[Federal Register Volume 88, Number 49 (Tuesday, March 14, 2023)]
[Notices]
[Pages 15782-15803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05128]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97081; File No. SR-MIAX-2023-08]


Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Its 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, Miami International Securities Exchange, LLC 
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

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

[[Page 15783]]

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

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

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule as follows: (1) 
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') 
fiber connection for Members \3\ and non-Members; and (2) amend the 
fees for Limited Service MIAX Express Interface (``MEI'') Ports \4\ 
available to Market Makers.\5\ The Exchange and its affiliate, MIAX 
PEARL, LLC (``MIAX Pearl'') operated 10Gb ULL connectivity (for MIAX 
Pearl's options market) on a single shared network that provided access 
to both exchanges via a single 10Gb ULL connection. The Exchange last 
increased fees for 10Gb ULL connections from $9,300 to $10,000 per 
month on January 1, 2021.\6\ At the same time, MIAX Pearl also 
increased its 10Gb ULL connectivity fee from $9,300 to $10,000 per 
month.\7\ The Exchange and MIAX Pearl shared a combined cost analysis 
in those filings due to the single shared 10Gb ULL connectivity network 
for both exchanges. In those filings, the Exchange and MIAX Pearl 
allocated a combined total of $17.9 million in expenses to providing 
10Gb ULL connectivity.\8\
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    \3\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \4\ MIAX Express Interface is a connection to MIAX systems that 
enables Market Makers to submit simple and complex electronic quotes 
to MIAX. See Fee Schedule, note 26.
    \5\ The term ``Market Makers'' refers to Lead Market Makers 
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered 
Market Makers (``RMMs'') collectively. See Exchange Rule 100.
    \6\ See Securities Exchange Act Release No. 90980 (January 25, 
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
    \7\ See Securities Exchange Act Release No. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
    \8\ See id.
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    Beginning in late January 2023, the Exchange also recently 
determined a substantial operational need to no longer operate 10Gb ULL 
connectivity on a single shared network with MIAX Pearl. The Exchange 
is bifurcating 10Gb ULL connectivity due to ever-increasing capacity 
constraints and to enable it to continue to satisfy the anticipated 
access needs for Members and other market participants.\9\ Since the 
time of 2021 increase discussed above, the Exchange experienced ongoing 
increases in expenses, particularly internal expenses.\10\ As discussed 
more fully below, the Exchange recently calculated increased annual 
aggregate costs of $12,034,554 for providing 10Gb ULL connectivity on a 
single unshared network (an overall increase over its prior cost to 
provide 10Gb ULL connectivity on a shared network with MIAX Pearl) and 
$2,157,178 for providing Limited Service MEI Ports.
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    \9\ See MIAX Options and MIAX Pearl Options--Announce planned 
network changes related to shared 10G ULL extranet, issued August 
12, 2022, available at https://www.miaxoptions.com/alerts/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-related-0. The Exchange will continue to provide access to 
both the Exchange and MIAX Pearl over a single shared 1Gb 
connection. See Securities Exchange Act Release Nos. 96553 (December 
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
    \10\ 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 services. 
Subscribers expect the Exchange to provide this level of support so 
they continue to receive the performance they expect. This 
differentiates the Exchange from its competitors.
    The Exchange now proposes to amend the Fee Schedule to amend the 
fees for 10Gb ULL connectivity and Limited Service MEI Ports in order 
to recoup cost related to bifurcating 10Gb connectivity to the Exchange 
and MIAX Pearl as well as the ongoing costs and increase in expenses 
set forth below in the Exchange's cost analysis.\11\ 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-MIAX-2022-50) (the ``Initial Proposal'').\12\ The 
Exchange recently withdrew the Initial Proposal and replaced it with 
this current proposal (SR-MIAX-2023-08).
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    \11\ The Exchange notes that MIAX Pearl will make a similar 
filing to increase its 10Gb ULL connectivity fees.
    \12\ See Securities Exchange Act Release No. 96629 (January 10, 
2023), 88 FR 2729 (January 17, 2023) (SR-MIAX-2022-50).
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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 (MIAX Pearl (separately among MIAX Pearl Options 
and MIAX Pearl Equities) and MIAX Emerald, LLC (``MIAX Emerald,'' 
together with MIAX Pearl Options and MIAX Pearl Equities, 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 
Limited Service MEI 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 \13\ 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

[[Page 15784]]

a practice of ``unquestioning reliance'' on claims made by a self-
regulatory organization (``SRO'') in the course of filing a rule or fee 
change with the Commission.\14\ 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.\15\ 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'').\16\ 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.'' \17\ The Commission denied requests 
by various exchanges and plan participants for reconsideration of the 
Remand Order.\18\ 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.'' \19\ Both the Remand Order and 
the Order Denying Reconsideration were appealed to the D.C. Circuit.
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    \13\ See Susquehanna International Group, LLP v. Securities & 
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the 
``Susquehanna Decision'').
    \14\ Id.
    \15\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA 
Decision'').
    \16\ 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).
    \17\ Id. at page 2.
    \18\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order 
Denying Reconsideration'').
    \19\ 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.\20\ 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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    \20\ 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.'' \21\ 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.'' \22\ 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.'' \23\
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    \21\ 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'').
    \22\ Id.
    \23\ 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 \24\ and remanded for further proceedings consistent 
with its opinion.\25\ 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.'' \26\ 
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.\27\ 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.'' 
\28\ 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.\29\
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    \24\ 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.
    \25\ 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.
    \26\ Id. at *2; see also id. (``[T]he sole purpose of the 
challenged remand has disappeared.'').
    \27\ 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'').
    \28\ Id.
    \29\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 90087 (October 5, 2020).
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    As a result of the Commission's loss of the NASDAQ v. SEC case 
noted above, the Commission never followed through with its intention 
to subject the over 400 fee filings to ``develop a record,'' and to 
``explain their conclusions, based on that record, in a written 
decision that is sufficient to enable us to perform our review.'' \30\ 
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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    \30\ See supra note 16, at page 2.

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[[Page 15785]]

    While the Exchange appreciates that the Staff Guidance articulates 
an important policy goal of improving disclosures and requiring 
exchanges to justify that their market data and access fee proposals 
are fair and reasonable, the practical effect of the Revised Review 
Process, Staff Guidance, and the Commission's related practice of 
continuous suspension of new fee filings, is anti-competitive, 
discriminatory, and has put in place an un-level playing field, which 
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched, 
legacy exchanges (``legacy exchanges'').\31\ 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 \32\ 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.\33\ These fees 
remain in effect today.
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    \31\ 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.
    \32\ 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.
    \33\ 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.\34\ 
By impeding any path forward for non-legacy exchanges to establish 
commensurate non-transaction fees, or by failing to provide any 
alternative means for smaller markets to establish ``fee parity'' with 
legacy exchanges, the Commission is stifling competition: non-legacy 
exchanges are, in effect, being deprived of the revenue necessary to 
compete on a level playing field with legacy exchanges. This is 
particularly harmful, given that the costs to maintain exchange systems 
and operations continue to increase. The Commission Staff's change in 
position impedes the ability of non-legacy exchanges to raise revenue 
to invest in their systems to compete with the legacy exchanges who 
already enjoy disproportionate non-transaction fee based revenue. For 
example, the Cboe Exchange, Inc. (``Cboe'') reported ``access and 
capacity fee'' revenue of $70,893,000 for 2020 \35\ and $80,383,000 for 
2021.\36\ Cboe C2 Exchange, Inc. (``C2'') reported ``access and 
capacity fee'' revenue of $19,016,000 for 2020 \37\ and $22,843,000 for 
2021.\38\ Cboe BZX Exchange, Inc. (``BZX'') reported ``access and 
capacity fee'' revenue of $38,387,000 for 2020 \39\ and $44,800,000 for 
2021.\40\ Cboe EDGX Exchange, Inc. (``EDGX'') reported ``access and 
capacity fee'' revenue of $26,126,000 for 2020 \41\ and $30,687,000 for 
2021.\42\ 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.\43\ 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.'' \44\
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    \34\ The Exchange has filed, and subsequently withdrawn, various 
forms of this proposed fee change numerous times since August 2021 
with each proposal containing hundreds of cost and revenue 
disclosures never previously disclosed by legacy exchanges in their 
access and market data fee filings prior to 2019.
    \35\ 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.
    \36\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
    \37\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
    \38\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
    \39\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \40\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
    \41\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
    \42\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
    \43\ 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.
    \44\ See PHLX Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf. The Exchange 
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 15786]]

    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,\45\ 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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    \45\ 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 . . .'',\46\ this is not the reality experienced by 
exchanges such as MIAX. 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. The Exchange has attempted 
to increase fees using a cost-based justification numerous times, 
having submitted over six filings.\47\ 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 \48\ 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.
---------------------------------------------------------------------------

    \46\ See supra note 21, at note 1.
    \47\ See Securities Exchange Act Release Nos. 94890 (May 11, 
2022), 87 FR 29945 (May 17, 2022) (SR-MIAX-2022-20); 94720 (April 
14, 2022), 87 FR 23586 (April 20, 2022) (SR-MIAX-2022-16); 94719 
(April 14, 2022), 87 FR 23600 (April 20, 2022) (SR-MIAX-2022-14); 
94259 (February 15, 2022), 87 FR 9747 (February 22, 2022) (SR-MIAX-
2022-08); 94256 (February 15, 2022), 87 FR9711 (February 22, 2022) 
(SR-MIAX-2022-07); 93771 (December 14, 2021), 86 FR 71940 (December 
20, 2021) (SR-MIAX-2021-60); 93775 (December 14, 2021), 86 FR 71996 
(December 20, 2021) (SR-MIAX-2021-59); 93185 (September 29, 2021), 
86 FR 55093 (October 5, 2021) (SR-MIAX-2021-43); 93165 (September 
28, 2021), 86 FR 54750 (October 4, 2021) (SR-MIAX-2021-41); 92661 
(August 13, 2021), 86 FR 46737 (August 19, 2021) (SR-MIAX-2021-37); 
92643 (August 11, 2021), 86 FR 46034 (August 17, 2021) (SR-MIAX-
2021-35).
    \48\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    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,\49\ 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; \50\ 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.
---------------------------------------------------------------------------

    \49\ 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.
    \50\ 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 places a 
substantial burden on competition. The Exchange would be uniquely 
disadvantaged by not being able to increase its access fees to 
comparable levels (or lower levels than current market rates) to those 
of other options exchanges for connectivity. If the Commission Staff 
were to disapprove this proposal, that action, and not market forces, 
would substantially affect whether the Exchange can be successful in 
its competition with other options exchanges. Disapproval of this 
filing could also be viewed as an arbitrary and capricious decision 
should the Commission Staff continue to ignore its past treatment of 
non-transaction fee filings before implementation of the Revised Review 
Process and Staff Guidance and refuse to allow such filings to be 
approved despite significantly enhanced arguments and cost 
disclosures.\51\
---------------------------------------------------------------------------

    \51\ 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

[[Page 15787]]

fee increases by other exchanges to remain in effect by publishing 
those filings for comment and allowing the exchange to withdraw and re-
file numerous times.\52\ Recently, the Commission Staff has not 
afforded the Exchange the same flexibility.\53\ 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.
---------------------------------------------------------------------------

    \52\ 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).
    \53\ See Securities Exchange Act Release Nos. 94719 (April 14, 
2022), 87 FR 23600 (April 20, 2022) (SR-MIAX-2022-14) and 94720 
(April 14, 2022), 87 FR 23586 (April 20, 2022) (SR-MIAX-2022-16).
---------------------------------------------------------------------------

* * * * *
10Gb ULL Connectivity Fee Change
    The Exchange recently filed a proposal to no longer operate 10Gb 
connectivity to the Exchange on a single shared network with its 
affiliate, MIAX Pearl. This change is an operational necessity due to 
ever-increasing capacity constraints and to accommodate anticipated 
access needs for Members and other market participants.\54\ This 
proposal: (i) sets forth the applicable fees for the bifurcated 10Gb 
ULL network; and (ii) removes provisions in the Fee Schedule that 
provides for a shared 10Gb ULL network; and (iii) specifies that market 
participants may continue to connect to both the Exchange and MIAX 
Pearl via the 1Gb network.
---------------------------------------------------------------------------

    \54\ See supra note 9.
---------------------------------------------------------------------------

    The Exchange bifurcated the Exchange and MIAX Pearl 10Gb ULL 
networks on January 23, 2023. The Exchange issued an alert on August 
12, 2022 publicly announcing the planned network change and 
implementation plan and dates to provide market participants adequate 
time to prepare.\55\ Upon bifurcation of the 10Gb ULL network, 
subscribers would need to purchase separate connections to the Exchange 
and MIAX at the applicable rate. The Exchange's proposed amended rate 
for 10Gb ULL connectivity is described below. Until the 10Gb ULL 
network is bifurcated, subscribers to 10Gb ULL connectivity would be 
able to connect to both the Exchange and MIAX Pearl at the applicable 
rate set forth below.
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

    The Exchange, therefore, proposes to amend the Fee Schedule to 
increase the fees for Members and non-Members to access the Exchange's 
system networks \56\ via a 10Gb ULL fiber connection and to specify 
that this fee is for a dedicated connection to the Exchange and no 
longer provides access to MIAX Pearl. Specifically, the Exchange 
proposes to amend Sections 5(a)-(b) of the Fee Schedule to increase the 
10Gb ULL connectivity fee for Members and non-Members from $10,000 per 
month to $13,500 per month (``10Gb ULL Fee'').\57\ The Exchange also 
proposes to amend the Fee Schedule to reflect the bifurcation of the 
10Gb ULL network and specify that only the 1Gb network provides access 
to both the Exchange and MIAX Pearl.
---------------------------------------------------------------------------

    \56\ The Exchange's system networks consist of the Exchange's 
extranet, internal network, and external network.
    \57\ Market participants that purchase additional 10Gb ULL 
connections as a result of this change will not be subject to the 
Exchange's Member Network Connectivity Testing and Certification Fee 
under Section 4(c) of the Exchange's fee schedule. See Section 4(c) 
of the Exchange's fee schedule available at https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Options_Fee_Schedule_10192022.pdf (providing that ``Network 
Connectivity Testing and Certification Fees will not be assessed in 
situations where the Exchange initiates a mandatory change to the 
Exchange's system that requires testing and certification. Member 
Network Connectivity Testing and Certification Fees will not be 
assessed for testing and certification of connectivity to the 
Exchange's Disaster Recovery Facility.'').
---------------------------------------------------------------------------

    The Exchange proposes to make the following changes to reflect the 
bifurcated 10Gb ULL network for the Exchange and MIAX Pearl. The 
Exchange proposes to amend the explanatory paragraphs below the network 
connectivity fee tables in Sections 5(a)-(b) of the Fee Schedule to 
specify that, with the bifurcated 10Gb ULL network, Members (and non-
Members) utilizing the MENI to connect to the trading platforms, market 
data systems, test systems, and disaster recovery facilities of the 
Exchange and MIAX Pearl via a single, can only do so via a shared 1Gb 
connection.
    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the Exchange APIs or market data feeds in the production 
environment. The Exchange will continue to pro-rate the fees when a 
Member or non-Member makes a change to the connectivity (by adding or 
deleting connections) with such pro-rated fees based on the number of 
trading days that the Member or non-Member has been credentialed to 
utilize any of the Exchange APIs or market data feeds in the production 
environment through such connection, divided by the total number of 
trading days in such month multiplied by the applicable monthly rate.
Limited Service MEI Ports
Background
    The Exchange also proposes to amend Section 5(d) of the Fee 
Schedule to adopt a tiered-pricing structure for Limited Service MEI 
Ports available to Market Makers. The Exchange allocates two (2) Full 
Service MEI Ports \58\ and two (2) Limited Service MEI Ports \59\ per 
matching engine \60\ to which each Market Maker connects. Market Makers 
may also request additional Limited Service MEI Ports for each matching 
engine to which they connect. The Full Service MEI Ports and Limited 
Service MEI Ports all include access to the Exchange's primary and 
secondary data centers and its disaster recovery center. Market Makers 
may request additional Limited Service MEI Ports. Currently, Market 
Makers are assessed a $100 monthly fee for each Limited Service MEI 
Port for each matching engine above the first two Limited Service MEI

[[Page 15788]]

Ports that are included for free. This fee was unchanged since 
2016.\61\
---------------------------------------------------------------------------

    \58\ Full Service MEI Ports provide Market Makers with the 
ability to send Market Maker quotes, eQuotes, and quote purge 
messages to the MIAX System. Full Service MEI Ports are also capable 
of receiving administrative information. Market Makers are limited 
to two Full Service MEI Ports per matching engine. See Fee Schedule, 
Section 5(d)(ii), note 27.
    \59\ Limited Service MEI Ports provide Market Makers with the 
ability to send eQuotes and quote purge messages only, but not 
Market Maker Quotes, to the MIAX System. Limited Service MEI Ports 
are also capable of receiving administrative information. Market 
Makers initially receive two Limited Service MEI Ports per matching 
engine. See Fee Schedule, Section 5(d)(ii), note 28.
    \60\ A ``matching engine'' is a part of the MIAX electronic 
system that processes options quotes and trades on a symbol-by-
symbol basis. Some matching engines will process option classes with 
multiple root symbols, and other matching engines will be dedicated 
to one single option root symbol (for example, options on SPY will 
be processed by one single matching engine that is dedicated only to 
SPY). A particular root symbol may only be assigned to a single 
designated matching engine. A particular root symbol may not be 
assigned to multiple matching engines. See Fee Schedule, Section 
5(d)(ii), note 29.
    \61\ See Securities Exchange Act Release No. 79666 (December 22, 
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47).
---------------------------------------------------------------------------

Limited Service MEI Port Fee Changes
    The Exchange now proposes to move from a flat monthly fee per 
Limited Service MEI Port for each matching engine to a tiered-pricing 
structure for Limited Service MEI Ports for each matching engine under 
which the monthly fee would vary depending on the number of Limited 
Service MEI Ports each Market Maker elects to purchase. Specifically, 
the Exchange will continue to provide the first and second Limited 
Service MEI Ports for each matching engine free of charge. For Limited 
Service MEI Ports, the Exchange proposes to adopt the following tiered-
pricing structure: (i) the third and fourth Limited Service MEI Ports 
for each matching engine will increase from the current flat monthly 
fee of $100 to $150 per port; (ii) the fifth and sixth Limited Service 
MEI Ports for each matching engine will increase from the current flat 
monthly fee of $100 to $200 per port; and (iii) the seventh or more 
Limited Service MEI Ports will increase from the current monthly flat 
fee of $100 to $250 per port. The Exchange believes a tiered-pricing 
structure will encourage Market Makers to be more efficient when 
determining how to connect to the Exchange. This should also enable the 
Exchange to better monitor and provide access to the Exchange's network 
to ensure sufficient capacity and headroom in the System \62\ in 
accordance with its fair access requirements under Section 6(b)(5) of 
the Act.\63\
---------------------------------------------------------------------------

    \62\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See the Definitions 
Section of the Fee Schedule and Exchange Rule 100.
    \63\ See 15 U.S.C. 78f(b). The Exchange may offer access on 
terms that are not unfairly discriminatory among its Members, and 
ensure sufficient capacity and headroom in the System. The Exchange 
monitors the System's performance and makes adjustments to its 
System based on market conditions and Member demand.
---------------------------------------------------------------------------

    The Exchange offers various types of ports with differing prices 
because each port accomplishes different tasks, are suited to different 
types of Members, and consume varying capacity amounts of the network. 
For instance, Market Makers who take the maximum amount of Limited 
Service MEI Ports account for approximately greater than 99% of message 
traffic over the network, while Market Makers with fewer Limited 
Service MEI Ports account for approximately less than 1% of message 
traffic over the network. In the Exchange's experience, Market Makers 
who only utilize the two free Limited Service MEI Ports do not have a 
business need for the high performance network solutions required by 
Market Makers who take the maximum amount of Limited Service MEI Ports. 
The Exchange's high performance network solutions and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput and the capacity to handle approximately 18 million 
quote messages per second. Based on November 2022 trading results, on 
an average day, the Exchange handles over approximately 8.8 billion 
quotes, and more than 185 billion quotes over the entire month. Of that 
total, Market Makers with the maximum amount of Limited Service MEI 
Ports generated approximately 5 billion quotes, and Market Makers who 
utilized the two free Limited Service MEI Ports generated approximately 
1.5 billion quotes. Also for November 2022, Market Makers who utilized 
3 to 4 Limited Service MEI ports submitted an average of 1,152,654,133 
quotes per day and Market Makers who utilized 5 to 9 Limited Service 
MEI ports submitted an average of 1,172,105,181 quotes per day. To 
achieve a consistent, premium network performance, the Exchange must 
build out and maintain a network that has the capacity to handle the 
message rate requirements of its most heavy network consumers. These 
billions of messages per day consume the Exchange's resources and 
significantly contribute to the overall network connectivity expense 
for storage and network transport capabilities. The Exchange must also 
purchase additional storage capacity on an ongoing basis to ensure it 
has sufficient capacity to store these messages as part of it 
surveillance program and to satisfy its record keeping requirements 
under the Exchange Act.\64\ Thus, as the number of connections a Market 
Maker has increases, certain other costs incurred by the Exchange that 
are correlated to, though not directly affected by, connection costs 
(e.g., storage costs, surveillance costs, service expenses) also 
increase. The Exchange sought to design the proposed tiered-pricing 
structure to set the amount of the fees to relate to the number of 
connections a firm purchases. The more connections purchased by a 
Market Maker likely results in greater expenditure of Exchange 
resources and increased cost to the Exchange. With this in mind, the 
Exchange proposes no fee or lower fees for those Market Makers who 
receive fewer Limited Service MEI Ports since those Market Makers 
generally tend to send the least amount of orders and messages over 
those connections. Given this difference in network utilization rate, 
the Exchange believes that it is reasonable, equitable, and not 
unfairly discriminatory that Market Makers who take the most Limited 
Service MEI Ports pay for the vast majority of the shared network 
resources from which all Member and non-Member users benefit, but is 
designed and maintained from a capacity standpoint to specifically 
handle the message rate and performance requirements of those Market 
Makers.
---------------------------------------------------------------------------

    \64\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    The Exchange proposes to increase its monthly Limited Service MEI 
Port fees since it has not done so since 2016,\65\ which is designed to 
recover a portion of the costs associated with directly accessing the 
Exchange.
---------------------------------------------------------------------------

    \65\ See Securities Exchange Act Release No. 79666 (December 22, 
2016), 81 FR 96133 (December 29, 2016) (SR-MIAX-2016-47).
---------------------------------------------------------------------------

    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 \66\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \67\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among Members and other persons using any facility or system which the 
Exchange operates or controls. The Exchange also believes the proposed 
fees further the objectives of Section 6(b)(5) of the Act \68\ 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.
---------------------------------------------------------------------------

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

    The Exchange believes that the information provided to justify the 
proposed fees meets or exceeds the amount of detail required in respect 
of proposed fee changes under the Revised Review Process and as set 
forth in recent Staff Guidance. Based on both the BOX Order \69\ and 
the Staff Guidance,\70\ the Exchange believes that the proposed

[[Page 15789]]

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.
---------------------------------------------------------------------------

    \69\ See supra note 20.
    \70\ See supra note 21.
---------------------------------------------------------------------------

    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.'' 
\71\ 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.'' \72\ 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.'' \73\
---------------------------------------------------------------------------

    \71\ Id.
    \72\ Id.
    \73\ Id.
---------------------------------------------------------------------------

    The proposed fees are reasonable because they promote parity among 
exchange pricing for access, which promotes competition, including in 
the Exchanges' ability to competitively price transaction fees, invest 
in infrastructure, new products and other innovations, all while 
allowing the Exchange to recover its costs to provide dedicated access 
via 10Gb ULL connectivity (driven by the bifurcation of the 10Gb ULL 
network) and Limited Service MEI Ports. As discussed above, the Revised 
Review Process and Staff Guidance have created an uneven playing field 
between legacy and non-legacy exchanges by severely restricting non-
legacy exchanges from being able to increase non-transaction related 
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 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 2012 and adopted its initial 
fee schedule, with all connectivity and port fees set at $0.00 (the 
Exchange originally had a non-ULL 10Gb connectivity option, which it 
has since removed).\74\ As a new exchange entrant, the Exchange chose 
to offer connectivity and ports 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.\75\
---------------------------------------------------------------------------

    \74\ See Securities Exchange Act Release No. 68415 (December 12, 
2012), 77 FR 74905 (December 18, 2012) (SR-MIAX-2012-01).
    \75\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he 
Exchange established this lower (when compared to other options 
exchanges in the industry) Participant Fee in order to encourage 
market participants to become Participants of BOX . . .''). See also 
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR 
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the 
initial fee schedule and stating that ``[u]nder the initial proposed 
Fee Schedule, the Exchange proposes to make clear that it does not 
charge any fees for membership, market data products, physical 
connectivity or application sessions.''). MEMX's market share has 
increased and recently proposed to adopt numerous non-transaction 
fees, including fees for membership, market data, and connectivity. 
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87 
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt 
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7, 
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845 
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for 
connectivity). See also, e.g., Securities Exchange Act Release No. 
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange 
after initially setting such fees at zero).
---------------------------------------------------------------------------

    Later in 2013, as the Exchange's market share increased,\76\ the 
Exchange adopted a nominal $10 fee for each additional Limited Service 
MEI Port.\77\ The Exchange last increased the fees for its 10Gb ULL 
fiber connections from $9,300 to $10,000 per month on January 1, 
2021.\78\ 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.
---------------------------------------------------------------------------

    \76\ The Exchange experienced a monthly average equity options 
trading volume of 1.87% for the month of November 2013. See Market 
at a Glance, available at www.miaxoptions.com.
    \77\ See Securities Exchange Act Release No. 70903 (November 20, 
2013), 78 FR 70615 (November 26, 2013) (SR-MIAX-2013-52).
    \78\ See Securities Exchange Act Release No. 90980 (January 25, 
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
---------------------------------------------------------------------------

    The proposed changes to the Fee Schedule are reasonable in several 
respects. As a threshold matter, the Exchange is subject to significant

[[Page 15790]]

competitive forces, which constrains its pricing determinations for 
transaction fees as well as non-transaction fees. The fact that the 
market for order flow is competitive has long been recognized by the 
courts. In NetCoalition v. Securities and Exchange Commission, the D.C. 
Circuit stated, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers' . . . .'' \79\
---------------------------------------------------------------------------

    \79\ 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.'' \80\
---------------------------------------------------------------------------

    \80\ 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.' '' \81\ 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.'' \82\ 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.'' \83\ 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.'' \84\
---------------------------------------------------------------------------

    \81\ 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.'').
    \82\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \83\ Id.
    \84\ See supra note 21.
---------------------------------------------------------------------------

    The Exchange believes the competing exchanges' 10Gb connectivity 
and port fees are useful examples of alternative approaches to 
providing and charging for access and demonstrating how such fees are 
competitively set and constrained. To that end, the Exchange believes 
the proposed fees are competitive and reasonable because the proposed 
fees are similar to or less than fees charged for similar connectivity 
and port access provided by other options exchanges with comparable 
market shares. As such, the Exchange believes that denying its ability 
to institute fees that allow us to recoup our costs and some margin in 
a manner that is 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 options exchanges with similar market share. 
Each of the market data rates in place at competing options exchanges 
were filed with the Commission for immediate effectiveness and remain 
in place today.

----------------------------------------------------------------------------------------------------------------
                                                Type of connection
                   Exchange                          or port          Monthly fee (per connection or per port)
----------------------------------------------------------------------------------------------------------------
MIAX (as proposed) (equity options market      10Gb ULL connection  $13,500.
 share of 5.64% for the month of November      Limited Service MEI  1-2 ports: FREE (not changed in this
 2022) \85\.                                    Ports.               proposal).
                                                                    3-4 ports: $150 each.
                                                                    5-6 ports: $200 each.
                                                                    7 or more ports: $250 each.
NASDAQ \86\ (equity options market share of    10Gb Ultra fiber     $15,000 per connection.
 6.61% for the month of November 2022) \87\.    connection.         1-5 ports: $1,500 per port.
                                               SQF Port \88\......  6-20 ports: $1,000 per port.
                                                                    21 or more ports: $500 per port.
NASDAQ ISE LLC (``ISE'') \89\ (equity options  10Gb Ultra fiber     $15,000 per connection.
 market share of 5.76% for the month of         connection.         $1,100 per port.
 November 2022) \90\.                          SQF Port...........
NYSE American LLC (``NYSE American'') \91\     10Gb LX LCN          $22,000 per connection.
 (equity options market share of 6.41% for      connection.         1-40 ports: $450 per port.
 the month of November 2022) \92\.             Order/Quote Entry    41 or more ports: $150 per port.
                                                Port.
NASDAQ GEMX, LLC (``GEMX'') \93\ (equity       10Gb Ultra           $15,000 per connection.
 options market share of 1.79% for the month    connection.         $1,250 per port.
 of November 2022) \94\.                       SQF Port...........
----------------------------------------------------------------------------------------------------------------

    There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options 
exchanges. Market participants may choose to become a member of one or 
more options exchanges based on the market participant's assessment of 
the business opportunity relative to the costs of the Exchange. With 
this, there is elasticity of demand for exchange membership. As an 
example, the Exchange's affiliate,

[[Page 15791]]

MIAX PEARL, LLC (``MIAX Pearl''), experienced a decrease in membership 
as the result of similar fees proposed herein. One MIAX Pearl 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.
---------------------------------------------------------------------------

    \85\ See supra note 76.
    \86\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \87\ See supra note 76.
    \88\ Similar to the Exchange's MEI Ports, SQF ports are 
primarily utilized by Market Makers.
    \89\ See ISE Pricing Schedule, Options 7, Section 7, 
Connectivity Fees and ISE Rules, General 8: Connectivity.
    \90\ See supra note 76.
    \91\ See NYSE American Options Fee Schedule, Section V.A. Port 
Fees and Section V.B. Co-Location Fees.
    \92\ See supra note 76.
    \93\ See GEMX Pricing Schedule, Options 7, Section 6, 
Connectivity Fees and GEMX Rules, General 8: Connectivity.
    \94\ See supra note 76.
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    It is not a requirement for market participants to become members 
of all options exchanges, in fact, certain market participants conduct 
an options business as a member of only one options market.\95\ A very 
small number of market participants choose to become a member of all 
sixteen options exchanges. Most firms that actively trade on options 
markets are not currently Members of the Exchange and do not purchase 
connectivity or port services at the Exchange. Connectivity and ports 
are only available to Members or service bureaus, and only a Member may 
utilize a port.\96\
---------------------------------------------------------------------------

    \95\ 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.''
    \96\ Service Bureaus may obtain ports on behalf of Members.
---------------------------------------------------------------------------

    One other exchange recently noted in a proposal to amend their own 
trading permit fees that of the 62 market making firms that are 
registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access 
only one of the three exchanges.\97\ The Exchange and its affiliates, 
MIAX Pearl and MIAX Emerald, have a total of 47 members. Of those 47 
total members, 35 are members of all three affiliated exchanges, four 
are members of only two (2) affiliated exchanges, and eight (8) are 
members of only one affiliated exchange. The Exchange also notes that 
no firm is a Member of the Exchange only. The above data evidences that 
a broker-dealer need not have direct connectivity to all options 
exchanges, let alone the Exchange and its two affiliates, and broker-
dealers may elect to do so based on their own business decisions and 
need to directly access each exchange's liquidity pool.
---------------------------------------------------------------------------

    \97\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change to Amend the 
Fee Schedule on the BOX Options Market LLC Facility To Adopt 
Electronic Market Maker Trading Permit Fees). The Exchange believes 
that BOX's observation demonstrates that market making firms can, 
and do, select which exchanges they wish to access, and, 
accordingly, options exchanges must take competitive considerations 
into account when setting fees for such access.
---------------------------------------------------------------------------

    Not only is there not an actual regulatory requirement to connect 
to every options exchange, the Exchange believes there is also no ``de 
facto'' or practical requirement as well, as further evidenced by the 
broker-dealer membership analysis of the options exchanges discussed 
above. As noted above, this is evidenced by the fact that one MIAX 
Pearl 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 (which are similar to the changes 
proposed herein). Indeed, broker-dealers choose if and how to access a 
particular exchange and because it is a choice, the Exchange must set 
reasonable pricing, otherwise prospective members would not connect and 
existing members would disconnect from the Exchange. The decision to 
become a member of an exchange, particularly for registered market 
makers, is complex, and not solely based on the non-transactional costs 
assessed by an exchange. As noted herein, specific factors include, but 
are not limited to: (i) an exchange's available liquidity in options 
series; (ii) trading functionality offered on a particular market; 
(iii) product offerings; (iv) customer service on an exchange; and (v) 
transactional pricing. Becoming a member of the exchange does not 
``lock'' a potential member into a market or diminish the overall 
competition for exchange services.
    In lieu of becoming a member at each options exchange, a market 
participant may join one exchange and elect to have their orders routed 
in the event that a better price is available on an away market. 
Nothing in the Order Protection Rule requires a firm to become a Member 
at--or establish connectivity to--the Exchange.\98\ 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.\99\
---------------------------------------------------------------------------

    \98\ See Options Order Protection and Locked/Crossed Market Plan 
(August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
    \99\ Members may elect to not route their orders by utilizing 
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------

    With respect to the submission of orders, Members may also choose 
not to purchase any connection at all from the Exchange, and instead 
rely on the port of a third party to submit an order. For example, a 
third-party broker-dealer Member of the Exchange may be utilized by a 
retail investor to submit orders into an Exchange. An institutional 
investor may utilize a broker-dealer, a service bureau,\100\ or request 
sponsored access \101\ through a member of an exchange in order to 
submit a trade directly to an options exchange.\102\ 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.
---------------------------------------------------------------------------

    \100\ Service Bureaus provide access to market participants to 
submit and execute orders on an exchange. On the Exchange, a Service 
Bureau may be a Member. Some Members utilize a Service Bureau for 
connectivity and that Service Bureau may not be a Member. Some 
market participants utilize a Service Bureau who is a Member to 
submit orders.
    \101\ Sponsored Access is an arrangement whereby a Member 
permits its customers to enter orders into an exchange's system that 
bypass the Member's trading system and are routed directly to the 
Exchange, including routing through a service bureau or other third-
party technology provider.
    \102\ This may include utilizing a floor broker and submitting 
the trade to one of the five options trading floors.
---------------------------------------------------------------------------

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

[[Page 15792]]

party).\103\ Indeed, the Exchange does not receive any connectivity 
revenue when connectivity is resold by a third-party, which often is 
resold to multiple customers, some of whom are agency broker-dealers 
that have numerous customers of their own.\104\ Particularly, in the 
event that a market participant views the Exchange's direct 
connectivity and access fees as more or less attractive than competing 
markets, that market participant can choose to connect to the Exchange 
indirectly or may choose not to connect to the Exchange and connect 
instead to one or more of the other 16 options markets. Accordingly, 
the Exchange believes that the proposed fees are fair and reasonable 
and constrained by competitive forces.
---------------------------------------------------------------------------

    \103\ 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).
    \104\ The Exchange notes that resellers, such as SFTI, are not 
required to publicize, let alone justify or file with the Commission 
their fees, and as such could charge the market participant any fees 
it deems appropriate (including connectivity fees higher than the 
Exchange's connectivity fees), even if such fees would otherwise be 
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------

    The Exchange is obligated to regulate its Members and secure access 
to its environment. In order to properly regulate its Members and 
secure the trading environment, the Exchange takes measures to ensure 
access is monitored and maintained with various controls. Connectivity 
and ports are methods utilized by the Exchange to grant Members secure 
access to communicate with the Exchange and exercise trading rights. 
When a market participant elects to be a Member, and is approved for 
membership by the Exchange, the Member is granted trading rights to 
enter orders and/or quotes into Exchange through secure connections.
    Again, there is no legal or regulatory requirement that a market 
participant become a Member of the Exchange. This is again evidenced by 
the fact that one MIAX Pearl 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. If a market 
participant chooses to become a 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.
Bifurcation of 10Gb ULL Connectivity and Related Fees
    The Exchange began to operate on a single shared network with MIAX 
Pearl when MIAX Pearl commenced operations as a national securities 
exchange on February 7, 2017.\105\ The Exchange and MIAX Pearl have 
operated on a single shared network to provide Members with a single 
convenient set of access points for both exchanges. Both the Exchange 
and MIAX Pearl offer two methods of connectivity, 1Gb and 10Gb ULL 
connections. The 1Gb connection services are supported by a discrete 
set of switches providing 1Gb access ports to Members. The 10Gb ULL 
connection services are supported by a second and mutually exclusive 
set of switches providing 10Gb ULL access ports to Members. Previously, 
both the 1Gb and 10Gb ULL shared extranet ports allow Members to use 
one connection to access both exchanges, namely their trading 
platforms, market data systems, test systems, and disaster recovery 
facilities.
---------------------------------------------------------------------------

    \105\ See Securities Exchange Act Release No. 80061 (February 
17, 2017), 82 FR 11676 (February 24, 2017) (establishing MIAX Pearl 
Fee Schedule and establishing that the MENI can also be configured 
to provide network connectivity to the trading platforms, market 
data systems, test systems, and disaster recovery facility of the 
MIAX Pearl's affiliate, MIAX, via a single, shared connection).
---------------------------------------------------------------------------

    The Exchange stresses that bifurcating the 10Gb ULL connectivity 
between the Exchange and MIAX Pearl was not designed with the objective 
to generate an overall increase in access fee revenue. Rather, the 
proposed change was necessitated by 10Gb ULL connectivity experiencing 
a significant decrease in port availability mostly driven by 
connectivity demands of latency sensitive Members that seek to maintain 
multiple 10Gb ULL connections on every switch in the network. Operating 
two separate national securities exchanges on a single shared network 
provided certain benefits, such as streamlined connectivity to multiple 
exchanges, and simplified exchange infrastructure. However, doing so 
was no longer sustainable due to ever-increasing capacity constraints 
and current system limitations. The network is not an unlimited 
resource. As described more fully in the proposal to bifurcate the 10Gb 
ULL network,\106\ the connectivity needs of Members and market 
participants has increased every year since the launch of MIAX Pearl 
and the operations of the Exchange and MIAX Pearl on a single shared 
10Gb ULL network is no longer feasible. This required constant System 
expansion to meet Member demand for additional ports and 10Gb ULL 
connections has resulted in limited available System headroom, which 
eventually became operationally problematic for both the Exchange and 
its customers.
---------------------------------------------------------------------------

    \106\ See Securities Exchange Act Release Nos. 96553 (December 
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
---------------------------------------------------------------------------

    As stated above, the shared network is not an unlimited resource 
and its expansion was constrained by MIAX's and MIAX Pearl's ability to 
provide fair and equitable access to all market participants of both 
markets. Due to the ever-increasing connectivity demands, the Exchange 
found it necessary to bifurcate 10Gb ULL connectivity to the Exchange's 
and MIAX Pearl's Systems and networks to be able to continue to meet 
ongoing and future 10Gb ULL connectivity and access demands.\107\
---------------------------------------------------------------------------

    \107\ Currently, the Exchange maintains sufficient headroom to 
meet ongoing and future requests for 1Gb connectivity. Therefore, 
the Exchange did not propose to alter 1Gb connectivity and continues 
to provide 1Gb connectivity over a shared network.
---------------------------------------------------------------------------

    Unlike the switches that provide 1Gb connectivity, the availability 
for additional 10Gb ULL connections on each switch had significantly 
decreased. This was mostly driven by the connectivity demands of 
latency sensitive Members (e.g., Market Makers and liquidity removers) 
that sought to maintain connectivity across multiple 10Gb ULL switches. 
Based on the Exchange's experience, such Members did not typically use 
a shared 10Gb ULL connection to reach both the Exchange and MIAX Pearl 
due to related latency concerns. Instead, those Members maintain 
dedicated separate 10Gb ULL connections for the Exchange and separate 
dedicated 10Gb ULL connections for MIAX Pearl. This resulted in a much 
higher 10Gb ULL usage per switch by those Members on the shared 10Gb 
ULL network than would otherwise be needed if the Exchange and MIAX 
Pearl had their own dedicated 10Gb ULL networks. Separation of the 
Exchange and MIAX Pearl 10Gb ULL networks naturally lends itself to 
reduced 10Gb ULL port consumption on each switch and, therefore, 
increased 10Gb ULL port availability for current Members and new 
Members.
    Prior to bifurcating the 10Gb ULL network, the Exchange and MIAX 
Pearl continued to add switches to meet ongoing demand for 10Gb ULL 
connectivity. That was no longer sustainable because simply adding 
additional switches to expand the current shared 10Gb ULL network

[[Page 15793]]

would not adequately alleviate the issue of limited available port 
connectivity. While it would have resulted in a gain in overall port 
availability, the existing switches on the shared 10Gb ULL network in 
use would have continued to suffer from lack of port headroom given 
many latency sensitive Members' needs for a presence on each switch to 
reach both the Exchange and MIAX Pearl. This was because those latency 
sensitive Members sought to have a presence on each switch to maximize 
the probability of experiencing the best network performance. Those 
Members routinely decide to rebalance orders and/or messages over their 
various connections to ensure each connection is operating with maximum 
efficiency. Simply adding switches to the extranet would not have 
resolved the port availability needs on the shared 10Gb ULL network 
since many of the latency sensitive Members were unwilling to relocate 
their connections to a new switch due to the potential detrimental 
performance impact. As such, the impact of adding new switches and 
rebalancing ports would not have been effective or responsive to 
customer needs. The Exchange has found that ongoing and continued 
rebalancing once additional switches are added has had, and would have 
continued to have had, a diminishing return on increasing available 
10Gb ULL connectivity.
    Based on its experience and expertise, the Exchange found the most 
practical way to increase connectivity availability on its switches was 
to bifurcate the existing 10Gb ULL networks for the Exchange and MIAX 
Pearl by migrating the exchanges' connections from the shared network 
onto their own set of switches. Such changes accordingly necessitated a 
review of the Exchange's previous 10Gb ULL connectivity fees and 
related costs. The proposed fees are necessary to allow the Exchange to 
cover ongoing costs related to providing and maintaining such 
connectivity, described more fully below. The ever increasing 
connectivity demands that necessitated this change further support that 
the proposed fees are reasonable because this demand reflects that 
Members and non-Members believe they are getting value from the 10Gb 
ULL connections they purchase.
    The Exchange announced on August 12, 2022 the planned network 
change and the January 23, 2023 implementation date to provide market 
participants adequate time to prepare.\108\ Since August 12, 2022, the 
Exchange has worked with current 10Gb ULL subscribers to address their 
connectivity needs ahead of the January 23, 2023 date. Based on those 
interactions and subscriber feedback, the Exchange experienced a 
minimal net increase of approximately six (6) overall 10Gb ULL 
connectivity subscriptions across the Exchange and MIAX Pearl. This 
anticipated immaterial increase in overall connections reflect a 
minimal fee impact for all types of subscribers and reflects that 
subscribers elected to reallocate existing 10Gb ULL connectivity 
directly to the Exchange or MIAX Pearl, or chose to decrease or cease 
connectivity as a result of the change.
---------------------------------------------------------------------------

    \108\ See supra note 9.
---------------------------------------------------------------------------

    Should the Commission Staff disapprove such fees, it would 
effectively dictate how an exchange manages its technology and would 
hamper the Exchange's ability to continue to invest in and fund access 
services in a manner that allows it to meet existing and anticipated 
access demands of market participants. Disapproval could also have the 
adverse effect of discouraging exchanges from optimizing its operations 
and deploying innovative technology to the benefit of market 
participants if it believes the Commission would later prevent that 
exchange from covering its costs and monetizing operational 
enhancements, thus adversely impacting competition. Also, as noted 
above, the economic consequences of not being able to better establish 
fee parity with other exchanges for non-transaction fees hampers the 
Exchange's ability to compete on transaction fees.
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 Members--both 
generally and in relation to other Members, i.e., to assure the fee 
will not create a financial burden on any participant and will not have 
an undue impact in particular on smaller Members and competition among 
Members in general. The Exchange believes that this level of diligence 
and transparency is called for by the requirements of Section 19(b)(1) 
under the Act,\109\ and Rule 19b-4 thereunder,\110\ with respect to the 
types of information SROs should provide when filing fee changes, and 
Section 6(b) of the Act,\111\ which requires, among other things, that 
exchange fees be reasonable and equitably allocated,\112\ not designed 
to permit unfair discrimination,\113\ and that they not impose a burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act.\114\ 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.\115\ 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.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78s(b)(1).
    \110\ 17 CFR 240.19b-4.
    \111\ 15 U.S.C. 78f(b).
    \112\ 15 U.S.C. 78f(b)(4).
    \113\ 15 U.S.C. 78f(b)(5).
    \114\ 15 U.S.C. 78f(b)(8).
    \115\ See supra note 21.
---------------------------------------------------------------------------

    As detailed below, the Exchange recently calculated its aggregate 
annual costs for providing physical 10Gb ULL connectivity to the 
Exchange at $12,034,554 (or approximately $1,002,880 per month, rounded 
up to the nearest dollar when dividing the annual cost by 12 months) 
and its aggregate annual costs for providing Limited Service MEI Ports 
at $2,157,178 (or approximately $179,765 per month, rounded down to the 
nearest dollar when dividing the annual cost by 12 months). In order to 
cover the aggregate costs of providing connectivity to its Users (both 
Members and non-Members \116\) going forward and to make a modest 
profit, as described below, the Exchange proposes to modify its Fee 
Schedule to charge a fee of $13,500 per month for each physical 10Gb 
ULL connection and to remove language providing for a shared 10Gb ULL 
network between the Exchange and

[[Page 15794]]

MIAX Pearl. The Exchange also proposes to modify its Fee Schedule to 
charge tiered rates for additional Limited Service MEI Ports.
---------------------------------------------------------------------------

    \116\ Types of market participants that obtain connectivity 
services from the Exchange but are not Members include service 
bureaus and extranets. Service bureaus offer technology-based 
services to other companies for a fee, including order entry 
services, and thus, may access Limited Service MEI Ports on behalf 
of one or more Members. Extranets offer physical connectivity 
services to Members and non-Members.
---------------------------------------------------------------------------

    In 2019, the Exchange completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis'').\117\ 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'').
---------------------------------------------------------------------------

    \117\ 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 
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,\118\ 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.
---------------------------------------------------------------------------

    \118\ For example, the Exchange maintains 24 matching engines, 
MIAX Pearl Options maintains 12 matching engines, MIAX Pearl 
Equities 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 1Gb and 10Gb ULL 
connectivity (62%), with smaller allocations to all ports (15%), and 
the remainder to the provision of transaction execution, membership 
services and market data services (23%). 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 
Members and parties that they sponsor to participate directly on the 
Exchange may submit orders to the Exchange; many Members (but not all) 
consume market data from the Exchange in order to trade on the 
Exchange; and, the Exchange consumes market data from external sources 
in order to comply with regulatory obligations. Accordingly, given this 
interdependence, the allocation of costs to each service or revenue 
source required judgment of the Exchange and was weighted based on 
estimates of the Exchange that the Exchange believes are reasonable, as 
set forth below. While there is no standardized and generally accepted 
methodology 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 will continue to be left with its best efforts to 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 
10Gb ULL connectivity and Limited Service MEI Port services, including 
both physical 10Gb connections and Limited Service MEI Ports, result in 
an aggregate monthly cost of approximately $1,182,645 (utilizing the 
rounded numbers when dividing the annual cost for 10Gb ULL connectivity 
and annual cost for Limited Service MEI Ports by 12 months, then adding 
both numbers together), as further detailed below.
Costs Related to Offering Physical 10Gb ULL Connectivity
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering physical dedicated 
10Gb ULL connectivity via an unshared network as well as the percentage 
of the Exchange's overall costs that such costs represent for such area 
(e.g., as set forth below, the Exchange allocated approximately

[[Page 15795]]

25.6% of its overall Human Resources cost to offering physical 
connectivity).

----------------------------------------------------------------------------------------------------------------
                         Cost drivers                           Annual cost \119\  Monthly cost \120\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...............................................         $3,867,297            $322,275         25
Connectivity (external fees, cabling, switches, etc.).........             70,163               5,847       60.6
Internet Services, including External Market Data.............            424,584              35,382       73.3
Data Center...................................................            718,950              59,912       60.6
Hardware and Software Maintenance and Licenses................            727,734              60,645       49.8
Depreciation..................................................          2,310,898             192,575       61.6
Allocated Shared Expenses.....................................          3,914,928             326,244       49.1
                                                               -------------------------------------------------
    Total.....................................................         12,034,554           1,002,880       39.4
----------------------------------------------------------------------------------------------------------------

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

    \119\ The Annual Cost includes figures rounded to the nearest 
dollar.
    \120\ The Monthly Cost was determined by dividing the Annual 
Cost for each line item by twelve (12) months and rounding up or 
down to the nearest dollar.
---------------------------------------------------------------------------

Human Resources
    For personnel costs (Human Resources), the Exchange calculated an 
allocation of employee time for employees whose functions include 
providing and maintaining physical connectivity and performance thereof 
(primarily the Exchange's network infrastructure team, which spends 
most of their time performing functions necessary to provide physical 
connectivity) and for which the Exchange allocated a percentage of 42% 
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 18%). 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 employees as 
needed, 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 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. options 
industry, as well as content, connectivity, and infrastructure services 
for critical components of the network that are necessary to provide 
and maintain its System Networks and access to its System Networks via 
10Gb ULL connectivity. Specifically, the Exchange utilizes connectivity 
and content service providers to connect to other national securities 
exchanges, the Options Price Reporting Authority (``OPRA''), and to 
receive market data from other exchanges and market data providers. The 
Exchange understands that these service providers provide services to 
most, if not all, of the other U.S. exchanges and other market 
participants. Connectivity and market data provided these service 
providers is critical to the Exchanges daily operations and performance 
of its System Networks to which market participants connect to via 10Gb 
ULL connectivity. Without these services providers, the Exchange would 
not be able to connect to other national securities exchanges, market 
data providers, or OPRA and, therefore, would not be able to operate 
and support its System Networks. The Exchange does not employ a 
separate fee to cover its connectivity and content service provider 
expense and recoups that expense, in part, by charging for 10Gb ULL 
connectivity.
Data Center
    Data Center costs includes an allocation of the costs the Exchange 
incurs to provide physical connectivity in the third-party data centers 
where it maintains its equipment (such as dedicated space, security 
services, cooling and power). The Exchange notes that it does not own 
the Primary Data Center or the Secondary Data Center, but instead, 
leases space in data centers operated by third parties. The Exchange 
has allocated a high percentage of the Data Center cost (60.6%) to 
physical 10Gb ULL connectivity because the third-party data centers and 
the

[[Page 15796]]

Exchange's physical equipment contained therein is the most direct cost 
in providing physical access to the Exchange. In other words, for the 
Exchange to operate in a dedicated space with connectivity of 
participants to a physical trading platform, the data centers are a 
very tangible cost, and in turn, if the Exchange did not maintain such 
a presence then physical connectivity would be of no value to market 
participants.
External Market Data
    External Market Data includes fees paid to third parties, including 
other exchanges, to receive and consume market data from other markets. 
The Exchange included External Market Data fees to the provision of 
10Gb ULL connectivity as such market data is necessary here to offer 
certain services related to such connectivity, such as certain risk 
checks that are performed prior to execution, and checking for other 
conditions (e.g., re-pricing of orders to avoid lock or crossed 
markets, trading collars). This allocation was included as part of the 
internet Services cost described above. Thus, as market data from other 
exchanges is consumed at the matching engine level, (to which 10Gb ULL 
connectivity provides access to) in order to validate orders before 
additional entering the matching engine or being executed, the Exchange 
believes it is reasonable to allocate a small amount of such costs to 
10Gb ULL connectivity.
Hardware and Software Maintenance and Licenses
    Hardware and Software Licenses includes hardware and software 
licenses used to operate and monitor physical assets necessary to offer 
physical connectivity to the Exchange.\121\
---------------------------------------------------------------------------

    \121\ This expense may be less than the Exchange's affiliated 
markets, specifically MIAX Pearl, because, unlike the Exchange, 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 Pearl.
---------------------------------------------------------------------------

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 61.6% of all depreciation costs to providing physical 10Gb 
ULL connectivity. The Exchange notes, however, that it did not allocate 
depreciation costs for any depreciated software necessary to operate 
the Exchange to physical connectivity, as such software does not impact 
the provision of physical connectivity. 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.\122\ The Exchange notes that the 
49.1% allocation of general shared expenses for physical 10Gb ULL 
connectivity is higher than that allocated to general shared expenses 
for Limited Service MEI Ports based on its allocation methodology that 
weighted costs attributable to each Core Service based on an 
understanding of each area. While physical connectivity has several 
areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Centers, as described above), 
Limited Service MEI Ports do not require as many broad or indirect 
resources as other Core Services. The total monthly cost for 10Gb ULL 
connectivity of $1,002,880 was divided by the number of physical 10Gb 
ULL connections the Exchange maintained at the time that proposed 
pricing was determined (93), to arrive at a cost of approximately 
$10,784 per month, per physical 10Gb ULL connection.
---------------------------------------------------------------------------

    \122\ The Exchange notes that MEMX allocated a precise amount of 
10% of the overall cost for directors to providing physical 
connectivity. The Exchange does not calculate is expenses at that 
granular a level. Instead, director costs are included as part of 
the overall general allocation.
---------------------------------------------------------------------------

Costs Related to Offering Limited Service MEI Ports
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering Limited Service 
MEO Ports as well as the percentage of the Exchange's overall costs 
such costs represent for such area (e.g., as set forth below, the 
Exchange allocated approximately 5.8% of its overall Human Resources 
cost to offering Limited Service MEI Ports).
---------------------------------------------------------------------------

    \123\ See supra note 119 (describing rounding of Annual Costs).
    \124\ See supra note 120 (describing rounding of Monthly Costs 
based on Annual Costs).

----------------------------------------------------------------------------------------------------------------
                         Cost drivers                           Annual cost \123\  Monthly cost \124\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...............................................           $898,480             $74,873        5.8
Connectivity (external fees, cabling, switches, etc.).........              4,435                 370        3.8
Internet Services, including External Market Data.............             41,601               3,467        7.2
Data Center...................................................             85,214               7,101        7.2
Hardware and Software Maintenance and Licenses................            104,859               8,738        7.2
Depreciation..................................................            237,335              19,778        6.3
Allocated Shared Expenses.....................................            785,254              65,438        9.8
                                                               -------------------------------------------------
    Total.....................................................          2,157,178             179,765        7.1
----------------------------------------------------------------------------------------------------------------


[[Page 15797]]

Human Resources
    With respect to Limited Service MEI Ports, the Exchange calculated 
Human Resources cost by taking an allocation of employee time for 
employees whose functions include providing Limited Service MEI Ports 
and maintaining performance thereof (including a broader range of 
employees such as technical operations personnel, market operations 
personnel, and software engineering personnel) as well as a limited 
subset of personnel with ancillary functions related to maintaining 
such connectivity (such as sales, membership, and finance personnel). 
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 Limited Service MEI Ports and maintaining 
performance thereof, and confirming that the proposed allocations were 
reasonable based on an understanding of the percentage of their time 
such employees devote to tasks related to providing Limited Service MEI 
Ports and maintaining performance thereof. The Exchange notes that 
senior level executives were only allocated Human Resources costs to 
the extent the Exchange believed they are involved in overseeing tasks 
related to providing Limited Service MEI Ports and maintaining 
performance thereof. The Human Resources cost was again calculated 
using a blended rate of compensation reflecting salary, equity and 
bonus compensation, benefits, payroll taxes, and 401(k) matching 
contributions.
Connectivity and Internet Services
    The Connectivity cost includes external fees paid to connect to 
other exchanges, cabling and switches, as described above. For purposes 
of Limited Service MEI Ports, the Exchange also includes a portion of 
its costs related to External Market Data, as described below.
Data Center
    Data Center costs includes an allocation of the costs the Exchange 
incurs to provide physical connectivity in the third-party data centers 
where it maintains its equipment as well as related costs (the Exchange 
does not own the Primary Data Center or the Secondary Data Center, but 
instead, leases space in data centers operated by third parties).
External Market Data
    External Market Data includes fees paid to third parties, including 
other exchanges, to receive and consume market data from other markets. 
The Exchange included External Market Data fees to the provision of 
Limited Service MEI Ports as such market data is also necessary here 
(in addition to physical connectivity) to offer certain services 
related to such ports, such as validating orders on entry against the 
national best bid and national best offer and checking for other 
conditions (e.g., whether a symbol is halted). This allocation was 
included as part of the internet Services cost described above.\125\ 
Thus, as market data from other Exchanges is consumed at the Limited 
Service MEI Port level in order to validate orders before additional 
processing occurs with respect to such orders, the Exchange believes it 
is reasonable to allocate a small amount of such costs to Limited 
Service MEI Ports.
---------------------------------------------------------------------------

    \125\ The Exchange notes that MEMX separately allocated 7.5% of 
its external market data costs to providing physical connectivity.
---------------------------------------------------------------------------

Hardware and Software Maintenance and Licenses
    Hardware and Software Licenses includes hardware and software 
licenses used to monitor the health of the order entry services 
provided by the Exchange, as described above.
Monthly Depreciation
    All physical assets and software, which also includes assets used 
for testing and monitoring of order entry infrastructure, were valued 
at cost, depreciated or leased over periods ranging from three to five 
years. Thus, the depreciation cost primarily relates to servers 
necessary to operate the Exchange, some of which is owned by the 
Exchange and some of which is leased by the Exchange in order to allow 
efficient periodic technology refreshes. The Exchange allocated 6.3% of 
all depreciation costs to providing Limited Service MEI Ports. In 
contrast to physical connectivity, described above, the Exchange did 
allocate depreciation costs for depreciated software necessary to 
operate the Exchange to Limited Service MEI Ports because such software 
is related to the provision of such connectivity. 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 Limited Service MEI Ports costs as without these general 
shared costs the Exchange would not be able to operate in the manner 
that it does and provide Limited Service MEI Ports. The costs included 
in general shared expenses include general expenses of the Exchange, 
including office space and office expenses (e.g., occupancy and 
overhead expenses), utilities, recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services (including external and internal audit expenses), and 
telecommunications costs. The Exchange again notes that the cost of 
paying directors to serve on its Board of Directors is included in the 
calculation of Allocated Shared Expenses, and thus a portion of such 
overall cost amounting to less than 10% of the overall cost for 
directors was allocated to providing Limited Service MEI Ports. The 
Exchange notes that the 9.8% allocation of general shared expenses for 
Limited Service MEI Ports is lower than that allocated to general 
shared expenses for physical connectivity based on its allocation 
methodology that weighted costs attributable to each Core Service based 
on an understanding of each area. While Limited Service MEI Ports have 
several areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Centers, as described above), 10Gb 
ULL connectivity requires a broader level of support from Exchange 
personnel in different areas, which in turn leads to a broader general 
level of cost to the Exchange. The total monthly cost of $179,765 was 
divided by the number of chargeable Limited Service MEI Ports 
(excluding the two free Limited Service MEI Ports per matching engine 
that each Member receives) the Exchange maintained at the time that 
proposed pricing was determined (1303), to arrive at a cost of 
approximately $138 per month, per charged Limited Service MEI Port.
Cost Analysis--Additional Discussion
    In conducting its Cost Analysis, the Exchange did not allocate any 
of its expenses in full to any core services (including physical 
connectivity or Limited Service MEI Ports) and did not double-count any 
expenses. Instead, as described above, the Exchange allocated 
applicable cost drivers across its core services and used the same Cost 
Analysis to form the basis of this proposal and the filings the 
Exchange submitted proposing fees for proprietary

[[Page 15798]]

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 (42%) given their focus 
on functions necessary to provide physical connections. The salaries of 
those same personnel were allocated only 8.4% to Limited Service MEI 
Ports and the remaining 49.6% was allocated to 1Gb connectivity, other 
port services, transaction services, membership services and market 
data. The Exchange did not allocate any other Human Resources expense 
for providing physical connections to any other employee group, outside 
of a smaller allocation of 17.8% for 10Gb ULL connectivity or 18.2% for 
the entire network, of the cost associated with certain specified 
personnel who work closely with and support network infrastructure 
personnel. In contrast, the Exchange allocated much smaller percentages 
of costs (5% or less) across a wider range of personnel groups in order 
to allocate Human Resources costs to providing Limited Service MEI 
Ports. This is because a much wider range of personnel are involved in 
functions necessary to offer, monitor and maintain Limited Service MEI 
Ports but the tasks necessary to do so are not a primary or full-time 
function.
    In total, the Exchange allocated 25.6% of its personnel costs to 
providing physical connections and 5.8% of its personnel costs to 
providing Limited Service MEI Ports, for a total allocation of 31.4% 
Human Resources expense to provide these specific connectivity 
services. In turn, the Exchange allocated the remaining 68.6% of its 
Human Resources expense to membership services, transaction services, 
other port services and market data. Thus, again, the Exchange's 
allocations of cost across core services were based on real costs of 
operating the Exchange and were not double-counted across the core 
services or their associated revenue streams.
    As another example, the Exchange allocated depreciation expense to 
all core services, including physical connections and Limited Service 
MEI Ports, but in different amounts. The Exchange believes it is 
reasonable to allocate the identified portion of such expense because 
such expense includes the actual cost of the computer equipment, such 
as dedicated servers, computers, laptops, monitors, information 
security appliances and storage, and network switching infrastructure 
equipment, including switches and taps that were purchased to operate 
and support the network. Without this equipment, the Exchange would not 
be able to operate the network and provide connectivity services to its 
Members and non-Members and their customers. However, the Exchange did 
not allocate all of the depreciation and amortization expense toward 
the cost of providing connectivity services, but instead allocated 
approximately 67.9% of the Exchange's overall depreciation and 
amortization expense to connectivity services (61.6% attributed to 10Gb 
ULL physical connections and 6.3% to Limited Service MEI Ports). The 
Exchange allocated the remaining depreciation and amortization expense 
(approximately 32.1%) toward the cost of providing transaction 
services, membership services, other port services and market data.
    The Exchange notes that its revenue estimates are based on 
projections across all potential revenue streams and will only be 
realized to the extent such revenue streams actually produce the 
revenue estimated. The Exchange does not yet know whether such 
expectations will be realized. For instance, in order to generate the 
revenue expected from connectivity, the Exchange will have to be 
successful in retaining existing clients that wish to maintain physical 
connectivity and/or Limited Service MEI Ports or in obtaining new 
clients that will purchase such services. Similarly, the Exchange will 
have to be successful in retaining a positive net capture on 
transaction fees in order to realize the anticipated revenue from 
transaction pricing.
    The Exchange notes that the Cost Analysis is based on the 
Exchange's 2023 fiscal year of operations and projections. It is 
possible however that such costs will either decrease or increase. To 
the extent the Exchange sees growth in use of connectivity services it 
will receive additional revenue to offset future cost increases.
    However, if use of connectivity services is static or decreases, 
the Exchange might not realize the revenue that it anticipates or needs 
in order to cover applicable costs. Accordingly, the Exchange is 
committing to conduct a one-year review after implementation of these 
fees. The Exchange expects that it may propose to adjust fees at that 
time, to increase fees in the event that revenues fail to cover costs 
and a reasonable mark-up of such costs. Similarly, the Exchange would 
propose to decrease fees in the event that revenue materially exceeds 
our current projections. In addition, the Exchange will periodically 
conduct a review to inform its decision making on whether a fee change 
is appropriate (e.g., to monitor for costs increasing/decreasing or 
subscribers increasing/decreasing, etc. in ways that suggest the then-
current fees are becoming dislocated from the prior cost-based 
analysis) and would propose to increase fees in the event that revenues 
fail to cover its costs and a reasonable mark-up, or decrease fees in 
the event that revenue or the mark-up materially exceeds our current 
projections. In the event that the Exchange determines to propose a fee 
change, the results of a timely review, including an updated cost 
estimate, will be included in the rule filing proposing the fee change. 
More generally, the Exchange believes that it is appropriate for an 
exchange to refresh and update information about its relevant costs and 
revenues in seeking any future changes to fees, and the Exchange 
commits to do so.
Projected Revenue \126\
---------------------------------------------------------------------------

    \126\ For purposes of calculating revenue for 10Gb ULL 
connectivity, the Exchange used projected revenues for February 
2023, the first full month for which it will provide dedicated 10Gb 
ULL connectivity to the Exchange and cease operating a shared 10Gb 
ULL network with MIAX Pearl.
---------------------------------------------------------------------------

    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.

[[Page 15799]]

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 $12,034,554. Based on current 10Gb 
ULL connectivity services usage, the Exchange would generate annual 
revenue of approximately $15,066,000. This represents a modest profit 
of 20% when compared to the cost of providing 10Gb ULL connectivity 
services, which will decrease over time.\127\ The Exchange's Cost 
Analysis estimates the annual cost to provide Limited Service MEI Port 
services at $2,157,178. Based on current Limited Service MEI Port 
services usage, the Exchange would generate annual revenue of 
approximately $3,300,600. This represents an estimated profit margin of 
35% when compared to the cost of providing Limited Service MEI Port 
services, which will decrease over time.\128\ Even if the Exchange 
earns those amounts or incrementally more or less, the Exchange 
believes the proposed fees are fair and reasonable because they will 
not result in pricing that deviates from that of other exchanges or 
supra-competitive profit, when comparing the total expense of the 
Exchange associated with providing 10Gb ULL connectivity and Limited 
Service MEI Port services versus the total projected revenue of the 
Exchange associated with network 10Gb ULL connectivity and Limited 
Service MEI Port services.
---------------------------------------------------------------------------

    \127\ Assuming the U.S. inflation rate continues at its current 
rate, the projected profit margins in this proposal will decrease 
and may reach single to negative digit levels in approximately 18 to 
24 months. See, e.g., https://www.usinflationcalculator.com/inflation/current-inflation-rates/ (last visited February 15, 2023).
    \128\ Id.
---------------------------------------------------------------------------

* * * * *
    The Exchange has operated at a cumulative net annual loss since it 
launched operations in 2012.\129\ The Exchange has operated at a net 
loss due to a number of factors, one of which is choosing to forgo 
revenue by offering certain products, such as connectivity, at lower 
rates than other options exchanges to attract order flow and encourage 
market participants to experience the high determinism, low latency, 
and resiliency of the Exchange's trading systems. The Exchange should 
not now be penalized for seeking to raise its fees in light of 
necessary technology changes and its increased costs after offering 
such products as discounted prices. Therefore, the Exchange believes 
the proposed fees are reasonable because they are based on both 
relative costs to the Exchange to provide dedicated 10Gb ULL 
connectivity and Limited Service MEI Ports, the extent to which the 
product drives the Exchange's overall costs and the relative value of 
the product, as well as the Exchange's objective to make access to its 
Systems broadly available to market participants. The Exchange also 
believes the proposed fees are reasonable because they are designed to 
generate annual revenue to recoup the Exchange's costs of providing 
dedicated 10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

    \129\ The Exchange has incurred a cumulative loss of $121 
million since its inception in 2012 through full year 2021. See 
Exchange's Form 1/A, Application for Registration or Exemption from 
Registration as a National Securities Exchange, filed June 29, 2022, 
available at https://www.sec.gov/Archives/edgar/vprr/2200/22001163.pdf.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimate is based on 
projections and will only be realized to the extent customer activity 
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving 
competition, the Exchange does not yet know whether such projections 
will be realized. For instance, in order to generate the revenue 
expected from 10Gb ULL connectivity and Limited Service MEI Ports, the 
Exchange will have to be successful in retaining existing clients that 
wish to utilize 10Gb ULL connectivity and Limited Service MEI Ports 
and/or obtaining new clients that will purchase such access. To the 
extent the Exchange is successful in encouraging new clients to utilize 
10Gb ULL connectivity and Limited Service MEI Ports, the Exchange does 
not believe it should be penalized for such success. 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 owned by a holding company that is the parent 
company of 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

[[Page 15800]]

higher costs alone could be used to justify fees increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for 
the Equitable Allocation of Fees, Dues, and Other Charges
    The Exchange believes that the proposed fees are reasonable, fair, 
equitable, and not unfairly discriminatory because they are designed to 
align fees with services provided and will apply equally to all 
subscribers.
10Gb ULL Connectivity
    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity and port 
alternatives, as the users of 10Gb ULL connections consume 
substantially more bandwidth and network resources than users of 1Gb 
ULL connection. Specifically, the Exchange notes that 10Gb ULL 
connection users account for more than 99% of message traffic over the 
network, driving other costs that are linked to capacity utilization, 
as described above, while the users of the 1Gb ULL connections account 
for less than 1% of message traffic over the network. In the Exchange's 
experience, users of the 1Gb connections do not have the same business 
needs for the high-performance network as 10Gb ULL users.
    The Exchange's high-performance network and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput with the network ability to support access to several 
distinct options markets. To achieve a consistent, premium network 
performance, the Exchange must build out and maintain a network that 
has the capacity to handle the message rate requirements of its most 
heavy network consumers. These billions of messages per day consume the 
Exchange's resources and significantly contribute to the overall 
network connectivity expense for storage and network transport 
capabilities. The Exchange must also purchase additional storage 
capacity on an ongoing basis to ensure it has sufficient capacity to 
store these messages to satisfy its record keeping requirements under 
the Exchange Act.\130\ 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.
---------------------------------------------------------------------------

    \130\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
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Limited Service MEI Ports
    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity alternatives, as the 
users of the Limited Service MEI Ports consume the most bandwidth and 
resources of the network. Specifically, like above for the 10Gb ULL 
connectivity, the Exchange notes that the Market Makers who take the 
maximum amount of Limited Service MEI Ports account for approximately 
greater than 99% of message traffic over the network, while Market 
Makers with fewer Limited Service MEI Ports account for approximately 
less than 1% of message traffic over the network. In the Exchange's 
experience, Market Makers who only utilize the two free Limited Service 
MEI Ports do not have a business need for the high performance network 
solutions required by Market Makers who take the maximum amount of 
Limited Service MEI Ports. The Exchange's high performance network 
solutions and supporting infrastructure (including employee support), 
provides unparalleled system throughput and the capacity to handle 
approximately 18 million quote messages per second. Based on November 
2022 trading results, on an average day, the Exchange handles over 
approximately 8.8 billion quotes, and more than 185 billion quotes over 
the entire month. Of that total, Market Makers with the maximum amount 
of Limited Service MEI Ports generate approximately 5 billion quotes, 
and Market Makers who utilize the two free Limited Service MEI Ports 
generate approximately 1.5 billion quotes. Also for November 2022, 
Market Makers who utilized 3 to 4 Limited Service MEI ports submitted 
an average of 1,152,654,133 quotes per day and Market Makers who 
utilized 5 to 9 Limited Service MEI ports submitted an average of 
1,172,105,181 quotes per day. To achieve a consistent, premium network 
performance, the Exchange must build out and maintain a network that 
has the capacity to handle the message rate requirements of its most 
heavy network consumers. These billions of messages per day consume the 
Exchange's resources and significantly contribute to the overall 
network connectivity expense for storage and network transport 
capabilities. The Exchange must also purchase additional storage 
capacity on an ongoing basis to ensure it has sufficient capacity to 
store these messages as part of it surveillance program and to satisfy 
its record keeping requirements under the Exchange Act.\131\ Thus, as 
the number of connections a Market Maker has increases, certain other 
costs incurred by the Exchange that are correlated to, though not 
directly affected by, connection costs (e.g., storage costs, 
surveillance costs, service expenses) also increase. The Exchange 
sought to design the proposed tiered-pricing structure to set the 
amount of the fees to relate to the number of connections a firm 
purchases. The more connections purchased by a Market Maker likely 
results in greater expenditure of Exchange resources and increased cost 
to the Exchange. With this in mind, the Exchange proposes no fee or 
lower fees for those Market Makers who receive fewer Limited Service 
MEI Ports since those Market Makers generally tend to send the least 
amount of orders and messages over those connections. Given this 
difference in network utilization rate, the Exchange believes that it 
is reasonable, equitable, and not unfairly discriminatory that Market 
Makers who take the most Limited Service MEI Ports pay for the vast 
majority of the shared network resources from which all Member and non-
Member users benefit, but is designed and maintained from a capacity 
standpoint to specifically handle the message rate and performance 
requirements of those Market Makers.
---------------------------------------------------------------------------

    \131\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    To achieve a consistent, premium network performance, the Exchange 
must build out and maintain a network that has the capacity to handle 
the message rate requirements of its most heavy network consumers. 
Billions of messages per day consume the Exchange's resources and 
significantly contribute to the overall network connectivity expense 
for storage and network transport capabilities. The Exchange must also 
purchase additional storage capacity on an ongoing basis to ensure it 
has sufficient capacity to store these messages as part of it 
surveillance program and to satisfy its record keeping requirements 
under the Exchange Act.\132\ Thus, as the number of connections a 
Market Maker has increases, the related pull on Exchange

[[Page 15801]]

resources also increases. The Exchange sought to design the proposed 
tiered-pricing structure to set the amount of the fees to relate to the 
number of connections a firm purchases. The more connections purchased 
by a Market Maker likely results in greater expenditure of Exchange 
resources and increased cost to the Exchange.
---------------------------------------------------------------------------

    \132\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes the proposed fees will not result in any 
burden on intra-market competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the proposed fees 
will allow the Exchange to recoup some of its costs in providing 10Gb 
ULL connectivity and Limited Service MEI Ports at below market rates to 
market participants since the Exchange launched operations. As 
described above, the Exchange has operated at a cumulative net annual 
loss since it launched operations in 2012 \133\ due to providing a low-
cost alternative to attract order flow and encourage market 
participants to experience the high determinism and resiliency of the 
Exchange's trading Systems. To do so, the Exchange chose to waive the 
fees for some non-transaction related services and Exchange products or 
provide them at a very lower fee, which was not profitable to the 
Exchange. This resulted in the Exchange forgoing revenue it could have 
generated from assessing any fees or higher fees. The Exchange could 
have sought to charge higher fees at the outset, but that could have 
served to discourage participation on the Exchange. Instead, the 
Exchange chose to provide a low-cost exchange alternative to the 
options industry, which resulted in lower initial revenues. Examples of 
this are 10Gb ULL connectivity and Limited Service MEI Ports, for which 
the Exchange only now seeks to adopt fees at a level similar to or 
lower than those of other options exchanges.
---------------------------------------------------------------------------

    \133\ See supra note 129.
---------------------------------------------------------------------------

    Further, the Exchange does not believe that the proposed fee 
increase for the 10Gb ULL connection change would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants or affect the ability of such market 
participants to compete. As is the case with the current proposed flat 
fee, the proposed fee would apply uniformly to all market participants 
regardless of the number of connections they choose to purchase. The 
proposed fee does not favor certain categories of market participants 
in a manner that would impose an undue burden on competition.
    The Exchange does not believe that the proposed rule change would 
place certain market participants at the Exchange at a relative 
disadvantage compared to other market participants or affect the 
ability of such market participants to compete. In particular, Exchange 
personnel has been informally discussing potential fees for 
connectivity services with a diverse group of market participants that 
are connected to the Exchange (including large and small firms, firms 
with large connectivity service footprints and small connectivity 
service footprints, as well as extranets and service bureaus) for 
several months leading up to that time. The Exchange does not believe 
the proposed fees for connectivity services would negatively impact the 
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and 
customers of those resellers to compete with other market participants 
or that they are placed at a disadvantage.
    The Exchange does anticipate, however, that some market 
participants may reduce or discontinue use of connectivity services 
provided directly by the Exchange in response to the proposed fees. In 
fact, as mentioned above, one MIAX Pearl Market Maker terminated their 
MIAX Pearl membership on January 1, 2023 as a direct result of the 
similar proposed fee changes by MIAX Pearl.\134\ 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.
---------------------------------------------------------------------------

    \134\ 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 52. 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.
---------------------------------------------------------------------------

Inter-Market Competition
    The Exchange also does not believe that the proposed rule change 
will result in any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, options market participants are not forced to connect 
to all options exchanges. There is no reason to believe that our 
proposed price increase will harm another exchange's ability to 
compete. There are other options markets of which market participants 
may connect to trade options at higher rates than the Exchange's. There 
is also a range of alternative strategies, including routing to the 
exchange through another participant or market center or accessing the 
Exchange indirectly. Market participants are free to choose which 
exchange or reseller to use to satisfy their business needs. 
Accordingly, the Exchange does not believe its proposed fee changes 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    The Exchange also believes that the proposed fees for 10Gb 
connectivity are appropriate and warranted in light of it bifurcating 
10Gb connectivity between the Exchange and MIAX Pearl and would not 
impose any burden on competition because this is a technology driven 
change that would assist the Exchange in recovering costs related to 
providing dedicating 10Gb connectivity

[[Page 15802]]

to the Exchange while enabling it to continue to meet current and 
anticipated demands for connectivity by its Members and other market 
participants. Separating its 10Gb network from MIAX Pearl would enable 
the Exchange to better compete with other exchanges by ensuring it can 
continue to provide adequate connectivity to existing and new Members, 
which may increase in ability to compete for order flow and deepen its 
liquidity pool, improving the overall quality of its market.
    The proposed rates for 10Gb ULL connectivity are also driven by the 
Exchange's need to bifurcate its 10Gb ULL network shared with MIAX 
Pearl so that it can continue to meet current and anticipated 
connectivity demands of all market participants. Similarly, and also in 
connection with a technology change, Cboe Exchange, Inc. (``Cboe'') 
amended access and connectivity fees, including port fees.\135\ 
Specifically, Cboe adopted certain logical ports to allow for the 
delivery and/or receipt of trading messages--i.e., orders, accepts, 
cancels, transactions, etc. Cboe established tiered pricing for BOE and 
FIX logical ports, tiered pricing for BOE Bulk ports, and flat prices 
for DROP, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server 
Ports. Cboe argued in its fee proposal that the proposed pricing more 
closely aligned its access fees to those of its affiliated exchanges, 
and reasonably so, as the affiliated exchanges offer substantially 
similar connectivity and functionality and are on the same platform 
that Cboe migrated to.\136\ Cboe also justified its proposal by stating 
that, ``. . . the Exchange believes substitutable products and services 
are in fact available to market participants, including, among other 
things, other options exchanges a market participant may connect to in 
lieu of the Exchange, indirect connectivity to the Exchange via a 
third-party reseller of connectivity and/or trading of any options 
product, including proprietary products, in the Over-the-Counter (OTC) 
markets.'' \137\ Cboe stated in its proposal that,
---------------------------------------------------------------------------

    \135\ See Securities Exchange Act Release No. 90333 (November 4, 
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105). The 
Exchange notes that Cboe submitted this filing after the Staff 
Guidance and contained no cost based justification.
    \136\ Id. at 71676.
    \137\ Id.

    The rule structure for options exchanges are also fundamentally 
different from those of equities exchanges. In particular, options 
market participants are not forced to connect to (and purchase 
market data from) all options exchanges. For example, there are many 
order types that are available in the equities markets that are not 
utilized in the options markets, which relate to mid-point pricing 
and pegged pricing which require connection to the SIPs and each of 
the equities exchanges in order to properly execute those orders in 
compliance with best execution obligations. Additionally, in the 
options markets, the linkage routing and trade through protection 
are handled by the exchanges, not by the individual members. Thus 
not connecting to an options exchange or disconnecting from an 
options exchange does not potentially subject a broker-dealer to 
violate order protection requirements. Gone are the days when the 
retail brokerage firms (such as Fidelity, Schwab, and eTrade) were 
members of the options exchanges--they are not members of the 
Exchange or its affiliates, they do not purchase connectivity to the 
Exchange, and they do not purchase market data from the Exchange. 
Accordingly, not only is there not an actual regulatory requirement 
to connect to every options exchange, the Exchange believes there is 
also no ``de facto'' or practical requirement as well, as further 
evidenced by the recent significant reduction in the number of 
broker-dealers that are members of all options exchanges.\138\
---------------------------------------------------------------------------

    \138\ Id. at 71676.

    The proposal also referenced the National Market System Plan 
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\139\ wherein 
the Commission discussed the existence of competition in the 
marketplace generally, and particularly for exchanges with unique 
business models. The Commission acknowledged that, even if an exchange 
were to exit the marketplace due to its proposed fee-related change, it 
would not significantly impact competition in the market for exchange 
trading services because these markets are served by multiple 
competitors.\140\ Further, the Commission explicitly stated that 
``[c]onsequently, demand for these services in the event of the exit of 
a competitor is likely to be swiftly met by existing competitors.'' 
\141\ Finally, the Commission recognized that while some exchanges may 
have a unique business model that is not currently offered by 
competitors, a competitor could create similar business models if 
demand were adequate, and if a competitor did not do so, the Commission 
believes it would be likely that new entrants would do so if the 
exchange with that unique business model was otherwise profitable.\142\
---------------------------------------------------------------------------

    \139\ See Securities Exchange Act Release No. 86901 (September 
9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
    \140\ Id.
    \141\ Id.
    \142\ Id.
---------------------------------------------------------------------------

    Cboe also filed to establish a monthly fee for Certification 
Logical Ports of $250 per Certification Logical Port.\143\ Cboe 
reasoned that purchasing additional Certification Logical Ports, beyond 
the one Certification Logical Port per logical port type offered in the 
production environment free of charge, is voluntary and not required in 
order to participate in the production environment, including live 
production trading on the Exchange.\144\
---------------------------------------------------------------------------

    \143\ See Securities Exchange Act Release No. 94512 (March 24, 
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011). Cboe offers 
BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical 
Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server 
Ports. For each type of the aforementioned logical ports that are 
used in the production environment, the Exchange also offers 
corresponding ports which provide Trading Permit Holders and non-
TPHs access to the Exchange's certification environment to test 
proprietary systems and applications (i.e., ``Certification Logical 
Ports'').
    \144\ See Securities Exchange Act Release No. 94512 (March 24, 
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011).
---------------------------------------------------------------------------

    In its statutory basis, Cboe justified the new port fee by stating 
that it believed the Certification Logical Port fee were reasonable 
because while such ports were no longer completely free, TPHs and non-
TPHs would continue to be entitled to receive free of charge one 
Certification Logical Port for each type of logical port that is 
currently offered in the production environment.\145\ Cboe noted that 
other exchanges assess similar fees and cited to NASDAQ LLC and 
MIAX.\146\ Cboe also noted that the decision to purchase additional 
ports is optional and no market participant is required or under any 
regulatory obligation to purchase excess Certification Logical Ports in 
order to access the Exchange's certification environment.\147\ Finally, 
similar proposals to adopt a Certification Logical Port monthly fee 
were filed by Cboe BYX Exchange, Inc.,\148\ BZX,\149\ and Cboe EDGA 
Exchange, Inc.\150\
---------------------------------------------------------------------------

    \145\ Id. at 18426.
    \146\ Id.
    \147\ Id.
    \148\ See Securities Exchange Act Release No. 94507 (March 24, 
2002), 87 FR 18439 (March 30, 2022) (SR-CboeBYX-2022-004).
    \149\ See Securities Exchange Act Release No. 94511 (March 24, 
2002), 87 FR 18411 (March 30, 2022) (SR-CboeBZX-2022-021).
    \150\ See Securities Exchange Act Release No. 94517 (March 25, 
2002), 87 FR 18848 (March 31, 2022) (SR-CboeEDGA-2022-004).
---------------------------------------------------------------------------

    The Cboe fee proposals described herein were filed subsequent to 
the D.C. Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866 
F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject 
to the same (and current) standard for SEC review and approval as this 
proposal. In summary, the Exchange requests the Commission apply the 
same standard of review to this proposal which was applied to the 
various Cboe and Cboe affiliated markets' filings with respect to non-

[[Page 15803]]

transaction fees. If the Commission were to apply a different standard 
of review to this proposal than it applied to other exchange fee 
filings it would create a burden on competition such that it would 
impair the Exchange's ability to make necessary technology driven 
changes, such as bifurcating its 10Gb ULL network, because it would be 
unable to monetize or recoup costs related to that change and compete 
with larger, non-legacy exchanges.
* * * * *
    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.\151\ 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.
---------------------------------------------------------------------------

    \151\ See letter from Brian Sopinsky, General Counsel, 
Susquehanna International Group, LLP to Vanessa Countryman, 
Secretary, Commission, dated February 7, 2023.
---------------------------------------------------------------------------

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,\152\ and Rule 19b-4(f)(2) \153\ 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.
---------------------------------------------------------------------------

    \152\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \153\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MIAX-2023-08 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-MIAX-2023-08. 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-MIAX-2023-08 and should be submitted on 
or before April 4, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\154\
---------------------------------------------------------------------------

    \154\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05128 Filed 3-13-23; 8:45 am]
BILLING CODE 8011-01-P


