[Federal Register Volume 88, Number 10 (Tuesday, January 17, 2023)]
[Notices]
[Pages 2651-2668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00659]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96628; File No. SR-EMERALD-2023-01]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change by MIAX 
Emerald, LLC To Amend the Fee Schedule To Modify Certain Connectivity 
and Port Fees

January 10, 2023.
    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 January 9, 2023, MIAX Emerald, LLC (``MIAX Emerald'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') a 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 a proposal to amend the MIAX Emerald Fee 
Schedule (the ``Fee Schedule'') to amend its 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 below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule as follows: (1) 
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') 
fiber connection for Members \3\ and non-Members; and (2) adopt a 
tiered-pricing structure for Limited Service MIAX Emerald Express 
Interface (``MEI'') Ports \4\ available to Market Makers.\5\ 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).\6\ 
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 term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \4\ 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.
    \5\ 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.
    \6\ 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.\7\ 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.\8\
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    \7\ See id. for a description of each of these ports.
    \8\ Id.
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    Since the time of 2021 increase discussed above, the Exchange 
experienced ongoing increases in expenses, particularly internal 
expenses. As discussed more fully below, the Exchange recently 
calculated increased annual aggregate costs of $11,361,586 for 
providing 10Gb ULL connectivity and $1,779,066 for providing Limited 
Service MEI Ports.
    Much of the cost relates to monitoring and analysis of data and 
performance of the network via the subscriber's connection with 
nanosecond granularity, and continuous improvements in network 
performance with the goal of improving the subscriber's experience. The 
costs associated with maintaining and enhancing a state-of-the-art 
network is a significant expense for the Exchange, and thus the 
Exchange believes that it is reasonable and appropriate to help offset 
those increased costs by amending fees for connectivity services. 
Subscribers expect the Exchange to provide this level of support so 
they continue to receive the performance they expect. This 
differentiates the Exchange from its competitors.
    The Exchange now proposes to amend the Fee Schedule to amend the 
fees for 10Gb ULL connectivity and Limited

[[Page 2652]]

Service MEI Ports in order to recoup ongoing costs and increase in 
expenses set forth below in the Exchange's cost analysis.
* * * * *
    Starting in 2017, following the United States Court of Appeals for 
the District of Columbia's Susquehanna Decision \9\ and various other 
developments, the Commission began to undertake a heightened review of 
exchange filings, including non-transaction fee filings that was 
substantially and materially different from it prior review process 
(hereinafter referred to as the ``Revised Review Process''). In the 
Susquehanna Decision, the D.C. Circuit Court stated that the Commission 
could not maintain a practice of ``unquestioning reliance'' on claims 
made by a self-regulatory organization (``SRO'') in the course of 
filing a rule or fee change with the Commission.\10\ Then, on October 
16, 2018, the Commission issued an opinion in Securities Industry and 
Financial Markets Association finding that exchanges failed both to 
establish that the challenged fees were constrained by significant 
competitive forces and that these fees were consistent with the 
Act.\11\ On that same day, the Commission issued an order remanding to 
various exchanges and national market system (``NMS'') plans challenges 
to over 400 rule changes and plan amendments that were asserted in 57 
applications for review (the ``Remand Order'').\12\ The Remand Order 
directed the exchanges to ``develop a record,'' and to ``explain their 
conclusions, based on that record, in a written decision that is 
sufficient to enable us to perform our review.'' \13\ The Commission 
denied requests by various exchanges and plan participants for 
reconsideration of the Remand Order.\14\ However, the Commission did 
extend the deadlines in the Remand Order ``so that they d[id] not begin 
to run until the resolution of the appeal of the SIFMA Decision in the 
D.C. Circuit and the issuance of the court's mandate.'' \15\ Both the 
Remand Order and the Order Denying Reconsideration were appealed to the 
D.C. Circuit.
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    \9\ See Susquehanna International Group, LLP v. Securities & 
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the 
``Susquehanna Decision'').
    \10\ Id.
    \11\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA 
Decision'').
    \12\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 84433, 2018 WL 5023230 (Oct. 16, 2018). See 15 U.S.C. 
78k-1, 78s; see also Rule 608(d) of Regulation NMS, 17 CFR 
242.608(d) (asserted as an alternative basis of jurisdiction in some 
applications).
    \13\ Id. at page 2.
    \14\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order 
Denying Reconsideration'').
    \15\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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    While the above appeal to the D.C. Circuit was pending, on March 
29, 2019, the Commission issued an order disapproving a proposed fee 
change by BOX Exchange LLC (``BOX'') to establish connectivity fees 
(the ``BOX Order''), which significantly increased the level of 
information needed for the Commission to believe that an exchange's 
filing satisfied its obligations under the Act with respect to changing 
a fee.\16\ Despite approving hundreds of access fee filings in the 
years prior to the BOX Order (described further below) utilizing a 
``market-based'' test, the Commission changed course and disapproved 
BOX's proposal to begin charging connectivity at one-fourth the rate of 
competing exchanges' pricing.
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    \16\ 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). The Commission noted 
in the BOX Order that it ``historically applied a `market-based' 
test in its assessment of market data fees, which [the Commission] 
believe[s] present similar issues as the connectivity fees proposed 
herein.'' Id. at page 16. Despite this admission, the Commission 
disapproved BOX's proposal to begin charging $5,000 per month for 
10Gb connections (while allowing legacy exchanges to charge rates 
equal to 3-4 times that amount utilizing ``market-based'' fee 
filings from years prior).
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    Also while the above appeal was pending, 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.'' \17\ In the Staff 
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.'' \18\ The Staff 
Guidance also 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.'' \19\
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    \17\ See Staff Guidance on SRO Rule Filings Relating to Fees 
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Staff Guidance'').
    \18\ Id.
    \19\ Id.
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    Following the BOX Order and Staff Guidance, on August 6, 2020, the 
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock 
Market, LLC v. SEC \20\ and remanded for further proceedings consistent 
with its opinion.\21\ That same day, the D.C. Circuit issued an order 
remanding the Remand Order to the Commission for reconsideration in 
light of NASDAQ. The court noted that the Remand Order required the 
exchanges and NMS plan participants to consider the challenges that the 
Commission had remanded in light of the SIFMA Decision. The D.C. 
Circuit concluded that because the SIFMA Decision ``has now been 
vacated, the basis for the [Remand Order] has evaporated.'' \22\ 
Accordingly, on August 7, 2020, the Commission vacated the Remand Order 
and ordered the parties to file briefs addressing whether the holding 
in NASDAQ v. SEC that Exchange Act Section 19(d) does not permit 
challenges to generally applicable fee rules requiring dismissal of the 
challenges the Commission previously remanded.\23\ The Commission 
further invited ``the parties to submit briefing stating whether the 
challenges asserted in the applications for review . . . should be 
dismissed, and specifically identifying any challenge that they contend 
should not be dismissed pursuant to the holding of Nasdaq v. SEC.'' 
\24\ Without resolving the above issues, on October 5, 2020, the 
Commission issued an order granting SIFMA and Bloomberg's request to 
withdraw their applications for review and dismissed the 
proceedings.\25\
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    \20\ NASDAQ Stock Mkt., LLC v. SEC, No 18-1324, --- Fed. App'x -
---, 2020 WL 3406123 (D.C. Cir. June 5, 2020). The court's mandate 
was issued on August 6, 2020.
    \21\ Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020). 
The court's mandate issued on August 6, 2020. The D.C. Circuit held 
that Exchange Act ``Section 19(d) is not available as a means to 
challenge the reasonableness of generally-applicable fee rules.'' 
Id. The court held that ``for a fee rule to be challengeable under 
Section 19(d), it must, at a minimum, be targeted at specific 
individuals or entities.'' Id. Thus, the court held that ``Section 
19(d) is not an available means to challenge the fees at issue'' in 
the SIFMA Decision. Id.
    \22\ Id. at *2; see also id. (``[T]he sole purpose of the 
challenged remand has disappeared.'').
    \23\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 89504, 2020 WL 4569089 (August 7, 2020) (the ``Order 
Vacating Prior Order and Requesting Additional Briefs'').
    \24\ Id.
    \25\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 90087 (October 5, 2020).
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    As a result of the Commission's loss of the NASDAQ v. SEC case 
noted above, the Commission never followed through with its intention 
to subject the over 400 fee filings to ``develop a record,'' and to 
``explain their conclusions, based on that record, in a written 
decision that is sufficient to

[[Page 2653]]

enable us to perform our review.'' \26\ As such, all of those fees 
remained in place and amounted to a baseline set of fees for those 
exchanges that had the benefit of getting their fees in place before 
the Commission Staff's fee review process materially changed. The net 
result of this history and lack of resolution in the D.C. Circuit Court 
resulted in an uneven competitive landscape where the Commission 
subjects all new non-transaction fee filings, particularly those 
submitted by new exchanges, to the new Revised Review Process, while 
allowing the previously challenged fee filings, mostly submitted by 
incumbent exchanges prior to 2019, to remain in effect and not subject 
to the ``record'' or ``review'' earlier intended by the Commission.
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    \26\ See supra note 12, at page 2.
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    While the Exchange appreciates that the Staff Guidance articulates 
an important policy goal of improving disclosures and requiring 
exchanges to justify that their market data and access fee proposals 
are fair and reasonable, the practical effect of the Revised Review 
Process, Staff Guidance, and the Commission's related practice of 
continuous suspension of new fee filings, is anti-competitive, 
discriminatory, and has put in place an un-level playing field, which 
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched, 
legacy exchanges (``legacy exchanges'').\27\ The legacy exchanges all 
established a significantly higher baseline for access and market data 
fees prior to the Revised Review Process. From 2011 until the issuance 
of the Staff Guidance in 2019, national securities exchanges filed, and 
the Commission Staff did not abrogate or suspend (allowing such fees to 
become effective), at least 92 filings \28\ to amend exchange 
connectivity or port fees (or similar access fees). The support for 
each of those filings was a simple statement by the relevant exchange 
that the fees were constrained by competitive forces.\29\ These fees 
remain in effect today.
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    \27\ Commission Chair Gary Gensler recently reiterated the 
Commission's mandate to ensure competition in the equities markets. 
See ``Statement on Minimum Price Increments, Access Fee Caps, Round 
Lots, and Odd-Lots'', by Chair Gary Gensler, dated December 14, 2022 
(stating ``[i]n 1975, Congress tasked the Securities and Exchange 
Commission with responsibility to facilitate the establishment of 
the national market system and enhance competition in the securities 
markets, including the equity markets'' (emphasis added)). In that 
same statement, Chair Gary Gensler cited the five objectives laid 
out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1), 
including ensuring ``fair competition among brokers and dealers, 
among exchange markets, and between exchange markets and markets 
other than exchange markets. . . .'' (emphasis added). Id. at note 
1. See also Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249.
    \28\ This timeframe also includes challenges to over 400 rule 
filings by SIFMA and Bloomberg discussed above. Sec. Indus. & Fin. 
Mkts. Ass'n, Securities Exchange Act Release No. 84433, 2018 WL 
5023230 (Oct. 16, 2018). Those filings were left to stand, while at 
the same time, blocking newer exchanges from the ability to 
establish competitive access and market data fees. See The Nasdaq 
Stock Market, LLC v. SEC, Case No. 18-1292 (D.C. Cir. June 5, 2020). 
The expectation at the time of the litigation was that the 400 rule 
flings challenged by SIFMA and Bloomberg would need to be justified 
under revised review standards.
    \29\ See, e.g., Securities Exchange Act Release Nos. 74417 
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016 
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26); 
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November 
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061 
(January 10, 2017) (SR-NYSEARCA-2016-172).
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    The net result is that the non-legacy exchanges are effectively now 
blocked by the Commission Staff from adopting or increasing fees to 
amounts comparable to the legacy exchanges (which were not subject to 
the Revised Review Process and Staff Guidance), despite providing 
enhanced disclosures and rationale to support their proposed fee 
changes that far exceed any such support provided by legacy exchanges. 
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission 
applied a ``market-based'' test that only relied upon the assumed 
presence of significant competitive forces, while exchanges today are 
subject to a cost-based test requiring extensive cost and revenue 
disclosures, a process that is complex, inconsistently applied, and 
rarely results in a successful outcome, i.e., non-suspension. The 
Revised Review Process and Staff Guidance changed decades-long 
Commission Staff standards for review, resulting in unfair 
discrimination and placing an undue burden on inter-market competition 
between legacy exchanges and non-legacy exchanges.
    Commission Staff now require exchange filings, including from non-
legacy exchanges such as the Exchange, to provide detailed cost-based 
analysis in place of competition-based arguments to support such 
changes. However, even with the added detailed cost and expense 
disclosures, the Commission Staff continues to either suspend such 
filings and institute disapproval proceedings, or put the exchanges in 
the unenviable position of having to repeatedly withdraw and re-file 
with additional detail in order to continue to charge those fees.\30\ 
By impeding any path forward for non-legacy exchanges to establish 
commensurate non-transaction fees, or by failing to provide any 
alternative means for smaller markets to establish ``fee parity'' with 
legacy exchanges, the Commission is stifling competition: non-legacy 
exchanges are, in effect, being deprived of the revenue necessary to 
compete on a level playing field with legacy exchanges. This is 
particularly harmful, given that the costs to maintain exchange systems 
and operations continue to increase. The Commission Staff's change in 
position impedes the ability of non-legacy exchanges to raise revenue 
to invest in their systems to compete with the legacy exchanges who 
already enjoy disproportionate non-transaction fee based revenue. For 
example, the Cboe Exchange, Inc. (``Cboe'') reported ``access and 
capacity fee'' revenue of $70,893,000 for 2020 \31\ and $80,383,000 for 
2021.\32\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and 
capacity fee'' revenue of $19,016,000 for 2020 \33\ and $22,843,000 for 
2021.\34\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and 
capacity fee'' revenue of $38,387,000 for 2020 \35\ and $44,800,000 for 
2021.\36\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and 
capacity fee'' revenue of $26,126,000 for 2020 \37\ and $30,687,000 for 
2021.\38\ For 2021, the affiliated Cboe, C2, BZX, and EDGX (the four 
largest exchanges of the Cboe exchange group) reported $178,712,000 in 
``access and capacity fees'' in 2021. NASDAQ Phlx,

[[Page 2654]]

LLC (``NASDAQ Phlx'') reported ``Trade Management Services'' revenue of 
$20,817,000 for 2019.\39\ The Exchange notes it is unable to compare 
``access fee'' revenues with NASDAQ Phlx (or other affiliated NASDAQ 
exchanges) because after 2019, the ``Trade Management Services'' line 
item was bundled into a much larger line item in PHLX's Form 1, simply 
titled ``Market services.'' \40\
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    \30\ The Exchange has filed, and subsequently withdrawn, various 
forms of this proposed fee numerous times since August 2021 with 
each proposal containing hundreds of cost and revenue disclosures 
never previously disclosed by legacy exchanges in their access and 
market data fee filings prior to 2019.
    \31\ According to Cboe's 2021 Form 1 Amendment, access and 
capacity fees represent fees assessed for the opportunity to trade, 
including fees for trading-related functionality. See Cboe 2021 Form 
1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \32\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
    \33\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
    \34\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
    \35\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \36\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
    \37\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
    \38\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
    \39\ According to PHLX, ``Trade Management Services'' includes 
``a wide variety of alternatives for connectivity to and accessing 
[the PHLX] markets for a fee. These participants are charged monthly 
fees for connectivity and support in accordance with [PHLX's] 
published fee schedules.'' See PHLX 2020 Form 1 Amendment, available 
at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
    \40\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf.
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    The much higher non-transaction fees charged by the legacy 
exchanges provides them with two significant competitive advantages. 
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing 
and advertising on major media outlets,\41\ new products and other 
innovations. Second, higher non-transaction fees provide the legacy 
exchanges with greater flexibility to lower their transaction fees (or 
use the revenue from the higher non-transaction fees to subsidize 
transaction fee rates), which are more immediately impactful in 
competition for order flow and market share, given the variable nature 
of this cost on member firms. The prohibition of a reasonable path 
forward denies the Exchange (and other non-legacy exchanges) this 
flexibility, eliminates the ability to remain competitive on 
transaction fees, and hinders the ability to compete for order flow and 
market share with legacy exchanges. While one could debate whether the 
pricing of non-transaction fees are subject to the same market forces 
as transaction fees, there is little doubt that subjecting one exchange 
to a materially different standard than that historically applied to 
legacy exchanges for non-transaction fees leaves that exchange at a 
disadvantage in its ability to compete with its pricing of transaction 
fees.
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    \41\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at 
https://www.cnbc.com/id/46517876.
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    While the Commission has clearly noted that the Staff Guidance is 
merely guidance and ``is not a rule, regulation or statement of the . . 
. Commission . . . the Commission has neither approved nor disapproved 
its content. . .'',\42\ this is not the reality experienced by 
exchanges such as MIAX Emerald. As such, non-legacy exchanges are 
forced to rely on an opaque cost-based justification standard. However, 
because the Staff Guidance is devoid of detail on what must be 
contained in cost-based justification, this standard is nearly 
impossible to meet despite good-faith efforts by the Exchange to 
provide substantial amount of cost-related details. The Exchange has 
attempted to increase fees using a cost-based justification numerous 
times, having submitted over six filings.\43\ However, despite 
providing 100+ page filings describing in extensive detail its costs 
associated with providing the services described in the filings, 
Commission Staff continues to suspend such filings, with the rationale 
that the Exchange has not provided sufficient detail of its costs. The 
Commission Staff appears to be interpreting the reasonableness standard 
set forth in Section 6(b)(4) of the Act \44\ in a manner that is not 
possible to achieve. This essentially nullifies the cost-based approach 
for exchanges as a legitimate alternative as laid out in the Staff 
Guidance. By refusing to accept a reasonable cost-based argument to 
justify non-transaction fees (in addition to refusing to accept a 
competition-based argument as described above), or by failing to 
provide the detail required to achieve that standard, the Commission 
Staff is effectively preventing non-legacy exchanges from making any 
non-transaction fee changes, which benefits the legacy exchanges and 
anticompetitive to the non-legacy exchanges. This does not meet the 
fairness standard under the Act and is discriminatory.
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    \42\ See supra note 17, at note 1.
    \43\ See Securities Exchange Act Release Nos. 94889 (May 11, 
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April 
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15); 94717 
(April 14, 2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13); 
94260 (February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-
EMERALD-2022-05); 94257 (February 15, 2022), 87 FR 9678 (February 
22, 2022) (SR-EMERALD-2022-04); 93772 (December 14, 2021), 86 FR 
71965 (December 20, 2021) (SR-EMERALD-2021-43); 93776 (December 14, 
2021), 86 FR 71983 (December 20, 2021) (SR-EMERALD-2021-42); 93188 
(September 29, 2021), 86 FR 55052 (October 5, 2021) (SR-EMERALD-
2021-31); (SR-EMERALD-2021-30) (withdrawn without being noticed by 
the Commission); 93166 (September 28, 2021), 86 FR 54760 (October 4, 
2021) (SR-EMERALD-2021-29); 92662 (August 13, 2021), 86 FR 46726 
(August 19, 2021) (SR-EMERALD-2021-25); 92645 (August 11, 2021), 86 
FR 46048 (August 17, 2021) (SR-EMERALD-2021-23).
    \44\ 15 U.S.C. 78f(b)(4).
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    Because of the un-level playing field created by the Revised Review 
Process and Staff Guidance, the Exchange believes that the Commission 
Staff, at this point, should either (a) provide sufficient clarity on 
how its cost-based standard can be met, including a clear and 
exhaustive articulation of required data and its views on acceptable 
margins,\45\ to the extent that this is pertinent; (b) establish a 
framework to provide for commensurate non-transaction based fees among 
competing exchanges to ensure fee parity; \46\ or (c) accept that 
certain competition-based arguments are applicable given the linkage 
between non-transaction fees and transaction fees, especially where 
non-transaction fees among exchanges are based upon disparate standards 
of review, lack parity, and impede fair competition. Considering the 
absence of any such framework or clarity, the Exchange believes that 
the Commission does not have a reasonable basis to deny the Exchange 
this change in fees, where the proposed change would result in fees 
meaningfully lower than comparable fees at competing exchanges and 
where the associated non-transaction revenue is meaningfully lower than 
competing exchanges.
---------------------------------------------------------------------------

    \45\ To the extent that the cost-based standard includes 
Commission Staff making determinations as to the appropriateness of 
certain profit margins, the Exchange believes that Staff should be 
clear as to what they determine is an appropriate profit margin.
    \46\ In light of the arguments above regarding disparate 
standards of review for historical legacy non-transaction fees and 
current non-transaction fees for non-legacy exchanges, a fee parity 
alternative would be one possible way to avoid the current unfair 
and discriminatory effect of the Staff Guidance and Revised Review 
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time 
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
---------------------------------------------------------------------------

    In light of the above, disapproval of this would not meet the 
fairness standard under the Act, would be discriminatory and place a 
substantial burden on competition. The Exchange would be uniquely 
disadvantaged by not being able to increase its access fees to 
comparable levels (or lower levels than current market rates) to those 
of other options exchanges for connectivity. If the Commission Staff 
were to disapprove this proposal, that action, and not market forces, 
would substantially affect whether the Exchange can be successful in 
its competition with other options exchanges. Disapproval of this 
filing could also be viewed as an arbitrary and capricious decision 
should the Commission Staff continue to ignore its past treatment of 
non-transaction fee filings before implementation of the Revised Review 
Process and Staff Guidance and refuse to allow such filings to be 
approved despite

[[Page 2655]]

significantly enhanced arguments and cost disclosures.\47\
---------------------------------------------------------------------------

    \47\ The Exchange's costs have clearly increased and continue to 
increase, particularly regarding capital expenditures, as well as 
employee benefits provided by third parties (e.g., healthcare and 
insurance). Yet, practically no fee change proposed by the Exchange 
to cover its ever-increasing costs has been acceptable to the 
Commission Staff since 2021. The only other fair and reasonable 
alternative would be to require the numerous fee filings 
unquestioningly approved before the Staff Guidance and Revised 
Review Process to ``develop a record,'' and to ``explain their 
conclusions, based on that record, in a written decision that is 
sufficient to enable us to perform our review,'' and to ensure a 
comparable review process with the Exchange's filing.
---------------------------------------------------------------------------

    Lastly, the Exchange notes that the Commission Staff has allowed 
similar fee increases by other exchanges to remain in effect by 
publishing those filings for comment and allowing the exchange to 
withdraw and re-file numerous times.\48\ Recently, the Commission Staff 
has not afforded the Exchange the same flexibility.\49\ This again is 
evidence that the Commission Staff is not treating non-transaction fee 
filings in a consistent manner and is holding exchanges to different 
levels of scrutiny in reviewing filings.
---------------------------------------------------------------------------

    \48\ See, e.g., Securities Exchange Act Release Nos. 93937 
(January 10, 2022), 87 FR 2466 (January 14, 2022) (SR-MEMX-2021-22); 
94419 (March 15, 2022), 87 FR 16046 (March 21, 2022) (SR-MEMX-2022-
02); SR-MEMX-2022-12 (withdrawn before being noticed); 94924 (May 
16, 2022), 87 FR 31026 (May 20, 2022) (SR-MEMX-2022-13); 95299 (July 
15, 2022), 87 FR 43563 (July 21, 2022) (SR-MEMX-2022-17); SR-MEMX-
2022-24 (withdrawn before being noticed); 95936 (September 27, 
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26); 94901 (May 
12, 2022), 87 FR 30305 (May 18, 2022) (SR-MRX-2022-04); SR-MRX-2022-
06 (withdrawn before being noticed); 95262 (July 12, 2022), 87 FR 
42780 (July 18, 2022) (SR-MRX-2022-09); 95710 (September 8, 2022), 
87 FR 56464 (September 14, 2022) (SR-MRX-2022-12); 96046 (October 
12, 2022), 87 FR 63119 (October 18, 2022) (SR-MRX-2022-20); 95936 
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26); and 96430 (December 1, 2022), 87 FR 75083 (December 7, 2022) 
(SR-MEMX-2022-32).
    \49\ See Securities Exchange Act Release Nos. 94889 (May 11, 
2022), 87 FR 29928 (May 17, 2022) (SR-EMERALD-2022-19); 94718 (April 
14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15).
---------------------------------------------------------------------------

* * * * *
10Gb ULL Connectivity Fee Change
    The Exchange proposes to amend the Fee Schedule to increase the 
fees for Members and non-Members to access the Exchange's system 
networks \50\ 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 $13,500 per month (``10Gb ULL Fee'').\51\
---------------------------------------------------------------------------

    \50\ The Exchange's system networks consist of the Exchange's 
extranet, internal network, and external network.
    \51\ Market participants that purchase additional 10Gb ULL 
connections as a result of this change will not be subject to the 
Exchange's Member Network Connectivity Testing and Certification Fee 
under Section (4)(c) of the Exchange's fee schedule. See Section 
(4)(c) of the Exchange's fee schedule available at https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10192022.pdf (providing that ``Network 
Connectivity Testing and Certification Fees will not be assessed in 
situations where the Exchange initiates a mandatory change to the 
Exchange's system that requires testing and certification. Member 
Network Connectivity Testing and Certification Fees will not be 
assessed for testing and certification of connectivity to the 
Exchange's Disaster Recovery Facility.'').
---------------------------------------------------------------------------

    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 will continue 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.
Limited Service MEI Ports
Background
    The Exchange also 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 \52\ and two (2) Limited Service MEI Ports \53\ per 
matching engine \54\ 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. Currently, Market 
Makers are 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.
---------------------------------------------------------------------------

    \52\ The term ``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.
    \53\ The term ``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.
    \54\ The term ``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.
---------------------------------------------------------------------------

Limited Service MEI Port Fee Changes
    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.\55\ 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

[[Page 2656]]

capacity and headroom in the System \56\ in accordance with its fair 
access requirements under Section 6(b)(5) of the Act.\57\
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    \55\ 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.
    \56\ 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.
    \57\ 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.
---------------------------------------------------------------------------

    The Exchange offers various types of ports with differing prices 
because each port accomplishes different tasks, are suited to different 
types of Members, and consume varying capacity amounts of the network. 
For instance, 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. Based on November 2022 trading results, on 
an average day, the Exchange handles over approximately 6.9 billion 
quotes, and more than 146 billion quotes over the entire month. Of that 
total, Market Makers with the maximum amount of Limited Service MEI 
Ports generate over 4 billion quotes, and Market Makers who utilize the 
two free Limited Service MEI Ports generate approximately 1.6 billion 
quotes. Also for November 2022, Market Makers who utilized 7 to 9 
Limited Service MEI ports submitted an average of 1,264,703,600 quotes 
per day. 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.\58\ 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.
---------------------------------------------------------------------------

    \58\ 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 proposes to increase its monthly Limited Service MEI 
Port fees to recover a portion of the costs associated with directly 
accessing the Exchange.
Implementation
    The Exchange initially filed this proposal on December 30, 2022 as 
SR-EMERALD-2022-38. On January 9, 2023, the Exchange withdrew SR-
EMERALD-2022-38 and resubmitted this proposal. The proposed fee changes 
are immediately effective.
2. Statutory Basis
    The Exchange believes that the proposed fees are consistent with 
Section 6(b) of the Act \59\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \60\ 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 \61\ 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.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78f(b).
    \60\ 15 U.S.C. 78f(b)(4).
    \61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 under the Revised Review Process and as set 
forth in recent Staff Guidance. Based on both the BOX Order \62\ and 
the Staff Guidance,\63\ 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 Staff 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.
---------------------------------------------------------------------------

    \62\ See supra note 16.
    \63\ See supra note 17.
---------------------------------------------------------------------------

    The Exchange believes that exchanges, in setting fees of all types, 
should meet 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 Staff 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.'' 
\64\ The Staff 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.'' \65\ In the Staff Guidance, the Commission

[[Page 2657]]

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, . . . , specific information, including 
quantitative information, should be provided to support that 
argument.'' \66\
---------------------------------------------------------------------------

    \64\ Id.
    \65\ Id.
    \66\ Id.
---------------------------------------------------------------------------

    The proposed fees are reasonable because they promote parity among 
exchange pricing for access, which promotes competition, including in 
the Exchanges' ability to competitively price transaction fees, invest 
in infrastructure, new products and other innovations, all while 
allowing the Exchange to recover its costs to provide dedicated access 
via 10Gb ULL connectivity and Limited Service MEI Ports. As discussed 
above, the Revised Review Process and Staff Guidance have created an 
uneven playing field between legacy and non-legacy exchanges by 
severely restricting non-legacy exchanges from being able to increase 
non-transaction relates fees to provide them with additional necessary 
revenue to better compete. The much higher non-transaction fees charged 
by the legacy exchanges provides them with two significant competitive 
advantages: (i) additional non-transaction revenue that may be used to 
fund areas other than the non-transaction service related to the fee, 
such as investments in infrastructure, advertising, new products and 
other innovations; and (ii) greater flexibility to lower their 
transaction fees (or use the revenue from the higher non-transaction 
fees to subsidize transaction fee rates). The latter is more 
immediately impactful in competition for order flow and market share, 
given the variable nature of this cost on Member firms. The absence of 
a reasonable path forward to increase non-transaction fees to 
comparable (or lower rates) limits the Exchange's flexibility to, among 
other things, make additional investments in infrastructure and 
advertising, diminishes the ability to remain competitive on 
transaction fees, and hinders the ability to compete for order flow and 
market share. Again, while one could debate whether the pricing of non-
transaction fees are subject to the same market forces as transaction 
fees, there is little doubt that subjecting one exchange to a 
materially different standard than that applied to other exchanges for 
non-transaction fees leaves that exchange at a disadvantage in its 
ability to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which 
Promotes Competition
    The Exchange initially adopted a fee of $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. At that same time, the Exchange only charged $6,000 per 
month for each 10Gb ULL connection. As a new exchange entrant, the 
Exchange chose to offer connectivity and ports at very low fees to 
encourage market participants to trade on the Exchange and experience, 
among things, the quality of the Exchange's technology and trading 
functionality. This practice is not uncommon. New exchanges often do 
not charge fees or charge lower fees for certain services such as 
memberships/trading permits to attract order flow to an exchange, and 
later amend their fees to reflect the true value of those services, 
absorbing all costs to provide those services in the meantime. Allowing 
new exchange entrants time to build and sustain market share through 
various pricing incentives before increasing non-transaction fees 
encourages market entry and fee parity, which promotes competition 
among exchanges. It also enables new exchanges to mature their markets 
and allow market participants to trade on the new exchanges without 
fees serving as a potential barrier to attracting memberships and order 
flow.\67\
---------------------------------------------------------------------------

    \67\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he 
Exchange established this lower (when compared to other options 
exchanges in the industry) Participant Fee in order to encourage 
market participants to become Participants of BOX. . .''). See also 
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR 
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the 
initial fee schedule and stating that ``[u]nder the initial proposed 
Fee Schedule, the Exchange proposes to make clear that it does not 
charge any fees for membership, market data products, physical 
connectivity or application sessions.''). MEMX's market share has 
increased and recently proposed to adopt numerous non-transaction 
fees, including fees for membership, market data, and connectivity. 
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87 
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt 
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7, 
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845 
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for 
connectivity). See also, e.g., Securities Exchange Act Release No. 
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange 
after initially setting such fees at zero).
---------------------------------------------------------------------------

    Later in 2020, as the Exchange's market share increased,\68\ 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.\69\ The Exchange balanced business 
and competitive concerns with the need to financially compete with the 
larger incumbent exchanges that charge higher fees for similar 
connectivity and use that revenue to invest in their technology and 
other service offerings.
---------------------------------------------------------------------------

    \68\ The Exchange experienced a monthly average trading volume 
of 3.43% for the month of October 2020. See Market at a Glance, 
available at www.miaxoptions.com.
    \69\ 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).
---------------------------------------------------------------------------

    The proposed changes to the Fee Schedule are reasonable in several 
respects. As a threshold matter, the Exchange is subject to significant 
competitive forces, which constrains its pricing determinations for 
transaction fees as well as non-transaction fees. The fact that the 
market for order flow is competitive has long been recognized by the 
courts. In NetCoalition v. Securities and Exchange Commission, the D.C. 
Circuit stated, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . .'' \70\
---------------------------------------------------------------------------

    \70\ See NetCoalition, 615 F.3d at 539 (D.C. Cir. 2010) (quoting 
Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 
74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention to determine 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues, and also recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its

[[Page 2658]]

broader forms that are most important to investors and listed 
companies.'' \71\
---------------------------------------------------------------------------

    \71\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Congress directed the Commission to ``rely on `competition, 
whenever possible, in meeting its regulatory responsibilities for 
overseeing the SROs and the national market system.' '' \72\ As a 
result, and as evidenced above, the Commission has historically relied 
on competitive forces to determine whether a fee proposal is equitable, 
fair, reasonable, and not unreasonably or unfairly discriminatory. ``If 
competitive forces are operative, the self-interest of the exchanges 
themselves will work powerfully to constrain unreasonable or unfair 
behavior.'' \73\ Accordingly, ``the existence of significant 
competition provides a substantial basis for finding that the terms of 
an exchange's fee proposal are equitable, fair, reasonable, and not 
unreasonably or unfairly discriminatory.'' \74\ In the Revised Review 
Process and Staff Guidance, Commission Staff indicated that they would 
look at factors beyond the competitive environment, such as cost, only 
if a ``proposal lacks persuasive evidence that the proposed fee is 
constrained by significant competitive forces.'' \75\
---------------------------------------------------------------------------

    \72\ See NetCoalition, 615 F.3d at 534-35; see also H.R. Rep. 
No. 94-229 at 92 (1975) (``[I]t is the intent of the conferees that 
the national market system evolve through the interplay of 
competitive forces as unnecessary regulatory restrictions are 
removed.'').
    \73\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \74\ Id.
    \75\ See Staff Guidance, supra note 17.
---------------------------------------------------------------------------

    The Exchange believes the competing exchanges' 10Gb connectivity 
and port fees are useful examples of alternative approaches to 
providing and charging for access and demonstrating how such fees are 
competitively set and constrained. 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 
such, the Exchange believes that denying its ability to institute fees 
that are closer to parity with legacy exchanges, in effect, impedes its 
ability to compete, including in its pricing of transaction fees and 
ability to invest in competitive infrastructure.
    The following table shows how 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. 
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
           Exchange             connection or       Monthly fee (per
                                     port        connection or per port)
------------------------------------------------------------------------
MIAX Emerald (as proposed)     10Gb ULL         $13,500.
 (equity options market share   connection.     1-2 ports: FREE (not
 of 2.88% for the month of     Limited Service   changed in this
 November 2022) \76\.           MEI Ports.       proposal).
                                                3-4 ports: $200 each.
                                                5-6 ports: $300 each.
                                                7 or more ports: $400
                                                 each.
NASDAQ \77\ (equity options    10Gb Ultra       $15,000 per connection.
 market share of 6.61% for      fiber           1-5 ports: $1,500 per
 the month of November 2022)    connection.      port.
 \78\.                         SQF Port.......  6-20 ports: $1,000 per
                                                 port.
                                                21 or more ports: $500
                                                 per port.
NASDAQ ISE LLC (``ISE'') \79\  10Gb Ultra       $15,000 per connection.
 (equity options market share   fiber           $1,100 per port.
 of 5.76% for the month of      connection.
 November 2022) \80\.          SQF Port.......
NYSE American LLC (``NYSE      10Gb LX LCN      $22,000 per connection.
 American'') \81\ (equity       connection.     Ports 1-40. $450 per
 options market share of       Order/Quote       port.
 6.41% for the month of         Entry Port.     Ports 41 and greater.
 November 2022) \82\.                            $150 per port.
NASDAQ GEMX, LLC (``GEMX'')    10Gb Ultra       $15,000 per connection.
 \83\ (equity options market    connection.     $1,250 per port.
 share of 1.79% for the month  SQF Port.......
 of November 2022) \84\.
------------------------------------------------------------------------

     \\
---------------------------------------------------------------------------

    \76\ See supra note 68.
    \77\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \78\ See supra note 68.
    \79\ See ISE Pricing Schedule, Options 7, Section 7, 
Connectivity Fees and ISE Rules, General 8: Connectivity.
    \80\ See supra note 68.
    \81\ See NYSE American Options Fee Schedule, Section V.A. Port 
Fees and Section V.B. Co-Location Fees.
    \82\ See supra note 68.
    \83\ See GEMX Pricing Schedule, Options 7, Section 6, 
Connectivity Fees and GEMX Rules, General 8: Connectivity.
    \84\ See supra note 68.
---------------------------------------------------------------------------

    The Exchange notes that, in regard to Limited Service MEI Ports, 
other exchanges charge on a per port basis and require firms to connect 
to multiple matching engines, thereby multiplying the cost to access 
their full market.\85\
---------------------------------------------------------------------------

    \85\ 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.
---------------------------------------------------------------------------

    There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options 
exchanges. Market participants may choose to become a member of one or 
more options exchanges based on the market participant's assessment of 
the business opportunity relative to the costs of the Exchange. With 
this, there is elasticity of demand for exchange membership. As an 
example, the Exchange's affiliate, MIAX PEARL, LLC (``MIAX Pearl''), 
experienced a decrease in membership as the result of similar fees 
proposed herein. One MIAX Pearl Member notified MIAX Pearl that it will 
terminate their MIAX Pearl membership effective January 1, 2023, as a 
direct result of the proposed connectivity and port fee changes on MIAX 
Pearl.
    It is not a requirement for market participants to become members 
of all options exchanges, in fact, certain market participants conduct 
an options business as a member of only one

[[Page 2659]]

options market.\86\ A very small number of market participants choose 
to become a member of all sixteen options exchanges. Most firms that 
actively trade on options markets are not currently Members of the 
Exchange and do not purchase connectivity or port services at the 
Exchange. Connectivity and ports are only available to Members or 
service bureaus, and only a Member may utilize a port.\87\
---------------------------------------------------------------------------

    \86\ BOX recently adopted an electronic market maker trading 
permit fee. See Securities Exchange Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17). In that 
proposal, BOX stated that, ``. . . it is not aware of any reason why 
Market Makers could not simply drop their access to an exchange (or 
not initially access an exchange) if an exchange were to establish 
prices for its non-transaction fees that, in the determination of 
such Market Maker, did not make business or economic sense for such 
Market Maker to access such exchange. [BOX] again notes that no 
market makers are required by rule, regulation, or competitive 
forces to be a Market Maker on [BOX].'' Also in 2022, MEMX 
established a monthly membership fee. See Securities Exchange Act 
Release No. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022) 
(SR-MEMX-2021-19). In that proposal, MEMX reasoned that that there 
is value in becoming a member of the exchange and stated that it 
believed that the proposed membership fee ``is not unfairly 
discriminatory because no broker-dealer is required to become a 
member of the Exchange'' and that ``neither the trade-through 
requirements under Regulation NMS nor broker-dealers' best execution 
obligations require a broker-dealer to become a member of every 
exchange.''
    \87\ Service Bureaus may obtain ports on behalf of Members.
---------------------------------------------------------------------------

    One other exchange recently noted in a proposal to amend their own 
trading permit fees that of the 62 market making firms that are 
registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access 
only one of the three exchanges.\88\ The Exchange and its affiliates, 
MIAX Pearl and MIAX, have a total of 47 members. Of those 47 total 
members, 35 are members of all three affiliated exchanges, four are 
members of only two (2) affiliated exchanges, and eight (8) are members 
of only one affiliated exchange. The Exchange also notes that no firm 
is a Member of the Exchange only. The above data evidences that a 
broker-dealer need not have direct connectivity to all options 
exchanges, let alone the Exchange and its two affiliates, and broker-
dealers may elect to do so based on their own business decisions and 
need to directly access each exchange's liquidity pool.
---------------------------------------------------------------------------

    \88\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change to Amend the 
Fee Schedule on the BOX Options Market LLC Facility To Adopt 
Electronic Market Maker Trading Permit Fees). The Exchange believes 
that BOX's observation demonstrates that market making firms can, 
and do, select which exchanges they wish to access, and, 
accordingly, options exchanges must take competitive considerations 
into account when setting fees for such access.
---------------------------------------------------------------------------

    Not only is there not an actual regulatory requirement to connect 
to every options exchange, the Exchange believes there is also no ``de 
facto'' or practical requirement as well, as further evidenced by the 
broker-dealer membership analysis of the options exchanges discussed 
above. As noted above, this is evidenced by the fact that one MIAX 
Pearl Member will terminate their MIAX Pearl membership effective 
January 1, 2023 as a direct result of the proposed connectivity and 
port fee changes on MIAX Pearl (which are similar to the changes 
proposed herein). Indeed, broker-dealers choose if and how to access a 
particular exchange and because it is a choice, the Exchange must set 
reasonable pricing, otherwise prospective members would not connect and 
existing members would disconnect from the Exchange. The decision to 
become a member of an exchange, particularly for registered market 
makers, is complex, and not solely based on the non-transactional costs 
assessed by an exchange. As noted herein, specific factors include, but 
are not limited to: (i) an exchange's available liquidity in options 
series; (ii) trading functionality offered on a particular market; 
(iii) product offerings; (iv) customer service on an exchange; and (v) 
transactional pricing. Becoming a member of the exchange does not 
``lock'' a potential member into a market or diminish the overall 
competition for exchange services.
    In lieu of becoming a member at each options exchange, a market 
participant may join one exchange and elect to have their orders routed 
in the event that a better price is available on an away market. 
Nothing in the Order Protection Rule requires a firm to become a Member 
at--or establish connectivity to--the Exchange.\89\ If the Exchange is 
not at the NBBO, the Exchange will route an order to any away market 
that is at the NBBO to ensure that the order was executed at a superior 
price and prevent a trade-through.\90\
---------------------------------------------------------------------------

    \89\ See Options Order Protection and Locked/Crossed Market Plan 
(August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
    \90\ Members may elect to not route their orders by utilizing 
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------

    With respect to the submission of orders, Members may also choose 
not to purchase any connection at all from the Exchange, and instead 
rely on the port of a third party to submit an order. For example, a 
third-party broker-dealer Member of the Exchange may be utilized by a 
retail investor to submit orders into an Exchange. An institutional 
investor may utilize a broker-dealer, a service bureau,\91\ or request 
sponsored access \92\ through a member of an exchange in order to 
submit a trade directly to an options exchange.\93\ A market 
participant may either pay the costs associated with becoming a member 
of an exchange or, in the alternative, a market participant may elect 
to pay commissions to a broker-dealer, pay fees to a service bureau to 
submit trades, or pay a member to sponsor the market participant in 
order to submit trades directly to an exchange.
---------------------------------------------------------------------------

    \91\ Service Bureaus provide access to market participants to 
submit and execute orders on an exchange. On the Exchange, a Service 
Bureau may be a Member. Some Members utilize a Service Bureau for 
connectivity and that Service Bureau may not be a Member. Some 
market participants utilize a Service Bureau who is a Member to 
submit orders.
    \92\ Sponsored Access is an arrangement whereby a Member permits 
its customers to enter orders into an exchange's system that bypass 
the Member's trading system and are routed directly to the Exchange, 
including routing through a service bureau or other third-party 
technology provider.
    \93\ This may include utilizing a floor broker and submitting 
the trade to one of the five options trading floors.
---------------------------------------------------------------------------

    Non-Member third-parties, such as service bureaus and extranets, 
resell the Exchange's connectivity. This indirect connectivity is 
another viable alternative for market participants to trade on the 
Exchange without connecting directly to the Exchange (and thus not pay 
the Exchange's connectivity fees), which alternative is already being 
used by non-Members and further constrains the price that the Exchange 
is able to charge for connectivity and other access fees to its market. 
The Exchange notes that it could, but chooses not to, preclude market 
participants from reselling its connectivity. Unlike other exchanges, 
the Exchange also does not currently assess fees on third-party 
resellers on a per customer basis (i.e., fees based on the number of 
firms that connect to the Exchange indirectly via the third-party).\94\ 
Indeed, the Exchange does not receive any connectivity revenue when 
connectivity is resold by a third-party, which often is resold to 
multiple customers, some of whom are agency broker-dealers that have 
numerous

[[Page 2660]]

customers of their own.\95\ Particularly, in the event that a market 
participant views the Exchange's direct connectivity and access fees as 
more or less attractive than competing markets, that market participant 
can choose to connect to the Exchange indirectly or may choose not to 
connect to the Exchange and connect instead to one or more of the other 
16 options markets. Accordingly, the Exchange believes that the 
proposed fees are fair and reasonable and constrained by competitive 
forces.
---------------------------------------------------------------------------

    \94\ See, e.g., Nasdaq Price List--U.S. Direct Connection and 
Extranet Fees, available at, US Direct-Extranet Connection 
(nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077 
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022) 
(SR-NASDAQ-2017-114).
    \95\ The Exchange notes that resellers, such as SFTI, are not 
required to publicize, let alone justify or file with the Commission 
their fees, and as such could charge the market participant any fees 
it deems appropriate (including connectivity fees higher than the 
Exchange's connectivity fees), even if such fees would otherwise be 
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------

    The Exchange is obligated to regulate its Members and secure access 
to its environment. In order to properly regulate its Members and 
secure the trading environment, the Exchange takes measures to ensure 
access is monitored and maintained with various controls. Connectivity 
and ports are methods utilized by the Exchange to grant Members secure 
access to communicate with the Exchange and exercise trading rights. 
When a market participant elects to be a Member, and is approved for 
membership by the Exchange, the Member is granted trading rights to 
enter orders and/or quotes into Exchange through secure connections.
    Again, there is no legal or regulatory requirement that a market 
participant become a Member of the Exchange, or, if it is a Member, to 
purchase connectivity beyond the one connection that is necessary to 
quote or submit orders on the Exchange. Members may freely choose to 
rely on one or many connections, depending on their business model.
Cost Analysis
    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 
seeks 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,\96\ and Rule 19b-4 
thereunder,\97\ with respect to the types of information SROs should 
provide when filing fee changes, and Section 6(b) of the Act,\98\ which 
requires, among other things, that exchange fees be reasonable and 
equitably allocated,\99\ not designed to permit unfair 
discrimination,\100\ and that they not impose a burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Act.\101\ 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.\102\ The Exchange 
notes that the legacy exchanges with whom the Exchange vigorously 
competes for order flow and market share, were not subject to any such 
diligence or transparency in setting their baseline non-transaction 
fees, most of which were put in place before the Revised Review Process 
and Staff Guidance.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78s(b)(1).
    \97\ 17 CFR 240.19b-4.
    \98\ 15 U.S.C. 78f(b).
    \99\ 15 U.S.C. 78f(b)(4).
    \100\ 15 U.S.C. 78f(b)(5).
    \101\ 15 U.S.C. 78f(b)(8).
    \102\ See Staff Guidance, supra note 17.
---------------------------------------------------------------------------

    As detailed below, the Exchange recently calculated its aggregate 
annual costs for providing physical 10Gb ULL connectivity to the 
Exchange at $11,361,586 (or approximately $946,799 per month, rounded 
to the nearest dollar when dividing the annual cost by 12 months) and 
its aggregate annual costs for providing Limited Service MEI Ports at 
$1,799,066 (or approximately $148,255 per month, rounded to the nearest 
dollar when dividing the annual cost by 12 months). In order to cover 
the aggregate costs of providing connectivity to its Users (both 
Members and non-Members \103\) going forward and to make a modest 
profit, as described below, the Exchange proposes to modify its Fee 
Schedule to charge a fee of $13,500 per month for each physical 10Gb 
ULL connection. The Exchange also proposes to modify its Fee Schedule 
to charge tiered rates for additional Limited Service MEI Ports.
---------------------------------------------------------------------------

    \103\ 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, and thus, may access Limited Service MEI Ports on behalf 
of one or more Members. Extranets offer physical connectivity 
services to Members and non-Members.
---------------------------------------------------------------------------

    In 2020, the Exchange completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis'').\104\ The 
Cost Analysis required a detailed analysis of the Exchange'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 port access 
(which provide order entry, cancellation and modification 
functionality, risk functionality, the ability to receive drop copies, 
and other functionality). The Exchange 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, the Exchange 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 1Gb and 10Gb ULL 
connectivity (62%), with smaller allocations to all ports (10%), and 
the remainder to the provision of transaction execution, membership 
services and market data services (28%). The allocation methodology was 
developed 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.
---------------------------------------------------------------------------

    \104\ The Exchange frequently updates it Cost Analysis as 
strategic initiatives change, costs increase or decrease, and market 
participant needs and trading activity changes. The Exchange's most 
recent Cost Analysis was conducted ahead of this filing.
---------------------------------------------------------------------------

    By allocating segmented costs to each core service, the Exchange 
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 five primary sources of revenue that it can

[[Page 2661]]

potentially use to fund its operations: transaction fees, fees for 
connectivity and port services, membership fees, regulatory fees, and 
market data fees. Accordingly, the Exchange must cover its expenses 
from these five 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. While there is no 
standardized and generally accepted methodology the allocation of an 
exchange's costs, the Exchange's methodology is the result of an 
extensive review and analysis and will be consistently applied going 
forward for any other potential fee proposals.
    Through the Exchange's extensive updated 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 ports, 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, the Exchange estimates that the cost drivers to provide 
10Gb ULL connectivity and Limited Service MEI Port services, including 
both physical 10Gb connections and Limited Service MEI Ports, result in 
an aggregate monthly cost of approximately $1,095,054 (utilizing the 
rounded numbers when dividing the annual cost for 10Gb ULL connectivity 
and annual cost for Limited Service MEI Ports by 12 months, then adding 
both numbers together), as further detailed below.
Costs Related To Offering Physical 10Gb ULL Connectivity
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering physical dedicated 
10Gb ULL connectivity via an unshared network as well as the percentage 
of the Exchange's overall costs that such costs represent for such area 
(e.g., as set forth below, the Exchange allocated approximately 28.1% 
of its overall Human Resources cost to offering physical connectivity).

----------------------------------------------------------------------------------------------------------------
                                                                    Annual cost       Monthly cost
                          Cost drivers                                 \105\             \106\         % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................        $3,520,856           $293,405          28
Connectivity (external fees, cabling, switches, etc.)..........            71,675              5,973        61.9
Internet Services, including External Market Data..............           373,249             31,104        84.8
Data Center....................................................           752,545             62,712        61.9
Hardware and Software Maintenance and Licenses.................           666,208             55,517        50.9
Depreciation...................................................         1,929,118            160,760        63.8
Allocated Shared Expenses......................................         4,047,935            337,328        51.3
                                                                ------------------------------------------------
    Total......................................................        11,361,586            946,799        42.8
----------------------------------------------------------------------------------------------------------------

    Below are additional details regarding each of the line-item costs 
considered by the Exchange to be related to offering physical 10Gb ULL 
connectivity.
---------------------------------------------------------------------------

    \105\ The Annual Cost includes figures rounded to the nearest 
dollar.
    \106\ The Monthly Cost was determined by dividing the Annual 
Cost for each line item by twelve (12) months and rounding up or 
down to the nearest dollar.
---------------------------------------------------------------------------

Human Resources
    For personnel costs (Human Resources), the Exchange calculated an 
allocation of employee time for employees whose functions include 
providing and maintaining physical connectivity and performance thereof 
(primarily the Exchange's network infrastructure team, which spends 
most of their time performing functions necessary to provide physical 
connectivity) and for which the Exchange allocated a percentage of 
42.4% 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 184 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 and Internet Services
    The Connectivity cost includes external fees paid to connect to 
other exchanges and third parties, cabling and switches required to 
operate the Exchange. 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

[[Page 2662]]

existing regulations, primarily Regulation NMS.
    The Exchange relies on various 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. Specifically, the Exchange utilizes connectivity 
and content service providers 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. The 
Exchange understands that these service providers provide services to 
most, if not all, of the other U.S. exchanges and other market 
participants. Connectivity and market data provided these service 
providers is critical to the Exchanges daily operations and performance 
of its System Networks to which market participants connect to via 10Gb 
ULL connectivity. Without these services 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 connectivity and content service provider 
expense and recoups that expense, in part, by charging for 10Gb ULL 
connectivity.
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 (61.9%) to 
physical 10Gb ULL 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 included External Market Data fees to the provision of 
10Gb ULL connectivity as such market data is necessary here to offer 
certain services related to such connectivity, such as certain risk 
checks that are performed prior to execution, and checking for other 
conditions (e.g., re-pricing of orders to avoid lock or crossed 
markets, trading collars). This allocation was included as part of the 
Internet Services cost described above. Thus, as market data from other 
exchanges is consumed at the matching engine level, (to which 10Gb ULL 
connectivity provides access to) in order to validate orders before 
additional entering the matching engine or being executed, the Exchange 
believes it is reasonable to allocate a small amount of such costs to 
10Gb ULL connectivity.
Hardware and Software Maintenance and 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 63.8% of all depreciation costs to providing physical 10Gb 
ULL 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.\107\ The Exchange notes that the 
51.3% allocation of general shared expenses for physical 10Gb ULL 
connectivity is higher than that allocated to general shared expenses 
for Limited Service MEI Ports 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), 
Limited Service MEI Ports do not require as many broad or indirect 
resources as other Core Services. The total monthly cost for 10Gb ULL 
connectivity of $946,799 was divided by the number of physical 10Gb ULL 
connections the Exchange maintained at the time that proposed pricing 
was determined (102), to arrive at a cost of approximately $9,282 per 
month, per physical 10Gb ULL connection.
---------------------------------------------------------------------------

    \107\ The Exchange notes that MEMX allocated a precise amount of 
10% of the overall cost for directors to providing physical 
connectivity. The Exchange does not calculate is expenses at that 
granular a level. Instead, director costs are included as part of 
the overall general allocation.
---------------------------------------------------------------------------

Costs Related To Offering Limited Service MEI Ports
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering Limited Service 
MEO Ports 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 5.9% of its overall Human Resources 
cost to offering Limited Service MEI Ports).

[[Page 2663]]



----------------------------------------------------------------------------------------------------------------
                                                                    Annual cost       Monthly cost
                          Cost drivers                                 \108\             \109\         % of all
----------------------------------------------------------------------------------------------------------------
Human Resources................................................          $737,784            $61,482         5.9
Connectivity (external fees, cabling, switches, etc.)..........             3,713                309         3.2
Internet Services..............................................            14,102              1,175         3.2
Data Center....................................................            55,686              4,641         4.6
Hardware and Software Maintenance and Licenses.................            41,951              3,496         3.2
Depreciation...................................................           112,694              9,391         3.7
Allocated Shared Expenses......................................           813,136             67,761        10.3
                                                                ------------------------------------------------
    Total......................................................         1,779,066            148,255         6.7
----------------------------------------------------------------------------------------------------------------

Human Resources
---------------------------------------------------------------------------

    \108\ See supra note 105 (describing rounding of Annual Costs).
    \109\ See supra note 106 (describing rounding of Monthly Costs 
based on Annual Costs).
---------------------------------------------------------------------------

    With respect to Limited Service MEI Ports, the Exchange calculated 
Human Resources cost by taking an allocation of employee time for 
employees whose functions include providing Limited Service MEI Ports 
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 Limited Service MEI Ports 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 
Limited Service MEI Ports 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 Limited Service MEI Ports 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 and Internet Services
    The Connectivity cost includes external fees paid to connect to 
other exchanges, cabling and switches, as described above. For purposes 
of Limited Service MEI Ports, the Exchange also includes a portion of 
its costs related to External Market Data, as described below.
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 included External Market Data fees to the provision of 
Limited Service MEI Ports 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). This 
allocation was included as part of the Internet Services cost described 
above.\110\ Thus, as market data from other Exchanges is consumed at 
the Limited Service MEI Port 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 
Limited Service MEI Ports.
---------------------------------------------------------------------------

    \110\ The Exchange notes that MEMX separately allocated 7.5% of 
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------

Hardware and Software Maintenance and Licenses
    Hardware and Software Licenses includes hardware and software 
licenses used to monitor the health of the order entry services 
provided by the Exchange, as described above.
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 3.7% of 
all depreciation costs to providing Limited Service MEI Ports. In 
contrast to physical connectivity, described above, the Exchange did 
allocate depreciation costs for depreciated software necessary to 
operate the Exchange to Limited Service MEI Ports 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 Limited Service MEI Ports costs as without these general 
shared costs the Exchange would not be able to operate in the manner 
that it does and provide Limited Service MEI Ports. The costs included 
in general shared expenses include 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 11% of the overall cost for 
directors was allocated to providing Limited Service MEI Ports. The 
Exchange notes that the 10.3% allocation of general shared expenses for 
Limited Service MEI Ports is lower 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 Limited Service MEI Ports have 
several areas where certain tangible costs are heavily weighted

[[Page 2664]]

towards providing such service (e.g., Data Centers, as described 
above), 10Gb ULL connectivity requires 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 
$148,255 was divided by the number of chargeable Limited Service MEI 
Ports (excluding the two free Limited Service MEI Ports per matching 
engine that each Member receives) the Exchange maintained at the time 
that proposed pricing was determined (706), to arrive at a cost of 
approximately $210 per month, per charged Limited Service MEI Port.
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 Limited Service MEI Ports) 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 filings the 
Exchange submitted proposing fees for proprietary data feeds offered by 
the Exchange. For instance, in calculating the Human 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 (42.4%) given their 
focus on functions necessary to provide physical connections. The 
salaries of those same personnel were allocated only 8.0% to Limited 
Service MEI Ports and the remaining 49.6% was allocated to 1Gb 
connectivity, other port services, transaction services, membership 
services 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 of 19.8% for 10Gb ULL 
connectivity or 19.9% for the entire network, 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 (5% or less) across a wider range of 
personnel groups in order to allocate Human Resources costs to 
providing Limited Service MEI Ports. This is because a much wider range 
of personnel are involved in functions necessary to offer, monitor and 
maintain Limited Service MEI Ports but the tasks necessary to do so are 
not a primary or full-time function.
    In total, the Exchange allocated 28.1% of its personnel costs to 
providing physical connections and 5.9% of its personnel costs to 
providing Limited Service MEI Ports, for a total allocation of 34% 
Human Resources expense to provide these specific connectivity 
services. In turn, the Exchange allocated the remaining 66% of its 
Human Resources expense to membership services, transaction services, 
other port services and market data. 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 Limited Service 
MEI Ports, 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 67.5% of the Exchange's overall depreciation and 
amortization expense to connectivity services (63.8% attributed to 10Gb 
ULL physical connections and 3.7% to Limited Service MEI Ports). The 
Exchange allocated the remaining depreciation and amortization expense 
(approximately 32.5%) toward the cost of providing transaction 
services, membership services, other port services and market data
    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. 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 Limited Service MEI Ports 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 is based on the 
Exchange's 2023 fiscal year of operations and projections. 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, the Exchange believes 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.
Projected Revenue
    The proposed fees 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;

[[Page 2665]]

without such hardware, infrastructure, monitoring and support the 
Exchange would be unable to provide the connectivity services. Much of 
the cost relates to monitoring and analysis of data and performance of 
the network via the subscriber's connection(s). The above cost, namely 
those associated with hardware, software, and human capital, enable the 
Exchange to measure network performance with nanosecond granularity. 
These same costs are also associated with time and money spent seeking 
to continuously improve the network performance, improving the 
subscriber's experience, based on monitoring and analysis activity. 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 amending fees for 
connectivity services. Subscribers, particularly those of 10Gb ULL 
connectivity, expect the Exchange to provide this level of support to 
connectivity so they continue to receive the performance they expect. 
This differentiates the Exchange from its competitors. As detailed 
above, the Exchange has five 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 five 
primary sources of revenue.
    The Exchange's Cost Analysis estimates the annual cost to provide 
10Gb ULL connectivity services at $11,361,586. Based on current 10Gb 
ULL connectivity services usage, the Exchange would generate annual 
revenue of approximately $16,524,000. This represents a modest profit 
of 31% when compared to the cost of providing 10Gb ULL connectivity 
services. The Exchange's Cost Analysis estimates the annual cost to 
provide Limited Service MEI Port services at $1,779,066. Based on 
current Limited Service MEI Port services usage, the Exchange would 
generate annual revenue of approximately $2,809,200. This represents a 
modest profit of 37% when compared to the cost of providing Limited 
Service MEI Port services. Even if the Exchange earns those amounts or 
incrementally more, the Exchange believes the proposed fees are fair 
and reasonable because they will not result in excessive pricing or 
supra-competitive profit, when comparing the total expense of the 
Exchange associated with providing 10Gb ULL connectivity and Limited 
Service MEI Port services versus the total projected revenue of the 
Exchange associated with network 10Gb ULL connectivity and Limited 
Service MEI Port services.
* * * * *
    The Exchange has operated at a cumulative net annual loss since it 
launched operations in 2019.\111\ 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 its fees in light of 
necessary technology changes and its increased costs 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 dedicated 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 
dedicated 10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

    \111\ The Exchange has incurred a cumulative loss of $9 million 
since its inception in 2019. See Exchange's Form 1/A, Application 
for Registration or Exemption from Registration as a National 
Securities Exchange, filed June 29, 2022, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001164.pdf.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimate is based on 
projections and will only be realized to the extent customer activity 
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving 
competition, the Exchange does not yet know whether such projections 
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 
and/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, which provides 
economic value to its Members. To the extent the Exchange has mispriced 
and experiences a net loss in clients, the Exchange could experience a 
net reduction in revenue. While the Exchange believes in transparency 
around costs and potential revenue, 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.
    Further, the proposal reflects the Exchange's efforts to control 
its costs, which the Exchange does on an ongoing basis as a matter of 
good business practice. A potential profit margin should not be judged 
alone based on its size, but is also indicative of costs management and 
whether the ultimate fee reflects the value of the services provided. 
For example, a profit margin on one exchange should not be deemed 
excessive where that exchange has been successful in controlling its 
costs, but not excessive where on another exchange where that exchange 
is charging comparable fees but has a lower profit margin due to higher 
costs. Doing so could have the perverse effect of not incentivizing 
cost control where higher costs alone could be used to justify fees 
increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for 
the Equitable Allocation of Fees, Dues, and Other Charges
    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 equitably 
allocated among users of the network connectivity and port 
alternatives, as the users of 10Gb ULL connections consume 
substantially more bandwidth and network resources than users of 1Gb 
ULL connection. Specifically, the Exchange notes that 10Gb ULL 
connection users account for more than 99% of message traffic over the 
network, driving other costs that are linked to capacity utilization, 
as described above, while the users of the 1Gb ULL connections account 
for less than 1% of

[[Page 2666]]

message traffic over the network. In the Exchange's experience, users 
of the 1Gb connections do not have the same business needs for the 
high-performance network as 10Gb ULL users.
    The Exchange's high-performance network and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput with the network ability to support access to several 
distinct options markets. 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 to satisfy its record keeping requirements under 
the Exchange Act.\112\ 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.
---------------------------------------------------------------------------

    \112\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

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. Based on November 
2022 trading results, on an average day, the Exchange handles over 
approximately 6.9 billion quotes, and more than 146 billion quotes over 
the entire month. Of that total, Market Makers with the maximum amount 
of Limited Service MEI Ports generate over 4 billion quotes, and Market 
Makers who utilize the two free Limited Service MEI Ports generate 
approximately 1.6 billion quotes. Also for November 2022, Market Makers 
who utilized 7 to 9 Limited Service MEI ports submitted an average of 
1,264,703,600 quotes per day. 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.\113\ 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.
---------------------------------------------------------------------------

    \113\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    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. 
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.\114\ Thus, as the number of connections a 
Market Maker has increases, the related pull on Exchange resources also 
increases. 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.
---------------------------------------------------------------------------

    \114\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
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 operated at a cumulative net annual loss 
since its

[[Page 2667]]

launch in 2019 \115\ 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 lower fee, 
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.
---------------------------------------------------------------------------

    \115\ See supra note 111.
---------------------------------------------------------------------------

    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.
    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, Exchange 
personnel has 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 does not believe 
the proposed fees for connectivity services would negatively impact the 
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and 
customers of those resellers to compete with other market participants 
or that they are placed at a disadvantage.
    The Exchange does anticipate, however, that some market 
participants may reduce or discontinue use of connectivity services 
provided directly by the Exchange in response to the proposed fees. In 
fact, as mentioned above, one MIAX Pearl Member will terminate their 
MIAX Pearl membership on January 1, 2023 as a direct result of the 
similar proposed fee changes by MIAX Pearl. 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 
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 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 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 at higher rates than the Exchange's. There 
is also a 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.
* * * * *
    In conclusion, as discussed thoroughly above, the Exchange 
regrettably believes that the application of the Revised Review Process 
and Staff Guidance has adversely affected inter-market competition 
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and 
access services (including connectivity and port products and services) 
that are on parity or commensurate with fee levels previously 
established by legacy exchanges. Since the adoption of the Revised 
Review Process and Staff Guidance, and even more so recently, it has 
become extraordinarily difficult to adopt or increase fees to generate 
revenue necessary to invest in systems, provide innovative trading 
products and solutions, and improve competitive standing to the benefit 
of non-legacy exchanges' market participants. Although the Staff 
Guidance served an important policy goal of improving disclosures and 
requiring exchanges to justify that their market data and access fee 
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase 
fees that would enable them to more fairly compete with legacy 
exchanges, despite providing enhanced disclosures and rationale under 
both competitive and cost basis approaches provided for by the Revised 
Review Process and Staff Guidance to support their proposed fee 
changes.

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

    Written comments were neither solicited nor received.

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,\116\ and Rule

[[Page 2668]]

19b-4(f)(2) \117\ thereunder. 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 should be 
approved or disapproved.
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \117\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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-EMERALD-2023-01 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-EMERALD-2023-01. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-EMERALD-2023-01 and should be submitted 
on or before February 7, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\118\
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    \118\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-00659 Filed 1-13-23; 8:45 am]
BILLING CODE 8011-01-P


