via

[[Page 23640]]

Limited Service MEI Ports. The Exchange reviewed its employee 
compensation and benefits expense and the portion of that expense 
allocated to providing and maintaining the System Networks and access 
to System Networks via Limited Service MEI Ports. As part of this 
review, the Exchange considered employees whose functions include 
providing and maintaining the System Networks and Limited Service MEI 
Ports and used a blended rate of compensation reflecting salary, stock 
and bonus compensation, bonuses, benefits, payroll taxes, and 401K 
matching contributions.\41\
---------------------------------------------------------------------------

    \41\ For purposes of this allocation, the Exchange did not 
consider expenses related to supporting employees who support 
Limited Service MEI Ports, such as office space and supplies. The 
Exchange determined cost allocation for employees who perform work 
in support of offering access services and System Networks to arrive 
at a full time equivalent (``FTE'') of 2.8 FTEs across all the 
identified personnel. The Exchange then multiplied the FTE times a 
blended compensation rate for all relevant Exchange personnel to 
determine the personnel costs associated with providing the access 
services and System Networks associated with Limited Service MEI 
Ports.
---------------------------------------------------------------------------

    Based on this review, the Exchange determined to allocate $916,303 
in employee compensation and benefits expense to providing access to 
the System Networks. To determine the appropriate allocation the 
Exchange reviewed the time employees allocated to supporting its System 
Networks and access to its System Networks via Limited Service MEI 
Ports. Senior staff also reviewed these time allocations with 
department heads and team leaders to determine whether those 
allocations were appropriate. These employees are critical to the 
Exchange to provide and maintain access to its System Networks via 
Limited Service MEI Ports for its Members, non-Members and their 
customers. The Exchange determined the above allocation based on the 
personnel whose work focused on functions necessary to provide and 
maintain the System Networks and access to System Networks via Limited 
Service MEI Ports. The Exchange does not charge a separate fee 
regarding employees who support Limited Service MEI Ports and the 
Exchange seeks to recoup that expense, in part, by charging for Limited 
Service MEI Ports.
Depreciation and Amortization
    A key expense incurred by the Exchange relates to the depreciation 
and amortization of equipment that the Exchange procured to provide and 
maintain the System Networks and access to System Networks via Limited 
Service MEI Ports. The Exchange reviewed all of its physical assets and 
software, owned and leased, and determined whether each asset is 
related to providing and maintaining its System Networks and access to 
its System Networks via Limited Service MEI Ports, and added up the 
depreciation of those assets. All physical assets and software, which 
includes assets used for testing and monitoring of Exchange 
infrastructure, were valued at cost, depreciated or leased over periods 
ranging from three to five years. In determining the amount of 
depreciation and amortization to apply to providing Limited Service MEI 
Ports and the System Networks, the Exchange considered the depreciation 
of hardware and software that are key to the operation of the Exchange 
and its System Networks. This includes servers, computers, laptops, 
monitors, information security appliances and storage, and network 
switching infrastructure equipment, including switches and taps that 
were previously purchased to maintain and provide access to its System 
Networks via Limited Service MEI Ports. Without them, market 
participants would not be able to access the System Networks. The 
Exchange seeks to recoup a portion of its depreciation expense by 
charging for Limited Service MEI Ports.
    Based on this review, the Exchange determined to allocate $81,932 
in depreciation and amortization expense to providing access to the 
System Networks via Limited Service MEI Ports. The Exchange only 
allocated the portion of this depreciation expense to the hardware and 
software related to a market participant's use of M [sic] Limited 
Service MEI EO [sic] Ports. The Exchange, therefore, did not allocate 
portions of depreciation expense that relates to other areas of the 
Exchange's business, such as the depreciation of hardware and software 
used for market data or unrelated administrative services.\42\
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    \42\ All of the expenses outlined in this proposed fee change 
refer to the operating expenses of the Exchange. The Exchange did 
not included any future capital expenditures within these costs. 
Depreciation and amortization represent the expense of previously 
purchased hardware and internally developed software spread over the 
useful life of the assets. Due to the fact that the Exchange has 
only included operating expense and historical purchases, there is 
no double counting of expenses in the Exchange's cost estimates.
---------------------------------------------------------------------------

Occupancy
    The Exchange rents and maintains multiple physical locations to 
house staff and equipment necessary to support access services, System 
Networks, and exchange operations. The Exchange's occupancy expense is 
not limited to the housing of personnel and includes locations used to 
store equipment necessary for Exchange operations. In determining the 
amount of its occupancy related expense, the Exchange considered actual 
physical space used to house employees whose functions include 
providing and maintaining the System Networks and Limited Service MEI 
Ports. Similarly, the Exchange also considered the actual physical 
space used to house hardware and other equipment necessary to provide 
and maintain the System Networks and Limited Service MEI Ports. This 
equipment includes computers, servers, and accessories necessary to 
support the System Networks and Limited Service MEI Ports. Based on 
this review, the Exchange determined to allocate $10,501 of its 
occupancy expense to provide and maintain the System Networks and 
Limited Service MEI Ports. The Exchange believes this allocation is 
reasonable because it represents the Exchange's cost to rent and 
maintain a physical location for the Exchange's staff who operate and 
support the System Networks, including providing and maintaining access 
to its System Networks via Limited Service MEI Ports. The Exchange 
considered the rent paid for the Exchange's Princeton and Miami 
offices, as well as various related costs, such as physical security, 
property management fees, property taxes, and utilities at each of 
those locations. The Exchange did not include occupancy expenses 
related to housing employees and equipment related to other Exchange 
operations, such as market data and administrative services.
* * * * *
    The Exchange notes that a material portion of its total overall 
expense is allocated to the provision and maintenance of access 
services (including connectivity and ports). The Exchange believes this 
is reasonable as the Exchange operates a technology-based business that 
differentiates itself from its competitors based on its more 
deterministic and resilient trading systems that rely on access to a 
high performance network, resulting in significant technology expense. 
Over two-thirds of Exchange staff are technology-related employees. The 
majority of the Exchange's expense is technology-based. Thus, the 
Exchange believes it is reasonable to allocate a material portion of 
its total overall expense towards providing and maintaining its System 
Networks and access to its System Networks via Limited Service MEI 
Ports.

[[Page 23641]]

Allocated Shared Expense
    Finally, a limited portion of general shared expenses was allocated 
to overall Limited Service MEI Port costs as without these general 
shared costs, the Exchange would not be able to operate in the manner 
that it does and provide Limited Service MEI Ports. The costs included 
in general shared expenses include recruiting and training, marketing 
and advertising costs, professional fees for legal, tax and accounting 
services, and telecommunications costs. For 2022, the Exchange's 
general shared expense allocated to Limited Service MEI Ports and the 
System Networks that support those connections is estimated to be 
$321,808. The Exchange used the weighted average of the above 
allocations to determine the amount of general shared expenses to 
allocate to the Exchange. Next, based on additional management and 
expense analysis, these fees are allocated to the proposal.
Revenue and Estimated Profit Margin
    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 Limited Service MEI Ports), 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.
    To determine the Exchange's estimated revenue associated with 
Limited Service MEI Ports, the Exchange analyzed the number of Members 
currently utilizing Limited Service MEI Ports and used a recent monthly 
billing cycle representative of current monthly revenue. The Exchange 
also provided its baseline by analyzing March 2022, the monthly billing 
cycle prior to the proposed fees and compared this to its expenses for 
that month. As discussed below, the Exchange does not believe it is 
appropriate to factor into its analysis future revenue growth or 
decline into its estimates for purposes of these calculations, given 
the uncertainty of such estimates due to the continually changing 
access needs of market participants and potential changes in internal 
and third-party expenses.
    For March 2022, prior to the proposed fees, Members purchased 877 
Limited Service MEI Ports, for which the Exchange anticipates charging 
$64,100. This will result in a loss of $52,146 ($64,100 in Limited 
Service MEI Port revenue, minus $116,246 in monthly Limited Service MEI 
Port expenses). For April 2022, assuming the Exchange charges the 
proposed fees described herein, the Exchange anticipates Members 
purchasing 877 Limited Service MEI Ports, for which the Exchange 
anticipates charging $223,400. This will result in a profit of $107,154 
($223,400 in Limited Service MEI Port revenue, minus $116,246 in 
monthly Limited Service MEI Port expenses) for that month (a 48% profit 
margin).
    The Exchange believes that conducting the above analysis on a per 
month basis is reasonable as the revenue generated from access services 
subject to the proposed fee generally remains static from month to 
month. The Exchange also conducted the above analysis on a per month 
basis to comply with the Commission Staff's Guidance, which requires a 
baseline analysis to assist in determining whether the proposal 
generates a supra-competitive profit. The Exchange cautions that this 
profit margin may also fluctuate from month to month based on the 
uncertainty of predicting how many ports may be purchased from month to 
month as Members are free to add and drop ports at any time based on 
their own business decisions.
    The Exchange believes the proposed margin is reasonable and will 
not result in a ``supra-competitive'' profit. The Guidance defines 
``supra-competitive profit'' as ``profits that exceed the profits that 
can be obtained in a competitive market.'' \43\ Until recently, the 
Exchange has operated at a cumulative net annual loss since it launched 
operations in 2019.\44\ The Exchange has operated at a net loss due to 
a number of factors, one of which is choosing to forgo revenue by 
offering certain products, such as Limited Service MEI Ports, at lower 
rates than other options exchanges to attract order flow and encourage 
market participants to experience the high determinism, low latency, 
and resiliency of the Exchange's trading systems. The Exchange should 
not now be penalized for now seeking to raise it fees to near market 
rates after offering such products as discounted prices.
---------------------------------------------------------------------------

    \43\ See supra note 32.
    \44\ The Exchange has incurred a cumulative loss of $22 million 
since its inception in 2019 to 2020, the last year for which the 
Exchange's Form 1 data is available. See Exchange's Form 1/A, 
Application for Registration or Exemption from Registration as a 
National Securities Exchange, filed July 28, 2021, available at 
https://sec.report/Document/9999999997-21-004557/.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimate is based on estimates 
and will only be realized to the extent such revenue actually produces 
the revenue estimated. As a generally new entrant to the hyper-
competitive exchange environment, and an exchange focused on driving 
competition, the Exchange does not yet know whether such expectations 
will be realized. For instance, in order to generate the revenue 
expected from Limited Service MEI Ports, the Exchange will have to be 
successful in retaining existing clients that wish to maintain physical 
connectivity or obtaining new clients that will purchase such services. 
To the extent the Exchange is successful in encouraging new clients to 
connect directly to the Exchange, the Exchange does not believe it 
should be penalized for such success. The Exchange, like other 
exchanges, is, after all, a for-profit business. While the Exchange 
believes in transparency around costs and potential margins, the 
Exchange does not believe that these estimates should form the sole 
basis of whether or not a proposed fee is reasonable or can be adopted. 
Instead, the Exchange believes that the information should be used 
solely to confirm that an Exchange is not earning supra-competitive 
profits, and the Exchange believes its cost analysis and related 
estimates demonstrate this fact.
    Further, the proposed profit margin reflects the Exchange's efforts 
to control its costs. A profit margin should not be judged alone based 
on its size, but whether the ultimate fee reflects the value of the 
services provided and is in line with other exchanges. A profit margin 
on one exchange should not be deemed excessive where that exchange has 
been successful in control costs, but not excessive where an exchange 
is charging the same fee but has a lower profit margin due to higher 
costs.
    The expected margin is reasonable because the Exchange offers a 
premium System Network, System Networks connectivity, and a highly 
deterministic trading environment. The Exchange is recognized as a 
leader in network monitoring, determinism, risk protections, and 
network stability. For example, the Exchange experiences approximately 
a 95% determinism rate, system throughput of approximately 18 million 
quotes per second and average round trip latency rate of approximately 
17 microseconds for a single quote. The Exchange provides extreme 
performance and radical scalability designed to match the unique needs 
of trading differing asset class/market model combination. Exchange 
systems offer two customer interfaces, FIX gateway for orders, and MEI 
interfaces and data feeds with best-in-class wire order determinism. 
The Exchange also offers automated continuous testing to ensure high 
reliability, advanced monitoring and systems security, and employs a 
software architecture that results in minimizing the demands on power,

[[Page 23642]]

space, and cooling while allowing for rapid scalability, resiliency and 
fault isolation. The Exchange also provides latency equalized cross-
connects in the primary data center ensures fair and cost efficient 
access to the MIAX systems. The Exchange, therefore, believes the 
anticipated margin is reasonable because it reflect the Exchange cost 
controls and the quality of the Exchanges systems.
    The Exchange also believes its proposed margin does not exceed what 
can be obtained in a competitive market. The Exchange is one of sixteen 
registered U.S. options exchanges and maintains an average market share 
of approximately 3.95%.\45\ The anticipated rate of return is 
reasonable because it is based on a rate that likely remains lower than 
what other exchanges with comparable market share charge for similar 
connectivity. For example the below table is provided for comparison 
purposes only to show how the Exchange's proposed fees compare to fees 
currently charged by other options exchanges for similar port access. 
As shown by the below table, the Exchange's proposed fee remains less 
than fees charged for similar port access provided by other options 
exchanges with similar market share, notwithstanding that the competing 
exchanges may have different system architectures that may result in 
different cost structures for the provision of ports.
---------------------------------------------------------------------------

    \45\ See supra note 23.

------------------------------------------------------------------------
                                                        Monthly fee (per
              Exchange                  Type of port          port)
------------------------------------------------------------------------
MIAX Emerald (as proposed) (equity   Limited Service    1-2 ports. FREE
 options market share of 3.95% as     MEI Port.          (not changed in
 of March 29, 2022 for the month of                      this proposal);
 March).\46\                                             3-4 ports.
                                                         $200; 5-6
                                                         ports. $300; 7-
                                                         12 [sic]. $400.
Amex \47\ (equity options market     Order/Quote Entry  $450.
 share of 7.15% as of March 29,       Port.
 2022 for the month of March).\48\
NASDAQ \49\ (equity options market   SQF Port.........  1-5 ports.
 share of 8.62% as of March 29,                          $1,500.00; 6-20
 2022 for the month of March).\50\                       ports.
                                                         $1,000.00; 21
                                                         or more ports.
                                                         $500.
------------------------------------------------------------------------

    Lastly, the Exchange notes that this is a singular potential profit 
margin from a single revenue source and is not reflective of the 
Exchange's overall profit margin. This profit margin may be offset by 
lower or negative profit margins generated by other areas of the 
Exchange's operations that are not subject to this proposed fee change. 
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 Limited Service MEI Ports), regulatory fees, and market 
data fees. A potential profit margin in one area may be used to offset 
a potential loss in another area, and, therefore, a potential profit 
margin from a single product is not representative of the Exchange's 
overall profitability and whether that singular profit exceeds the 
profits that can be obtained in a competitive market.
---------------------------------------------------------------------------

    \46\ See ``The market at a glance,'' available at https//
www.miaxoptions.com/ (last visited March 29, 2022).
    \47\ See NYSE American Options Fee Schedule, Section V.A., Port 
Fees.
    \48\ See supra note 23.
    \49\ See Nasdaq Stock Market, Nasdaq Options 7 Pricing Schedule, 
Section 3, Nasdaq Options Market--Ports and Other Services.
    \50\ See supra note 23.
---------------------------------------------------------------------------

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 exchanges' costs 
to provide ports or their fee markup over those costs, and therefore 
cannot use other exchange's port fees as a benchmark to determine a 
reasonable markup over the costs of providing ports. Nevertheless, the 
Exchange believes the other exchanges' port fees are useful examples of 
alternative approaches to providing and charging for ports 
notwithstanding that the competing exchanges may have different system 
architectures that may result in different cost structures for the 
provision of connectivity. To that end, the Exchange believes the 
proposed fees are reasonable because the proposed fees are still less 
than fees charged for similar ports provided by other options exchanges 
with comparable market shares.
    As described in the above table, the Exchange's proposed fees 
remain less than fees charged for similar ports provided by other 
options exchanges with similar market share. In each of the above 
cases, the Exchange's proposed fees are still significantly lower than 
that of competing options exchanges with similar market share. Despite 
proposing lower or similar fees to that of competing options exchanges 
with similar market share, the Exchange believes that it provides a 
premium network experience to its Members and non-Members via a highly 
deterministic System, enhanced network monitoring and customer 
reporting, and a superior network infrastructure than markets with 
higher market shares and more expensive connectivity alternatives. Each 
of the rates in place at competing options exchanges were filed with 
the Commission for immediate effectiveness and remain in place today.
The Proposed Fees Are Equitably Allocated
    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity alternatives, as the 
users of the Limited Service MEI Ports consume the most bandwidth and 
resources of the network. Specifically, the Exchange notes that the 
users who take the maximum amount of Limited Service MEI Ports account 
for approximately greater than 99% of message traffic over the network, 
while the users of fewer Limited Service MEI Ports account for 
approximately less than 1% of message traffic over the network. In the 
Exchange's experience, users who only utilize the two free Limited 
Service MEI Ports do not have a business need for the high performance 
network solutions required by users who take the maximum amount of 
Limited Service MEI Ports. The Exchange's high performance network 
solutions and supporting infrastructure (including employee support), 
provides unparalleled system throughput and the capacity to handle 
approximately 18 million quote messages per second. On an average day, 
the Exchange handles over approximately 3 billion total messages. Of 
that total, users of the maximum amount of Limited Service MEI Ports 
generate approximately 3 billion messages, and users who utilize the 
two free Limited Service MEI Ports generate 500,000 messages. However, 
in

[[Page 23643]]

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 network 
connectivity expense for storage and network transport capabilities. 
Given this difference in network utilization rate, the Exchange 
believes that it is reasonable, equitable, and not unfairly 
discriminatory that users who take the most Limited Service MEI Ports 
pay for the vast majority of the shared network resources from which 
all Member and non-Member users benefit, but is designed and maintained 
from a capacity standpoint to specifically handle the message rate and 
performance requirements of those users.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    With respect to intra-market competition, the Exchange does not 
believe that the proposed rule change would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants or affect the ability of such market 
participants to compete. As stated above, the Exchange does not believe 
its proposed pricing will impose a barrier to entry to smaller 
participants and notes that the proposed pricing structure is 
associated with relative usage of the various market participants. 
Firms that are primarily order routers seeking best-execution do not 
utilize Limited Service MEI Ports on the Exchange and therefore will 
not pay the fees associated with the tiered-pricing structure. Rather, 
the fees described in the proposed tiered-pricing structure will only 
be allocated to Market Making firms that engage in advanced trading 
strategies and typically request multiple Limited Service MEI Ports, 
beyond the two that are free. Accordingly, the firms engaged in a 
Market Making business generate higher costs by utilizing more of the 
Exchange's resources. Those Market Making firms that purchase higher 
amounts of additional Limited Service MEI Ports tend to have specific 
business oriented market making and trading strategies, as opposed to 
firms engaging solely in best-execution order routing business. 
Additionally, the use of such additional Limited Service MEI Ports is 
entirely voluntary.
    The Exchange also does not believe that the proposed rule change 
will result in any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, options market participants are not forced to access 
all options exchanges. There is no reason to believe that our proposed 
price increase will harm another exchange's ability to compete. The 
Exchange operates in a highly competitive environment, and as discussed 
above, its ability to price access and ports is constrained by 
competition among exchanges and third parties. There are other options 
markets of which market participants may access in order to trade 
options. There is also a possible range of alternative strategies, 
including routing to the exchange through another participant or market 
center or accessing the Exchange indirectly. Accordingly, the Exchange 
does not believe its proposed fee changes impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.

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

    One comment letter was submitted on the Fifth Proposed Rule Change 
\51\ and the Exchange responds to issues raised in that comment letter 
here.
---------------------------------------------------------------------------

    \51\ See supra note 19.
---------------------------------------------------------------------------

    First, SIG Letter 4 asserts that the Exchange's motivation for the 
proposed fees is not a proper justification and refers to statements 
included in withdrawn filings about the Exchange's need to recoup 
initial capital expenditures. SIG Letter 4 does not provided a reason 
why recoupment of initial capital expenditures is not a proper 
justification for a proposed rule change. SIG Letter 4 also asserts 
that enhancing profitability is not an appropriate justification for 
the proposed fee change. The Exchange never asserted in any of the 
preceding versions of this proposed fee change that enhancing 
profitability was a motivation for the proposed fee change. Rather, the 
Exchange provided numerous reasons for the proposed fee change, 
including the need to cover ongoing internal and external expenses and 
anticipated increases in those costs due to ongoing inflationary 
pressures.
    Second, SIG Letter 4 claims that the Exchange omitted the data 
necessary to assess the proposed fee change under the Exchange Act. SIG 
Letter 4 also asserts that the Exchange's disclosed cost data is not 
reliable. With each iteration of this proposed fee change, the Exchange 
provided more detail about its cost based analysis and rationale. 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. The Exchange was commended by an 
industry group regarding the level of transparency and disclosure 
included in the proposed fee changes and that group was supportive of 
the efforts made by the Exchange and its affiliates to provide 
increased transparency and justification for their proposed fees. The 
commenter specifically noted 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. For example, MIAX detailed the 
associated projected revenues generated from the connectivity fees 
by user class, again in a clear attempt to comply with the SRO Fee 
Filing Guidance.'' \52\
---------------------------------------------------------------------------

    \52\ See letter from Tyler Gellasch, Executive Director, Healthy 
Markets Association (``HMA''), to Hon. Gary Gensler, Chair, 
Commission, dated October 29, 2021 (commenting on SR-CboeEDGA-2021-
017, SR-CboeBYX-2021-020, SR-Cboe-BZX-2021-047, SR-CboeEDGX-2021-
030, SR-MIAX-2021-41, SR-PEARL-2021-45, and SR-EMERALD-2021-29) 
(``HMA Letter'').

    Despite the Exchange refiling its fee proposals to include 
significantly greater information about the impact of the proposed fees 
on Members and non-Members, primarily at the request of the Commission 
Staff and in response to comments from SIG, SIG argues that the data 
the Exchange provided is insufficient or unreliable. Section 6(b)(4) of 
the Act \53\ requires an exchange to ``provide for the equitable 
allocation of reasonable dues, fees and other charges.'' The standard 
set by Congress for the Exchange to establish or amend a certain fee is 
``reasonableness,'' and the Exchange provided significant detail in 
this filing and past filings to support a finding that the proposed 
fees are reasonable under the Exchange Act.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    SIG Letter 4 also claims that the Exchange has not shown that the

[[Page 23644]]

estimated profit margin is reasonable. In this filing, the Exchange 
enhanced its justification and support to find that the projected 
margin is reasonable and would not result in a supra-competitive 
profit. SIG Letter 4 states that SIG believes exchanges are utilities 
and utilities should only generate single to low double digit profit 
margins. This statement assumes that the projected profit margin is 
reflective of the Exchange's overall profit margin and ignores that 
this is a single profit margin from a single offering that is offset by 
lower or negative profit margins for other products and services 
offered by the Exchange. SIG's statement that utilities should only 
generate single to low double digit profit margins ignores SIG's own 
reference to a 14.4%, low double digit profit margin from one of the 
Exchange's recent proposed fee changes, as well as single digit to 
negative profit margins in other Exchange filings currently pending 
before the Commission.

III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\54\ 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,\55\ 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.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78s(b)(3)(C).
    \55\ 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 August 
2, 2021. That proposal, SR-EMERALD-2021-25, was published for comment 
in the Federal Register on August 19, 2021.\56\ On September 24, 2021, 
the Exchange withdrew SR-EMERALD-2021-25 and re-filed its proposal on 
September 27, 2021 (SR-EMERALD-2021-30). On September 28, 2021, the 
Exchange withdrew SR-EMERALD-2021-30 and filed a proposed rule change 
proposing fee changes as proposed herein (SR-EMERALD-2021-31). That 
proposal, SR-EMERALD-2021-31, was published for comment in the Federal 
Register on October 5, 2021.\57\ The Commission received three comment 
letters from two separate commenters on SR-EMERALD-2021-31.\58\ On 
November 22, 2021, pursuant to Section 19(b)(3)(C) of the Act, the 
Commission: (1) Temporarily suspended the proposed rule change; and (2) 
instituted proceedings to determine whether to approve or disapprove 
the proposed rule change.\59\ On December 1, 2021, the Exchange 
withdrew SR-EMERALD-2021-31 and filed a proposed rule change proposing 
fee changes as proposed herein (SR-EMERALD-2021-43). That filing, SR-
EMERALD-2021-43, was published for comment in the Federal Register on 
December 20, 2021.\60\ On January 27, 2022, pursuant to Section 
19(b)(3)(C) of the Act, the Commission: (1) Temporarily suspended the 
proposed rule change (SR-EMERALD-2021-43); and (2) instituted 
proceedings to determine whether to approve or disapprove the 
proposal.\61\ On February 1, 2022, the Exchange withdrew SR-EMERALD-
2021-43 and filed a proposed rule change proposing fee changes as 
proposed herein (SR-EMERALD-2022-05). On February 15, 2022, pursuant to 
Section 19(b)(3)(C) of the Act, the Commission: (1) Temporarily 
suspended the proposed rule change (SR-EMERALD-2022-05); and (2) 
instituted proceedings to determine whether to approve or disapprove 
the proposal.\62\ The Commission received one comment letter on SR-
EMERALD-2022-05.\63\ On March 30, 2022, the Exchange withdrew SR-
EMERALD-2022-05 and on April 1, 2022, filed the instant filing, which 
is substantially similar.
---------------------------------------------------------------------------

    \56\ See Securities Exchange Act Release No. 92662 (August 13, 
2021), 86 FR 46726. The Commission received one comment letter on 
that proposal. Comment on SR-EMERALD-2021-25 can be found at: 
https://www.sec.gov/comments/sr-emerald-2021-25/sremerald202125.htm.
    \57\ See Securities Exchange Act Release No. 93188 (September 
29, 2021), 86 FR 55052.
    \58\ Comment on SR-EMERALD-2021-31 can be found at: https://www.sec.gov/comments/sr-emerald-2021-31/sremerald202131.htm.
    \59\ See Securities Exchange Act Release No. 93640, 86 FR 67745 
(November 29, 2021).
    \60\ See Securities Exchange Act Release No. 93772 (December 14, 
2021), 86 FR 71965.
    \61\ See Securities Exchange Act Release No. 94087, 87 FR 5918 
(February 2, 2022).
    \62\ See Securities Exchange Act Release No. 94260, 87 FR 9695 
(February 22, 2022).
    \63\ Comment on SR-EMERALD-2022-05 can be found at: https://www.sec.gov/comments/sr-emerald-2022-05/sremerald202205.htm.
---------------------------------------------------------------------------

    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.\64\ 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.'' \65\
---------------------------------------------------------------------------

    \64\ 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'').
    \65\ See 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; \66\ (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; \67\ and (3) not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\68\
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78f(b)(4).
    \67\ 15 U.S.C. 78f(b)(5).
    \68\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    In temporarily suspending the Exchange's fee change, the Commission 
intends to further consider whether the proposed additional Limited 
Service MEI Port fees are consistent with the statutory requirements 
applicable to a national securities exchange under the Act. In 
particular, the Commission will consider whether the proposed rule 
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.\69\
---------------------------------------------------------------------------

    \69\ 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.\70\
---------------------------------------------------------------------------

    \70\ 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).

---------------------------------------------------------------------------

[[Page 23645]]

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) \71\ and 19(b)(2)(B) \72\ 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.
---------------------------------------------------------------------------

    \71\ 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.
    \72\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\73\ 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),\74\ 6(b)(5),\75\ and 6(b)(8) \76\ 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.
---------------------------------------------------------------------------

    \73\ 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.
    \74\ 15 U.S.C. 78f(b)(4).
    \75\ 15 U.S.C. 78f(b)(5).
    \76\ 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 fees are constrained by competitive 
forces. Rather, the Exchange states that its proposed fees are based on 
a ``cost-plus model,'' employing a ``conservative approach,'' and that 
the $1,394,961 estimated total annual expense (comprised of $64,417 in 
allocated third-party expenses, $1,008,736 in allocated internal 
expenses, and $321,808 in allocated general shared expenses) is 
``directly related to the access to the Exchange's System Networks via 
Limited Service MEI Ports and not any other product or service offered 
by the Exchange.'' \77\ With respect to third-party and internal 
expenses: Do commenters believe that the Exchange provided sufficient 
detail about how it determined which sub-categories of third-party and 
internal expenses are directly related to Limited Service MEI Ports? 
Should the Exchange be required to identify the sub-categories of 
expenses that it deemed not to be directly related to Limited Service 
MEI Ports? Do commenters believe that the Exchange provided sufficient 
detail about how it determined what percentage or portion of each such 
sub-category's total annual expense should be allocated as actually 
supporting access to the Exchange's Systems Networks via Limited 
Service MEI Ports? The Exchange provided either the percentage or the 
portion of a sub-category's total annual expense that it allocated as 
supporting access to the Exchange's Systems Networks via Limited 
Service MEI Ports, but not both. Nor did the Exchange provide the total 
annual expense for each sub-category to which these percentages or 
portions apply. Do commenters believe that the Exchange provided 
sufficient context to permit an independent review and assessment of 
the reasonableness of the selected percentages/portions allocated to 
Limited Service MEI Ports? Do commenters believe the percentages/
portions allocated to Limited Service MEI Ports are reasonable? With 
respect to general shared expenses: Do commenters believe that the 
Exchange provided sufficient detail about the components of general 
shared expenses, and why a portion of general shared expenses should be 
allocated to Limited Service MEI Ports? Do commenters believe that the 
Exchange provided sufficient detail about how it determined to allocate 
$321,808 of general shared expenses to Limited Service MEI Ports? Do 
commenters believe that the Exchange provided sufficient context to 
permit an independent review and assessment of the reasonableness of 
this allocation? Do commenters believe that the allocation is 
reasonable? In general: Do commenters believe that the Exchange 
provided sufficient detail or explanation to support its claim that 
``no expense amount is allocated twice,'' \78\ whether among the sub-
categories of expenses in this filing, across the Exchange's fee 
filings for other products or services, or over time? Do commenters 
believe that the costs projected for 2022 are generally representative 
of expected costs going forward, 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?
---------------------------------------------------------------------------

    \77\ See supra Section II.A.2.
    \78\ See id.
---------------------------------------------------------------------------

    2. Revenue Estimates and Profit Margin Range. The Exchange uses a 
single monthly revenue figure (April 2022) as the basis for calculating 
its projected profit margin of 48%. The Exchange argues that projecting 
revenues 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.'' \79\ Yet the Exchange also acknowledges 
that ``profit margin may also fluctuate from month to month based on 
the uncertainty of predicting how many ports may be purchased from 
month to month as Members are free to add and drop ports at any time 
based on their own business decisions.'' \80\ Do commenters believe a 
single month provides a reasonable basis for a revenue projection? If 
not, why not? Should the Exchange provide a range of profit margins 
that it believes are reasonably possible, and the reasons therefor? The 
Exchange also provided its baseline by analyzing March 2022, the 
monthly billing cycle prior to the proposed fees. Do commenters believe

[[Page 23646]]

that March 2022 is an appropriate month for a baseline, given that the 
proposed fees were first introduced in August 2021?
---------------------------------------------------------------------------

    \79\ See id.
    \80\ See id.
---------------------------------------------------------------------------

    3. Reasonable Rate of Return. The Exchange states that its proposed 
fees are ``designed to cover its costs with a limited return in excess 
of such costs.'' \81\ The Exchange offers several justifications for 
why its 48% estimated profit margin is not a supra-competitive profit, 
including: (a) When it launched operations in 2019, it chose to forgo 
revenue by offering certain products, such as Limited Service MEI 
Ports, at lower rates than other options exchanges to attract order 
flow; (b) the Exchange has been successful in controlling its costs; 
(c) a profit margin should not be judged alone based on its size, but 
on whether the ultimate fee reflects the value of the services 
provided, and Exchange offers a premium System Network, System Networks 
connectivity, and a highly deterministic trading environment; (d) the 
Exchange's proposed fees remain less than fees charged for similar port 
access provided by other options exchanges with similar market share; 
and (e) this is a singular potential profit margin from a single 
revenue source, and is not reflective of the Exchange's overall profit 
margin.\82\ Do commenters agree with the Exchange that its estimated 
48% profit margin would constitute a reasonable rate of return over 
costs for additional Limited Service MEI Ports? If not, what would 
commenters consider to be a reasonable rate of return and/or what 
factors would they consider to be appropriate for determining whether a 
rate of return is reasonable? 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?
---------------------------------------------------------------------------

    \81\ See id.
    \82\ See id.
---------------------------------------------------------------------------

    4. Periodic Reevaluation. In light of the impact that the number of 
ports purchased has on profit margins, and the potential for costs to 
decrease (or increase) over time, what are commenters' views on the 
need for exchanges to commit to reevaluate, on an ongoing and periodic 
basis, their cost-based connectivity fees to ensure that the fees stay 
in line with their stated profitability projections and do not become 
unreasonable over time, for example, by failing to adjust for 
efficiency gains, cost increases or decreases, and changes in 
subscribers? How formal should that process be, how often should that 
reevaluation occur, and what metrics and thresholds should be 
considered? How soon after a new connectivity fee change is implemented 
should an exchange assess whether its revenue and/or cost estimates 
were accurate and at what threshold should an exchange commit to file a 
fee change if its estimates were inaccurate? Should an initial review 
take place within the first 30 days after a connectivity fee is 
implemented? 60 days? 90 days? Some other period?
    5. Tiered Structure for Additional Limited Service MEI Ports. The 
Exchange states that the proposed tiered fee structure is equitably 
allocated among users of the network connectivity alternatives, because 
users of Limited Service MEI Ports ``consume the most bandwidth and 
resources of the network.'' \83\ The Exchange states that users of the 
``maximum amount of Limited Service MEI Ports'' account for 
approximately greater than 99% of message traffic over the network 
(approximately 3 billion messages per day handled by the Exchange), 
while users of ``fewer Limited Service MEI Ports'' account for 
approximately less than 1% of message traffic over the network (users 
of the two free Limited Service MEI Ports generate approximately 
500,000 messages per day).\84\ According to the Exchange, these 
billions of messages per day consume the Exchange's resources and 
significantly contribute to the overall network connectivity expense 
for storage and network transport capabilities. Given this difference 
in network utilization rate, the Exchange believes that its tiered 
structure is reasonable, equitable, and not unfairly 
discriminatory.\85\ Do commenters believe that the fees for each tier 
(including the intermediary tiers), as well as the fee differences 
between the tiers, are supported by the Exchange's assertions? If not, 
what information do commenters believe would better substantiate, by 
tier, the demands on the Exchange's resources as a firm increases the 
number of additional Limited Service MEI Ports that it purchases?
---------------------------------------------------------------------------

    \83\ See id.
    \84\ See id.
    \85\ See id.
---------------------------------------------------------------------------

    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
[SRO] that proposed the rule change.'' \86\ 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,\87\ 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.\88\ 
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.\89\
---------------------------------------------------------------------------

    \86\ 17 CFR 201.700(b)(3).
    \87\ See id.
    \88\ See id.
    \89\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
---------------------------------------------------------------------------

    The Commission believes it is appropriate to institute proceedings 
to allow for additional consideration and comment on the issues raised 
herein, including as to whether the proposal is consistent with the 
Act, any potential comments or supplemental information provided by the 
Exchange, and any additional independent analysis by the Commission.

V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. In particular, the Commission invites the written views of 
interested persons concerning whether the proposal is consistent with 
Sections 6(b)(4), 6(b)(5), and 6(b)(8), or any other provision of the 
Act, or the rules and regulations thereunder. The Commission asks that 
commenters address the sufficiency and merit of the Exchange's 
statements in support of the proposal, in addition to any other 
comments they may wish to submit about the proposed rule change. 
Although there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\90\
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by an SRO. See Securities 
Acts Amendments of 1975, Report of the Senate Committee on Banking, 
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or

[[Page 23647]]

disapproved by May 11, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by May 25, 
2022.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-EMERALD-2022-15 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 No. SR-EMERALD-2022-15. 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 publ. All submissions 
should refer to File No. SR-EMERALD-2022-15 and should be submitted on 
or before May 11, 2022. Rebuttal comments should be submitted by May 
25, 2022.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\91\ that File No. SR-EMERALD-2022-15 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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    \91\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\92\
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    \92\ 17 CFR 200.30-3(a)(12), (57) and (58).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-08382 Filed 4-19-22; 8:45 am]
BILLING CODE 8011-01-P


