[Federal Register Volume 87, Number 95 (Tuesday, May 17, 2022)]
[Notices]
[Pages 29928-29945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10519]



[[Page 29928]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94889; File No. SR-EMERALD-2022-19]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing of a Proposed Rule Change To Amend Its Fee Schedule To Increase 
Certain Connectivity Fees and 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

May 11, 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 May 2, 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 connectivity and 
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 its Fee Schedule to increase the 
fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') fiber 
connection and adopt a tiered-pricing structure for Limited Service 
MIAX Emerald Express Interface (``MEI'') Ports \3\ available to Market 
Makers.\4\ The Exchange last increased the fees for both 10Gb ULL fiber 
connections and Limited Service MEI Ports beginning with a series of 
filings on October 1, 2020 (with the final filing made on March 24, 
2021).\5\ Prior to that fee change, the Exchange provided Limited 
Service MEI Ports for $50 per port, after the first two Limited Service 
MEI Ports that are provided free of charge, and the Exchange incurred 
all the costs associated to provide those first two Limited Service MEI 
Ports since it commenced operations in March 2019. The Exchange then 
increased the fee by $50 to a modest $100 fee per Limited Service MEI 
Port and increased the fee for 10Gb ULL fiber connections from $6,000 
to $10,000 per month.
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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\ See Securities Exchange Act Release Nos. 91460 (April 1, 
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184 
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5, 
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR 
12221 (March 2, 2021) (SR-EMERALD-2021-07).
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    Also, in that fee change, the Exchange adopted fees for providing 
five different types of ports for the first time. These ports were FIX 
Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and 
Purge Ports.\6\ Again, the Exchange absorbed all costs associated with 
providing these ports since its launch in March 2019. As explained in 
that filing, expenditures, as well as research and development 
(``R&D'') in numerous areas resulted in a material increase in expense 
to the Exchange and were the primary drivers for that proposed fee 
change. In that filing, the Exchange allocated a total of $9.3 million 
in expenses to providing 10Gb ULL fiber connectivity, additional 
Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop 
Ports, FIX Drop Copy Ports, and Purge Ports.\7\
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    \6\ See id. for a description of each of these ports.
    \7\ See supra note 5.
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    Since the time of that filing, the Exchange experienced an increase 
in expenses, particularly regarding internal expenses. For example, 
from October 2020 to March 2022 expenses related to employee 
compensation increased from $9,354,900 to $9,900,032 and occupancy 
expense increased from $473,323 to $538,916. In addition, from October 
2020 to March 2022, the Exchange's third party related expense 
increased as well. In October 2020, the exchange allocated $1,932,519 
of its third party expenses to providing the following seven types of 
connectivity and access: 10Gb ULL fiber connectivity, additional 
Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop 
Ports, FIX Drop Copy Ports, and Purge Ports. As described more fully 
below, the Exchange is now allocating $2,011,286 of its third party 
expense to the following two types of connectivity and access: 10Gb ULL 
connectivity and Limited Service MEI Ports, which represents only a 
portion of its total third party expense of $3,108,431. As discussed 
more fully below, the Exchange recently calculated its annual aggregate 
costs for providing 10Gb ULL connectivity and Limited Service MEI Ports 
to be $10,483,343, or $873,612 per month. The Exchange now proposes to 
amend the Fee Schedule to amend the fees for 10Gb ULL connectivity and 
Limited Service MEI Port in order to recoup these ongoing costs and as 
a result of the increase in expenses described above.
    First, the Exchange proposes to amend the Fee Schedule to increase 
the fees for Members \8\ and non-Members to access the Exchange's 
System Networks \9\ via a 10Gb ULL fiber connection. Specifically, the 
Exchange proposes to amend Sections (5)(a)-(b) of the Fee Schedule to 
increase the 10Gb ULL connectivity fee for Members and non-Members from 
$10,000 per month to $12,000 per month (``10Gb ULL Fee''). Prior to the 
proposed fee change, the Exchange assessed Members and

[[Page 29929]]

non-Members a flat monthly fee of $10,000 per 10Gb ULL connection for 
access to the Exchange's primary and secondary facilities.\10\
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    \8\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \9\ The Exchange's System Networks consist of the Exchange's 
extranet, internal network, and external network.
    \10\ The Exchange notes that it employed a tiered pricing 
structure for 10Gb ULL connectivity from August 2021 through March 
2022 (except for certain months where the Exchange's 10Gb ULL 
connectivity fee was rolled-back to $10,000 per month). See infra 
notes 26 to 28.
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    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the Exchange APIs or market data feeds in the production 
environment. The Exchange proposes to pro-rate the fees when a Member 
or non-Member makes a change to the connectivity (by adding or deleting 
connections) with such pro-rated fees based on the number of trading 
days that the Member or non-Member has been credentialed to utilize any 
of the Exchange APIs or market data feeds in the production environment 
through such connection, divided by the total number of trading days in 
such month multiplied by the applicable monthly rate. The Exchange will 
continue to assess monthly Member and non-Member network connectivity 
fees for connectivity to the disaster recovery facility in each month 
during which the Member or non-Member has established connectivity with 
the disaster recovery facility.
    Second, the Exchange proposes to amend Section (5)(d) of the Fee 
Schedule to adopt a tiered-pricing structure for Limited Service MEI 
Ports available to Market Makers. The Exchange allocates two (2) Full 
Service MEI Ports \11\ and two (2) Limited Service MEI Ports \12\ per 
matching engine \13\ 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 and 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 above the first two 
that are included for free for each matching engine. Prior to the 
proposed fee change, Market Makers were assessed a $100 monthly fee for 
each Limited Service MEI Port for each matching engine above the first 
two Limited Service MEI Ports that are included for free.
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    \11\ ``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.
    \12\ ``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.
    \13\ ``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 
Limited Service MEI Port for each matching engine to a tiered-pricing 
structure for Limited Service MEI Ports for each matching engine under 
which the monthly fee would vary depending on the number of Limited 
Service MEI Ports each Market Maker elects to purchase. Specifically, 
the Exchange will continue to provide the first and second Limited 
Service MEI Ports for each matching engine free of charge. For Limited 
Service MEI Ports, the Exchange proposes to adopt the following tiered-
pricing structure: (i) The third and fourth 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 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 or more 
Limited Service MEI Ports will increase from the current monthly flat 
fee of $100 to $400 per port.\14\ The Exchange believes a tiered-
pricing structure will encourage Market Makers to be more efficient 
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 \15\ in accordance with its fair access requirements under 
Section 6(b)(5) of the Act.\16\
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    \14\ As noted in the Fee Schedule, Market Makers will continue 
to be limited to fourteen Limited Service MEI Ports per Matching 
Engine. The Exchange also proposes to make a ministerial clarifying 
change to remove the defined term ``Additional Limited Service MEI 
Ports'' as a result of moving to a tiered pricing structure where 
the first two Limited Service MEI Ports continue to be provided free 
of charge. The Exchange proposes to make a related change to add the 
term ``Limited Service MEI Ports'' after the word ``fourteen'' in 
the Fee Schedule.
    \15\ 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.
    \16\ See 15 U.S.C. 78f(b). The Exchange may offer access on 
terms that are not unfairly discriminatory among its Members, and 
ensure sufficient capacity and headroom in the System. The Exchange 
monitors the System's performance and makes adjustments to its 
System based on market conditions and Member demand.
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    The Exchange believes that other exchanges' connectivity and port 
fees are useful examples and provides the following table for 
comparison purposes only to show how the Exchange's proposed fees 
compare to fees currently charged by other options exchanges for 
similar connectivity and port access. As shown by the below table, the 
Exchange's proposed fees are similar to or less than fees charged for 
similar access to other options exchanges.

------------------------------------------------------------------------
                                      Type of         Monthly fee (per
            Exchange               connection or     connection or per
                                       port                port)
------------------------------------------------------------------------
MIAX Emerald (as proposed)       10Gb ULL          $12,000.
 (equity options market share     connection.      1-2 ports. FREE (not
 of 4.49% as of April 12, 2022   Limited Service    changed in this
 for the month of April) \17\.    MEI Port.         proposal).
                                                   3-4 ports. $200.
                                                   5-6 ports. $300.
                                                   7 or more ports.
                                                    $400.
The NASDAQ Stock Market LLC      10Gb Ultra fiber  $15,000.
 (``NASDAQ'') \18\ (equity        connection.
 options market share of 8.31%
 as of April 12, 2022 for the
 month of April) \19\.

[[Page 29930]]

 
                                 SQF Port........  1-5 ports. $1,500.
                                                   6-20 ports. $1,000.
                                                   21 or more ports.
                                                    $500.
Nasdaq ISE LLC (``ISE'') \20\    10Gb Ultra fiber  $15,000.
 (equity options market share     connection.      $1,100.
 of 5.28% as of April 12, 2022   SQF Port........
 for the month of April) \21\.
NYSE American LLC (``NYSE        10Gb LX LCN       $22,000.
 American'') \22\ (equity         connection.      Ports 1-40. $450.
 options market share of 7.86%   Order/Quote       Ports 41 and greater.
 as of April 12, 2022 for the     Entry Port.       $150.
 month of April) \23\.
Nasdaq GEMX, LLC (``GEMX'')      10Gb Ultra        $15,000.
 \24\ (equity options market      connection.      $1,250.
 share of 2.31% as of April 12,  SQF Port........
 2022 for the month of April)
 \25\.
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Implementation and Procedural History
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    \17\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited April 12, 2022).
    \18\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \19\ See supra note 17.
    \20\ See ISE Pricing Schedule, Options 7, Section 7, 
Connectivity Fees and ISE Rules, General 8: Connectivity.
    \21\ See supra note 17.
    \22\ See NYSE American Options Fee Schedule, Section V.A. Port 
Fees and Section V.B. Co-Location Fees.
    \23\ See supra note 17.
    \24\ See GEMX Pricing Schedule, Options 7, Section 6, 
Connectivity Fees and GEMX Rules, General 8: Connectivity.
    \25\ See supra note 17.
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    The proposed rule change will be effective May 2, 2022. The 
Exchange initially filed proposals to adopt tiered-pricing structures 
for the 10Gb ULL connections and Limited Service MEI Ports, with the 
proposed fees being effective beginning August 1, 2021. Between August 
2021 and February 2022, the Exchange withdrew and refiled the proposed 
rule changes, each time to meaningfully attempt to provide additional 
justification for the proposed fee changes, provide enhanced details 
regarding the Exchange's cost methodology, and address questions 
contained in the Commission's suspension orders. The Exchange received 
six comment letters from three separate commenters on the filings.\26\ 
This revised proposal provided additional details regarding the 
Exchange's cost methodology, revenue projections, and responded to 
various questions and requests for information contained in the 
Commission's suspension orders.\27\ On April 1, 2022, the Exchange 
submitted revised proposals (separate filings for 10Gb ULL connectivity 
and Limited Service MEI Ports) to provide additional clarity regarding 
the Exchange's cost justifications and those proposals were 
subsequently suspended by the Commission.\28\ The Exchange withdrew 
those proposals and submitted this revised filing on May 2, 2022. This 
newest revised filing builds upon the additional details regarding the 
Exchange's cost methodology and revenue projections, and includes the 
Exchange's responses to various questions and requests for information 
contained in the Commission's suspension orders.
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    \26\ See letters from Richard J. McDonald, Susquehanna 
International Group, LLC (``SIG''), to Vanessa Countryman, 
Secretary, Commission, dated September 7, 2021, October 1, 2021, 
October 26, 2021, and March 15, 2022 (``SIG Letters''). See also 
letter from Tyler Gellasch, Executive Director, Healthy Markets 
Association (``HMA''), to Hon. Gary Gensler, Chair, Commission, 
dated October 29, 2021 (``HMA Letter''); and letter from 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'').
    \27\ See Securities Exchange Act Release Nos. 93644 (November 
22, 2021), 86 FR 67750 (November 29, 2021) (SR-EMERALD-2021-29); 
94089 (January 27, 2022); 87 FR 5910 (February 2, 2022) (SR-EMERALD-
2021-42); 94257 (February 15, 2022), 87 FR 9678 (February 22, 2022) 
(SR-EMERALD-2022-04); 93640 (November 22, 2021), 86 FR 67745 
(November 29, 2021) (SR-EMERALD-2021-31); 94087 (January 27, 2022), 
87 FR 5918 (February 2, 2022) (SR-EMERALD-2021-43); and 94260 
(February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-EMERALD-
2022-05).
    \28\ See Securities Exchange Act Release Nos. 94717 (April 14, 
2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13); and 94718 
(April 14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15).
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2. Statutory Basis
    The Exchange believes that the proposed fees are consistent with 
Section 6(b) of the Act \29\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \30\ 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 which the 
Exchange operates or controls. The Exchange also believes the proposed 
fees further the objectives of Section 6(b)(5) of the Act \31\ in that 
they are designed to promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general protect investors 
and the public interest and are not designed to permit unfair 
discrimination between customers, issuers, brokers and dealers.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(4).
    \31\ 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'').\32\ On May 21, 2019, the Commission Staff issued guidance 
``to assist the national securities exchanges and FINRA . . . in 
preparing Fee Filings that meet their burden to demonstrate that 
proposed fees are consistent with the requirements of the Securities 
Exchange Act.'' \33\ Based on both the BOX Order and the Guidance, the 
Exchange believes that 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 they 
are fair and reasonable and will not result in excessive pricing or 
supra-competitive profit.
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    \32\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to 
Amend the Fee Schedule on the BOX Market LLC Options Facility to 
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network).
    \33\ See Staff Guidance on SRO Rule Filings Relating to Fees 
(May 21, 2019), at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Guidance'').

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[[Page 29931]]

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.'' 
\34\ 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.'' \35\ 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.'' \36\ 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 10Gb ULL connectivity and Limited Service MEI Ports 
and will not result in the Exchange generating a supra-competitive 
profit.
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    \34\ See id.
    \35\ Id.
    \36\ 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.'' \37\ 
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.'' \38\ The Exchange provides 
this analysis below.
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    \37\ Id.
    \38\ Id.
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    The proposed fees are based on a cost-plus model. The Exchange 
believes that it is important to demonstrate that the proposed fees are 
based on its costs and reasonable business needs and believes the 
proposed fees will allow the Exchange to begin to offset expenses. 
However, as discussed more fully below, such fees may also result in 
the Exchange recouping less than, or more than, all of its costs of 
providing 10Gb ULL connectivity and Limited Service MEI Ports because 
of the uncertainty of forecasting subscriber decision making with 
respect to firms' 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 suspension orders sought additional information and comments on 
various aspects of the prior proposed fee changes. In many respects, 
the Commission's questions about the prior proposed fee changes raise 
broader questions around the factors the Commission should consider and 
the type of data and analysis an exchange should provide in considering 
whether market data, port fees, or connectivity fees are fair and 
reasonable under a cost-based methodology. The suspension orders also 
sought more specific information regarding the allocation of third-
party expenses, such as the overall estimated cost for each category of 
external expenses or at minimum the total applicable third-party 
expenses and percentage allocation or statements regarding the 
Exchange's overall estimated costs for the internal expense categories 
and general shared expenses figure. The Exchange added this additional 
information below.
    In this filing, the Exchange offers a conceptual framework for 
further considering the Commission's questions that draws on the 
Exchange's own experience over several years of analyzing its own 
costs. The elements of that framework are as follows:
    First, the Exchange proposes a flat, simple 10Gb ULL Fee that 
imposes a single monthly fee for Members and non-Members. The Exchange 
believes this relatively simple, flat fee structure is transparent and 
easy for users to apply, and also helps show that it meets the 
objectives of the Act. The Exchange also proposes a tiered-pricing 
structure for its Limited Service MEI Ports that continues to provide 
the first and second Limited Service MEI Ports free of charge for each 
matching engine. The Exchange believes the proposed tiered-pricing 
structure for Limited Service MEI Ports is also transparent and easy 
for users to apply, and is a common pricing method used by other 
options exchanges when charging for port connectivity.\39\
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    \39\ See supra notes 18 and 22.
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    The Exchange then 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 
providing 10Gb ULL connectivity and Limited Service MEI Ports. That 
methodology does not allow for ``double-counting'' of the same costs 
for different classes of exchange products--for example transaction 
services, market data, physical connectivity, ``logical'' port 
connections or regulatory resources. As a result of this review, the 
Exchange determined that it experienced an increase in costs since 
October 2020 as set forth above and determined to propose to increase 
select connectivity fees as described herein to attempt to recoup this 
increased expense.
    The Exchange then sought to narrowly allocate specific costs to 
10Gb ULL connectivity and Limited Service MEI Ports to which the 
proposed fees would apply. In this filing, the Exchange provided more 
detail about how that allocation was determined and included 
information about tangential cost items that were not included. 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 10Gb ULL connectivity and 
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 10Gb ULL connectivity and Limited 
Service MEI Ports. The Exchange reviewed each

[[Page 29932]]

individual expense to determine if such expense was related to 10Gb ULL 
connectivity and Limited Service MEI Ports. Once the expenses were 
identified, the Exchange department heads, with the assistance of the 
Exchange's internal finance department, reviewed such expenses 
holistically on an Exchange-wide level to determine what portion of 
that expense supports providing access services 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 10Gb 
ULL connectivity and Limited Service MEI Ports. For the avoidance of 
doubt, no expense amount is allocated twice. Specifically, no expense 
amount is allocated to more than one expense category within this 
filing and no expense amount that is allocated as a cost to provide and 
maintain access to the 10Gb ULL connectivity and Limited Service MEI 
Ports in this filing have been or will be allocated as a cost to 
provide any other exchange product or service in any other fee filing. 
In the suspension orders, the Commission questioned whether further 
explanation of the Exchange's cost analysis was necessary. The Exchange 
provides further details concerning its cost analysis in response to 
this question.
    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.
    Finally, the Exchange acknowledges that it is difficult to predict 
how much revenue the Exchange will receive from the proposed fees with 
precision. The analysis conducted by the Exchange is designed to make a 
fair and reasonable assessment of costs and resources allocated to 
support the provision of access services associated with the proposed 
fees. The Exchange further 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 basis, 
reviews its costs and resource allocations to ensure it appropriately 
allocates resources to properly provide services to the Exchange's 
constituents. As part of this proposed rule change, and as described 
further below, the Exchange is committing to conduct an annual cost 
review with respect to fees that are cost justified in this proposed 
rule change beginning one year from the date of this proposal, and 
annually thereafter. The Exchange expects that it may propose to adjust 
fees at that time, either to increase fees in the event that revenues 
fail to reasonably cover costs at the estimated margin set forth below, 
or to decrease fees in the event that revenue materially exceeds the 
Exchange's current projections. In the event that the Exchange 
determines to propose a fee change, updated cost estimates will be 
included in a rule filing proposing the fee change.
    The Exchange believes applying this framework to the proposed fees 
shows that they are consistent with the requirements of the Act, 
leaving aside that the proposed fees are relatively similar to fees 
charged by other exchanges for connectivity and port access.
Exchange Costs and Cost Methodology
    The Exchange notes that there are material costs associated with 
providing the infrastructure and headcount to fully support access to 
the Exchange via connectivity and ports. As described below, 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 10Gb ULL connectivity and Limited Service MEI Ports. For 
example, to accommodate new Members, the Exchange may need to purchase 
additional hardware to support those Members and provide access through 
10Gb ULL connectivity and Limited Service MEI Ports.\40\ 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 those 
costs associated with providing access to and maintaining its System 
Networks' infrastructure.
---------------------------------------------------------------------------

    \40\ The Exchange is not considering future costs associated 
with accommodating new 10Gb ULL connectivity and Limited Service MEI 
Ports subscriptions.
---------------------------------------------------------------------------

    The Exchange estimated its total annual expense to provide 10Gb ULL 
connectivity and 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 10Gb ULL connectivity and Limited Service MEI Ports; 
and (3) general shared expenses.\41\ The below table details each of 
these individual external and internal annual costs considered by the 
Exchange to be directly related to offering 10Gb ULL connectivity and 
Limited Service MEI Ports, and not any other product or service offered 
by the Exchange. The below table also details the general shared 
expense allocated to this proposal. Each of these expenses are 
discussed in more detail further below.
---------------------------------------------------------------------------

    \41\ The percentage allocations used in this proposed rule 
change may differ from past filings from the Exchange or its 
affiliates due to adjustments to internal resource allocations, and 
different system architecture of the Exchange as compared to its 
affiliates.
---------------------------------------------------------------------------

    For 2022, the total annual expense for providing the access 
services associated with providing 10Gb ULL connectivity and Limited 
Service MEI Ports is estimated to be $10,483,343, or $873,612 per 
month. The Exchange utilized its estimated 2022 revenue and costs, 
which utilize the same methodology set forth in the Exchange's 
previously-issued Audited Unconsolidated Financial Statements.\42\
---------------------------------------------------------------------------

    \42\ 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 orders, the Commission also asked should the Exchange 
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.

[[Page 29933]]



------------------------------------------------------------------------
                            External expenses
-------------------------------------------------------------------------
                                    Percentage of total expense amount
                                                 allocated
            Category             ---------------------------------------
                                       10Gb ULL         Limited service
                                     connectivity          MEI ports
------------------------------------------------------------------------
Data Center Provider............  62%...............  2.4%.
Fiber Connectivity Provider.....  62%...............  1.9%.
Security Financial Transaction    89%...............  2.4%.
 Infrastructure (``SFTI''), and
 Other Connectivity and Content
 Service Providers.
Hardware and Software Providers.  51%...............  1.5%.
                                 ---------------------------------------
    Total of External Expenses..  $2,011,286.\43\
------------------------------------------------------------------------


 
                            Internal expenses
-------------------------------------------------------------------------
                                         Expense amount allocated
                                 ---------------------------------------
            Category                   10Gb ULL         Limited service
                                     connectivity          MEI ports
------------------------------------------------------------------------
Employee Compensation...........  $3,259,251          $916,303
                                   (representing 33%   (representing
                                   of total            9.3% of total
                                   $9,900,032          $9,900,032
                                   expense).           expense).
Depreciation and Amortization...  $2,164,610          $81,932
                                   (representing       (representing
                                   64.3% of total      2.4% of total
                                   $3,363,841          $3,363,841
                                   expense).           expense).
Occupancy.......................  $284,947            $10,501
                                   (representing 53%   (representing
                                   of total $538,916   1.9% of total
                                   expense).           $538,916
                                                       expense).
                                 ---------------------------------------
    Total of Internal Expenses..  $6,717,544.
                                 ---------------------------------------
    Total Allocated Shared        $1,754,513 (representing 61% of total
     Expenses.                     $2,872,232 expense).
                                 ---------------------------------------
        Total External +          $10,483,343.
         Internal + Allocated
         Shared Expenses.
------------------------------------------------------------------------

    In its suspension orders, the Commission solicited commenters' 
views on whether the Exchange has provided sufficient detail on the 
identity and nature of services provided by third parties. The 
Commission further solicited commenters' views on whether the Exchange 
has provided sufficient detail on the elements that go into 
connectivity and port costs, including how shared costs are allocated 
and attributed to connectivity and port expenses, to permit an 
independent review and assessment of the reasonableness of purported 
cost-based fees and the corresponding profit margin thereon. In 
response, the Exchange provides additional detail regarding the 
identity and nature of services provided by third parties, the elements 
that go into connectivity and port costs, and how expenses are 
allocated. The Exchange believes this additional detail is sufficient 
to support a finding that the proposed fees are consistent with the 
Exchange Act.
---------------------------------------------------------------------------

    \43\ 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 10Gb ULL connectivity and Limited Service MEI 
Ports. The Exchange describes below the analysis conducted for each 
expense and the resources or determinations that were considered when 
determining the amount necessary to allocate to each expense. The 
Exchange notes that, without the specific external and internal expense 
items, the Exchange would not be able to provide access to its System 
Networks through 10Gb ULL connectivity and Limited Service MEI Ports. 
Each of these expense items, including physical hardware, software, 
employee compensation and benefits, occupancy costs, and the 
depreciation and amortization of equipment, were identified through a 
line-by-line cost analysis and determined to be integral to providing 
access to its System Networks through 10Gb ULL connectivity and Limited 
Service MEI Ports for the reasons discussed below. Only a portion of 
all fees paid to such third parties are included in the third party 
expenses described herein, and, again, no expense amount is allocated 
twice. For example, the Exchange does not allocate its entire 
information technology and communication costs to providing access to 
its System Networks through 10Gb ULL connectivity and Limited Service 
MEI Ports because it determined that a portion of those costs are 
attributable to other areas of the Exchange's operations, such as 
transaction services, market data, and other forms of connectivity 
offered by the Exchange. This may result in the Exchange under 
allocating an expense to provide access to its System Networks through 
10Gb ULL connectivity and Limited Service MEI Ports, and such expenses 
may actually be higher than what the Exchange allocated as part of this 
proposal.\44\
---------------------------------------------------------------------------

    \44\ The Exchange notes that expenses associated with its 
affiliates, MIAX and MIAX Pearl (the options and equities markets), 
are accounted for separately and are not included within the scope 
of this filing.
---------------------------------------------------------------------------

    Further, as part its ongoing assessment of costs and expenses, the 
Exchange recently conducted a periodic thorough review of its expenses 
and resource allocations, which resulted in revised percentage 
allocations in this filing as compared to prior versions of this 
proposed fee change that were previously withdrawn by the Exchange. The 
revised percentages are, among other things, the result of the shifting 
of internal resources in response to business objectives. Therefore, 
the percentage allocations used in this proposed rule change may differ 
from past filings from the Exchange or its affiliates due to 
adjustments to internal resource allocations, and different system 
architecture of the Exchange as compared to its affiliates.\45\
---------------------------------------------------------------------------

    \45\ The Exchange notes that the expense allocations differ from 
the Exchange's filing earlier in 2021, SR-EMERALD-2021-11, because 
that prior filing pertained to several different access fees, which 
the Exchange had not been charging for since the Exchange launched 
operations in March 2019. See Securities Exchange Act Release No. 
91460 (April 2, 2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-
11) (adopting fees for FIX Ports, MEI Ports, Purge Ports, Clearing 
Trade Drop Ports, and FIX Drop Copy Ports, all of which had been 
free for market participants for over two years since inception).

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

[[Page 29934]]

    The Exchange believes it is reasonable to consider the expense and 
revenue for 10Gb ULL connectivity and Limited Service MEI Ports 
together because ports and connectivity are inextricably linked 
components of the network infrastructure, and that both are necessary 
for a market participant to access the Exchange. The various types of 
connectivity and port alternatives that the Exchange offers provide a 
wide array of access alternatives necessary for a market participant to 
conduct its business using the Exchange, which is a business decision 
to be made by each particular type of market participant. The different 
types of connectivity and port alternatives allows Members to conduct 
their different business strategies--some Members put an emphasis on 
speed, while others emphasize other strategies, such as redundancy and 
certainty of execution. The Exchange does not require a Member to have 
a certain framework for accessing the Exchange, but provides various 
connectivity and port alternatives for each Member's distinct business 
lines.
External Expense Allocations
    For 2022, annual expenses relating to fees paid by the Exchange to 
third parties for products and services necessary to provide 10Gb ULL 
connectivity and Limited Service MEI Ports are estimated to be 
$2,011,286.\46\ This includes 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 and 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 
(4) hardware and software providers, which support the production 
environment in which Members and non-Members connect to the network to 
trade and receive market data.\47\
---------------------------------------------------------------------------

    \46\ See supra note 43.
    \47\ Id.
---------------------------------------------------------------------------

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, provide a trading platform for 
market participants, and produce and distribute market data. The 
Exchange does not employ a separate fee to cover its data center 
expense and recoups that expense, in part, by charging for 10Gb ULL 
connectivity and Limited Service MEI Ports.
    The Exchange reviewed its data center footprint and space utilized, 
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, 
connectivity (10Gb ULL and 1Gb ULL separately), and ports based on 
space utilized by each area.\48\ Based on this review, the Exchange 
determined that 62% of the total applicable data center provider 
expense is applicable to providing 10Gb ULL connectivity and 2.4% 
Limited Service MEI Ports. The Exchange reviewed space utilized to 
house rack space, cage usage, servers, switches, cabling, storage 
space, heating and cooling of physical space, and monitoring, and 
identified that a small portion of that footprint is dedicated to 
equipment used to support 10Gb ULL connectivity and Limited Service MEI 
Ports.
---------------------------------------------------------------------------

    \48\ The Investors Exchange, Inc. (``IEX'') also allocated data 
center costs to produce market data based on space utilized. See 
Securities Exchange Act Release No. 94630 (April 7, 2022), 87 FR 
21945, at page 21949 (April 13, 2022) (SR-IEX-2022-02) (``IEX Market 
Data Fee Proposal'') (noting that ``[d]ata Center costs consist of 
the fees charged by the third-party data centers used by IEX and 
represent less than 10% the Exchange's total data center costs based 
on space utilized'' (emphasis added)).
---------------------------------------------------------------------------

    The Exchange believes this allocation is reasonable because it 
represents the costs associated with housing the Exchange's equipment 
dedicated to supporting 10Gb ULL connectivity and Limited Service MEI 
Ports. 10Gb ULL connectivity and Limited Service MEI Ports are core 
means of access to the Exchange's network, providing several methods 
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 space utilized to provide and maintain 
connectivity and port access 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 and space that are dedicated to market data. The 
Exchange also did not allocate the remainder of the data center expense 
because it pertains to space utilized by other areas of the Exchange's 
operations, such as 1Gb ULL connectivity, other types of 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 
System Networks, primary and secondary data centers, 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. Fiber 
connectivity is also necessary for personnel responsible for overseeing 
and providing customer service related to supporting 10Gb ULL 
connectivity and Limited Service MEI Ports, receiving relevant data and 
being able to communicate between the Exchange's various locations and 
data centers. 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 10Gb ULL connectivity 
and 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

[[Page 29935]]

communicate between its data centers and office locations in a manner 
necessary to maintain and support 10Gb ULL connectivity and Limited 
Service MEI Ports. Fiber connectivity is a necessary integral means to 
disseminate information, including data related to supporting 10Gb ULL 
connectivity and Limited Service MEI Ports, from the Exchange's primary 
data center to other Exchange locations. It is necessary for Exchange 
employees located in various locations to be able to communicate and 
receive the necessary data to maintain and provide customer support 
related to 10Gb ULL connectivity and Limited Service MEI Ports. The 
Exchange would not be able to operate and support the network and 
provide and maintain access services and System Networks associated 
with 10Gb ULL connectivity and Limited Service MEI Ports without third 
party fiber connectivity. The Exchange does not employ a separate fee 
to cover its fiber connectivity expense and recoups that expense, in 
part, by charging for 10Gb ULL connectivity and Limited Service MEI 
Ports.
    The Exchange reviewed it 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. 
Based on this review, the Exchange determined that 62% of the total 
fiber connectivity expense was applicable to providing and maintaining 
access services and System Networks associated with 10Gb ULL 
connectivity and 1.9% to Limited Service MEI Ports. The Exchange 
reviewed its total fiber connectivity expense and allocated it among 
transaction services, connectivity, ports, market data, and 
administrative operations, based on usage. The Exchange then further 
divided up its fiber connectivity costs related to connectivity and 
ports and identified the portion that is attributable to supporting 
10Gb ULL connectivity and Limited Service MEI Ports, also based on 
usage. This allocation is, therefore, based on the amount of bandwidth 
and fiber connectivity the Exchange calculated is utilized to support 
exchange operations, and ongoing network monitoring and maintenance 
that are necessary to provide 10Gb ULL connectivity and Limited Service 
MEI Ports. The Exchange believes this allocation is reasonable because 
10Gb ULL connectivity and Limited Service MEI Ports are core means of 
access to the Exchange's network, providing several methods 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. The 
Exchange also excluded from this allocation fiber connectivity usage 
related to other business lines, such as transaction services, market 
data, and other forms of connectivity offered by the Exchange, 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 and does not directly relate to providing and 
maintaining access services and System Networks associated with 10Gb 
ULL connectivity and Limited Service MEI Ports. The Exchange believes 
this allocation is reasonable because it represents the Exchange's cost 
to providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and 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 that are 
necessary to provide and maintain its System Networks and access to its 
System Networks via 10Gb ULL connectivity and 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. Connectivity and market 
data provided by SFTI and other service is critical to the Exchanges 
daily operations and performance of its System Networks to which market 
participants connect to via 10Gb ULL connectivity and Limited Service 
MEI Ports. 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 10Gb ULL connectivity and 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. Based on this review, 
the Exchange determined that 89% of the total applicable SFTI and other 
service provider expense is allocated to providing and maintaining 
access services and System Networks associated with 10Gb ULL 
connectivity and 2.4% to Limited Service MEI Ports. The Exchange 
reviewed its total SFTI and other service provider expense and 
allocated it among transaction services, connectivity, ports, other 
market data products, and administrative operations, based on usage. 
The Exchange then further divided up its SFTI and other service 
provider costs related to connectivity and ports and identified the 
portion that is attributable to supporting 10Gb ULL connectivity and 
Limited Service MEI Ports, also based on usage. This allocation is, 
therefore, based on the amount of SFTI and other service provider 
resources utilized to support exchange operations, and ongoing network 
monitoring and maintenance that are necessary to provide 10Gb ULL 
connectivity and Limited Service MEI Ports. SFTI and other content 
service providers are key vendors and necessary components in providing 
access 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 10Gb ULL connectivity and 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 10Gb ULL 
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 exchanges and

[[Page 29936]]

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 10Gb ULL connectivity or 
Limited Service MEI Ports, such as transaction services, market data, 
other forms of connectivity offered by the Exchange, or unrelated 
administrative services. 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 10Gb 
ULL connectivity and 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 devices needed by Exchange personnel 
to monitor servers and the health 10Gb ULL connectivity and Limited 
Service MEI Ports. This consists of real-time monitoring of system 
performance, integrity, and latency of 10Gb ULL connectivity and 
Limited Service MEI Ports. It also includes the Exchange purchasing or 
licensing 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 a 10Gb ULL connectivity and 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 
10Gb ULL connectivity and Limited Service MEI Ports.
    The Exchange reviewed its 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. The Exchange 
then divided those costs among transaction services, ports, 
connectivity, market data, and other Exchange operations based on 
whether all of that hardware or software is based on usage. The 
Exchange then reviewed the amount allocated to connectivity and ports 
generally and what portion of that hardware and software equipment or 
license is used to support 10Gb ULL connectivity and Limited Service 
MEI Ports specifically. Based on this review, the Exchange determined 
that 51% of the total applicable hardware and software expense is 
allocated to providing and maintaining access services and System 
Networks associated with 10Gb ULL connectivity and 1.5% to Limited 
Service MEI Ports. These percentages reflect the amount of hardware and 
software equipment and licenses dedicated to support 10Gb ULL 
connectivity and Limited Service MEI Ports.\49\ Hardware and software 
equipment and licenses are key to the operation of the Exchange and its 
System Networks. Without them, the Exchange would not be able to 
provide and maintain access services and System Networks associated 
with 10Gb ULL connectivity and Limited Service MEI Ports. The Exchange 
only allocated the portion of this expense to the hardware and software 
that is related to 10Gb ULL connectivity and Limited Service MEI Ports, 
such as operating servers and equipment necessary to provide and 
maintain access services and System Networks associated with 10Gb ULL 
connectivity and Limited Service MEI Ports. 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 
transaction services, market data, and other forms of connectivity 
offered by the Exchange, and is not directly relate to providing 10Gb 
ULL connectivity or Limited Service MEI Ports. The Exchange believes 
this allocation is reasonable because it represents the Exchange's cost 
to provide and maintain access services and System Networks associated 
with 10Gb ULL connectivity and Limited Service MEI Ports, and not any 
other service, as supported by its cost review.
---------------------------------------------------------------------------

    \49\ The Exchange notes that IEX used a similar methodology to 
allocate hardware costs to market data. See supra note 48, IEX 
Market Data Fee Proposal, at page 21950 (noting that ``IEX only 
included hardware specifically dedicated to the market data feeds in 
calculating the costs of providing market data'').
---------------------------------------------------------------------------

Internal Expense Allocations
    For 2022, total internal annual expenses relating to the Exchange 
providing and maintaining its System Networks and access to its System 
Networks for 10Gb ULL connectivity and Limited Service MEI Ports is 
estimated to be $6,717,544. This includes costs associated with: (1) 
Employee compensation and benefits for full-time employees that support 
the System Networks and access to System Networks via 10Gb ULL 
connectivity and 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 the 10Gb ULL 
connectivity and 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 10Gb 
ULL connectivity and Limited Service MEI Ports.
Employee Compensation and Benefits
    Human personnel are key to exchange operations and supporting the 
Exchange's ongoing provision of 10Gb ULL connectivity and Limited 
Service MEI Ports. The Exchange reviewed its employee compensation and 
benefits expense and the portion of that expense allocated to providing 
10Gb ULL connectivity and Limited Service MEI Ports. As part of this 
review, the Exchange considered employees whose functions include 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity 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.\50\
---------------------------------------------------------------------------

    \50\ For purposes of this allocation, the Exchange did not 
consider expenses related to office space, supplies, or equipment 
use by employees who support 10Gb ULL connectivity and Limited 
Service MEI Ports.

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

[[Page 29937]]

    In its suspension orders, the Commission asked the Exchange provide 
more detail about the methodology the Exchange used to determine how 
much of an employee's time is devoted to connectivity and port related 
activities. In considering the cost of personnel, the Exchange 
generally considered the time spent on various access service projects 
and initiatives through project management tracking tools and analysis 
of employee resource allocations, among its Technology Team in the 
following areas: Technical Operations, Software Engineering, Quality 
Assurance, and Infrastructure. The Exchange did not consider non-
Technology Teams such as Market Operations, Project Management, 
Regulatory, Legal, and Accounting/Finance.\51\
---------------------------------------------------------------------------

    \51\ The Exchange notes that IEX used a similar methodology to 
allocate employee compensation related costs to market data. See 
supra note 48, IEX Market Data Fee Proposal, at page 29150 (noting 
that ``[f]or personnel costs, IEX calculated an allocation of 
employee time for employees whose functions include providing and 
maintaining IEX Data and/or the proprietary market data feeds used 
to transmit IEX Data, and used a blended rate of compensation 
reflecting salary, stock and bonus compensation, benefits, payroll 
taxes, and 401(k) matching contributions'').
---------------------------------------------------------------------------

    Based on this review, the Exchange determined to allocate 
$4,175,554 in combined employee compensation and benefits expense to 
provide and maintain access services and System Networks associated 
with 10Gb ULL connectivity and Limited Service MEI Ports. This is only 
a portion of the $9,900,032 total projected expense for employee 
compensation and benefits. Of that total, the Exchange allocated 
approximately 33% of the total applicable employee compensation and 
benefits expense to providing and maintaining access services and 
System Networks associated with 10Gb ULL connectivity and 9.3% to 
Limited Service MEI Ports. The Exchange determined the cost allocation 
for employees who perform work in support of providing and maintaining 
access services and System Networks associated with 10Gb ULL 
connectivity and Limited Service MEI Ports to arrive at full time 
equivalents (``FTE'') of 9.9 FTEs across all the identified personnel 
related to 10Gb ULL connectivity and 2.8 FTEs across all the identified 
personnel related to Limited Service MEI Ports. The Exchange then 
multiplied the FTE times a blended compensation rate for all relevant 
Exchange personnel to determine the personnel costs associated with 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and 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 providing 
and maintaining access services and System Networks associated with 
10Gb ULL connectivity and Limited Service MEI Ports. The Exchange 
determined the above allocation based on the personnel whose work 
focused on functions necessary to providing and maintaining access 
services and System Networks associated with 10Gb ULL connectivity and 
Limited Service MEI Ports. The Exchange does not charge a separate fee 
regarding employees who support 10Gb ULL connectivity and Limited 
Service MEI Ports and the Exchange seeks to recoup those expenses, in 
part, by charging for 10Gb ULL connectivity and Limited Service MEI 
Ports.
    The Exchange believes it is appropriate to include incentive 
compensation in the blended personnel compensation rate on the same 
basis as other personnel costs for in-scope employees because incentive 
compensation is a part of the total personnel costs associated with the 
Exchange's provision of 10Gb ULL connectivity and Limited Service MEI 
Ports. Moreover, the Exchange notes that it has taken a conservative 
approach in determining which employees to include in its cost 
analysis, in terms of function and percent allocation, so that the 
included personnel costs are directly and closely tied to the costs of 
providing 10Gb ULL connectivity and Limited Service MEI Ports. The FTE 
allocation represents just 42.2% of the Exchange's overall personnel 
costs. Consistent with the Exchange's conservative methodology to limit 
costs allocated to 10Gb ULL connectivity and Limited Service MEI Ports, 
this approach includes only a de minimis personnel cost allocation for 
senior level executives and no allocation for members of the Exchange's 
board of directors. Accordingly, the Exchange believes that the 
allocated personnel expenses included are appropriately attributable to 
10Gb ULL connectivity and 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 access services and System Networks associated with 10Gb ULL 
connectivity and 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 the 10Gb ULL 
connectivity and 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 and depreciated or leased over 
periods ranging from three to five years. Based on the Exchange's 
experience, this depreciation period equals the typical life expectancy 
of those assets. In determining the amount of depreciation and 
amortization to apply to providing and maintaining access services and 
System Networks associated with 10Gb ULL connectivity and Limited 
Service MEI Ports, the Exchange considered the depreciation of hardware 
and software that are key to the operation of the Exchange and its 
provision of 10Gb ULL connectivity and Limited Service MEI Ports. 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 provide 
and maintain access services and System Networks associated with 10Gb 
ULL connectivity and Limited Service MEI Ports. Without them, market 
participants would not be able to access the Exchange. The Exchange 
seeks to recoup a portion of its depreciation expense by charging for 
10Gb ULL connectivity and Limited Service MEI Ports.
    Based on this review, the Exchange determined to allocate 
$2,246,542 in combined depreciation and amortization expense to 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Limited Service MEI Ports. 
This is only a portion of the $3,363,841 total projected expense for 
depreciation and amortization. This allocation represents approximately 
64.3% of the total applicable depreciation expense to providing and 
maintaining access services and System Networks associated with 10Gb 
ULL connectivity and 2.4% to Limited Service MEI Ports. For purposes of 
the allocation of these costs to 10Gb ULL connectivity and Limited 
Service MEI Ports, the Exchange allocates the annual depreciation 
(i.e., one-third or one-fifth of the initial asset value based on the 
typical life expectancy of those assets). One-third or one-fifth of the 
cost of each asset is included in the annual costs allocated to 10Gb 
ULL connectivity and Limited Service MEI Ports. The

[[Page 29938]]

Exchange only included assets specifically dedicated to 10Gb ULL 
connectivity and Limited Service MEI Ports in calculating the costs of 
providing 10Gb ULL connectivity and Limited Service MEI Ports. This 
means that physical assets used for such as transaction services, 
market data, other forms of connectivity offered by the Exchange, or 
other Exchange operations were excluded from the calculation.\52\ 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, unrelated 
administrative services, or other connectivity or ports offered by the 
Exchange. All of the expenses outlined in this proposed fee change 
refer to the operating expenses of the Exchange. In the suspension 
orders, the Commission asked for additional detail or explanation to 
ensure that no expense amount is allocated twice. The Exchange did not 
included any future capital expenditures within these costs ensuring 
that no cost is counted twice. 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.
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    \52\ The Exchange notes that IEX used a similar methodology to 
allocate hardware costs to market data. See supra note 48, IEX 
Market Data Fee Proposal at note 54, at page 21950 (noting that 
``[h]ardware is depreciated on a straight-line three-year period, 
which in IEX's experience, is equal to the typical life expectancy 
of those assets. As noted above, one-third of the cost of each 
hardware asset is included in the annual costs allocated to market 
data. IEX only included hardware specifically dedicated to the 
market data feeds in calculating the costs of providing market data. 
This means that physical assets used for both order entry and market 
data were excluded from the calculation'').
---------------------------------------------------------------------------

Occupancy
    The Exchange rents and maintains multiple physical locations to 
house staff and equipment necessary to support access to System 
Networks via 10Gb ULL connectivity and Limited Service MEI Ports. 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 access services and 
System Networks associated with 10Gb ULL connectivity 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 10Gb ULL connectivity and Limited Service MEI 
Ports. The Exchange maintains staff that support 10Gb ULL connectivity 
and Limited Service MEI Ports in various locations and needs to provide 
workplaces for that staff as well as space to house hardware and 
equipment necessary for those employees to perform those functions.\53\ 
This equipment includes computers, servers, and accessories necessary 
to support the access to the System Networks via 10Gb ULL connectivity 
and Limited Service MEI Ports. Based on this review, the Exchange 
determined to allocate $295,448 of its combined occupancy expense to 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Limited Service MEI Ports. 
According to the Exchange's calculations, it allocated approximately 
53% of the total applicable occupancy expense to providing and 
maintaining access services and System Networks associated with 10Gb 
ULL connectivity and 1.93% to Limited Service MEI Ports. This is only a 
portion of the $538,916 total projected expense for occupancy. 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 10Gb ULL connectivity and 
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 transaction and 
administrative services.
---------------------------------------------------------------------------

    \53\ For the avoidance of doubt, the Exchange did not include 
within this cost any portion of its costs related to third party 
fiber connectivity used by Exchange staff in different office 
locations to communicate as part of their role in supporting 10Gb 
ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

Allocated Shared Expense
    Finally, a limited portion of general shared expenses was allocated 
to providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Limited Service MEI Ports as 
without these general shared costs, the Exchange would not be able to 
operate in the manner that it does. 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 combined expense allocated to 10Gb ULL connectivity and 
Limited Service MEI Ports is estimated to be $1,754,513. This 
represents approximately 61% of the $2,872,232 total projected general 
shared combined expense. 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, 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 10Gb 
ULL connectivity and Limited Service MEI Ports, the Exchange analyzed 
the number of Members and non-Members currently utilizing 10Gb ULL 
connectivity and 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 external expenses, as well as because the Exchange is committing to 
review this cost analysis for these fees on an annual basis going 
forward.
    For March 2022, prior to the proposed fees, the Exchange had 102 
10Gb ULL connections and 877 Limited Service MEI Ports purchased, for 
which the Exchange charged a total of $1,045,839 (including charges for 
connections that were dropped or added mid-month, resulting in pro-
rated charges). This resulted in a profit of $172,227 for that

[[Page 29939]]

month (a profit margin of 16%). For April 2022, the Exchange 
anticipates that 98 10Gb ULL connections and 841 Limited Service MEI 
Ports will be charged for (as of the date of this filing).\54\ Assuming 
the Exchange charges its proposed monthly rate of $12,000 per 10Gb ULL 
fiber connection and the proposed tiered-pricing rates for Limited 
Service MEI Ports, the Exchange would generate revenue of $1,374,100 
for April 2022 (not including potential pro-rated connection charges 
for mid-month connections) for 10Gb ULL connectivity and Limited 
Service MEI Port fees combined. This would result in a profit of 
$500,488 ($1,374,100 minus $873,612) for April (a 36.4% profit margin). 
As discussed above, the Exchange believes it is reasonable to consider 
the expense and revenue for 10Gb ULL connectivity and Limited Service 
MEI Ports together because ports and connectivity are inextricably 
linked components of the network infrastructure, and that both are 
necessary for a market participant to access the Exchange.
---------------------------------------------------------------------------

    \54\ The Exchange notes that the number of subscribers of 10Gb 
ULL connections and Limited Service MEI Ports may change over time. 
For example, from June 2021 to April 2022, the Exchange had the 
following number of subscribers of 10Gb ULL connectivity per month: 
June (97); July (98); August (104); September (97); October (100); 
November (102); December (104); January (98); February (100); March 
(102); April (98). From June 2021 to April 2022, the Exchange had 
the following number of Limited Service MEI Ports utilized per 
month: June (601); July (625); August (825); September (828); 
October (864); November (840); December (840); January (864); 
February (850); March (877); April (841).
---------------------------------------------------------------------------

    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 connections and ports may be 
purchased from month to month as Members and non-Members are free to 
add and drop connections and ports at any time based on their own 
business decisions.
    The Exchange believes the proposed profit 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.'' \55\ Until recently, the 
Exchange has operated at a cumulative net annual loss since it launched 
operations in 2019.\56\ 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 connectivity, 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 seeking to raise it fees to near market rates 
after offering such products as discounted prices. Therefore, the 
Exchange believes the proposed fees are reasonable because they are 
based on both relative costs to the Exchange to provide 10Gb ULL 
connectivity and Limited Service MEI Ports, the extent to which the 
product drives the Exchange's overall costs and the relative value of 
the product, as well as the Exchange's objective to make access to its 
Systems broadly available to market participants. The Exchange also 
believes the proposed fees are reasonable because they are designed to 
generate annual revenue to recoup the Exchange's costs of providing 
10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

    \55\ See supra note 33.
    \56\ 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 
projections 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 10Gb ULL connectivity and Limited Service MEI 
Ports, the Exchange will have to be successful in retaining existing 
clients that wish to utilize 10Gb ULL connectivity and Limited Service 
MEI Ports or obtaining new clients that will purchase such access. To 
the extent the Exchange is successful in encouraging new clients to 
utilize 10Gb ULL connectivity and Limited Service MEI Ports, 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 this proposal 
demonstrates 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 controlling costs, but not excessive where an 
exchange is charging the same fee but has a lower profit margin due to 
higher costs.
    The expected profit 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 and average round trip latency rate of approximately 18 
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 combinations. The 
Exchange's systems offer two customer interfaces, FIX gateway for 
orders, and ultra-low latency MEI interface 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, 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 Exchange's Systems. The 
Exchange, therefore, believes the anticipated profit margin is 
reasonable because it reflects the Exchange's cost controls and the 
quality of the Exchange's systems.
    Finally, the Exchange believes that the proposed fees are 
reasonable because they will not impose onerous audit requirements on 
subscribers,

[[Page 29940]]

because there will be no need to substantiate the number of users of 
10Gb ULL connectivity and Limited Service MEI Ports or the manner in 
which it is being used.
Annual Review of Fees
    In its suspension orders, the Commission asks whether exchanges 
should periodically reevaluate fees on an ongoing and periodic basis in 
order to assure that actual revenue aligns with a reasonable cost-plus 
model. As described above and as part of this proposed rule change, the 
Exchange is committing to conduct a one year review of the fees that 
are cost justified as part of this proposed rule change after the date 
of this proposal, and annually thereafter. The Exchange expects that it 
may propose to adjust fees at that time, either to increase fees in the 
event that revenues fail to reasonably cover costs at the estimated 
margin set forth below [sic], or to decrease fees in the event that 
revenue materially exceeds the Exchange's current projections. In the 
event that the Exchange determines to propose a fee change, updated 
cost estimates will be included in a rule filing proposing the fee 
change. The Exchange believes this approach will further increase 
transparency around market data costs and help to ensure that Exchange 
fees continue to be reasonably related to costs.
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 options exchanges' 
costs to provide connectivity and port access or their fee markup over 
those costs, and therefore cannot use other exchange's connectivity and 
port fees as benchmarks to determine a reasonable markup over the costs 
of providing such access. Nevertheless, the Exchange believes the other 
exchanges' 10Gb connectivity and port fees are useful examples of 
alternative approaches to providing and charging for access 
notwithstanding that the competing exchanges may have different system 
architectures that may result in different cost structures for the 
provision of connectivity and ports. To that end, the Exchange believes 
the proposed fees are reasonable because the proposed fees are similar 
to or less than fees charged for similar connectivity and port access 
provided by other options exchanges with comparable market shares.
    As described in the table below, the Exchange's proposed fees 
remain similar to or less than fees charged for similar connectivity 
and port access provided by other options exchanges with similar market 
share. In the each of the below cases, the Exchange's proposed fees are 
still significantly lower than that of competing options exchanges with 
similar market share. Each of the market data rates in place at 
competing options exchanges were filed with the Commission for 
immediate effectiveness and remain in place today.

------------------------------------------------------------------------
                                      Type of         Monthly fee (per
            Exchange               connection or     connection or per
                                       port                port)
------------------------------------------------------------------------
MIAX Emerald (as proposed)       10Gb ULL          $12,000.
 (equity options market share     connection.      1-2 ports. FREE (not
 of 4.49% as of April 12, 2022   Limited Service    changed in this
 for the month of April) \57\.    MEI Port.         proposal).
                                                   3-4 ports. $200.
                                                   5-6 ports. $300.
                                                   7 or more ports.
                                                    $400.
NASDAQ \58\ (equity options      10Gb Ultra fiber  $15,000.
 market share of 8.31% as of      connection.      1-5 ports. $1,500.
 April 12, 2022 for the month    SQF Port........  6-20 ports. $1,000.
 of April) \59\.                                   21 or more ports.
                                                    $500.
ISE \60\ (equity options market  10Gb Ultra fiber  $15,000.
 share of 5.28% as of April 12,   connection.      $1,100.
 2022 for the month of April)    SQF Port........
 \61\.
NYSE American \62\ (equity       10Gb LX LCN       $22,000.
 options market share of 7.86%    connection.      Ports 1-40. $450.
 as of April 12, 2022 for the    Order/Quote       Ports 41 and greater.
 month of April) \63\.            Entry Port.       $150.
GEMX \64\ (equity options        10Gb Ultra        $15,000.
 market share of 2.31% as of      connection.      $1,250.
 April 12, 2022 for the month    SQF Port........
 of April) \65\.
------------------------------------------------------------------------

The Proposed Pricing Is Not Unfairly Discriminatory and Provides for 
the Equitable Allocation of Fees, Dues, and Other Charges
---------------------------------------------------------------------------

    \57\ See supra note 17.
    \58\ See supra note 18.
    \59\ See supra note 17.
    \60\ See supra note 20.
    \61\ See supra note 17.
    \62\ See supra note 22.
    \63\ See supra note 17.
    \64\ See supra note 24.
    \65\ See supra note 17.
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees are reasonable, fair, 
equitable, and not unfairly discriminatory because they are designed to 
align fees with services provided and will apply equally to all 
subscribers.
10Gb ULL Connectivity
    The Exchange believes that the proposed fees are reasonable, 
equitably allocated and not unfairly discriminatory because, for one 
10Gb ULL connection, the Exchange provides each Member or non-Member 
access to all twelve (12) matching engines on MIAX Emerald and a vast 
majority choose to connect to all twelve (12) matching engines. The 
Exchange believes that other exchanges require firms to connect to 
multiple matching engines.\66\ For the foregoing reasons, the Exchange 
believes that the proposed fees are reasonable, equitably allocated, 
and not unfairly discriminatory.
---------------------------------------------------------------------------

    \66\ See Specialized Quote Interface Specification, Nasdaq PHLX, 
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2, 
Architecture (revised August 16, 2019), available at http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is 
unclear whether the NASDAQ exchanges include connectivity to each 
matching engine for the single fee or charge per connection, per 
matching engine. See also NYSE Technology FAQ and Best Practices: 
Options, Section 5.1 (How many matching engines are used by each 
exchange?) (September 2020). The Exchange notes that NYSE provides a 
link to an Excel file detailing the number of matching engines per 
options exchange, with Arca and Amex having 19 and 17 matching 
engines, respectively.
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity and port 
alternatives, as the users of 10Gb ULL connections consume the more 
bandwidth and network resources than users of 1Gb ULL connection.

[[Page 29941]]

Specifically, the Exchange notes that 10Gb ULL connection users account 
for approximately more than 99% of message traffic over the network, 
while the users of the 1Gb ULL connections account for approximately 
less than 1% of message traffic over the network. In the Exchange's 
experience, users of the 1Gb connections do not have a business need 
for the high performance network solutions required by 10Gb ULL users. 
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 those, users of the 10Gb ULL 
connections generate approximately 3 billion messages, and users of the 
1Gb connections generate 500,000 messages. 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. The Exchange must also purchase additional storage 
capacity on an ongoing basis to ensure it has sufficient capacity to 
store these messages as part of it surveillance program and to satisfy 
its record keeping requirements under the Exchange Act.\67\ Thus, as 
the number of messages an entity increases, certain other costs 
incurred by the Exchange that are correlated to, though not directly 
affected by, connection costs (e.g., storage costs, surveillance costs, 
service expenses) also increase. Given this difference in network 
utilization rate, the Exchange believes that it is reasonable, 
equitable, and not unfairly discriminatory that the 10Gb ULL users pay 
for the vast majority of the shared network resources from which all 
market participants' benefit.
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    The Exchange also believes that the connectivity fees are equitably 
allocated amongst users of the network connectivity alternatives, when 
these fees are viewed in the context of the overall trading volume on 
the Exchange. To illustrate, the purchasers of the 10Gb ULL 
connectivity account for approximately 95.8% of the volume on the 
Exchange. This overall volume percentage (95.8% of total Exchange 
volume) is in line with the amount of network connectivity revenue 
collected from 10Gb ULL purchasers (99.8% of total Exchange 
connectivity revenue). For example, utilizing a recent billing cycle, 
Exchange Members and non-Members that purchased 10Gb ULL connections 
accounted for approximately 99.8% of the total network connectivity 
revenue collected by the Exchange from all connectivity alternatives; 
and Members and non-Members that purchased 1Gb connections accounted 
for approximately 0.2% of the revenue collected by the Exchange from 
all connectivity alternatives.
Limited Service MEI Ports
    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, like above for the 10Gb ULL 
connectivity, the Exchange notes that the Market Makers who take the 
maximum amount of Limited Service MEI Ports account for approximately 
greater than 99% of message traffic over the network, while Market 
Makers with fewer Limited Service MEI Ports account for approximately 
less than 1% of message traffic over the network. In the Exchange's 
experience, Market Makers who only utilize the two free Limited Service 
MEI Ports do not have a business need for the high performance network 
solutions required by Market Makers 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 7.5 billion total quotes. Of 
that total, Market Makers with the maximum amount of Limited Service 
MEI Ports generate approximately 5 billion messages, and Market Makers 
who utilize the two free Limited Service MEI Ports generate 
approximately 1.8 billion messages. Specifically, Market Makers who 
utilize only one to two Limited Service MEI ports for free submitted an 
average of 375,821,358 quotes per day for the month of April 2022. Also 
for April 2022, Market Makers who utilized three to four Limited 
Service MEI ports submitted an average of 533,527,402 quotes per day 
and Market Makers who utilized seven or more Limited Service MEI ports 
submitted an average of 1,056,292,513 quotes per day.\68\
---------------------------------------------------------------------------

    \68\ The Exchange notes that no firm utilized five to six 
Limited Service Ports in April 2022.
---------------------------------------------------------------------------

    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. The Exchange must also 
purchase additional storage capacity on an ongoing basis to ensure it 
has sufficient capacity to store these messages as part of it 
surveillance program and to satisfy its record keeping requirements 
under the Exchange Act.\69\ Thus, as the number of connections a Market 
Maker has increases, certain other costs incurred by the Exchange that 
are correlated to, though not directly affected by, connection costs 
(e.g., storage costs, surveillance costs, service expenses) also 
increase. The Exchange sought to design the proposed tiered-pricing 
structure to set the amount of the fees to relate to the number of 
connections a firm purchases. The more connections purchased by a 
Market Maker likely results in greater expenditure of Exchange 
resources and increased cost to the Exchange. With this in mind, the 
Exchange proposes no fee or lower fees for those Market Makers who 
receive fewer Limited Service MEI Ports since those Market Makers 
generally tend to send the least amount of orders and messages over 
those connections. Given this difference in network utilization rate, 
the Exchange believes that it is reasonable, equitable, and not 
unfairly discriminatory that Market Makers 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 Market 
Makers.
---------------------------------------------------------------------------

    \69\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
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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

[[Page 29942]]

necessary or appropriate in furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes the proposed fees will not result in any 
burden on intra-market competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the proposed fees 
will allow the Exchange to recoup some of its costs in providing 10Gb 
ULL connectivity and Limited Service MEI Ports at below market rates to 
market participants since the Exchange launched operations. As 
described above, the Exchange has operated at a cumulative net annual 
loss since it launched operations in 2019 \70\ due to providing a low 
cost alternative to attract order flow and encourage market 
participants to experience the high determinism and resiliency of the 
Exchange's trading Systems. To do so, the Exchange chose to waive the 
fees for some non-transaction related services and Exchange products or 
provide them at a very marginal cost, which was not profitable to the 
Exchange. This resulted in the Exchange forgoing revenue it could have 
generated from assessing any fees or higher fees. The Exchange could 
have sought to charge higher fees at the outset, but that could have 
served to discourage participation on the Exchange. Instead, the 
Exchange chose to provide a low cost exchange alternative to the 
options industry, which resulted in lower initial revenues. Examples of 
this are 10Gb ULL connectivity and Limited Service MEI Ports, for which 
the Exchange only now seeks to adopt fees at a level similar to or 
lower than those of other options exchanges.
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    \70\ See supra note 56.
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    Further, the Exchange does not believe that the proposed fee 
increase for the 10Gb ULL connection 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 is the case with the current proposed flat 
fee, the proposed fee would apply uniformly to all market participants 
regardless of the number of connections they choose to purchase. The 
proposed fee does not favor certain categories of market participants 
in a manner that would impose an undue burden on competition.
Inter-Market Competition
    The Exchange also does not believe that the proposed rule change 
will result in any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, options market participants are not forced to connect 
to all options exchanges. There is no reason to believe that our 
proposed price increase will harm another exchange's ability to 
compete. There are other options markets of which market participants 
may connect to trade options. There is also a possible range of 
alternative strategies, including routing to the exchange through 
another participant or market center or accessing the Exchange 
indirectly. Market participants are free to choose which exchange or 
reseller to use to satisfy their business needs. 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

    Written comments were neither solicited nor received.

III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\71\ 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,\72\ 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.
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78s(b)(3)(C).
    \72\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    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.\73\ 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.'' \74\
---------------------------------------------------------------------------

    \73\ 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'').
    \74\ See id.
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    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; \75\ (2) perfect the mechanism of a 
free and open market and a national market system, protect investors 
and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; \76\ 
and (3) not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\77\
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78f(b)(4).
    \76\ 15 U.S.C. 78f(b)(5).
    \77\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    In temporarily suspending the Exchange's fee change, the Commission 
intends to further consider whether the proposed 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 do not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\78\
---------------------------------------------------------------------------

    \78\ 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.\79\
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    \79\ For purposes of temporarily suspending the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

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

    The Commission is instituting proceedings pursuant to Sections

[[Page 29943]]

19(b)(3)(C) \80\ and 19(b)(2)(B) \81\ 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.
---------------------------------------------------------------------------

    \80\ 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.
    \81\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\82\ 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),\83\ 6(b)(5),\84\ and 6(b)(8) \85\ 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.
---------------------------------------------------------------------------

    \82\ 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.
    \83\ 15 U.S.C. 78f(b)(4).
    \84\ 15 U.S.C. 78f(b)(5).
    \85\ 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.\86\ Rather, the Exchange states that its proposed fees are 
based on a ``cost-plus model,'' employing a ``conservative approach,'' 
and that the expenses are ``directly related'' to 10Gb ULL connectivity 
and Limited Service MEI Ports, and not any other product or service 
offered by the Exchange.\87\ In explaining its costs, should the 
Exchange identify more specifically which, if any, of its costs are 
incurred solely to provide 10Gb ULL connectivity and solely to provide 
Limited Service MEI Ports? Regarding the allocations provided by the 
Exchange as described in greater detail above, do commenters believe 
that the Exchange provided sufficient detail about how it determined 
these allocations and why they are reasonable? \88\ Why or why not? Do 
commenters believe that the Exchange provided sufficient context to 
permit an independent review and assessment of the reasonableness of 
the allocations? Do commenters believe that the Exchange provided 
sufficient detail or explanation to support its claim that ``no expense 
amount is allocated twice,'' \89\ whether among the sub-categories of 
expenses in this filing, across the Exchange's fee filings for other 
products or services, or over time?
---------------------------------------------------------------------------

    \86\ See supra Section II.A.2.
    \87\ See id.
    \88\ See id.
    \89\ 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 combined profit margin of 36.4%.\90\ 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.'' \91\ Yet the Exchange 
also acknowledges that ``profit margin may also fluctuate from month to 
month based on the uncertainty of predicting how many connections and 
ports may be purchased from month to month as Members and non-Members 
are free to add and drop connections and ports at any time based on 
their own business decisions.'' \92\ 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.\93\ Do 
commenters believe that March 2022 is an appropriate month for a 
baseline? What are commenters' views on the Exchange providing a 
combined profit margin for both 10Gb ULL connectivity and Limited 
Service MEI Ports, rather than separate margins for each?
---------------------------------------------------------------------------

    \90\ See id.
    \91\ See id.
    \92\ See id.
    \93\ See id.
---------------------------------------------------------------------------

    3. Reasonableness. The Exchange states that its proposed fees are 
``reasonable because they will permit recovery of the Exchange's costs 
in providing access services to supply 10Gb ULL connectivity and 
Limited Service MEI Ports and will not result in the Exchange 
generating a supra-competitive profit.'' \94\ The Exchange offers 
several justifications for why its estimated profit margin (which is 
blended and not discussed separately for each service) is not a supra-
competitive profit, including: (a) When it launched operations in 2019, 
it chose to forgo revenue by offering certain products 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 (d) the 
Exchange's proposed fees remain similar to or less than fees charged 
for access provided by other options exchanges with similar market 
share. Do commenters agree that these factors are relevant to 
assessment of whether the fees are reasonable for each service? Should 
such an assessment include consideration of any factors other than 
costs; and if so, what factors should be considered, and why?
---------------------------------------------------------------------------

    \94\ See id.
---------------------------------------------------------------------------

    4. Periodic Reevaluation. The Exchange has stated that it will 
conduct a review of the cost-based fees subject to this proposal one 
year after the date of the proposal, and annually thereafter.\95\ In 
light of the impact that the number of connections and ports purchased 
has on profit margins, and

[[Page 29944]]

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 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 
amounts purchased? 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 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?
---------------------------------------------------------------------------

    \95\ See id.
---------------------------------------------------------------------------

    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.'' \96\ 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, 
while users of ``fewer Limited Service MEI Ports'' account for 
approximately less than 1% of message traffic over the network.\97\ 
Specifically, the Exchange states that Market Makers who utilize 1-2, 
3-4, or 7 or more Limited Service MEI ports submit an average of 
375,821,358 quotes per day, 533,527,402 quotes per day, and 
1,056,292,513 quotes per day, respectively, for the month of April 
2022.\98\ 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.\99\ Given this difference in network utilization rate, 
the Exchange believes that its tiered structure is reasonable, 
equitable, and not unfairly discriminatory.\100\ 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, is there an alternative basis on which 
increased demand by a market-making firm on the Exchange's resources 
would justify a tiered fee structure for additional Limited Service MEI 
Ports?
---------------------------------------------------------------------------

    \96\ See id.
    \97\ See id.
    \98\ See id.
    \99\ See id.
    \100\ 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.'' \101\ 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,\102\ 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.\103\ 
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.\104\
---------------------------------------------------------------------------

    \101\ 17 CFR 201.700(b)(3).
    \102\ See id.
    \103\ See id.
    \104\ 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.\105\
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by an SRO. 
See Securities Acts Amendments of 1975, Report of the Senate 
Committee on Banking, Housing and Urban Affairs to Accompany S. 249, 
S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 7, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 21, 
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-2022-19 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-2022-19. 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.

[[Page 29945]]

Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-EMERALD-2022-19 and should be 
submitted on or before June 7, 2022. Rebuttal comments should be 
submitted by June 21, 2022.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\106\ that File No. SR-EMERALD-2022-19 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.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\107\
---------------------------------------------------------------------------

    \107\ 17 CFR 200.30-3(a)(12), (57) and (58).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10519 Filed 5-16-22; 8:45 am]
BILLING CODE 8011-01-P


