[Federal Register Volume 88, Number 49 (Tuesday, March 14, 2023)]
[Notices]
[Pages 15746-15763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05124]



[[Page 15746]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97077; File No. SR-PEARL-2023-06]


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

March 8, 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 February 23, 2023, MIAX PEARL, LLC (``MIAX Pearl'' 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 fee schedule (the 
``Fee Schedule'') applicable to MIAX Pearl Equities, an equities 
trading facility of the Exchange 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/pearl at MIAX 
Pearl's principal office, and at the Commission's Public Reference 
Room.

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

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

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule to amend fees for: 
(1) the 1 gigabit (``Gb'') and 10Gb ultra-low latency (``ULL'') fiber 
connections for Equity Members \3\ and non-Members; (2) the Financial 
Information Exchange (``FIX'') Ports,\4\ and the MIAX Express Orders 
Interface (``MEO'') Ports.\5\ The Exchange adopted connectivity and 
port fees in September 2020,\6\ and has not changed those fees since 
they were adopted. Since that time, the Exchange experienced ongoing 
increases in expenses, particularly internal expenses.\7\ As discussed 
more fully below, the Exchange recently calculated increased annual 
aggregate costs of $18,331,650 for providing 1Gb and 10Gb ULL 
connectivity combined and $3,951,993 for providing FIX and MEO Ports.
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    \3\ The term ``Equity Member'' means a Member authorized by the 
Exchange to transact business on MIAX PEARL Equities. See Exchange 
Rule 1901.
    \4\ ``FIX Order Interface'' or ``FOI'' means the Financial 
Information Exchange interface for certain order types as set forth 
in Exchange Rule 2614. See the Definitions section of the Fee 
Schedule.
    \5\ Each MEO interface will have one Full Service Port (``FSP'') 
and one Purge Port. ``Full Service Port'' or ``FSP'' means an MEO 
port that supports all MEO order input message types. See the 
Definitions section of the Fee Schedule.
    \6\ See Securities Exchange Act Release No. 90651 (December 11, 
2020), 85 FR 81971 (December 17, 2020) (SR-PEARL-2020-33).
    \7\ For example, the New York Stock Exchange, Inc.'s (``NYSE'') 
Secure Financial Transaction Infrastructure (``SFTI'') network, 
which contributes to the Exchange's connectivity cost, increased its 
fees by approximately 9% since 2021. Similarly, since 2021, the 
Exchange, and its affiliates, experienced an increase in data center 
costs of approximately 17% and an increase in hardware and software 
costs of approximately 19%. These percentages are based on the 
Exchange's actual 2021 and proposed 2023 budgets.
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    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 and port 
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 FIX and MEO Ports in order to recoup 
ongoing costs and increased expenses set forth below in the Exchange's 
cost analysis. The Exchange proposes to implement the changes to the 
Fee Schedule pursuant to this proposal immediately. The Exchange 
initially filed the proposal on December 30, 2022 (SR-PEARL-2022-61) 
(the ``Initial Proposal'').\8\ The Exchange recently withdrew the 
Initial Proposal and replaced it with this current proposal (SR-PEARL-
2023-06).
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    \8\ See Securities Exchange Act Release No. 96631 (January 10, 
2023), 88 FR 2671 (January 17, 2023) (SR-PEARL-2022-61).
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    The Exchange previously included a cost analysis in the Initial 
Proposal. As described more fully below, the Exchange provides an 
updated cost analysis that includes, among other things, additional 
descriptions of how the Exchange allocated costs among it and its 
affiliated exchanges (separately among MIAX Pearl Options and MIAX 
Pearl Equities, Miami International Securities Exchange, LLC 
(``MIAX''), and MIAX Emerald, LLC (``MIAX Emerald,'' together with MIAX 
and MIAX Pearl Options, the ``affiliated markets'')) to ensure no cost 
was allocated more than once, as well as additional detail supporting 
its cost allocation processes and explanations as to why a cost 
allocation in this proposal may differ from the same cost allocation in 
a similar proposal submitted by one of its affiliated exchanges. 
Although the baseline cost analysis used to justify the proposed fees 
was made in the Initial Proposal, the fees themselves have not changed 
since the Initial Proposal and the Exchange still proposes fees that 
are intended to cover the Exchange's cost of providing 10Gb ULL 
connectivity and FIX and MEO Ports with a reasonable mark-up over those 
costs.
* * * * *
    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''

[[Page 15747]]

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 vs. 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 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 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 21, at page 2.
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    While the Exchange appreciates that the Staff Guidance articulates 
an important policy goal of improving

[[Page 15748]]

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.
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    \30\ For example, the options exchange affiliates of MIAX Pearl 
Equities, MIAX, MIAX Pearl Options, and MIAX Emerald, have filed, 
and subsequently withdrawn, various forms of connectivity and port 
fee changes seven (7) times since August 2021. Each of the proposals 
contained hundreds of cost and revenue disclosures never previously 
disclosed by legacy exchanges in their access and market data fee 
filings prior to 2019.
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    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, 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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    \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. The Exchanges 
notes that this type of Form 1 accounting appears to be designed to 
obfuscate the true financials of such exchanges and has the effect 
of perpetuating fee and revenue advantages of legacy exchanges.

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[[Page 15749]]

    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 Pearl. 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 repeated good-faith efforts by the Exchange 
to provide substantial amount of cost-related details. For example, the 
options facility of MIAX Pearl has attempted to increase similar 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 and without ever being precise 
about what additional data points are required. 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 is 
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, e.g., Securities Exchange Act Release Nos. 92798 
(August 27, 2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-
33); 92644 (August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-
PEARL-2021-36); 93162 (September 28, 2021), 86 FR 54739 (October 4, 
2021) (SR-PEARL-2021-45); 93556 (November 10, 2021), 86 FR 64235 
(November 17, 2021) (SR-PEARL-2021-53); 93774 (December 14, 2021), 
86 FR 71952 (December 20, 2021) (SR-PEARL-2021-57); 93894 (January 
4, 2022), 87 FR 1203 (January 10, 2022) (SR-PEARL-2021-58); 94258 
(February 15, 2022), 87 FR 9659 (February 22, 2022) (SR-PEARL-2022-
03); 94286 (February 18, 2022), 87 FR 10860 (February 25, 2022) (SR-
PEARL-2022-04); 94721 (April 14, 2022), 87 FR 23573 (April 20, 2022) 
(SR-PEARL-2022-11); 94722 (April 14, 2022), 87 FR 23660 (April 20, 
2022) (SR-PEARL-2022-12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 
2022) (SR-PEARL-2022-18).
    \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 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 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 
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

[[Page 15750]]

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\ Securities Exchange Act Release Nos. 94721 (April 14, 
2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11) and 94722 
(April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-12).
---------------------------------------------------------------------------

* * * * *
1Gb and 10Gb ULL Connectivity Fee Change
    Sections 2(a) and (b) of the Fee Schedule describe network 
connectivity fees for the 1Gb ULL and 10Gb ULL fiber connections, which 
are charged to both Equity Members and non-Members for connectivity to 
the Exchange's primary and secondary facilities. The Exchange offers 
its Equity Members the ability to connect to the Exchange in order to 
transmit orders to and receive information from the Exchange. Equity 
Members can also choose to connect to the Exchange indirectly through 
physical connectivity maintained by a third-party extranet. Extranet 
physical connections may provide access to one or multiple Equity 
Members on a single connection. The number of physical connections 
assigned to each User \50\ as of November 30, 2022, ranges from one to 
eleven, depending on the scope and scale of the Equity Member's trading 
activity on the Exchange as determined by the Equity Member, including 
the Equity Member's determination of the need for redundant 
connectivity. The Exchange notes that 40% of its Equity Members do not 
maintain a physical connection directly with the Exchange in the 
Primary Data Center (though many such Equity Members have connectivity 
through a third-party provider) and another 46% have either one or two 
physical ports to connect to the Exchange in the Primary Data Center. 
Thus, only a limited number of Equity Members, 14%, maintain three or 
more physical ports to connect to the Exchange in the Primary Data 
Center.
---------------------------------------------------------------------------

    \50\ The term ``User'' shall mean any Member or Sponsored 
Participant who is authorized to obtain access to the System 
pursuant to Exchange Rule 2602. See Exchange Rule 1901.
---------------------------------------------------------------------------

    In order to cover the continuous increase in aggregate costs of 
providing physical connectivity to Equity Members and non-Equity 
Members and make a modest profit, as described below, the Exchange 
proposes to amend the monthly connectivity fees as follows: (a) 
increase the 1Gb ULL connection from $1,000 to $2,500; and (b) increase 
the 10Gb ULL connection from $3,500 to $8,000.\51\
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    \51\ The Exchange notes that while its proposed fee of $8,000 
per 10Gb ULL connection is higher than MEMX's $6,000 monthly fee for 
its xNet Physical Connection, MEMX does not offer any other physical 
connectivity, such as a 1Gb connection, for a lower fee. See 
Securities Exchange Act Release No. 95936 (September 27, 2022), 87 
FR 59845 (October 3, 2022) (SR-MEMX-2022-26). See MEMX Fee Schedule, 
Connectivity and Application Sessions, available at https://info.memxtrading.com/fee-schedule/ (last visited December 28, 2022).
---------------------------------------------------------------------------

FIX and MEO Ports
    Similar to other exchanges, the Exchange offers its Equity Members 
application sessions, also known as ports, for order entry and receipt 
of trade execution reports and order messages. Equity Members can also 
choose to connect to the Exchange indirectly through a session 
maintained by a third-party service bureau. Service bureau sessions may 
provide access to one or multiple Equity Members on a single session. 
The number of sessions assigned to each User as of November 30, 2022, 
ranges from one to more than 100, depending on the scope and scale of 
the Equity Member's trading activity on the Exchange (either through a 
direct connection or through a service bureau) as determined by the 
Equity Member. For example, by using multiple sessions, Equity Members 
can segregate order flow from different internal desks, business lines, 
or customers. The Exchange does not impose any minimum or maximum 
requirements for how many application sessions an Equity Member or 
service bureau can maintain, and does not propose to impose any minimum 
or maximum session requirements for its Equity Members or their service 
bureaus.
    Section 2(d), Port Fees, of the Fee Schedule describes fees for 
access and services used by Equity Members and non-Members. The 
Exchange provides the following types of ports: (i) FIX Ports, which 
allow Equity Members to send orders and other messages using the FIX 
protocol; and (ii) MEO Ports, which allow Equity Members order entry 
capabilities to all Exchange matching engines.
    The Exchange operates a primary and secondary data center as well 
as a disaster recovery center. Each Port provides access to all 
Exchange data centers for a single fee. The Exchange currently provides 
the first twenty-five (25) FIX and MEO Ports free of charge and 
absorbed all associated costs since the launch of MIAX Pearl Equities. 
The Exchange charges the following separate monthly fees for FIX and 
MEO Ports: $450 for ports 26-50, $400 for ports 51-75, $350 for ports 
76-100, and $300 for ports 101 and higher. The Exchange now proposes to 
provide the first five (5) FIX or MEO Ports free of charge, then charge 
a flat rate of $450 per port for port six (6) and above.\52\
---------------------------------------------------------------------------

    \52\ The Exchange notes that the proposed fee of $450 per port 
equals the amount charged by MEMX for MEMX's application sessions 
(order entry and drop copy ports), but MEMX does not offer any ports 
free of charge. See MEMX Fee Schedule, Connectivity and Application 
Sessions, available at https://info.memxtrading.com/fee-schedule/ 
(last visited December 28, 2022). See Securities Exchange Act 
Release No. 95936 (September 27, 2022), 87 FR 59845 (October 3, 
2022) (SR-MEMX-2022-26). Unlike MEMX and other exchanges, the 
Exchange also continues to provide FXD Ports (i.e., Drop Copy Ports) 
free of charge.
---------------------------------------------------------------------------

Implementation
    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 \53\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \54\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among Equity 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 \55\ 
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.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78f(b).
    \54\ 15 U.S.C. 78f(b)(4).
    \55\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the information provided to justify the 
proposed fees meets or exceeds the

[[Page 15751]]

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 \56\ and the Staff Guidance,\57\ 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.
---------------------------------------------------------------------------

    \56\ See supra note 16.
    \57\ 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.'' 
\58\ 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.'' \59\ In the Staff Guidance, the Commission Staff further states 
that, ``[i]f an SRO seeks to support its claims that a proposed fee is 
fair and reasonable because it will permit recovery of the SRO's costs, 
. . . , specific information, including quantitative information, 
should be provided to support that argument.'' \60\
---------------------------------------------------------------------------

    \58\ Id.
    \59\ Id.
    \60\ 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 1Gb and10Gb ULL connectivity as well as FIX and MEO 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 with legacy exchanges, which 
largely set fees prior to the Revised Review Process. 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 by using 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 Equity 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 commenced operations in September 2020 and adopted its 
initial fee schedule, with 1Gb ULL connectivity set at $1,000, 10Gb ULL 
connectivity fees set at $3,500, and provided the first twenty-five 
(25) FIX and MEO Ports for free.\61\ As a new exchange entrant, the 
Exchange chose to offer such services at a discounted rate or free of 
charge 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.\62\
---------------------------------------------------------------------------

    \61\ See supra note 6.
    \62\ 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).
---------------------------------------------------------------------------

    The Exchange has not amended any of its non-transaction fees since 
its launch in September 2022. 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.
    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

[[Page 15752]]

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' . . . .'' \63\
---------------------------------------------------------------------------

    \63\ 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 broader forms that are most 
important to investors and listed companies.'' \64\
---------------------------------------------------------------------------

    \64\ 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.' '' \65\ 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.'' \66\ 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.'' \67\ 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.'' \68\
---------------------------------------------------------------------------

    \65\ 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.'').
    \66\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \67\ Id.
    \68\ See Staff Guidance, supra note 17.
---------------------------------------------------------------------------

    The Exchange believes the competing exchanges' 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 competitive and reasonable because the proposed 
fees are similar to or less than fees charged for similar connectivity 
and port access provided by other 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 
and other offerings.
    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 exchanges with similar market share. Each of 
the market data rates in place at competing exchanges were filed with 
the Commission for immediate effectiveness and remain in place today.

----------------------------------------------------------------------------------------------------------------
                                                Type of connection
                   Exchange                          or port          Monthly fee (per connection or per port)
----------------------------------------------------------------------------------------------------------------
MIAX Pearl Equities (as proposed) (market      1Gb ULL connection.  $2,500.
 share of 1.02% for the month of November      10Gb ULL connection  $8,000.
 2022) \69\.                                   FIX and MEO Ports..  1-5 ports: FREE.
                                                                    6 ports or more: $450 per port.
                                               FXD Ports (i.e.,     FREE.
                                                Drop Copy Ports).
MEMX \70\ (market share of 3.05% for the       1Gb connection.....  Not available.
 month of November 2022) \71\.                 xNet Physical        $6,000 per connection.
                                                connection.
                                               Order Entry Ports..  $450 per port.
                                               Drop Copy Ports....  $450 per port.
NASDAQ PSX LLC (``PSX'') \72\ (market share    1Gb connection.....  $2,500 per connection (plus $1,500
 of 0.70% for the month of November 2022)                            installation fee).
 \73\.
                                               10Gb connection....  $7,500 per connection (plus $1,500
                                                                     installation fee).
                                               Order Entry Ports..  $400 per port.
                                               Drop Copy Ports....  $400 per port.
NASDAQ BX LLC (``BX'') \74\ (market share of   1Gb Ultra            $2,500 per connection (plus $1,500
 0.60% for the month of November 2022) \75\.    connection.          installation fee).
                                               10Gb Ultra           $15,000 (plus $1,500 installation fee).
                                                connection.
                                               Order Entry Ports..  $500 per port.
                                               Drop Copy Ports....  $500 per port.
----------------------------------------------------------------------------------------------------------------

    There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available equity 
exchanges. Market participants may choose to become a member of one or 
more equities 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, one Market Maker of

[[Page 15753]]

MIAX Pearl Options terminated their membership effective January 1, 
2023 as a direct result of the proposed fee changes to the MIAX Pearl 
Options fee schedule.
---------------------------------------------------------------------------

    \69\ See Market at a Glance, available at https://www.miaxoptions.com/.
    \70\ See MEMX Fee Schedule, Connectivity and Application 
Sessions, available at https://info.memxtrading.com/fee-schedule/.
    \71\ See supra note 69.
    \72\ See PSX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=PSX_Pricing; and PSX Rules, 
General 8: Connectivity, Section 2, Direct Connectivity.
    \73\ See supra note 69.
    \74\ See BX Pricing Schedule, available at https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; and BX Rules, 
General 8: Connectivity, Section 2, Direct Connectivity.
    \75\ See supra note 69.
---------------------------------------------------------------------------

    It is not a requirement for market participants to become members 
of all equities exchanges, in fact, certain market participants conduct 
an equities business as a member of only one market.\76\ A very small 
number of market participants choose to become a member of all sixteen 
(16) equities exchanges. Most firms that actively trade on equities 
markets are not currently Equity Members of the Exchange and do not 
purchase connectivity or port services at the Exchange. Connectivity 
and ports are only available to Equity Members or service bureaus, and 
only an Equity Member may utilize a port.\77\
---------------------------------------------------------------------------

    \76\ 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.''
    \77\ Service Bureaus may obtain ports on behalf of Equity 
Members.
---------------------------------------------------------------------------

    BOX 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.\78\ For equities, the Exchange currently has 45 Equity 
Members. Also, MEMX noted in a January 2022 filing that it had only 66 
members, and, based on publicly available information regarding a 
sample of the Exchange's competitors, NYSE has 142 members, Cboe BZX 
has 140 members, and Investors Exchange LLC (``IEX'') has 133 
members.\79\ For options, the Exchange and its affiliates, MIAX and 
MIAX Emerald, have a total of 47 members. Of those 47 total members, 35 
are members of all three affiliated exchanges, four (4) are members of 
only two (2) affiliated exchanges, and eight (8) are members of only 
one affiliated exchange. The Exchange believes that significant 
differences in membership numbers describes by the Exchange, BOX, and 
MEMX demonstrate that firms can, and do, select which exchanges they 
wish to access, and, accordingly, exchanges must take competitive 
considerations into account when setting fees for such access. The 
Exchange also notes that no firm is an Equity Member of the Exchange 
only. The above data evidences that a broker-dealer need not have 
direct connectivity to all exchanges, let alone the Exchange and its 
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.
---------------------------------------------------------------------------

    \78\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17).
    \79\ See Securities Exchange Act Release No. 93927 (January 7, 
2022), 87 FR 2191 (January 13, 2022) (SR-MEMX-2021-19).
---------------------------------------------------------------------------

    Not only is there not an actual regulatory requirement to connect 
to every equities 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 exchanges discussed above. 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, 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 equities securities; (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 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 an Equity Member 
at--or establish connectivity to--the Exchange.\80\ 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.\81\
---------------------------------------------------------------------------

    \80\ See 17 CFR 242.611.
    \81\ Members may elect to not route their orders by utilizing 
the Do Not Route or Post Only order type instructions. See Exchange 
Rule 2614(c)(1) and (2).
---------------------------------------------------------------------------

    With respect to the submission of orders, Equity 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 Equity 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,\82\ or request sponsored access \83\ through a member of an 
exchange in order to submit a trade directly to an equities 
exchange.\84\ 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.
---------------------------------------------------------------------------

    \82\ Service Bureaus provide access to market participants to 
submit and execute orders on an exchange. On the Exchange, a Service 
Bureau may be an Equity Member. Some Equity Members utilize a 
Service Bureau for connectivity and that Service Bureau may not be 
an Equity Member. Some market participants utilize a Service Bureau 
who is an Equity Member to submit orders.
    \83\ Sponsored Access is an arrangement whereby an Equity Member 
permits its customers to enter orders into an exchange's system that 
bypass the Equity Member's trading system and are routed directly to 
the Exchange, including routing through a service bureau or other 
third-party technology provider.
    \84\ This may include utilizing a floor broker and submitting 
the trade to an equities trading floor.
---------------------------------------------------------------------------

    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-Equity 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).\85\ Indeed, the Exchange does not

[[Page 15754]]

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 customers of their 
own.\86\ 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 15 
equities markets. Accordingly, the Exchange believes that the proposed 
fees are fair and reasonable and constrained by competitive forces.
---------------------------------------------------------------------------

    \85\ 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).
    \86\ 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 Equity Members and secure 
access to its environment. To properly regulate its Equity 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 Equity Members 
secure access to communicate with the Exchange and exercise trading 
rights. When a market participant elects to be an Equity Member, and is 
approved for membership by the Exchange, the Equity 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 an Equity Member of the Exchange, or, if it is an 
Equity Member, to purchase connectivity beyond the one connection that 
is necessary to quote or submit orders on the Exchange. Equity Members 
may freely choose to rely on one or many connections, depending on 
their business model. This is again evidenced by the fact that one MIAX 
Pearl Options Market Maker terminated their MIAX Pearl membership 
effective January 1, 2023 as a direct result of the proposed 
connectivity and port fee changes on MIAX Pearl Options. If a market 
participant chooses to become an Equity Member, they may then choose 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 
is especially diligent in assessing those fees in a transparent way 
against its own aggregate costs of providing the related service, and 
in carefully and transparently assessing the impact on Equity Members--
both generally and in relation to other Equity 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 Equity Members and 
competition among Equity 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,\87\ and Rule 19b-4 
thereunder,\88\ with respect to the types of information SROs should 
provide when filing fee changes, and Section 6(b) of the Act,\89\ which 
requires, among other things, that exchange fees be reasonable and 
equitably allocated,\90\ not designed to permit unfair 
discrimination,\91\ and that they not impose a burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Act.\92\ 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.\93\ The Exchange 
reiterates 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.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78s(b)(1).
    \88\ 17 CFR 240.19b-4.
    \89\ 15 U.S.C. 78f(b).
    \90\ 15 U.S.C. 78f(b)(4).
    \91\ 15 U.S.C. 78f(b)(5).
    \92\ 15 U.S.C. 78f(b)(8).
    \93\ See Staff Guidance, supra note 17.
---------------------------------------------------------------------------

    As detailed below, the Exchange recently calculated its aggregate 
annual costs for providing physical 1Gb and 10Gb ULL connectivity to 
the Exchange at $18,331,650 combined ($17,726,799 for 10Gb ULL 
connectivity and $604,851 for 1Gb connectivity) (or approximately 
$1,527,637 per month for combined connectivity costs, rounded to the 
nearest dollar when dividing the combined annual cost by 12 months). 
The Exchange also recently calculated its aggregate annual costs for 
providing FIX and MEO Ports at $3,951,993 combined ($911,998 for FIX 
Ports and $3,039,995 for MEO Ports) (or approximately $329,333 per 
month for combined FIX and MEO Port costs, rounded to the nearest 
dollar when dividing the combined annual cost by 12 months). In order 
to cover a portion of the aggregate costs of providing connectivity to 
its Users (both Equity Members and non-Equity Members \94\) going 
forward, as described below, the Exchange proposes to modify its Fee 
Schedule as described above.
---------------------------------------------------------------------------

    \94\ 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 application sessions 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'').\95\ 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'').
---------------------------------------------------------------------------

    \95\ 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.
---------------------------------------------------------------------------

    As an initial step, the Exchange determined the total cost for the

[[Page 15755]]

Exchange and the affiliated markets. That total cost was then divided 
among the Exchange and each of its affiliated markets based on a number 
of factors, including server counts, additional hardware and software 
utilization, current or anticipated functional or non-functional 
development projects, capacity needs, end-of-life or end-of-service 
intervals, number of members, market model (e.g., price time or pro-
rata), which may impact message traffic, individual system 
architectures that impact platform size,\96\ storage needs, dedicated 
infrastructure versus shared infrastructure allocated per platform 
based on the resources required to support each platform, number of 
available connections, and employees allocated time. This will result 
in different allocation percentages among the Exchange and its 
affiliated markets. Meanwhile this allocation methodology ensures that 
no portion of any cost was allocated twice or double-counted between 
the Exchange and its affiliated markets.
---------------------------------------------------------------------------

    \96\ For example, the Exchange maintains 24 matching engines, 
MIAX Pearl Options maintains 12 matching engines, MIAX maintains 24 
matching engines and MIAX Emerald maintains 12 matching engines.
---------------------------------------------------------------------------

    Next, the Exchange adopted an allocation methodology with 
thoughtful and consistently applied principles to guide how much of a 
particular cost amount allocated to the Exchange pursuant to the above 
methodology should be allocated within the Exchange to each core 
service. For instance, fixed costs that are not driven by client 
activity (e.g., message rates), such as data center costs, were 
allocated more heavily to the provision of physical connectivity (62%), 
with smaller allocations to FIX Ports (1.2%) and MEO Ports (3.8%), and 
the remainder to the provision of transaction execution, membership 
services and market data services (33%). This next level of the 
allocation methodology at the individual exchange level also took into 
account a number of factors similar to those set forth under the first 
allocation methodology described above, to determine the appropriate 
allocation to connectivity or market data versus what is to be 
allocated to providing other services. The allocation methodology was 
developed through an assessment of costs with senior management 
intimately 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. Each of the below 
cost allocations is unique to the Exchange and represents a percentage 
of overall cost that was allocated to the Exchange pursuant to the 
initial allocation described above.
    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 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 
Equity Members and parties that they sponsor to participate directly on 
the Exchange may submit orders to the Exchange; many Equity 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 for 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. In the absence of the Commission attempting to 
specify a methodology for the allocation of exchanges' interdependent 
costs, the Exchange is left with its best efforts attempt to conduct 
such an allocation in a thoughtful and reasonable manner.
    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 
1Gb and10Gb ULL connectivity, as well as FIX and MEO Ports, result in 
an aggregate combined monthly cost of $1,856,970, as further detailed 
below.
Costs Related to Offering Physical 1Gb and 10Gb ULL Connectivity
    The following charts detail the individual line-item costs 
considered by the Exchange to be related to offering physical dedicated 
1Gb and 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 47.6% of its overall Human Resources cost to offering 
physical 1Gb and 10Gb ULL connectivity).
---------------------------------------------------------------------------

    \97\ The Annual Cost includes figures rounded to the nearest 
dollar.
    \98\ 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.

                                              10Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
                         Cost drivers                            Annual cost \97\   Monthly cost \98\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...............................................          5,936,741             494,728       46.1
Connectivity (external fees, cabling, switches, etc.).........             69,451               5,788         60
Internet Services, including Internet Services................          1,818,808             151,567       72.5
Data Center...................................................          1,052,797              87,733         60
Hardware and Software Maintenance and Licenses................            642,112              53,509         58
Depreciation..................................................          3,448,206             287,351       73.6

[[Page 15756]]

 
Allocated Shared Expenses.....................................          4,758,684             396,557       48.6
                                                               -------------------------------------------------
    Total.....................................................         17,726,799           1,477,233         54
----------------------------------------------------------------------------------------------------------------


                                              1Gb ULL Connectivity
----------------------------------------------------------------------------------------------------------------
                         Cost drivers                            Annual cost \99\  Monthly cost \100\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...............................................           $202,566             $16,880        1.6
Connectivity (external fees, cabling, switches, etc.).........              2,370                 197        2.0
Internet Services, including External Market Data.............             62,059               5,172        2.5
Data Center...................................................             35,922               2,993        2.0
Hardware and Software Maintenance and Licenses................             21,909               1,826        2.0
Depreciation..................................................            117,655               9,805        2.5
Allocated Shared Expenses.....................................            162,370              13,531        1.7
                                                               -------------------------------------------------
    Total.....................................................            604,851              50,404        1.8
----------------------------------------------------------------------------------------------------------------

    Below are additional details regarding each of the line-item costs 
considered by the Exchange to be related to offering physical 1Gb and 
10Gb ULL connectivity.
---------------------------------------------------------------------------

    \99\ See supra note 97.
    \100\ See supra note 98.
---------------------------------------------------------------------------

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 percentages of 58% 
for 10Gb ULL connectivity and 2.0% for 1Gb connectivity 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 37%). The Exchange notes that 
it and its affiliated markets have 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. Specifically, twice a year and as needed with additional new 
hires and new project initiatives, in consultation with each employee, 
managers and department heads assign a percentage of time to every 
employee and then allocate that time amongst the Exchange and its 
affiliated markets to determine that market's individual Human 
Resources expense. Then, again in consultation with each employee, 
managers and department heads assign a percentage of each employee's 
time allocated to the Exchange into buckets including, network 
connectivity, ports, market data, and other exchange services. This 
process ensures that every employee is 100% allocated, ensuring there 
is no double counting between the Exchange and its affiliated markets.
    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 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. equities 
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 
1Gb and 10Gb ULL connectivity. Specifically, the Exchange utilizes 
connectivity and content service providers to connect to other national 
securities exchanges, the NASDAQ UTP and CTA/CQ Plans, 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 the NASDAQ UTP and CTA/CQ Plans and, therefore, 
would not be able to operate and support its System Networks. The 
Exchange does

[[Page 15757]]

not employ a separate fee to cover its connectivity and content service 
provider expense and recoups that expense, in part, by charging for 1Gb 
and 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 (62%) to 
physical 1Gb and 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 
physical 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., limit order price protection, trading collars). This 
allocation was included as part of the internet Services cost described 
above.\101\ Thus, as market data from other Exchanges is consumed at 
the matching engine level, (to which physical 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.
---------------------------------------------------------------------------

    \101\ This allocation may differ from MIAX Pearl Options due to 
the different amount of proprietary market data feeds the Exchange 
purchases for its options and equities trading platforms. For 
options, the Exchange primarily relies on data purchased from OPRA. 
For equities, the Exchange does not solely rely on data purchased 
from the consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ 
plans), but rather purchases multiple proprietary market data feeds 
from other equities exchanges. See, e.g., Exchange Rule 2613 
(setting forth the data feeds the Exchange subscribes to for each 
equities exchange and trading center).
---------------------------------------------------------------------------

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.\102\
---------------------------------------------------------------------------

    \102\ This expense may be greater than the Exchange's affiliated 
markets, specifically MIAX and MIAX Emerald, because, unlike MIAX 
and MIAX Emerald, MIAX Pearl (the options and equities markets) 
maintains an additional gateway to accommodate its member's access 
and connectivity needs. This added gateway contributes to the 
difference in allocations between the Exchange and MIAX and MIAX 
Emerald.
---------------------------------------------------------------------------

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 73.6% of all depreciation costs to providing physical 10Gb 
ULL connectivity and 2.5% of all depreciation costs to providing 1Gb 
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. The Exchange also notes that 
this allocation differs from its affiliated markets due to a number of 
factors, such as the age of physical assets and software (e.g., older 
physical assets and software were previously depreciated and removed 
from the allocation), or certain system enhancements that required new 
physical assets and software, thus providing a higher contribution to 
the depreciated cost.
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.\103\ The Exchange notes that the 
50% allocation of general shared expenses for physical connectivity is 
higher than that allocated to general shared expenses for FIX and MEO 
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), FIX and MEO Ports do not 
require as many broad or indirect resources as other Core Services. The 
total monthly cost for 10Gb ULL connectivity of $1,477,233 was divided 
by the number of physical 10Gb ULL connections the Exchange maintained 
at the time that proposed pricing was determined (90), to arrive at a 
cost of approximately $16,414 per month, per physical 10Gb ULL 
connection. The total monthly cost for 1Gb connectivity of $50,404 was 
divided by the number of physical 1Gb connections the Exchange 
maintained at the time that proposed pricing was determined (8), to 
arrive at a cost of approximately $6,301 per month, per physical 1Gb 
connection.
---------------------------------------------------------------------------

    \103\ 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 FIX and MEO Ports
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering FIX and 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 22.4% of its overall Human Resources cost to 
offering FIX and MEO Ports).

[[Page 15758]]



                                                    FIX Ports
----------------------------------------------------------------------------------------------------------------
                         Cost drivers                           Annual cost \104\  Monthly cost \105\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...............................................           $665,726             $55,476        5.2
Connectivity (external fees, cabling, switches, etc.).........                535                  45        0.5
Internet Services, including External Market Data.............             11,574                 965        0.5
Data Center...................................................             20,262               1,689        1.2
Hardware and Software Maintenance and Licenses................              5,108                 426        0.5
Depreciation..................................................             92,114               7,676        2.0
Allocated Shared Expenses.....................................            116,679               9,723        1.2
                                                               -------------------------------------------------
    Total.....................................................            911,998              76,000        2.8
----------------------------------------------------------------------------------------------------------------


                                                    MEO Ports
----------------------------------------------------------------------------------------------------------------
                         Cost drivers                           Annual cost \106\  Monthly cost \107\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...............................................         $2,219,088            $184,924       17.2
Connectivity (external fees, cabling, switches, etc.).........              1,782                 149        1.5
Internet Services, including External Market Data.............             38,582               3,215        1.5
Data Center...................................................             67,538               5,628        3.8
Hardware and Software Maintenance and Licenses................             17,026               1,419        1.5
Depreciation..................................................            307,048              25,587        6.6
Allocated Shared Expenses.....................................            388,931              32,411        4.0
                                                               -------------------------------------------------
    Total.....................................................          3,039,995             253,333        9.3
----------------------------------------------------------------------------------------------------------------

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

    \104\ See supra note 97 (describing rounding of Annual Costs).
    \105\ See supra note 98 (describing rounding of Monthly Costs 
based on annual costs).
    \106\ See supra note 97 (describing rounding of Annual Costs).
    \107\ See supra note 98 (describing rounding of Monthly Costs 
based on annual costs).
---------------------------------------------------------------------------

    With respect to FIX and MEO Ports, the Exchange calculated Human 
Resources cost by taking an allocation of employee time for employees 
whose functions include providing FIX and MEO 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). Just 
as described above for 10Gb ULL connectivity, the estimates of Human 
Resources cost were again determined by consulting with department 
leaders, determining which employees are involved in tasks related to 
providing application sessions and maintaining performance thereof, and 
confirming that the proposed allocations were reasonable based on an 
understanding of the percentage of their time such employees devote to 
tasks related to providing application sessions and maintaining 
performance thereof. The Exchange notes that senior level executives 
were only allocated Human Resources costs to the extent the Exchange 
believed they are involved in overseeing tasks related to providing 
application sessions and maintaining performance thereof. The Human 
Resources cost was again calculated using a blended rate of 
compensation reflecting salary, equity and bonus compensation, 
benefits, payroll taxes, and 401(k) matching contributions.
Connectivity and Internet Services
    The Connectivity cost includes external fees paid to connect to 
other exchanges, cabling and switches, as described above. For purposes 
of FIX and MEO 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 
application sessions as such market data is also necessary here (in 
addition to physical connectivity) to offer certain services related to 
such sessions, such as validating orders on entry against the national 
best bid and national best offer and checking for other conditions 
(e.g., whether a symbol is halted or subject to a short sale circuit 
breaker). This allocation was included as part of the internet Services 
cost described above.\108\ Thus, as market data from other Exchanges is 
consumed at the application session level in order to validate orders 
before additional processing occurs with respect to such orders, the 
Exchange believes it is reasonable to allocate a small amount of such 
costs to application sessions.
---------------------------------------------------------------------------

    \108\ This allocation may differ from MIAX Pearl Options due to 
the different amount of proprietary market data feeds the Exchange 
purchases for its options and equities trading platforms. For 
options, the Exchange primarily relies on data purchased from OPRA. 
For equities, the Exchange does not solely rely on data purchased 
from the consolidated tape plans (e.g., Nasdaq UTP, CTA, and CQ 
plans), but rather purchases multiple proprietary market data feeds 
from other equities exchanges. See, e.g., Exchange Rule 2613 
(setting forth the data feeds the Exchange subscribes to for each 
equities exchange and trading center). The Exchange separately notes 
that MEMX separately allocated 7.5% of its external market data 
costs to providing physical connectivity.
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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.

[[Page 15759]]

Monthly Depreciation
    All physical assets and software, which also includes assets used 
for testing and monitoring of order entry infrastructure, were valued 
at cost, depreciated or leased over periods ranging from three to five 
years. Thus, the depreciation cost primarily relates to servers 
necessary to operate the Exchange, some of which is owned by the 
Exchange and some of which is leased by the Exchange in order to allow 
efficient periodic technology refreshes. The Exchange allocated 8.6% of 
all depreciation costs to providing FIX and MEO Ports. In contrast to 
physical connectivity, described above, the Exchange did allocate 
depreciation costs for depreciated software necessary to operate the 
Exchange to FIX and MEO Ports because such software is related to the 
provision of such connectivity. The Exchange also notes that this 
allocation differs from its affiliated markets due to a number of 
factors, such as the age of physical assets and software (e.g., older 
physical assets and software were previously depreciated and removed 
from the allocation), or certain system enhancements that required new 
physical assets and software, thus providing a higher contribution to 
the depreciated cost.
Allocated Shared Expenses
    Finally, a limited portion of general shared expenses was allocated 
to overall FIX and MEO Ports costs as without these general shared 
costs the Exchange would not be able to operate in the manner that it 
does and provide application sessions. The costs included in general 
shared expenses include general expenses of the Exchange, including 
office space and office expenses (e.g., occupancy and overhead 
expenses), utilities, recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services (including external and internal audit expenses), and 
telecommunications costs. The Exchange again notes that the cost of 
paying directors to serve on its Board of Directors is included in the 
calculation of Allocated Shared Expenses, and thus a portion of such 
overall cost amounting to less than 20% of the overall cost for 
directors was allocated to providing FIX and MEO Ports. The Exchange 
notes that the 5.2% allocation of general shared expenses for FIX and 
MEO 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 FIX and MEO Ports have several areas where certain 
tangible costs are heavily weighted towards providing such service 
(e.g., Data Centers, as described above), 1Gb and 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 for FIX Ports of $76,000 was 
divided by the number of FIX Ports the Exchange maintained at the time 
that proposed pricing was determined (142), to arrive at a cost of 
approximately $535 per month, per FIX Port (rounded to the nearest 
dollar when dividing the approximate monthly cost by the number of FIX 
Ports). The total monthly cost for MEO Ports of $253,333 was divided by 
the number of MEO Ports the Exchange maintained at the time that 
proposed pricing was determined (336), to arrive at a cost of 
approximately $754 per month, per MEO Port (rounded to the nearest 
dollar when dividing the approximate monthly cost by the number of MEO 
Ports).
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 FIX and MEO 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 based upon the above described 
methodology, 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 (60%) to 1Gb and 10Gb ULL connectivity given 
their focus on functions necessary to provide physical connections. The 
salaries of those same personnel were allocated only 25% to FIX and MEO 
Ports and the remaining 15% was allocated to transactions and market 
data. The Exchange did not allocate any other Human Resources expense 
for providing physical connections to any other employee group, outside 
of a smaller allocation of 37% for 1Gb and 10Gb ULL connectivity 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 (less than 21%) across a 
wider range of personnel groups in order to allocate Human Resources 
costs to providing FIX and MEO Ports. This is because a much wider 
range of personnel are involved in functions necessary to offer, 
monitor and maintain FIX and MEO Ports but the tasks necessary to do so 
are not a primary or full-time function.
    In total, the Exchange allocated 47.6% of its personnel costs to 
providing physical connections and 22.4% of its personnel costs to 
providing FIX and MEO Ports, for a total allocation of 70% Human 
Resources expense to provide these specific connectivity services. In 
turn, the Exchange allocated the remaining 30% of its Human Resources 
expense to membership (less than 1%) and transactions and market data 
(9.5%). Thus, again, the Exchange's allocations of cost across core 
services were based on real costs of operating the Exchange and were 
not double-counted across the core services or their associated revenue 
streams.
    As another example, the Exchange allocated depreciation expense to 
all core services, including physical connections and FIX and MEO 
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 Equity 
Members and non-Equity 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 85% of the Exchange's overall depreciation and 
amortization expense to connectivity services (76.185% attributed to 
1Gb and 10Gb ULL physical connections and 8.6% to FIX and MEO Ports). 
The Exchange allocated the remaining depreciation and amortization 
expense (approximately 15%) toward the cost of providing transaction 
services, membership 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

[[Page 15760]]

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 FIX and MEO 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. It is 
possible however that such costs will either decrease or increase. To 
the extent the Exchange sees growth in use of connectivity services it 
will receive additional revenue to offset future cost increases.
    However, if use of connectivity services is static or decreases, 
the Exchange might not realize the revenue that it anticipates or needs 
in order to cover applicable costs. Accordingly, the Exchange is 
committing to conduct a one-year review after implementation of these 
fees. The Exchange expects that it may propose to adjust fees at that 
time, to increase fees in the event that revenues fail to cover costs 
and a reasonable mark-up of such costs. Similarly, the Exchange would 
propose to decrease fees in the event that revenue materially exceeds 
our current projections. In addition, the Exchange will periodically 
conduct a review to inform its decision making on whether a fee change 
is appropriate (e.g., to monitor for costs increasing/decreasing or 
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based 
analysis) and would propose to increase fees in the event that revenues 
fail to cover its costs and a reasonable mark-up, or decrease fees in 
the event that revenue or the mark-up materially exceeds our current 
projections. In the event that the Exchange determines to propose a fee 
change, the results of a timely review, including an updated cost 
estimate, will be included in the rule filing proposing the fee change. 
More generally, we believe that it is appropriate for an exchange to 
refresh and update information about its relevant costs and revenues in 
seeking any future changes to fees, and the Exchange commits to do so.
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; 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 $17,726,799. Based on current 
10Gb ULL connectivity services usage, the Exchange would generate 
annual revenue of approximately $9,144,000. This represents a negative 
margin when compared to the cost of providing 10Gb ULL connectivity 
services, which will decrease over time.\109\
---------------------------------------------------------------------------

    \109\ Assuming the U.S. inflation rate continues at its current 
rate, the projected profit margins in this proposal will further 
decrease. See, e.g., https://www.usinflationcalculator.com/inflation/current-inflation-rates/ (last visited February 15, 2023).
---------------------------------------------------------------------------

     The Exchange's Cost Analysis estimates the annual cost to 
provide 1Gb connectivity services at $604,851. Based on current 1Gb 
connectivity services usage, the Exchange would generate annual revenue 
of approximately $312,000. This represents a negative margin when 
compared to the cost of providing 1Gb connectivity services, which will 
decrease over time.\110\
---------------------------------------------------------------------------

    \110\ Id.
---------------------------------------------------------------------------

     The Exchange's Cost Analysis estimates the annual cost to 
provide FIX Port services at $911,998. Based on current FIX Port 
services usage, the Exchange would generate annual revenue of 
approximately $388,800. This represents a negative margin when compared 
to the cost of providing FIX Port services, which will decrease over 
time.\111\
---------------------------------------------------------------------------

    \111\ Id.
---------------------------------------------------------------------------

     The Exchange's Cost Analysis estimates the annual cost to 
provide MEO Port services at $3,039,995. Based on current MEO Port 
services usage, the Exchange would generate annual revenue of 
approximately $1,296,000. This represents a negative margin when 
compared to the cost of providing MEO Port services, which will 
decrease over time.\112\
---------------------------------------------------------------------------

    \112\ Id.
---------------------------------------------------------------------------

    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 that deviates from that of 
other exchanges or supra-competitive profit, when comparing the total 
expense of the Exchange associated with providing 1Gb and 10Gb ULL 
connectivity and FIX and MEO Port services versus the total projected 
revenue of the Exchange associated with those services. In fact, the 
Exchange will generate negative margins on those connectivity and port 
services even with the proposed fees.
* * * * *
    MIAX Pearl Equities has operated at a cumulative net annual loss 
since it launched operations in 2020.\113\ 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 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

[[Page 15761]]

they are based on both relative costs to the Exchange to provide 
dedicated 1Gb and 10Gb ULL connectivity as well as FIX and MEO 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 1Gb and 10Gb ULL connectivity as well as 
FIX and MEO Ports.
---------------------------------------------------------------------------

    \113\ The Exchange has incurred a cumulative loss of $79 million 
since its inception in 2020. See Exchange's Form 1/A, Application 
for Registration or Exemption from Registration as a National 
Securities Exchange, filed July 28, 2021, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
---------------------------------------------------------------------------

    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 1Gb and 10Gb ULL connectivity as well as FIX and MEO 
Ports, the Exchange will have to be successful in retaining existing 
clients that wish to utilize 1Gb and 10Gb ULL connectivity as well as 
FIX and MEO Ports and/or obtaining new clients that will purchase such 
access. To the extent the Exchange is successful in encouraging new 
clients, the Exchange does not believe it should be penalized for such 
success. 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.
    The Exchange is part of a holding company that operates four 
exchange markets and, therefore, the Exchange and its affiliated 
markets must allocate shared costs across all of those markets 
accordingly, pursuant to the above-described allocation methodology. In 
contrast, the Investors Exchange LLC (``IEX'') and MEMX, which are 
currently each operating only one exchange, in their recent non-
transaction fee filings can allocate the entire amount of that same 
cost to a single exchange. This can result in lower profit margins for 
the non-transaction fees proposed by IEX and MEMX because the single 
allocated cost does not experience the efficiencies and synergies 
associated with shared costs across multiple platforms. The Exchange 
and its affiliated markets must share a single cost, which results in 
cost efficiencies that cause a broader gap between the allocated cost 
amount and projected revenue, even though the fee levels being proposed 
are lower or similar to competing markets (as described above). To the 
extent that the application of a cost-based standard results in 
Commission Staff making determinations as to the appropriateness of 
certain profit margins, the Commission Staff must consider whether the 
proposed fee level is comparable to, or on parity with, the same fee 
charged by competing exchanges and how different cost allocation 
methodologies (such as across multiple markets) may result in different 
profit margins for comparable fee levels. If it is the case that the 
Commission Staff is making determinations as to appropriate profit 
margins, the Exchange believes that Staff should be clear to all market 
participants as to what they determine is an appropriate profit margin 
and should apply such determinations consistently and, in the case of 
certain legacy exchanges, retroactively, if such standards are to avoid 
having a discriminatory effect.
    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.
1Gb and 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 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 equities 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.\114\ 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.
---------------------------------------------------------------------------

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

FIX and MEO Ports
    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

[[Page 15762]]

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.\115\ Thus, as the number 
of connections an Equity Member has increases, the related pull on 
Exchange resources also increases. The Exchange sought to design the 
proposed pricing structure to set the amount of the fees to relate to 
the number of connections a firm purchases, while continuing to provide 
the first five (5) ports for free. The more connections purchased by an 
Equity Member likely results in greater expenditure of Exchange 
resources and increased cost to the Exchange. The Exchange further 
believes that the proposed fees are reasonable, equitably allocated and 
not unfairly discriminatory because, for the flat fee, the Exchange 
provides each Equity Member their first five (5) ports for free, unlike 
other equity exchanges referenced above.
---------------------------------------------------------------------------

    \115\ 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 1Gb 
and10Gb ULL connectivity as well as FIX and MEO Ports at below market 
rates to market participants since the Exchange launched operations. As 
described above, the Exchange has operated at a cumulative net annual 
loss since it launched operations in 2020 \116\ 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 
industry, which resulted in lower initial revenues. Examples of this 
are 1Gb and 10Gb ULL connectivity as well as FIX and MEO Ports, for 
which the Exchange only now seeks to adopt fees at a level similar to 
or lower than those of other equity exchanges.
---------------------------------------------------------------------------

    \116\ See supra note 113.
---------------------------------------------------------------------------

    Further, the Exchange does not believe that the proposed fee 
increase for the 1Gb or 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. The proposed fees 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 Equity Members, non-Equity 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 Market Maker terminated their 
MIAX Pearl Options membership on January 1, 2023 as a direct result of 
the proposed fee changes.\117\ 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.
---------------------------------------------------------------------------

    \117\ The Exchange acknowledges that IEX included in its 
proposal to adopt market data fees after offering market data for 
free an analysis of what its projected revenue would be if all of 
its existing customers continued to subscribe versus what its 
projected revenue would be if a limited number of customers 
subscribed due to the new fees. See Securities Exchange Act Release 
No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-
2022-02). MEMX did not include a similar analysis in either of its 
recent non-transaction fee proposals. See, e.g., supra note 48. The 
Exchange does not believe a similar analysis would be useful here 
because it is amending existing fees, not proposing to charge a new 
fee where existing subscribers may terminate connections because 
they are no longer enjoying the service at no cost. In addition, 
despite the potential for existing subscribers to terminate 
connections due to the proposal, the Exchange anticipates its number 
of subscribers to remain generally static, resulting in an 
immaterial difference between a best case and worst case scenario.
---------------------------------------------------------------------------

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, market participants are not forced to connect to all 
exchanges. There is no reason to believe that our

[[Page 15763]]

proposed price increase will harm another exchange's ability to 
compete. There are other markets of which market participants may 
connect to trade equities 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

    The Exchange received one comment letter on the Initial 
Proposal.\118\ In its letter, the sole commenter seeks to incorporate 
comments submitted on previous Exchange proposals to which the Exchange 
has previously responded. To the extent the sole commenter has 
attempted to raise new issues in its letter, the Exchange believes 
those issues are not germane to this proposal in particular, but rather 
raise larger issues with the current environment surrounding exchange 
non-transaction fee proposals that should be addressed by the 
Commission through rule making, or Congress, more holistically and not 
through an individual exchange fee filing. Among other things, the 
commenter is requesting additional data and information that is both 
opaque and a moving target and would constitute a level of disclosure 
materially over and above that provided by any competitor exchanges.
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    \118\ See letter from Brian Sopinsky, General Counsel, 
Susquehanna International Group, LLP to Vanessa Countryman, 
Secretary, Commission, dated February 7, 2023.
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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,\119\ and Rule 19b-4(f)(2) \120\ 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.
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    \119\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \120\ 17 CFR 240.19b-4(f)(2).
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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-PEARL-2023-06 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-PEARL-2023-06. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-PEARL-2023-06 and should be submitted on 
or before April 4, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\121\
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    \121\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05124 Filed 3-13-23; 8:45 am]
BILLING CODE 8011-01-P


