[Federal Register Volume 87, Number 190 (Monday, October 3, 2022)]
[Notices]
[Pages 59845-59856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-21339]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95936; File No. SR-MEMX-2022-26]


Self-Regulatory Organizations; MEMX LLC; Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend the 
Exchange's Fee Schedule To Adopt Connectivity Fees

September 27, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 15, 2022, MEMX LLC (``MEMX'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I, II, and III 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.
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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 with the Commission a proposed rule change 
to amend the Exchange's fee schedule applicable to Members \3\ and non-
Members (the ``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and 
(c). The Exchange proposes to implement the changes to the Fee Schedule 
pursuant to this proposal immediately. The text of the proposed rule 
change is provided in Exhibit 5.
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    \3\ See Exchange Rule 1.5(p).
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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 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
Background
    The Exchange is re-filing its proposal to amend the Fee Schedule 
regarding fees the Exchange charges to Members and non-Members for 
physical connectivity to the Exchange and for application sessions 
(otherwise known as ``logical ports'') that a Member utilizes in 
connection with their participation on the Exchange (together with 
physical connectivity, collectively referred to in this proposal as 
``connectivity services,'' as described in greater detail below and in 
Exhibit 5). The Exchange is proposing to implement the proposed fees 
immediately.
    The Exchange filed its Initial Proposal on December 30, 2021, and 
began charging fees for connectivity services for the first time in 
January of 2022. On February 28, 2022, the Commission suspended the 
Initial Proposal and asked for comments on several questions.\4\ The 
Exchange then filed the

[[Page 59846]]

Second Proposal, which was subsequently withdrawn and replaced with the 
Third Proposal. The Third Proposal was subsequently withdrawn and 
replaced with the Fourth Proposal. As set forth below, the Exchange 
believes that both the Initial Proposal, the Second Proposal, the Third 
Proposal, and the Fourth Proposal provided a great deal of transparency 
regarding the cost of providing connectivity services and anticipated 
revenue and that each of the prior proposals was consistent with the 
Act and associated guidance. The Exchange is re-filing this proposal 
promptly following the withdrawal of the Fourth Proposal with the 
intention of maintaining the existing fees for connectivity services 
while at the same time revising the proposal to focus on its Cost 
Analysis, as described below. The Exchange believes that this approach 
is appropriate and fair for competitive reasons as several other 
exchanges currently charge for similar services, as described below, 
and because others have followed a similar approach when adopting 
fees.\5\
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    \4\ See Securities Exchange Act Release No. 94332 (February 28, 
2022) (SR-MEMX-2021-22) (Suspension of and Order Instituting 
Proceedings to Determine Whether to Approve or Disapprove Proposed 
Rule Change to Amend the Exchange's Fee Schedule to Adopt 
Connectivity Fees) (the ``OIP'').
    \5\ See, e.g., Securities Exchange Act Release No. 87875 
(December 31, 2019), 85 FR 770 (January 7, 2020) (SR-MIAX-2019-51) 
(notice of filing and immediate effectiveness of changes to the 
Miami International Securities Exchange LLC, or ``MIAX'', fee 
schedule). The Exchange notes that the MIAX filing was the eighth 
filing by MIAX to adopt the fees proposed for certain connectivity 
services following multiple times of withdrawing and re-filing the 
proposal. The Exchange notes that MIAX charged the applicable fees 
throughout this period while working to develop a filing that met 
the new standards being applied to fee filings. See also Fee 
Guidance, infra note 12.
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    As set forth in the Initial Proposal, the Second Proposal, the 
Third Proposal, the Fourth Proposal, and this filing, the Exchange does 
incur significant costs related to the provision of connectivity 
services and believes it should be permitted to continue charging for 
such services while also providing additional time for public comment 
on the level of detail contained in this proposal and other questions 
posed in the OIP. Finally, the Exchange does not believe that the 
ability to charge fees for connectivity services or the level of the 
Exchange's proposed fees are at issue, but rather, that the level of 
detail required to be included by the Exchange when adopting such fees 
is at issue. For these reasons, the Exchange believes it is appropriate 
to re-file this proposal and to continue charging for connectivity 
services.
    In general, the Exchange believes that exchanges, in setting fees 
of all types, should meet very high standards of transparency to 
demonstrate why each new fee or fee increase meets the Exchange Act 
requirements that fees be reasonable, equitably allocated, not unfairly 
discriminatory, and not create an undue burden on competition among 
members and markets. In particular, the Exchange believes that each 
exchange should take extra care to be able to demonstrate that these 
fees are based on its costs and reasonable business needs.
    In proposing to charge fees for connectivity services, the Exchange 
has sought to be especially diligent in assessing those fees in a 
transparent way against its own aggregate costs of providing the 
related service, and also carefully and transparently assessing the 
impact on Members--both generally and in relation to other Members, 
i.e., to assure the fee will not create a financial burden on any 
participant and will not have an undue impact in particular on smaller 
Members and competition among Members in general. The Exchange believes 
that this level of diligence and transparency is called for by the 
requirements of Section 19(b)(1) under the Act,\6\ and Rule 19b-4 
thereunder,\7\ with respect to the types of information self-regulatory 
organizations (``SROs'') should provide when filing fee changes, and 
Section 6(b) of the Act,\8\ which requires, among other things, that 
exchange fees be reasonable and equitably allocated,\9\ not designed to 
permit unfair discrimination,\10\ and that they not impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\11\ This rule change proposal addresses those requirements, 
and the analysis and data in each of the sections that follow are 
designed to clearly and comprehensively show how they are met.\12\
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    \6\ 15 U.S.C. 78s(b)(1).
    \7\ 17 CFR 240.19b-4.
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(8).
    \12\ In 2019, Commission staff published guidance suggesting the 
types of information that SROs may use to demonstrate that their fee 
filings comply with the standards of the Exchange Act (``Fee 
Guidance''). While MEMX understands that the Fee Guidance does not 
create new legal obligations on SROs, the Fee Guidance is consistent 
with MEMX's view about the type and level of transparency that 
exchanges should meet to demonstrate compliance with their existing 
obligations when they seek to charge new fees. See Staff Guidance on 
SRO Rule Filings Relating to Fees (May 21, 2019) available at 
https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees.
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    Prior to January 3, 2022, MEMX did not charge fees for connectivity 
to the Exchange, including fees for physical connections or application 
sessions for order entry purposes or receipt of drop copies. The 
objective of this approach was to eliminate any fee-based barriers to 
connectivity for Members when MEMX launched as a national securities 
exchange in 2020, and it was successful in achieving this objective in 
that a significant number of Members are directly or indirectly 
connected to the Exchange.
    As detailed below, MEMX recently calculated its aggregate monthly 
costs for providing physical connectivity to the Exchange at $795,789 
and its aggregate monthly costs for providing application sessions at 
$347,936. Because MEMX offered all connectivity free of charge until 
January of this year, MEMX has borne 100% of all connectivity costs. In 
order to cover the aggregate costs of providing connectivity to its 
Users (both Members and non-Members \13\) going forward and to make a 
modest profit, as described below, the Exchange is proposing to modify 
its Fee Schedule, pursuant to MEMX Rules 15.1(a) and (c), to charge a 
fee of $6,000 per month for each physical connection in the data center 
where the Exchange primarily operates under normal market conditions 
(``Primary Data Center'') and a fee of $3,000 per month for each 
physical connection in the Exchange's geographically diverse data 
center, which is operated for backup and disaster recovery purposes 
(``Secondary Data Center''), each as further described below. The 
Exchange also proposes to modify its Fee Schedule, pursuant to MEMX 
Rules 15.1(a) and (c), to charge a fee of $450 per month for each 
application session used for order entry (``Order Entry Port'') and 
application session for receipt of drop copies (``Drop Copy Port'') in 
the Exchange's Primary Data Center, as further described below.\14\
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    \13\ Types of market participants that obtain connectivity 
services from the Exchange but are not Members include service 
bureaus and extranets. Service bureaus offer technology-based 
services to other companies for a fee, including order entry 
services to Members, and thus, may access application sessions on 
behalf of one or more Members. Extranets offer physical connectivity 
services to Members and non-Members.
    \14\ As proposed, fees for connectivity services would be 
assessed based on each active connectivity service product at the 
close of business on the first day of each month. If a product is 
cancelled by a Member's submission of a written request or via the 
MEMX User Portal prior to such fee being assessed then the Member 
will not be obligated to pay the applicable product fee. MEMX will 
not return pro-rated fees even if a product is not used for an 
entire month.

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[[Page 59847]]

Cost Analysis
Background on Cost Analysis
    In October 2021, MEMX completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis''). The Cost 
Analysis required a detailed analysis of MEMX's aggregate baseline 
costs, including a determination and allocation of costs for core 
services provided by the Exchange--transaction execution, market data, 
membership services, physical connectivity, and application sessions 
(which provide order entry, cancellation and modification 
functionality, risk functionality, ability to receive drop copies, and 
other functionality). MEMX separately divided its costs between those 
costs necessary to deliver each of these core services, including 
infrastructure, software, human resources (i.e., personnel), and 
certain general and administrative expenses (``cost drivers''). Next, 
MEMX adopted an allocation methodology with various principles to guide 
how much of a particular cost should be allocated to each core service. 
For instance, fixed costs that are not driven by client activity (e.g., 
message rates), such as data center costs, were allocated more heavily 
to the provision of physical connectivity (75%), with smaller 
allocations to logical ports (2.6%), and the remainder to the provision 
of transaction execution and market data services (22.4%). In contrast, 
costs that are driven largely by client activity (e.g., message rates), 
were not allocated to physical connectivity at all but were allocated 
primarily to the provision of transaction execution and market data 
services (90%) with a smaller allocation to application sessions (10%). 
The allocation methodology was decided through conversations with 
senior management familiar with each area of the Exchange's operations. 
After adopting this allocation methodology, the Exchange then applied 
an estimated allocation of each cost driver to each core service, 
resulting in the cost allocations described below.
    By allocating segmented costs to each core service, MEMX was able 
to estimate by core service the potential margin it might earn based on 
different fee models. The Exchange notes that as a non-listing venue it 
has four primary sources of revenue that it can potentially use to fund 
its operations: transaction fees, fees for connectivity services, 
membership and regulatory fees, and market data fees. Accordingly, the 
Exchange must cover its expenses from these four primary sources of 
revenue. The Exchange also notes that as a general matter each of these 
sources of revenue is based on services that are interdependent. For 
instance, the Exchange's system for executing transactions is dependent 
on physical hardware and connectivity, only Members and parties that 
they sponsor to participate directly on the Exchange may submit orders 
to the Exchange, many Members (but not all) consume market data from 
the Exchange in order to trade on the Exchange, and the Exchange 
consumes market data from external sources in order to comply with 
regulatory obligations. Accordingly, given this interdependence, the 
allocation of costs to each service or revenue source required judgment 
of the Exchange and was weighted based on estimates of the Exchange 
that the Exchange believes are reasonable, as set forth below.
    Through the Exchange's extensive Cost Analysis, the Exchange 
analyzed every expense item in the Exchange's general expense ledger to 
determine whether each such expense relates to the provision of 
connectivity services, and, if such expense did so relate, what portion 
(or percentage) of such expense actually supports the provision of 
connectivity services, and thus bears a relationship that is, ``in 
nature and closeness,'' directly related to network connectivity 
services. In turn, the Exchange allocated certain costs more to 
physical connectivity and others to applications, while certain costs 
were only allocated to such services at a very low percentage or not at 
all, using consistent allocation methodologies as described above. 
Based on this analysis, MEMX estimates that the cost drivers to provide 
connectivity services, including both physical connections and 
application sessions, result in an aggregate monthly cost of 
$1,143,715, as further detailed below.
Costs Related to Offering Physical Connectivity
    The following chart details the individual line-item costs 
considered by MEMX to be related to offering physical connectivity as 
well as the percentage of the Exchange's overall costs such costs 
represent for such area (e.g., as set forth below, the Exchange 
allocated approximately 13.8% of its overall Human Resources cost to 
offering physical connectivity).

------------------------------------------------------------------------
              Costs Drivers                    Costs      Percent of all
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Human Resources.........................        $262,129            13.8
Connectivity (external fees, cabling,            162,000            75.0
 switches, etc.)........................
Data Center.............................         219,000            75.0
External Market Data....................             n/a             n/a
Hardware and Software Licenses..........           4,507             1.2
Monthly Depreciation....................          99,328            18.5
Allocated Shared Expenses...............          48,826            10.0
                                         -------------------------------
    Total...............................         795,789            20.1
------------------------------------------------------------------------

    Below are additional details regarding each of the line-item costs 
considered by MEMX to be related to offering physical connectivity.
Human Resources
    For personnel costs (Human Resources), MEMX calculated an 
allocation of employee time for employees whose functions include 
providing and maintaining physical connectivity and performance thereof 
(primarily the MEMX network infrastructure team, which spends most of 
their time performing functions necessary to provide physical 
connectivity) and for which the Exchange allocated 75% of each 
employee's time. The Exchange also allocated Human Resources costs to 
provide physical connectivity to a limited subset of personnel with 
ancillary functions related to establishing and maintaining such 
connectivity (such as information security and finance personnel), for 
which the Exchange allocated cost on an employee-by-employee basis 
(i.e., only including those personnel who do support functions related 
to providing physical connectivity) and then applied a smaller 
allocation to such employees (less than 20%). The Exchange notes that 
it has fewer than seventy (70)

[[Page 59848]]

employees and each department leader has direct knowledge of the time 
spent by those spent by each employee with respect to the various tasks 
necessary to operate the Exchange. The estimates of Human Resources 
cost were therefore determined by consulting with such department 
leaders, determining which employees are involved in tasks related to 
providing physical connectivity, and confirming that the proposed 
allocations were reasonable based on an understanding of the percentage 
of their time such employees devote to tasks related to providing 
physical connectivity. The Exchange notes that senior level executives 
were only allocated Human Resources costs to the extent the Exchange 
believed they are involved in overseeing tasks related to providing 
physical connectivity. The Human Resources cost was calculated using a 
blended rate of compensation reflecting salary, equity and bonus 
compensation, benefits, payroll taxes, and 401(k) matching 
contributions.
Connectivity
    The Connectivity cost includes external fees paid to connect to 
other exchanges and third parties, cabling and switches required to 
operate the Exchange. The Exchange notes that it previously labeled 
this line item as ``Infrastructure and Connectivity'' but has 
eliminated the reference to Infrastructure because several other line-
item costs could be considered infrastructure given the generality of 
that term. The Connectivity line-item is more narrowly focused on 
technology used to complete connections to the Exchange and to connect 
to external markets. The Exchange notes that its connectivity to 
external markets is required in order to receive market data to run the 
Exchange's matching engine and basic operations compliant with existing 
regulations, primarily Regulation NMS.
Data Center
    Data Center costs includes an allocation of the costs the Exchange 
incurs to provide physical connectivity in the third-party data centers 
where it maintains its equipment (such as dedicated space, security 
services, cooling and power). The Exchange notes that it does not own 
the Primary Data Center or the Secondary Data Center, but instead, 
leases space in data centers operated by third parties. The Exchange 
has allocated a high percentage of the Data Center cost (75%) to 
physical connectivity because the third-party data centers and the 
Exchange's physical equipment contained therein is the most direct cost 
in providing physical access to the Exchange. In other words, for the 
Exchange to operate in a dedicated space with connectivity of 
participants to a physical trading platform, the data centers are a 
very tangible cost, and in turn, if the Exchange did not maintain such 
a presence then physical connectivity would be of no value to market 
participants.
External Market Data
    External Market Data includes fees paid to third parties, including 
other exchanges, to receive and consume market data from other markets. 
The Exchange notes that it did not allocate any External Market Data 
fees to the provision of physical connectivity as market data is not 
related to such services.
Hardware and Software Licenses
    Hardware and Software Licenses includes hardware and software 
licenses used to operate and monitor physical assets necessary to offer 
physical connectivity to the Exchange.
Monthly Depreciation
    All physical assets and software, which also includes assets used 
for testing and monitoring of Exchange infrastructure, were valued at 
cost, depreciated or leased over periods ranging from three to five 
years. Thus, the depreciation cost primarily relates to servers 
necessary to operate the Exchange, some of which are owned by the 
Exchange and some of which are leased by the Exchange in order to allow 
efficient periodic technology refreshes. As noted above, the Exchange 
allocated 18.5% of all depreciation costs to providing physical 
connectivity. The Exchange notes, however, that it did not allocate 
depreciation costs for any depreciated software necessary to operate 
the Exchange to physical connectivity, as such software does not impact 
the provision of physical connectivity.
Allocated Shared Expenses
    Finally, a limited portion of general shared expenses was allocated 
to overall physical connectivity costs as without these general shared 
costs the Exchange would not be able to operate in the manner that it 
does and provide physical connectivity. The costs included in general 
shared expenses include general expenses of the Exchange, including 
office space and office expenses (e.g., occupancy and overhead 
expenses), utilities, recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services (including external and internal audit expenses), and 
telecommunications costs. The Exchange notes that the cost of paying 
directors to serve on its Board of Directors is also included in the 
Exchange's general shared expenses, and thus a portion of such overall 
cost amounting to 10% of the overall cost for directors was allocated 
to providing physical connectivity. The Exchange notes that the 10% 
allocation of general shared expenses for physical connectivity is 
lower than that allocated to general shared expenses for application 
sessions based on its allocation methodology that weighted costs 
attributable to each Core Service based on an understanding of each 
area. While physical connectivity has several areas where certain 
tangible costs are heavily weighted towards providing such service 
(e.g., Data Centers, as described above), physical connectivity does 
not require as many broad or indirect resources as other Core Services. 
The total monthly cost of $795,789 was divided by the number of 
physical connections the Exchange maintained at the time that proposed 
pricing was determined (143), to arrive at a cost of approximately 
$5,565 per month, per physical connection.
Costs Related to Offering Application Sessions
    The following chart details the individual line-item costs 
considered by MEMX to be related to offering application sessions as 
well as the percentage of the Exchange's overall costs such costs 
represent for such area (e.g., as set forth below, the Exchange 
allocated approximately 7.7% of its overall Human Resources cost to 
offering application sessions).

------------------------------------------------------------------------
              Costs drivers                    Costs      Percent of all
------------------------------------------------------------------------
Human Resources.........................        $147,029             7.7
Connectivity (external fees, cabling,              5,520             2.6
 switches, etc.)........................
Data Center.............................           7,462             2.6
External Market Data....................          10,734             7.5

[[Page 59849]]

 
Hardware and Software Licenses..........          37,771            10.1
Monthly Depreciation....................          44,843             8.3
Allocated Shared Expenses...............          94,567            19.4
                                         -------------------------------
    Total...............................         347,926             8.8
------------------------------------------------------------------------

Human Resources
    With respect to application sessions, MEMX calculated Human 
Resources cost by taking an allocation of employee time for employees 
whose functions include providing application sessions and maintaining 
performance thereof (including a broader range of employees such as 
technical operations personnel, market operations personnel, and 
software engineering personnel) as well as a limited subset of 
personnel with ancillary functions related to maintaining such 
connectivity (such as sales, membership, and finance personnel). The 
estimates of Human Resources cost were again determined by consulting 
with department leaders, determining which employees are involved in 
tasks related to providing application sessions and maintaining 
performance thereof, and confirming that the proposed allocations were 
reasonable based on an understanding of the percentage of their time 
such employees devote to tasks related to providing application 
sessions and maintaining performance thereof. The Exchange notes that 
senior level executives were only allocated Human Resources costs to 
the extent the Exchange believed they are involved in overseeing tasks 
related to providing application sessions and maintaining performance 
thereof. The Human Resources cost was again calculated using a blended 
rate of compensation reflecting salary, equity and bonus compensation, 
benefits, payroll taxes, and 401(k) matching contributions.
Connectivity
    The Connectivity cost includes external fees paid to connect to 
other exchanges, cabling and switches, as described above.
Data Center
    Data Center costs includes 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 Exchange 
does not own the Primary Data Center or the Secondary Data Center, but 
instead, leases space in data centers operated by third parties).
External Market Data
    External Market Data includes fees paid to third parties, including 
other exchanges, to receive and consume market data from other markets. 
The Exchange allocated a small portion of External Market Data fees 
(7.5%) to the provision of application sessions as such market data is 
necessary to offer certain services related to such sessions, such as 
validating orders on entry against the national best bid and national 
best offer and checking for other conditions (e.g., whether a symbol is 
halted or subject to a short sale circuit breaker). Thus, as market 
data from other Exchanges is consumed at the application session level 
in order to validate orders before additional processing occurs with 
respect to such orders, the Exchange believes it is reasonable to 
allocate a small amount of such costs to application sessions.
Hardware and Software Licenses
    Hardware and Software Licenses includes hardware and software 
licenses used to monitor the health of the order entry services 
provided by the Exchange.
Monthly Depreciation
    All physical assets and software, which also includes assets used 
for testing and monitoring of order entry infrastructure, were valued 
at cost, depreciated or leased over periods ranging from three to five 
years. Thus, the depreciation cost primarily relates to servers 
necessary to operate the Exchange, some of which is owned by the 
Exchange and some of which is leased by the Exchange in order to allow 
efficient periodic technology refreshes. The Exchange allocated 8.3% of 
all depreciation costs to providing application sessions. In contrast 
to physical connectivity, described above, the Exchange did allocate 
depreciation costs for depreciated software necessary to operate the 
Exchange to application sessions because such software is related to 
the provision of such connectivity.
Allocated Shared Expenses
    Finally, a limited portion of general shared expenses was allocated 
to overall application session costs as without these general shared 
costs the Exchange would not be able to operate in the manner that it 
does and provide application sessions. The costs included in general 
shared expenses include general expenses of the Exchange, including 
office space and office expenses (e.g., occupancy and overhead 
expenses), utilities, recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services (including external and internal audit expenses), and 
telecommunications costs. The Exchange again notes that the cost of 
paying directors to serve on its Board of Directors is included in the 
calculation of Allocated Shared Expenses, and thus a portion of such 
overall cost amounting to less than 20% of the overall cost for 
directors was allocated to providing application sessions. The Exchange 
notes that the 19.4% allocation of general shared expenses for 
application sessions is higher than that allocated to general shared 
expenses for physical connectivity based on its allocation methodology 
that weighted costs attributable to each Core Service based on an 
understanding of each area. While physical connectivity has several 
areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Centers, as described above), 
application sessions require a broader level of support from Exchange 
personnel in different areas, which in turn leads to a broader general 
level of cost to the Exchange. The total monthly cost of $347,926 was 
divided by the number of application sessions the Exchange maintained 
at the time that proposed pricing was determined (835), to arrive at a 
cost of approximately $417 per month, per application session.
Cost Analysis--Additional Discussion
    In conducting its Cost Analysis, the Exchange did not allocate any 
of its expenses in full to any core services (including physical 
connectivity or application sessions) and did not double-count any 
expenses. Instead, as described above, the Exchange allocated 
applicable cost drivers across its core services and used the same Cost 
Analysis to form the basis of this proposal and the filing it recently 
submitted proposing fees for proprietary data feeds offered by the 
Exchange. For instance, in calculating the Human

[[Page 59850]]

Resources expenses to be allocated to physical connections, the 
Exchange has a team of employees dedicated to network infrastructure 
and with respect to such employees the Exchange allocated network 
infrastructure personnel with a high percentage of the cost of such 
personnel (75%) given their focus on functions necessary to provide 
physical connections. The salaries of those same personnel were 
allocated only 2.5% to application sessions and the remaining 22.5% was 
allocated to transactions and market data. The Exchange did not 
allocate any other Human Resources expense for providing physical 
connections to any other employee group outside of a smaller allocation 
(19%) of the cost associated with certain specified personnel who work 
closely with and support network infrastructure personnel. In contrast, 
the Exchange allocated much smaller percentages of costs (11% or less) 
across a wider range of personnel groups in order to allocate Human 
Resources costs to providing application sessions. This is because a 
much wider range of personnel are involved in functions necessary to 
offer, monitor and maintain application sessions but the tasks 
necessary to do so are not a primary or full-time function.
    In total, the Exchange allocated 13.8% of its personnel costs to 
providing physical connections and 7.7% of its personnel costs to 
providing application sessions, for a total allocation of 21.5% Human 
Resources expense to provide connectivity services. In turn, the 
Exchange allocated the remaining 78.5% of its Human Resources expense 
to membership (less than 1%) and transactions and market data (77.5%). 
Thus, again, the Exchange's allocations of cost across core services 
were based on real costs of operating the Exchange and were not double-
counted across the core services or their associated revenue streams.
    As another example, the Exchange allocated depreciation expense to 
all core services, including physical connections and application 
sessions, but in different amounts. The Exchange believes it is 
reasonable to allocate the identified portion of such expense because 
such expense includes the actual cost of the computer equipment, such 
as dedicated servers, computers, laptops, monitors, information 
security appliances and storage, and network switching infrastructure 
equipment, including switches and taps that were purchased to operate 
and support the network. Without this equipment, the Exchange would not 
be able to operate the network and provide connectivity services to its 
Members and non-Members and their customers. However, the Exchange did 
not allocate all of the depreciation and amortization expense toward 
the cost of providing connectivity services, but instead allocated 
approximately 27% of the Exchange's overall depreciation and 
amortization expense to connectivity services (18.5% attributed to 
physical connections and 8.3% to application sessions). The Exchange 
allocated the remaining depreciation and amortization expense 
(approximately 73%) toward the cost of providing transaction services 
and market data.
    Looking at the Exchange's operations holistically, the total 
monthly costs to the Exchange for offering core services is $3,954,537. 
Based on the initial four months of billing for connectivity services, 
the Exchange expects to collect its original estimate of $1,233,750 on 
a monthly basis for such services.\15\ Incorporating this amount into 
the Exchange's overall projected revenue, including projections related 
to market data fees adopted earlier this year, the Exchange anticipates 
monthly revenue ranging from $4,296,950 to $4,546,950 from all sources 
(i.e., connectivity fees and membership fees that were introduced in 
January 2022, transaction fees, and revenue from market data, both 
through the fees adopted in April 2022 and through the revenue received 
from the SIPs). As such, applying the Exchange's holistic Cost Analysis 
to a holistic view of anticipated revenues, the Exchange would earn 
approximately 8.5% to 15% margin on its operations as a whole. The 
Exchange believes that this amount is reasonable.
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    \15\ The Exchange notes that it has charged connectivity 
services for four months and so far the average amount expected is 
very close to the estimated revenue provided in the Initial 
Proposal. Specifically, the Exchange has earned an estimated 
$1,254,000 ($20,250 more than projected) for connectivity services 
on an average basis over January through July. The Exchange believes 
this difference is immaterial for purposes of this proposal and 
thus, will continue to use the original estimated revenue of 
$1,233,750 for purposes of this proposal.
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    The Exchange notes that its revenue estimates are based on 
projections across all potential revenue streams and will only be 
realized to the extent such revenue streams actually produce the 
revenue estimated. As a 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 
connectivity, the Exchange will have to be successful in retaining 
existing clients that wish to maintain physical connectivity and/or 
application sessions or in obtaining new clients that will purchase 
such services. Similarly, the Exchange will have to be successful in 
retaining a positive net capture on transaction fees in order to 
realize the anticipated revenue from transaction pricing.
    The Exchange notes that the Cost Analysis was based on the 
Exchange's first year of operations and projections for the next year 
(which is currently underway). As such, the Exchange believes that its 
costs will remain relatively similar in future years. It is possible 
however that such costs will either decrease or increase. To the extent 
the Exchange sees growth in use of connectivity services it will 
receive additional revenue to offset future cost increases. However, if 
use of connectivity services is static or decreases, the Exchange might 
not realize the revenue that it anticipates or needs in order to cover 
applicable costs. Accordingly, the Exchange is committing to conduct a 
one-year review after implementation of these fees. The Exchange 
expects that it may propose to adjust fees at that time, to increase 
fees in the event that revenues fail to cover costs and a reasonable 
mark-up of such costs. Similarly, the Exchange would propose to 
decrease fees in the event that revenue materially exceeds our current 
projections. In addition, the Exchange will periodically conduct a 
review to inform its decision making on whether a fee change is 
appropriate (e.g., to monitor for costs increasing/decreasing or 
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based 
analysis) and would propose to increase fees in the event that revenues 
fail to cover its costs and a reasonable mark-up, or decrease fees in 
the event that revenue or the mark-up materially exceeds our current 
projections. In the event that the Exchange determines to propose a fee 
change, the results of a timely review, including an updated cost 
estimate, will be included in the rule filing proposing the fee change. 
More generally, we believe that it is appropriate for an exchange to 
refresh and update information about its relevant costs and revenues in 
seeking any future changes to fees, and the Exchange commits to do so.
Proposed Fees
Physical Connectivity Fees
    MEMX offers its Members the ability to connect to the Exchange in 
order to transmit orders to and receive information from the Exchange. 
Members can also choose to connect to

[[Page 59851]]

MEMX indirectly through physical connectivity maintained by a third-
party extranet. Extranet physical connections may provide access to one 
or multiple Members on a single connection. Users of MEMX physical 
connectivity services (both Members and non-Members \16\) seeking to 
establish one or more connections with the Exchange submit a request to 
the Exchange via the MEMX User Portal or directly to Exchange 
personnel. Upon receipt of the completed instructions, MEMX establishes 
the physical connections requested by the User. The number of physical 
connections assigned to each User as of August 31, 2022, ranges from 
one to ten, depending on the scope and scale of the Member's trading 
activity on the Exchange as determined by the Member, including the 
Member's determination of the need for redundant connectivity. The 
Exchange notes that 44% of its Members do not maintain a physical 
connection directly with the Exchange in the Primary Data Center 
(though many such Members have connectivity through a third-party 
provider) and another 44% have either one or two physical ports to 
connect to the Exchange in the Primary Data Center. Thus, only a 
limited number of Members, 12%, maintain three or more physical ports 
to connect to the Exchange in the Primary Data Center.
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    \16\ See supra note 13.
---------------------------------------------------------------------------

    As described above, in order to cover the aggregate costs of 
providing physical connectivity to Users and make a modest profit, as 
described below, the Exchange is proposing to charge a fee of $6,000 
per month for each physical connection in the Primary Data Center and a 
fee of $3,000 per month for each physical connection in the Secondary 
Data Center. There is no requirement that any Member maintain a 
specific number of physical connections and a Member may choose to 
maintain as many or as few of such connections as each Member deems 
appropriate. The Exchange notes, however, that pursuant to Rule 2.4 
(Mandatory Participation in Testing of Backup Systems), the Exchange 
does require a small number of Members to connect and participate in 
functional and performance testing as announced by the Exchange, which 
occurs at least once every 12 months. Specifically, Members that have 
been determined by the Exchange to contribute a meaningful percentage 
of the Exchange's overall volume must participate in mandatory testing 
of the Exchange's backup systems (i.e., such Members must connect to 
the Secondary Data Center). The Exchange notes that Members that have 
been designated are still able to use third-party providers of 
connectivity to access the Exchange at its Secondary Data Center, and 
that one such designated Member does use a third-party provider instead 
of connecting directly to the Secondary Data Center through 
connectivity provided by the Exchange.\17\ Nonetheless, because some 
Members are required to connect to the Secondary Data Center pursuant 
to Rule 2.4 and to encourage Exchange Members to connect to the 
Secondary Data Center generally, the Exchange has proposed to charge 
one-half of the fee for a physical connection in the Primary Data 
Center. The Exchange notes that its costs related to operating the 
Secondary Data Center were not separately calculated for purposes of 
this proposal, but instead, all costs related to providing physical 
connections were considered in aggregate. The Exchange believes this is 
appropriate because had the Exchange calculated such costs separately 
and then determined the fee per physical connection that would be 
necessary for the Exchange to cover its costs for operating the 
Secondary Data Center, the costs would likely be much higher than those 
proposed for connectivity at the Primary Data Center because Members 
maintain significantly fewer connections at the Secondary Data Center. 
The Exchange believes that charging a higher fee for physical 
connections at the Secondary Data Center would be inconsistent with its 
objective of encouraging Members to connect at such data center and is 
inconsistent with the fees charged by other exchanges, which also 
provide connectivity for disaster recovery purposes at a discounted 
rate.\18\
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    \17\ The Exchange also notes that a second designated Member 
that is required to participate in mandatory testing with the 
Exchange for the first time this year has not yet connected to the 
Exchange in the Secondary Data Center and has indicated that it is 
likely to use a third-party provider.
    \18\ See, e.g., the BZX equities fee schedule, available at: 
https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/.
---------------------------------------------------------------------------

    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
physical connections a User requests, based upon factors deemed 
relevant by each User (either a Member, service bureau or extranet). 
The Exchange believes these factors include the costs to maintain 
connectivity, business model and choices Members make in how to 
participate on the Exchange, as further described below.
    The proposed fee of $6,000 per month for physical connections at 
the Primary Data Center is designed to permit the Exchange to cover the 
costs allocated to providing connectivity services with a modest markup 
(approximately 8%), which would also help fund future expenditures 
(increased costs, improvements, etc.). The Exchange believes it is 
appropriate to charge fees that represent a reasonable markup over cost 
given the other factors discussed above and the need for the Exchange 
to maintain a highly performant and stable platform to allow Members to 
transact with determinism. The Exchange also reiterates that the 
Exchange did not charge any fees for connectivity services prior to 
January 2022, and its allocation of costs to physical connections was 
part of a holistic allocation that also allocated costs to other core 
services without double-counting any expenses.
    As noted above, the Exchange proposes a discounted rate of $3,000 
per month for physical connections at its Secondary Data Center. The 
Exchange has proposed this discounted rate for Secondary Data Center 
connectivity in order to encourage Members to establish and maintain 
such connections. Also, as noted above, a small number of Members are 
required pursuant to Rule 2.4 to connect and participate in testing of 
the Exchange's backup systems, and the Exchange believes it is 
appropriate to provide a discounted rate for physical connections at 
the Secondary Data Center given this requirement. The Exchange notes 
that this rate is well below the cost of providing such services and 
the Exchange will operate its network and systems at the Secondary Data 
Center without recouping the full amount of such cost through 
connectivity services.
    The proposed fee for physical connections is effective on filing 
and will become operative immediately.
Application Session Fees
    Similar to other exchanges, MEMX offers its Members application 
sessions, also known as logical ports, for order entry and receipt of 
trade execution reports and order messages. Members can also choose to 
connect to MEMX indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one 
or multiple Members on a single session. Users of MEMX connectivity 
services (both Members and non-Members \19\) seeking to establish one 
or more application sessions with the Exchange submit a request to the 
Exchange via the MEMX User Portal or directly to Exchange personnel. 
Upon receipt of the completed instructions,

[[Page 59852]]

MEMX assigns the User the number of sessions requested by the User. The 
number of sessions assigned to each User as of August 31, 2022, ranges 
from one to more than 100, depending on the scope and scale of the 
Member's trading activity on the Exchange (either through a direct 
connection or through a service bureau) as determined by the Member. 
For example, by using multiple sessions, Members can segregate order 
flow from different internal desks, business lines, or customers. The 
Exchange does not impose any minimum or maximum requirements for how 
many application sessions a Member or service bureau can maintain, and 
it is not proposing to impose any minimum or maximum session 
requirements for its Members or their service bureaus.
---------------------------------------------------------------------------

    \19\ See supra note 13.
---------------------------------------------------------------------------

    As described above, in order to cover the aggregate costs of 
providing application sessions to Users and to make a modest profit, as 
described below, the Exchange is proposing to charge a fee of $450 per 
month for each Order Entry Port and Drop Copy Port in the Primary Data 
Center. The Exchange notes that it does not propose to charge for: (1) 
Order Entry Ports or Drop Copy Ports in the Secondary Data Center, or 
(2) any Test Facility Ports or MEMOIR Gap Fill Ports. The Exchange has 
proposed to provide Order Entry Ports and Drop Copy Ports in the 
Secondary Data Center free of charge in order to encourage Members to 
connect to the Exchange's backup trading systems. Similarly, because 
the Exchange wishes to encourage Members to conduct appropriate testing 
of their use of the Exchange, the Exchange has not proposed to charge 
for Test Facility Ports. With respect to MEMOIR Gap Fill ports, such 
ports are exclusively used in order to receive information when a 
market data recipient has temporarily lost its view of MEMX market 
data. The Exchange has not proposed charging for such ports because the 
costs of providing and maintaining such ports is more directly related 
to producing market data.
    The proposed fee of $450 per month for each Order Entry Port and 
Drop Copy Port in the Primary Data Center is designed to permit the 
Exchange to cover the costs allocated to providing application sessions 
with a modest markup (approximately 8%), which would also help fund 
future expenditures (increased costs, improvements, etc.). The Exchange 
also reiterates that the Exchange did not charge any fees for 
connectivity services prior to January 2022, and its allocation of 
costs to application sessions was part of a holistic allocation that 
also allocated costs to other core services without double-counting any 
expenses.
    The proposed fee is also designed to encourage Users to be 
efficient with their application session usage, thereby resulting in a 
corresponding increase in the efficiency that the Exchange would be 
able to realize in managing its aggregate costs for providing 
connectivity services. There is no requirement that any Member maintain 
a specific number of application sessions and a Member may choose to 
maintain as many or as few of such ports as each Member deems 
appropriate. The Exchange has designed its platform such that Order 
Entry Ports can handle a significant amount of message traffic (i.e., 
over 50,000 orders per second), and has no application flow control or 
order throttling. In contrast, other exchanges maintain certain 
thresholds that limit the amount of message traffic that a single 
logical port can handle.\20\ As such, while several Members maintain a 
relatively high number of ports because that is consistent with their 
usage on other exchanges and is preferable for their own reasons, the 
Exchange believes that it has designed a system capable of allowing 
such Members to significantly reduce the number of application sessions 
maintained.
---------------------------------------------------------------------------

    \20\ See, e.g., Cboe US Equities BOE Specification,available at: 
https://cdn.cboe.com/resources/membership/Cboe_US_Equities_BOE_Specification.pdf (describing a 5,000 message 
per second Port Order Rate Threshold on Cboe BOE ports).
---------------------------------------------------------------------------

    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
application sessions a User requests, based upon factors deemed 
relevant by each User (either a Member or service bureau on behalf of a 
Member). The Exchange believes these factors include the costs to 
maintain connectivity and choices Members make in how to segment or 
allocate their order flow.\21\
---------------------------------------------------------------------------

    \21\ The Exchange understands that some Members (or service 
bureaus) may also request more Order Entry Ports to enable the 
ability to send a greater number of simultaneous order messages to 
the Exchange by spreading orders over more Order Entry Ports, 
thereby increasing throughput (i.e., the potential for more orders 
to be processed in the same amount of time). The degree to which 
this usage of Order Entry Ports provides any throughput advantage is 
based on how a particular Member sends order messages to MEMX, 
however the Exchange notes that its architecture reduces the impact 
or necessity of such a strategy. All Order Entry Ports on MEMX 
provide the same throughput, and as noted above, the throughput is 
likely adequate even for a Member sending a significant amount of 
volume at a fast pace, and is not artificially throttled or limited 
in any way by the Exchange.
---------------------------------------------------------------------------

    The proposed fee for application sessions is effective on filing 
and will become operative immediately.
Proposed Fees--Additional Discussion
    As discussed above, the proposed fees for connectivity services do 
not by design apply differently to different types or sizes of Members. 
As discussed in more detail in the Statutory Basis section, the 
Exchange believes that the likelihood of higher fees for certain 
Members subscribing to connectivity services usage than others is not 
unfairly discriminatory because it is based on objective differences in 
usage of connectivity services among different Members. The Exchange's 
incremental aggregate costs for all connectivity services are 
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the 
Exchange, as such Members: (1) consume the most bandwidth and resources 
of the network; (2) transact the vast majority of the volume on the 
Exchange; and (3) require the high-touch network support services 
provided by the Exchange and its staff, including network monitoring, 
reporting and support services, resulting in a much higher cost to the 
Exchange to provide such connectivity services. For these reasons, MEMX 
believes it is not unfairly discriminatory for the Members with higher 
message traffic and/or Members with more complicated connections to pay 
a higher share of the total connectivity services fees. While Members 
with a business model that results in higher relative inbound message 
activity or more complicated connections are projected to pay higher 
fees, the level of such fees is based solely on the number of physical 
connections and/or application sessions deemed necessary by the Member 
and not on the Member's business model or type of Member. The Exchange 
notes that the correlation between message traffic and usage of 
connectivity services is not completely aligned because Members 
individually determine how many physical connections and application 
sessions to request, and Members may make different decisions on the 
appropriate ways based on facts unique to their individual businesses. 
Based on the Exchange's architecture, as described above, the Exchange 
believes that a Member even with high message traffic would be able to 
conduct business on the Exchange with a relatively small connectivity 
services footprint.
    Because the Exchange has already adopted fees for connectivity 
services, the Exchange has initial results of the

[[Page 59853]]

impact such fees have had on Member and non-Member usage of 
connectivity services. Since the fees went into effect as set forth in 
the Initial Proposal, nine (9) customers with physical connectivity to 
the Exchange have canceled one or more of their physical connections. 
These cancellations resulted in an approximate 6% drop in the physical 
connectivity offered by the Exchange prior to the Exchange charging for 
such connectivity.\22\ In each instance, the customer told the Exchange 
that its reason for cancelling its connectivity was the imposition of 
fees. Of these customers, two (2) customers canceled services entirely, 
three (3) maintained at least one physical connection provided directly 
by the Exchange, and the remaining four (4) customers migrated to 
alternative sources of connectivity through a third-party provider. As 
such, some market participants (one market data provider and one 
extranet) determined that they no longer wanted to connect to the 
Exchange directly or through a third party as it was not necessary for 
their business and their initial connection was only worthwhile so long 
as services were provided free of charge. Other market participants 
(one market data provider, one extranet and one Member) determined that 
they still wished to be directly connected to the Exchange but did not 
need as many connections. Finally, some market participants (one market 
data provider, one service bureau and two trading participants) 
determined that there was a more affordable alternative through a 
third-party provider of connectivity services. As a general matter, the 
customers that discontinued use of physical connectivity or 
transitioned to a third-party provider of connectivity services were 
either connected purely to consume market data for their own purposes 
or distribution to others, were themselves extranets or service bureaus 
providing alternatives to the Exchange's connectivity services, or were 
smaller trading firms that elected not to participate on the Exchange 
directly and likely connected initially due to the fact that there were 
no fees to connect.
---------------------------------------------------------------------------

    \22\ The Exchange notes that despite these cancellations, the 
Exchange has since had existing customers and new customers order 
physical connectivity that has resulted in the Exchange maintaining 
nearly the same amount of physical connections for customers as it 
did prior to the imposition of fees.
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    Additionally, since the Exchange began charging for application 
sessions, five (5) customers have canceled a total of thirty (30) 
application sessions (approximately 3.5% of all customer application 
sessions) due to the fees adopted by the Exchange.\23\ As a general 
matter, these customers determined that the number of application 
sessions that they maintained was not necessary in order to participate 
on the Exchange.
---------------------------------------------------------------------------

    \23\ The Exchange notes that, as was the case with respect to 
physical connectivity, the Exchange has since had existing customers 
and new customers order additional application sessions that has 
resulted in the Exchange maintaining nearly the same amount of 
application sessions for customers as it did prior to the imposition 
of fees.
---------------------------------------------------------------------------

    Finally, the fees for connectivity services will help to encourage 
connectivity services usage in a way that aligns with the Exchange's 
regulatory obligations. As a national securities exchange, the Exchange 
is subject to Regulation Systems Compliance and Integrity (``Reg 
SCI'').\24\ Reg SCI Rule 1001(a) requires that the Exchange establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure (among other things) that its Reg SCI systems have 
levels of capacity adequate to maintain the Exchange's operational 
capability and promote the maintenance of fair and orderly markets.\25\ 
By encouraging Users to be efficient with their usage of connectivity 
services, the proposed fee will support the Exchange's Reg SCI 
obligations in this regard by ensuring that unused application sessions 
are available to be allocated based on individual User needs and as the 
Exchange's overall order and trade volumes increase. As noted above, 
based on early results, the adoption of fees has led to certain firms 
reducing the number of application sessions maintained now that such 
sessions are no longer provided free of charge. Additionally, because 
the Exchange will charge a lower rate for a physical connection to the 
Secondary Data Center and will not charge any fees for application 
sessions at the Secondary Data Center or its Test Facility, the 
proposed fee structure will further support the Exchange's Reg SCI 
compliance by reducing the potential impact of a disruption should the 
Exchange be required to switch to its Disaster Recovery Facility and 
encouraging Members to engage in any necessary system testing with low 
or no cost imposed by the Exchange.\26\
---------------------------------------------------------------------------

    \24\ 17 CFR 242.1000-1007.
    \25\ 17 CFR 242.1001(a).
    \26\ While some Members might directly connect to the Secondary 
Data Center and incur the proposed $3,000 per month fee, there are 
other ways to connect to the Exchange, such as through a service 
bureau or extranet, and because the Exchange is not imposing fees 
for application sessions in the Secondary Data Center, a Member 
connecting through another method would not incur any fees charged 
directly by the Exchange. However, the Exchange notes that a third-
party service provider providing connectivity to the Exchange likely 
would charge a fee for providing such connectivity; such fees are 
not set by or shared in by the Exchange.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) \27\ of the Act in general, and 
furthers the objectives of Section 6(b)(4) \28\ of the Act, in 
particular, in that it is designed to provide for the equitable 
allocation of reasonable dues, fees and other charges among its Members 
and other persons using its facilities. Additionally, the Exchange 
believes that the proposed fees are consistent with the objectives of 
Section 6(b)(5) \29\ of the Act in that they are designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to a free and open market and 
national market system, and, in general, to protect investors and the 
public interest, and, particularly, are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78f.
    \28\ 15 U.S.C. 78f(b)(4).
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees for connectivity 
services are reasonable, equitable and not unfairly discriminatory 
because, as described above, the proposed pricing for connectivity 
services is directly related to the relative costs to the Exchange to 
provide those respective services and does not impose a barrier to 
entry to smaller participants.
    The Exchange recognizes that there are various business models and 
varying sizes of market participants conducting business on the 
Exchange. The Exchange's incremental aggregate costs for all 
connectivity services are disproportionately related to Members with 
higher message traffic and/or Members with more complicated connections 
established with the Exchange, as such Members: (1) consume the most 
bandwidth and resources of the network; (2) transact the vast majority 
of the volume on the Exchange; and (3) require the high-touch network 
support services provided by the Exchange and its staff, including 
network monitoring, reporting and support services, resulting in a much 
higher cost to the Exchange to provide such connectivity services. 
Accordingly, the Exchange believes the allocation of the proposed fees 
that increase based on the number of physical connections or 
application

[[Page 59854]]

sessions is reasonable based on the resources consumed by the 
respective type of market participant (i.e., lowest resource consuming 
Members will pay the least, and highest resource consuming Members will 
pay the most), particularly since higher resource consumption 
translates directly to higher costs to the Exchange.
    With regard to reasonableness, the Exchange understands that when 
appropriate given the context of a proposal the Commission has taken a 
market-based approach to examine whether the SRO making the proposal 
was subject to significant competitive forces in setting the terms of 
the proposal. In looking at this question, the Commission considers 
whether the SRO has demonstrated in its filing that: (i) there are 
reasonable substitutes for the product or service; (ii) ``platform'' 
competition constrains the ability to set the fee; and/or (iii) revenue 
and cost analysis shows the fee would not result in the SRO taking 
supra-competitive profits. If the SRO demonstrates that the fee is 
subject to significant competitive forces, the Commission will next 
consider whether there is any substantial countervailing basis to 
suggest the fee's terms fail to meet one or more standards under the 
Exchange Act. If the filing fails to demonstrate that the fee is 
constrained by competitive forces, the SRO must provide a substantial 
basis, other than competition, to show that it is consistent with the 
Exchange Act, which may include production of relevant revenue and cost 
data pertaining to the product or service.
    MEMX believes the proposed fees for connectivity services are fair 
and reasonable as a form of cost recovery for the Exchange's aggregate 
costs of offering connectivity services to Members and non-Members. The 
proposed fees are expected to generate monthly revenue of $1,233,750 
providing cost recovery to the Exchange for the aggregate costs of 
offering connectivity services, based on a methodology that narrowly 
limits the cost drivers that are allocated cost to those closely and 
directly related to the particular service. In addition, this revenue 
will allow the Exchange to continue to offer, to enhance, and to 
continually refresh its infrastructure as necessary to offer a state-
of-the-art trading platform. The Exchange believes that, consistent 
with the Act, it is appropriate to charge fees that represent a 
reasonable markup over cost given the other factors discussed above. 
The Exchange also believes the proposed fee is a reasonable means of 
encouraging Users to be efficient in the connectivity services they 
reserve for use, with the benefits to overall system efficiency to the 
extent Members and non-Members consolidate their usage of connectivity 
services or discontinue subscriptions to unused physical connectivity.
    The Exchange further believes that the proposed fees, as they 
pertain to purchasers of each type of connectivity alternative, 
constitute an equitable allocation of reasonable fees charged to the 
Exchange's Members and non-Members and are allocated fairly amongst the 
types of market participants using the facilities of the Exchange.
    As described above, the Exchange believes the proposed fees are 
equitably allocated because the Exchange's incremental aggregate costs 
for all connectivity services are disproportionately related to Members 
with higher message traffic and/or Members with more complicated 
connections established with the Exchange, as such Members: (1) consume 
the most bandwidth and resources of the network; (2) transact the vast 
majority of the volume on the Exchange; and (3) require the high-touch 
network support services provided by the Exchange and its staff, 
including network monitoring, reporting and support services, resulting 
in a much higher cost to the Exchange to provide such connectivity 
services.
    Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering 
whether an exchange's proposed fees are consistent with the Act.\30\ As 
described in the Fee Guidance, the term ``supra-competitive profits'' 
refers to profits that exceed the profits that can be obtained in a 
competitive market. The proposed fee structure would not result in 
excessive pricing or supra-competitive profits for the Exchange. The 
proposed fee structure is merely designed to permit the Exchange to 
cover the costs allocated to providing connectivity services with a 
modest markup (approximately 8%), which would also help fund future 
expenditures (increased costs, improvements, etc.). The Exchange 
believes that this is fair, reasonable, and equitable. Accordingly, the 
Exchange believes that its proposal is consistent with Section 6(b)(4) 
\31\ of the Act because the proposed fees will permit recovery of the 
Exchange's costs and will not result in excessive pricing or supra-
competitive profit.
---------------------------------------------------------------------------

    \30\ See Fee Guidance, supra note 12.
    \31\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The proposed fees for connectivity services will allow the Exchange 
to cover certain costs incurred by the Exchange associated with 
providing and maintaining necessary hardware and other network 
infrastructure as well as network monitoring and support services; 
without such hardware, infrastructure, monitoring and support the 
Exchange would be unable to provide the connectivity services. The 
Exchange routinely works to improve the performance of the network's 
hardware and software. The costs associated with maintaining and 
enhancing a state-of-the-art exchange network is a significant expense 
for the Exchange, and thus the Exchange believes that it is reasonable 
and appropriate to help offset those costs by adopting fees for 
connectivity services. As detailed above, the Exchange has four primary 
sources of revenue that it can potentially use to fund its operations: 
transaction fees, fees for connectivity services, membership and 
regulatory fees, and market data fees. Accordingly, the Exchange must 
cover its expenses from these four primary sources of revenue. The 
Exchange's Cost Analysis estimates the costs to provide connectivity 
services at $1,143,715. Based on current connectivity services usage, 
the Exchange would generate monthly revenues of approximately 
$1,233,750.\32\ This represents a modest profit when compared to the 
cost of providing connectivity services. Even if the Exchange earns 
that amount or incrementally more, the Exchange believes the proposed 
fees for connectivity services are fair and reasonable because they 
will not result in excessive pricing or supra-competitive profit, when 
comparing the total expense of MEMX associated with providing 
connectivity services versus the total projected revenue of the 
Exchange associated with network connectivity services. As noted above, 
when incorporating the projected revenue from connectivity services 
into the Exchange's overall projected revenue, including projections 
related to recently adopted market data fees, the Exchange anticipates 
monthly revenue ranging from $4,296,950 to $4,546,950 from all sources. 
As such, applying the Exchange's holistic Cost Analysis to a holistic 
view of anticipated revenues, the Exchange would earn approximately 
8.5% to 15% margin on its operations as a whole. The Exchange believes 
that this amount is reasonable and is again evidence that the Exchange 
will not earn a supra-competitive profit.
---------------------------------------------------------------------------

    \32\ See supra note 15.
---------------------------------------------------------------------------

    The Exchange notes that other exchanges offer similar connectivity 
options to market participants and that the Exchange's fees are a 
discount as

[[Page 59855]]

compared to the majority of such fees.\33\ With respect to physical 
connections, each of the Nasdaq Stock Market LLC (``Nasdaq''), NYSE, 
NYSE Arca, Inc. (``Arca''), BZX and Cboe EDGX Exchange, Inc. (``EDGX'') 
charges between $7,500-$22,000 per month for physical connectivity at 
their primary data centers that is comparable to that offered by the 
Exchange.\34\ Nasdaq, NYSE and Arca also charge installation fees, 
which are not proposed to be charged by the Exchange. With respect to 
application sessions, each of Nasdaq, NYSE, Arca, BZX and EDGX charges 
between $500-$575 per month for order entry and drop ports.\35\ The 
Exchange further notes that several of these exchanges each charge for 
other logical ports that the Exchange will continue to provide for 
free, such as application sessions for testing and disaster recovery 
purposes.\36\ While the Exchange's proposed connectivity fees are lower 
than the fees charged by Nasdaq, NYSE, Arca, BZX and EDGX, MEMX 
believes that it offers significant value to Members over these other 
exchanges in terms of bandwidth available over such connectivity 
services, which the Exchanges believes is a competitive advantage, and 
differentiates its connectivity versus connectivity to other 
exchanges.\37\ Additionally, the Exchange's proposed connectivity fees 
to its disaster recovery facility are within the range of the fees 
charged by other exchanges for similar connectivity alternatives.\38\ 
The Exchange believes that its proposal to offer certain application 
sessions free of charge is reasonable, equitably allocated and not 
unfairly discriminatory because such proposal is intended to encourage 
Member connections and use of backup and testing facilities of the 
Exchange, and, with respect to MEMOIR Gap Fill ports, such ports are 
used exclusively in connection with the receipt and processing of 
market data from the Exchange.
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    \33\ One significant differentiation between the Exchanges is 
that while it offers different types of physical connections, 
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does 
not propose to charge different prices for such connections. In 
contrast, most of the Exchange's competitors provide scaled pricing 
that increases depending on the size of the physical connection. The 
Exchange does not believe that its costs increase incrementally 
based on the size of a physical connection but instead, that 
individual connections and the number of such separate and disparate 
connections are the primary drivers of cost for the Exchange.
    \34\ See the Nasdaq equities fee schedule, available at: http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2; the NYSE fee 
schedule, available at: https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf; the NYSE Arca equities fee 
schedule, available at: https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf; the BZX equities 
fee schedule, available at: https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/; the EDGX equities fee schedule, 
available at: https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/. This range is based on a review of the fees 
charged for 10-40Gb connections at each of these exchanges and 
relates solely to the physical port fee or connection charge, 
excluding co-location fees and other fees assessed by these 
exchanges. The Exchange notes that it does not offer physical 
connections with lower bandwidth than 10Gb and that Members and non-
Members with lower bandwidth requirements typically access the 
Exchange through third-party extranets or service bureaus.
    \35\ See id.
    \36\ See id.
    \37\ As noted above, all physical connections offered by MEMX 
are at least 10Gb capable and physical connections provided with 
larger bandwidth capabilities will be provided at the same rate as 
such connections. In contrast to other exchanges, MEMX has not 
proposed different types of physical connections with higher pricing 
for those with greater capacity. See supra note 33. The Exchange 
also reiterates that MEMX application sessions are capable of 
handling significant amount of message traffic (i.e., over 50,000 
orders per second), and have no application flow control or order 
throttling, in contrast to competitors that have imposed message 
rate thresholds. See supra note 20 and accompanying text.
    \38\ See supra note 34.
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    In conclusion, the Exchange submits that its proposed fee structure 
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act 
\39\ for the reasons discussed above in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
its Members and other persons using its facilities, does not permit 
unfair discrimination between customers, issuers, brokers, or dealers, 
and is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and in general to protect investors 
and the public interest, particularly as the proposal neither targets 
nor will it have a disparate impact on any particular category of 
market participant.
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    \39\ 15 U.S.C. 78f(b)(4) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\40\ the Exchange 
does not believe that the proposed rule change would impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act.
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    \40\ 15 U.S.C. 78f(b)(8).
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Intra-Market Competition
    The Exchange does not believe that the proposed rule change would 
place certain market participants at the Exchange at a relative 
disadvantage compared to other market participants or affect the 
ability of such market participants to compete. In particular, while 
the Exchange did not officially propose fees until late December of 
2021 when it filed the Initial Proposal, Exchange personnel had been 
informally discussing potential fees for connectivity services with a 
diverse group of market participants that are connected to the Exchange 
(including large and small firms, firms with large connectivity service 
footprints and small connectivity service footprints, as well as 
extranets and service bureaus) for several months leading up to that 
time. The Exchange received no official complaints from Members, non-
Members (extranets or service bureaus), third-parties that purchase the 
Exchange's connectivity and resell it, and customers of those 
resellers, that the Exchange's fees or the proposed fees for 
connectivity services would negatively impact their abilities to 
compete with other market participants or that they are placed at a 
disadvantage.
    As expected, the Exchange did, however, have several market 
participants reduce or discontinue use of connectivity services 
provided directly by the Exchange in response to the fees adopted by 
the Exchange. The Exchange does not believe that the proposed fees for 
connectivity services place certain market participants at a relative 
disadvantage to other market participants because the proposed 
connectivity pricing is associated with relative usage of the Exchange 
by each market participant and does not impose a barrier to entry to 
smaller participants. The Exchange notes that two smaller trading firms 
cancelled connectivity services and elected not to participate on the 
Exchange directly due to the imposition of fees but these participants 
were not actively participating on the Exchange prior to disconnecting 
and likely connected initially due to the fact that there were no fees 
to connect. The Exchange believes its proposed pricing is reasonable 
and, when coupled with the availability of third-party providers that 
also offer connectivity solutions, that participation on the Exchange 
is affordable for all market participants, including smaller trading 
firms. As described above, the connectivity services purchased by 
market participants typically increase based on their additional 
message traffic and/or the complexity of their operations. The market 
participants that utilize more connectivity services typically utilize 
the most bandwidth, and those are the participants that consume the 
most resources from the network. Accordingly, the proposed fees for

[[Page 59856]]

connectivity services do not favor certain categories of market 
participants in a manner that would impose a burden on competition; 
rather, the allocation of the proposed connectivity fees reflects the 
network resources consumed by the various size of market participants 
and the costs to the Exchange of providing such connectivity services.
Inter-Market Competition
    The Exchange does not believes the proposed fees place an undue 
burden on competition on other SROs that is not necessary or 
appropriate. Additionally, other exchanges have similar connectivity 
alternatives for their participants, but with higher rates to 
connect.\41\ The Exchange is also unaware of any assertion that the 
proposed fees for connectivity services would somehow unduly impair its 
competition with other exchanges.
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    \41\ See supra notes 33-38 and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \42\ and Rule 19b-4(f)(2) \43\ thereunder.
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    \42\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \43\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 Number SR-MEMX-2022-26 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MEMX-2022-26. 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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MEMX-2022-26 and should be 
submitted on or before October 24, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-21339 Filed 9-30-22; 8:45 am]
BILLING CODE 8011-01-P


