
[Federal Register Volume 88, Number 219 (Wednesday, November 15, 2023)]
[Notices]
[Pages 78430-78442]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-25102]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98888; File No. SR-MEMX-2023-29]


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

November 8, 2023.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 24, 2023, MEMX LLC (``MEMX'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Commission a proposed rule change 
to amend the Exchange's fee schedule applicable to Members \4\ and non-
Members (the ``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and 
(c) to (i) apply the Exchange's current Connectivity and Application 
Session fees to MEMX Options Users, (ii) implement a waiver of 
Connectivity and Application Session fees solely related to 
participation on MEMX Options until January 1, 2024, and (iii) make an 
organizational change to its existing fee schedule for the Exchange's 
pre-existing equities market (``MEMX Equities''), in order to create a 
separate fee schedule for Connectivity Fees (for both MEMX Equities and 
MEMX Options). The Exchange proposes to implement the changes to the 
Fee Schedule pursuant to this proposal immediately. The text of the 
proposed rule change is provided in Exhibit 5.
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    \4\ See Exchange Rule 1.5(p).
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II. Self-Regulatory Organization's Statement of the Purpose of, and the 
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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    The Exchange is filing a proposal to amend the Fee Schedule to: (i) 
apply the Exchange's current Connectivity and Application Session fees 
to MEMX Options Users, (ii) implement a waiver of Connectivity and 
Application Session fees solely related to participation on MEMX 
Options until January 1, 2024, and (iii) make an organizational change 
to its existing fee schedule for the Exchange's pre-existing equities 
market (``MEMX Equities''), in order to create a separate fee schedule 
for Connectivity Fees (for both MEMX Equities and MEMX Options). The 
Exchange believes that these changes will provide greater transparency 
to Members about how the Exchange assesses fees, as well as allowing 
Members to more easily validate their bills on a monthly basis. The 
Exchange notes that none of these changes amend any existing fee 
applicable to MEMX Equities. The Exchange is proposing to implement the 
proposal immediately.
    As set forth below, the Exchange believes that its proposal 
provides a great deal of transparency regarding the cost of providing 
connectivity services and anticipated revenue and that the proposal is 
consistent with the Act and associated guidance.
(i) Fees for Connectivity to MEMX Options
    As noted above, the Exchange is proposing to apply the current fees 
it charges to Members and non-Members \5\ for physical connectivity to 
the Exchange and for application sessions (otherwise known as ``logical 
ports'') that a Member utilizes in connection with their participation 
on the Exchange (together with physical connectivity,

[[Page 78431]]

collectively referred to in this proposal as ``connectivity services'', 
as described in greater detail below) to both Users of MEMX Equities 
and MEMX Options.\6\ Specifically, the Exchange will continue to charge 
$6,000 per month for a physical connection in the data center where the 
Exchange primarily operates under normal market conditions (``Primary 
Data Center''), and $3,000 per month for a physical connection at the 
geographically diverse data center, which is operated for backup and 
disaster recovery purposes (``Secondary Data Center''). These physical 
connections can be used to access both platforms, accordingly, a firm 
that is a Member of both MEMX Equities and MEMX Options may use a 
single physical connection to access its application sessions at both 
MEMX Equities and MEMX Options. This differs from application sessions 
in that a firm that is a Member of both MEMX Equities and MEMX Options 
would need to purchase separate application sessions for each trading 
platform in order to access each such trading platform. These 
application session fees will continue to be $450 per month for an 
application session used for order entry (``Order Entry Port'') and 
$450 per month for an application session for receipt of drop copies 
(``Drop Copy Port''), to the extent such ports are in the Primary Data 
Center. As is true today for MEMX Equities, the Exchange will not 
charge for Order Entry Ports or Drop Copy Ports in the Secondary Data 
Center. The Exchange's proposal to apply the same fees to Equities and 
Options stems from the same cost analysis it conducted in adopting 
those fees to its Equities Members,\7\ which the Exchange has reviewed 
and updated for 2024 as detailed below. Given that the Exchange has 
only recently launched MEMX Options, however, and the fact that its 
analysis is based on projections across all potential revenue streams, 
the Exchange is committing to conduct a one-year review after these 
fees are applied. 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, or to decrease fees in the event that revenue materially 
exceeds expectations.
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    \5\ Types of market participants that obtain connectivity 
services from the Exchange but are not Members include service 
bureaus and extranets. Service bureaus offer technology-based 
services to other companies for a fee, including order entry 
services to Members, and thus, may access application sessions on 
behalf of one or more Members. Extranets offer physical connectivity 
services to Members and non-Members.
    \6\ MEMX Options launched on September 27, 2023.
    \7\ See Securities Exchange Act Release No. 59846 (September 27, 
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-026).
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    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 to MEMX 
Options, the Exchange has sought to be especially diligent in assessing 
those fees in a transparent way against its own aggregate costs of 
providing the related services, and also carefully and transparently 
assessing the impact on Members--both generally and in relation to 
other Members, i.e., to assure the fee will not create a financial 
burden on any participant and will not have an undue impact in 
particular on smaller Members and competition among Members in general. 
The Exchange believes that this level of diligence and transparency is 
called for by the requirements of section 19(b)(1) under the Act,\8\ 
and Rule 19b-4 thereunder,\9\ with respect to the types of information 
self-regulatory organizations (``SROs'') should provide when filing fee 
changes, and section 6(b) of the Act,\10\ which requires, among other 
things, that exchange fees be reasonable and equitably allocated,\11\ 
not designed to permit unfair discrimination,\12\ and that they not 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\13\ 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.\14\
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    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 17 CFR 240.19b-4.
    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78f(b)(8).
    \14\ In 2019, Commission staff published guidance suggesting the 
types of information that SROs may use to demonstrate that their fee 
filings comply with the standards of the Exchange Act (``Fee 
Guidance''). While MEMX understands that the Fee Guidance does not 
create new legal obligations on SROs, the Fee Guidance is consistent 
with MEMX's view about the type and level of transparency that 
exchanges should meet to demonstrate compliance with their existing 
obligations when they seek to charge new fees. See Staff Guidance on 
SRO Rule Filings Relating to Fees (May 21, 2019) available at 
https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees.
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    As detailed below, MEMX calculated its aggregate annual costs for 
providing physical connectivity to both MEMX Equities and MEMX Options 
in 2024 at $11,448,322 and its aggregate annual costs for providing 
application sessions at $5,918,788. In order to cover the aggregate 
costs of providing connectivity to its Options and Equities Users (both 
Members and non-Members) going forward and to make a modest profit, as 
described below, the Exchange is proposing to modify its Fee Schedule, 
pursuant to MEMX Rules 15.1(a) and (c), to charge a fee to Options 
Users, as it currently does to Equities Users, of $6,000 per month for 
each physical connection in the Primary Data Center and of $3,000 per 
month for each physical connection in the Secondary Data Center. The 
Exchange also proposes to modify its Fee Schedule, pursuant to MEMX 
Rules 15.1(a) and (c), to charge a fee to Options Users, as it 
currently does to Equities Users, of $450 per month for each Order 
Entry Port and Drop Copy Port in the Exchange's Primary Data Center, as 
further described below.\15\
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    \15\ As proposed, fees for connectivity services would be 
assessed based on each active connectivity service product at the 
close of business on the first day of each month. If a product is 
cancelled by a Member's submission of a written request or via the 
MEMX User Portal prior to such fee being assessed then the Member 
will not be obligated to pay the applicable product fee. MEMX will 
not return pro-rated fees even if a product is not used for an 
entire month.
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Cost Analysis
Background on Cost Analysis
    In September 2023, MEMX completed a study of its aggregate 
projected costs to produce market data and connectivity across both its 
Equities and Options platforms in 2024 (the ``Cost Analysis''). The 
Cost Analysis required a detailed analysis of MEMX's aggregate baseline 
costs, including a determination and allocation of costs for core 
services provided by the Exchange--transaction execution, market data, 
membership services and trading permits, regulatory services, physical 
connectivity, and application sessions (which provide order entry, 
cancellation and modification functionality, risk functionality, 
ability to receive drop copies, and other functionality). MEMX 
separately divided its costs between those costs necessary to deliver 
each of these core services, including infrastructure, software, human 
resources (i.e., personnel), and certain general and administrative 
expenses (``cost drivers''). Next, MEMX adopted an allocation 
methodology with various principles to guide how much of a particular 
cost should be allocated to each core service. For instance, fixed 
costs that are not driven by client activity (e.g., message rates), 
such as data center costs, were allocated more heavily to the provision 
of physical

[[Page 78432]]

connectivity (70%), with smaller allocations to logical ports (2%), and 
the remainder to the provision of transaction execution, regulatory 
services, and market data services (28%). In contrast, costs that are 
driven largely by client activity (e.g., message rates), were not 
allocated to physical connectivity at all but were allocated primarily 
to the provision of transaction execution and market data services 
(80%) with a smaller allocation to application sessions (20%). The 
allocation methodology was decided through conversations with senior 
management familiar with each area of the Exchange's operations. After 
adopting this allocation methodology, the Exchange then applied an 
estimated allocation of each cost driver to each core service, 
resulting in the cost allocations described below.
    By allocating segmented costs to each core service, MEMX was able 
to estimate by core service the potential margin it might earn based on 
different fee models. The Exchange notes that as a non-listing venue it 
has four primary sources of revenue that it can potentially use to fund 
its operations: transaction fees, fees for connectivity services, 
membership and regulatory fees, and market data fees. Accordingly, the 
Exchange must cover its expenses from these four primary sources of 
revenue. The Exchange also notes that as a general matter each of these 
sources of revenue is based on services that are interdependent. For 
instance, the Exchange's system for executing transactions is dependent 
on physical hardware and connectivity; only Members and parties that 
they sponsor to participate directly on the Exchange may submit orders 
to the Exchange; many Members (but not all) consume market data from 
the Exchange in order to trade on the Exchange; and the Exchange 
consumes market data from external sources in order to comply with 
regulatory obligations. Accordingly, given this interdependence, the 
allocation of costs to each service or revenue source required judgment 
of the Exchange and was weighted based on estimates of the Exchange 
that the Exchange believes are reasonable, as set forth below.
    Through the Exchange's extensive Cost Analysis, the Exchange 
analyzed every expense item in the Exchange's general expense ledger to 
determine whether each such expense relates to the provision of 
connectivity services, and, if such expense did so relate, what portion 
(or percentage) of such expense actually supports the provision of 
connectivity services, and thus bears a relationship that is, ``in 
nature and closeness,'' directly related to network connectivity 
services. In turn, the Exchange allocated certain costs more to 
physical connectivity and others to application sessions, while certain 
costs were only allocated to such services at a very low percentage or 
not at all, using consistent allocation methodologies as described 
above. Based on this analysis, MEMX estimates that the cost drivers to 
provide connectivity services in 2024, including both physical 
connections and application sessions, will result in an aggregate 
annual cost of $17,367,110, as further detailed below. The Exchange 
notes that it utilized the same principles to generate the 2021 Cost 
Analysis, applicable to Equities only, and at that time, the estimated 
annual aggregate cost to provide connectivity services was $13,724,580. 
The differences between such estimated costs and the overall analysis 
are primarily based on: (1) the addition of MEMX Options, (ii) 
increased, and in some cases decreased, costs projected by the 
Exchange, (iii) and changes made to reallocate certain costs into 
categories that more closely align the Exchange's audited financial 
statements, as further described below.
Costs Related to Offering Physical Connectivity
    The following chart details the individual line-item costs 
considered by MEMX to be related to offering physical connectivity as 
well as the percentage of the Exchange's overall costs such costs 
represent for such area (e.g., as set forth below, the Exchange 
allocated approximately 17% of its overall Human Resources cost to 
offering physical connectivity).

------------------------------------------------------------------------
             Costs driver                    Costs        Percent of all
------------------------------------------------------------------------
Human Resources......................         $4,685,902              17
Connectivity.........................            413,032              75
Data Center..........................          2,654,732              70
Technology (Hardware, Software                   842,258              21
 Licenses, etc.).....................
Depreciation.........................          2,030,846              33
External Market Data.................  .................               0
Allocated Shared Expenses............            821,552              12
                                      ----------------------------------
    Total............................         11,448,322            20.7
------------------------------------------------------------------------

    Below are additional details regarding each of the line-item costs 
considered by MEMX to be related to offering physical connectivity, as 
well as any relevant discussion of how the costs projected for 2024 
differ, if any, from the Exchange's previous Cost Analysis conducted in 
2021 in adopting Connectivity Fees for its Equities platform, which are 
the same fees the Exchange is proposing to apply for its Options 
platform in this filing.\16\
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    \16\ See supra note 6.
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Human Resources
    In allocating personnel (Human Resources) costs, in order to not 
double count any allocations, the Exchange first excluded any employee 
time allocated towards options regulation in order to recoup costs via 
the Options Regulatory Fee (``ORF'').\17\ Of the remaining employee 
time left over, MEMX then calculated an allocation of employee time for 
employees whose functions include providing and maintaining physical 
connectivity and performance thereof (primarily the MEMX network 
infrastructure team, which spends most of their time performing 
functions necessary to provide physical connectivity) and for which the 
Exchange allocated 75% of each employee's time. The Exchange also 
allocated Human Resources costs to provide physical connectivity to a 
limited subset of personnel with ancillary functions related to 
establishing and maintaining such connectivity (such as information 
security and finance personnel), for which the Exchange allocated cost 
on an employee-by-employee basis (i.e., only including those personnel 
who do

[[Page 78433]]

support functions related to providing physical connectivity) and then 
applied a smaller allocation to such employees (30%).\18\ The Exchange 
notes that it has fewer than 100 employees and each department leader 
has direct knowledge of the time spent by those spent by each employee 
with respect to the various tasks necessary to operate the Exchange. 
The estimates of Human Resources cost were therefore determined by 
consulting with such department leaders, determining which employees 
are involved in tasks related to providing physical connectivity, and 
confirming that the proposed allocations were reasonable based on an 
understanding of the percentage of their time such employees devote to 
tasks related to providing physical connectivity. The Exchange notes 
that senior level executives were only allocated Human Resources costs 
to the extent the Exchange believed they are involved in overseeing 
tasks related to providing physical connectivity. The Human Resources 
cost was calculated using a blended rate of compensation reflecting 
salary, equity and bonus compensation, benefits, payroll taxes, and 
401(k) matching contributions.
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    \17\ See Securities Exchange Act Release No. 98585 (September 
28, 2023), 88 FR 68692 (October 4, 2023) (SR-MEMX-2023-05).
    \18\ To reiterate, these allocations are applied to the 
percentage of employee time left over after the ORF allocation. As 
such, if 10% of an employee's time was allocated towards options 
regulation, the percentage of time allocated to physical 
connectivity in this example would apply to the 90% of the 
employee's time left over.
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    In 2021, 13.8% of the Exchange's Human Resources costs were 
allocated towards the provision of physical connectivity, which is 
slightly lower than the 17% allocation in the current Cost Analysis. 
The Exchanges notes that this increase is due to additional hiring 
necessary to support network infrastructure, and that in advance of the 
launch of MEMX Options, this hiring started at the beginning of 2023.
Connectivity
    The Connectivity cost includes external fees paid to connect to 
other exchanges and third parties. 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. 
Approximately 75% of the Exchange's connectivity costs are allocated 
towards the provision of physical connectivity, which is the same 
percentage identified in the 2021 Cost Analysis. Of note, the 2021 Cost 
Analysis allocated approximately $162,000 per month of connectivity 
costs towards physical connectivity, which is notably higher than the 
$34,420 \19\ per month allocated under the current Cost Analysis. The 
Exchange notes that this is due to a substantial redesign in the 
Exchange's connectivity plan which achieved the cost savings noted. 
Additionally, in the 2021 Cost Analysis, certain costs were included in 
the Connectivity category that have since been moved into the broader 
Technology category.
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    \19\ This figure is arrived at by dividing the annual allocated 
Connectivity costs in the table on page 11 ($413,032) by 12.
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Data Center
    Data Center costs include an allocation of the costs the Exchange 
incurs to provide physical connectivity in the third-party data centers 
where it maintains its equipment (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 (70%) to 
physical connectivity because the third-party data centers and the 
Exchange's physical equipment contained therein is the most direct cost 
in providing physical access to the Exchange. In other words, for the 
Exchange to operate in a dedicated space with connectivity of 
participants to a physical trading platform, the data centers are a 
very tangible cost, and in turn, if the Exchange did not maintain such 
a presence then physical connectivity would be of no value to market 
participants. This slight decrease over the allocation of Data Center 
costs to physical connectivity from 2021 (75%) is due to the fact that 
at the time of the 2021 Cost Analysis there were certain one-time costs 
in establishing the Exchange's data center presence that it will not 
have in 2024, as well as the fact that in the 2021 Cost Analysis, 
additional costs were included in the Data Center category that are not 
included in the current Analysis.
Technology
    The Technology category includes the Exchange's network 
infrastructure, other hardware, software, and software licenses used to 
operate and monitor physical assets necessary to offer physical 
connectivity to the Exchange. Of note, certain of these costs were 
included in the Connectivity and a separate Hardware and Software 
Licenses category in the 2021 Cost Analysis; however, in order to align 
more closely with the Exchange's audited financial statements these 
costs were combined into the broader Technology category. The Exchange 
allocated approximately 21% of its Technology costs to physical 
connectivity in 2024.
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 33% of all depreciation costs to providing physical 
connectivity. This is a higher percentage than was allocated to 
providing physical connectivity in 2021 (18.5%), and this increase is 
due to a high amount of capital expenditures required to build the 
Exchange's options platform, none of which began to depreciate until 
the launch of options in September 2023. The Exchange notes, however, 
that it did not allocate depreciation costs for any internally 
developed software to build the Exchange's trading platforms to 
physical connectivity, as such software does not impact the provision 
of physical connectivity.
External Market Data
    External Market Data includes fees paid to third parties, including 
other exchanges, to receive and consume market data from other markets. 
The Exchange notes that it did not allocate any External Market Data 
fees to the provision of physical connectivity as market data is not 
related to such services.
Allocated Shared Expenses
    Finally, a limited portion of general shared expenses was allocated 
to physical connectivity 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

[[Page 78434]]

Directors is also included in the Exchange's general shared expenses, 
and thus a portion of such overall cost amounting to 23% of the overall 
cost for directors was allocated to providing physical connectivity. 
The Exchange notes that the 12% allocation of general shared expenses 
for physical connectivity is lower than that allocated to general 
shared expenses for application sessions based on its allocation 
methodology that weighted costs attributable to each Core Service based 
on an understanding of each area. While physical connectivity has 
several areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Centers, as described above), 
physical connectivity does not require as many broad or indirect 
resources as other Core Services.
Costs Related to Offering Application Sessions
    The following chart details the individual line-item costs 
considered by MEMX to be related to offering application sessions as 
well as the percentage of the Exchange's overall costs such costs 
represent for such area (e.g., as set forth below, the Exchange 
allocated approximately 12% of its overall Human Resources cost to 
offering application sessions).

------------------------------------------------------------------------
             Costs driver                    Costs        Percent of all
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Human Resources......................         $3,251,548              12
Connectivity.........................              7,097               0
Data Center..........................             86,513               2
Technology (Hardware, Software                   459,116              11
 Licenses, etc.).....................
Depreciation.........................            553,931               9
External Market Data.................            420,394              18
Allocated Shared Expenses............          1,140,189              17
                                      ----------------------------------
    Total............................          5,918,788            10.7
------------------------------------------------------------------------

Human Resources
    With respect to application sessions, MEMX calculated Human 
Resources cost by taking an allocation of employee time for employees 
whose functions include providing application sessions and maintaining 
performance thereof (including a broader range of employees such as 
technical operations personnel, market operations personnel, and 
software engineering personnel) as well as a limited subset of 
personnel with ancillary functions related to maintaining such 
connectivity (such as sales, membership, and finance personnel). The 
estimates of Human Resources cost were again determined by consulting 
with department leaders, determining which employees are involved in 
tasks related to providing application sessions and maintaining 
performance thereof, and confirming that the proposed allocations were 
reasonable based on an understanding of the percentage of their time 
such employees devote to tasks related to providing application 
sessions and maintaining performance thereof. The Exchange notes that 
senior level executives were only allocated Human Resources costs to 
the extent the Exchange believed they are involved in overseeing tasks 
related to providing application sessions and maintaining performance 
thereof. The Human Resources cost was again calculated using a blended 
rate of compensation reflecting salary, equity and bonus compensation, 
benefits, payroll taxes, and 401(k) matching contributions. As shown in 
the table above, for 2024, the Exchange allocated approximately 12% of 
its Human Resources costs to providing application sessions, which is 
higher than the 7.7% it allocated in 2021. This increase is again due 
to additional hiring needed to support the addition of MEMX Options.
Connectivity
    The Connectivity cost includes external fees paid to connect to 
other exchanges, as described above. The Exchange did not allocate any 
Connectivity costs to application sessions in the current Cost 
Analysis, which differs from the 2.6% allocated towards application 
sessions in the 2021 Cost Analysis. This difference is due to the fact 
that certain formerly categorized Connectivity costs are now 
categorized under Technology in the current 2024 Cost Analysis.
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). As 
shown in the table, the Exchange allocated 2% of its Data Center costs 
to application sessions in the current Cost Analysis, which is in line 
with the 2.6% it allocated in the 2021 Cost Analysis.
Technology
    The Technology category includes the Exchange's network 
infrastructure, other hardware, software, and software licenses used to 
monitor the health of the order entry services provided by the 
Exchange. The Exchange allocated 11% of its Technology costs to the 
provision of application sessions, which is in line with the 10.1% it 
allocated in the 2021 Cost Analysis.
External Market Data
    External Market Data includes fees paid to third parties, including 
other exchanges, to receive and consume market data from other markets. 
The Exchange allocated 18% of External Market Data fees to the 
provision of application sessions as such market data is necessary to 
offer certain services related to such sessions, such as validating 
orders on entry against the National Best Bid and National Best Offer 
(``NBBO'') and checking for other conditions (e.g., whether a symbol is 
halted or subject to a short sale circuit breaker). Thus, as market 
data from other exchanges is consumed at the application session level 
in order to validate orders before additional processing occurs with 
respect to such orders, the Exchange believes it is reasonable to 
allocate a small amount of such costs to application sessions. The 
increase in allocation of External Market Data costs to the provision 
of application sessions compared to the 2021 Cost Analysis, in which 
7.5% of its External Market Data costs were allocated, is due to a 
restructuring of the category. Specifically, in 2021, External Market 
Data only included those costs incurred to receive data from other 
exchanges, while costs to receive the SIP feeds and other non-exchange 
data feeds were categorized under Hardware

[[Page 78435]]

and Software Licenses. These costs are now all categorized under 
External Market Data.
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 9% of 
all depreciation costs to providing application sessions. In contrast 
to physical connectivity, described above, the Exchange did allocate 
depreciation costs for depreciated internally developed software to 
build the Exchange's platforms to application sessions because such 
software is related to the provision of such connectivity.
Allocated Shared Expenses
    Finally, a limited portion of general shared expenses was allocated 
to overall application session costs as without these general shared 
costs the Exchange would not be able to operate in the manner that it 
does and provide application sessions. The costs included in general 
shared expenses include general expenses of the Exchange, including 
office space and office expenses (e.g., occupancy and overhead 
expenses), utilities, recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services (including external and internal audit expenses), and 
telecommunications costs. The Exchange again notes that the cost of 
paying directors to serve on its Board of Directors is included in the 
calculation of Allocated Shared Expenses, and thus a portion of such 
overall cost amounting to less than 20% of the overall cost for 
directors was allocated to providing application sessions. The Exchange 
notes that the 17% allocation of general shared expenses for 
application sessions is higher than that allocated to general shared 
expenses for physical connectivity based on its allocation methodology 
that weighted costs attributable to each Core Service based on an 
understanding of each area. While physical connectivity has several 
areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Centers, as described above), 
application sessions require a broader level of support from Exchange 
personnel in different areas, which in turn leads to a broader general 
level of cost to the Exchange.
Cost Analysis--Additional Discussion
    In conducting its Cost Analysis, the Exchange did not allocate any 
of its expenses in full to any core services (including physical 
connectivity or application sessions) and did not double-count any 
expenses. Instead, as described above, the Exchange allocated 
applicable cost drivers across its core services and used the same Cost 
Analysis to form the basis of this proposal and the filing it recently 
submitted proposing the establishment of an ORF.\20\ For instance, in 
calculating the Human Resources expenses to be allocated to physical 
connections, the Exchange has a team of employees dedicated to network 
infrastructure and with respect to such employees the Exchange 
allocated network infrastructure personnel with a high percentage of 
the time of such personnel (75%) given their focus on functions 
necessary to provide physical connections. The time of those same 
personnel were allocated only 6% to application sessions and the 
remaining 19% was allocated to transactions and market data. Of note, 
this allocation applied only to the network infrastructure employee's 
time that was left over after allocating for options regulation 
support. The Exchange did not allocate any other Human Resources 
expense for providing physical connections to any other employee group 
outside of a smaller allocation (30%) of the employee time associated 
with certain specified personnel who work closely with and support 
network infrastructure personnel. In contrast, the Exchange allocated 
much smaller percentages of employee time (15% or less) across a wider 
range of personnel groups in order to allocate Human Resources costs to 
providing application sessions. This is because a much wider range of 
personnel are involved in functions necessary to offer, monitor and 
maintain application sessions but the tasks necessary to do so are not 
a primary or full-time function.
---------------------------------------------------------------------------

    \20\ See supra note 16.
---------------------------------------------------------------------------

    In total, the Exchange allocated 17% of its Human Resources costs 
to providing physical connections and 12% of its Human Resources costs 
to providing application sessions, for a total allocation of 29% of its 
Human Resources expense to provide connectivity services. In turn, the 
Exchange allocated the remaining 71% of its Human Resources expense to 
Regulatory Services (21%), membership (2%) and transactions and market 
data (48%). Thus, again, the Exchange's allocations of cost across core 
services were based on real costs of operating the Exchange and were 
not double-counted across the core services or their associated revenue 
streams.
    As another example, the Exchange allocated depreciation expense to 
all core services, including physical connections and application 
sessions, but in different amounts. The Exchange believes it is 
reasonable to allocate the identified portion of such expense because 
such expense includes the actual cost of the computer equipment, such 
as dedicated servers, computers, laptops, monitors, information 
security appliances and storage, and network switching infrastructure 
equipment, including switches and taps that were purchased to operate 
and support the network. Without this equipment, the Exchange would not 
be able to operate the network and provide connectivity services to its 
Members and non-Members and their customers. However, the Exchange did 
not allocate all of the depreciation and amortization expense toward 
the cost of providing connectivity services, but instead allocated 
approximately 42% of the Exchange's overall depreciation and 
amortization expense to connectivity services (33% attributed to 
physical connections and 9% to application sessions). The Exchange 
allocated the remaining depreciation and amortization expense 
(approximately 58%) toward regulatory services (approximately 8%), and 
to providing transaction services and market data (approximately 50%).
    Looking at the Exchange's operations holistically, the estimated 
total monthly costs to the Exchange for offering core services in 2024 
is $4,604,583, compared to the $3,954,537 noted in the 2021 Cost 
Analysis. Based on its projections, the Exchange expects to collect 
approximately $1,768,800 on a monthly basis for connectivity services. 
Incorporating this amount into the Exchange's overall projected 
revenue, including projections related to the ORF, the Exchange 
anticipates monthly revenue of approximately $5,988,620 from all 
sources (i.e., connectivity fees and membership fees, transaction fees, 
ORF, and revenue from market data, both through the fees adopted in 
April 2022 \21\ and through the revenue received from the SIPs). As 
such, applying the Exchange's holistic Cost Analysis to a holistic view 
of

[[Page 78436]]

anticipated revenues, the Exchange would earn approximately 23% margin 
on its operations as a whole. The Exchange believes that this amount is 
reasonable.
---------------------------------------------------------------------------

    \21\ See Securities Exchange Act Release No. 97130 (March 13, 
2013), 88 FR 16491 (March 17, 2023) (SR-MEMX-2023-04).
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimates are based on 
projections across all potential revenue streams and will only be 
realized to the extent such revenue streams actually produce the 
revenue estimated. As a new entrant to the hyper-competitive exchange 
environment, and an exchange focused on driving competition, the 
Exchange does not yet know whether such expectations will be realized. 
For instance, in order to generate the revenue expected from 
connectivity, the Exchange will have to be successful in retaining 
existing options clients that wish to maintain physical connectivity 
and/or application sessions or in obtaining new clients that will 
purchase such services. Similarly, the Exchange will have to be 
successful in retaining a positive net capture on transaction fees in 
order to realize the anticipated revenue from transaction pricing.
    The Exchange notes that the Cost Analysis was based on the 
Exchange's operations in 2023 (which is currently underway) and 
projections for the next year. As such, the Exchange believes that its 
costs will remain relatively similar in future years (as demonstrated 
by the comparison of the 2021 Cost Analysis to the 2024 Cost Analysis). 
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 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.
Proposed Fees
Physical Connectivity Fees
    MEMX offers its Members the ability to connect to the Exchange in 
order to transmit orders to and receive information from the Exchange. 
Members can also choose to connect to MEMX indirectly through physical 
connectivity maintained by a third-party extranet. Extranet physical 
connections may provide access to one or multiple Members on a single 
connection. Users of MEMX physical connectivity services (both Members 
and non-Members \22\) seeking to establish one or more connections with 
the Exchange submit a request to the Exchange via the MEMX User Portal 
or directly to Exchange personnel. Upon receipt of the completed 
instructions, MEMX establishes the physical connections requested by 
the User. The number of physical connections assigned to each User (for 
both equities and options) as of October 1, 2023, ranges from one (1) 
to 30, depending on the scope and scale of the Member's trading 
activity on the Exchange as determined by the Member, including the 
Member's determination of the need for redundant connectivity. Separate 
physical connections are not required to access the Exchange's Options 
and Equities platforms, as such, a User could use a single connection 
to access both platforms. The Exchange notes that 52% of its Members do 
not maintain a physical connection directly with the Exchange in the 
Primary Data Center (though many such Members have connectivity through 
a third-party provider) and 24 members, or 32% have either one or two 
physical ports to connect to the Exchange in the Primary Data 
Center.\23\ Thus, only a limited number of Members, (12 members, or 
16%), maintain three or more physical ports to connect to the Exchange 
in the Primary Data Center.\24\
---------------------------------------------------------------------------

    \22\ See supra note 4.
    \23\ Of those 24 members, six (6) have designated certain of 
their physical ports will be used to connect to MEMX Options.
    \24\ Of those 12 members, nine (9) have designated certain of 
their physical ports will be used to connect to MEMX Options.
---------------------------------------------------------------------------

    As described above, the Exchange has previously justified its 
pricing with respect to MEMX Equities and believes the most fair 
approach, absent a significant differentiation between application 
costs to Equities and Options, is to apply the same pricing to all 
participants of either platform. As such, in order to cover the 
aggregate costs of providing physical connectivity to Options and 
Equities Users and make a modest profit, as described below, the 
Exchange is proposing to charge a fee of $6,000 per month for each 
physical connection in the Primary Data Center and a fee of $3,000 per 
month for each physical connection in the Secondary Data Center for 
connections to its Options platform, as it currently charges for 
connections to its Equities platform. There is no requirement that any 
Member maintain a specific number of physical connections and a Member 
may choose to maintain as many or as few of such connections as each 
Member deems appropriate. Further, as noted above, existing Equities 
Members may choose to use their existing physical connection(s) to 
access the Exchange's Options platform.
    The Exchange notes, however, that pursuant to Rule 2.4 (Mandatory 
Participation in Testing of Backup Systems), the Exchange does require 
a small number of Members to connect and participate in functional and 
performance testing as announced by the Exchange, which occurs at least 
once every 12 months. Specifically, Members that have been determined 
by the Exchange to contribute a meaningful percentage of the Exchange's 
overall volume must participate in mandatory testing of the Exchange's 
backup systems (i.e., such Members must connect to the Secondary Data 
Center). The Exchange notes that designated Members are still able to 
use third-party providers of connectivity to access the Exchange at its 
Secondary Data Center, and that for its Equities platform, one of eight 
such designated Members does use a third-party provider instead of 
connecting directly to the Secondary Data Center through connectivity 
provided by the Exchange. Nonetheless, because some Members are 
required to connect to the Secondary Data Center pursuant to Rule 2.4 
and to encourage Exchange Members to connect to the Secondary Data 
Center generally, the Exchange has proposed to charge one-half of the 
fee for a physical connection

[[Page 78437]]

in the Primary Data Center for its Options platform, as it currently 
charges for Equities. The Exchange notes that its costs related to 
operating the Secondary Data Center were not separately calculated for 
purposes of this proposal, but instead, all costs related to providing 
physical connections were considered in the aggregate. The Exchange 
believes this is appropriate because had the Exchange calculated such 
costs separately and then determined the fee per physical connection 
that would be necessary for the Exchange to cover its costs for 
operating the Secondary Data Center, the costs would likely be much 
higher than those proposed for connectivity at the Primary Data Center 
because Members maintain significantly fewer connections at the 
Secondary Data Center. The Exchange believes that charging a higher fee 
for physical connections at the Secondary Data Center would be 
inconsistent with its objective of encouraging Members to connect at 
such data center and is inconsistent with the fees charged by other 
exchanges, which also provide connectivity for disaster recovery 
purposes at a discounted rate.\25\
---------------------------------------------------------------------------

    \25\ See, e.g., the BZX options fee schedule, available at: 
https://www.cboe.com/us/options/membership/fee_schedule/bzx/.
---------------------------------------------------------------------------

    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
physical connections a User requests, based upon factors deemed 
relevant by each User (either a Member, service bureau or extranet). 
The Exchange believes these factors include the costs to maintain 
connectivity, business model and choices Members make in how to 
participate on the Exchange, as further described below.
    The proposed fee of $6,000 per month for physical connections at 
the Primary Data Center is designed to permit the Exchange to cover the 
costs allocated to providing connectivity services with a modest markup 
(approximately 19%), which would also help fund future expenditures 
(increased costs, improvements, etc.). The Exchange believes it is 
appropriate to charge fees that represent a reasonable markup over cost 
given the other factors discussed above and the need for the Exchange 
to maintain a highly performant and stable platform to allow Members to 
transact with determinism.
    As noted above, the Exchange proposes a discounted rate of $3,000 
per month for physical connections at its Secondary Data Center. The 
Exchange has proposed this discounted rate for Secondary Data Center 
connectivity in order to encourage Members to establish and maintain 
such connections. Also, as noted above, a small number of Members are 
required pursuant to Rule 2.4 to connect and participate in testing of 
the Exchange's backup systems, and the Exchange believes it is 
appropriate to provide a discounted rate for physical connections at 
the Secondary Data Center given this requirement. The Exchange notes 
that this rate is well below the cost of providing such services and 
the Exchange will operate its network and systems at the Secondary Data 
Center without recouping the full amount of such cost through 
connectivity services.
    The proposed fee for physical connections is effective on filing 
and will become operative immediately, subject to the proposed waiver 
described below.
Application Session Fees
    Similar to other exchanges, MEMX offers its Members application 
sessions, also known as logical ports, for order entry and receipt of 
trade execution reports and order messages. Members can also choose to 
connect to MEMX indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one 
or multiple Members on a single session. Users of MEMX connectivity 
services (both Members and non-Members \26\) seeking to establish one 
or more application sessions with the Exchange submit a request to the 
Exchange via the MEMX User Portal or directly to Exchange personnel. 
Upon receipt of the completed instructions, MEMX assigns the User the 
number of sessions requested by the User. The number of sessions 
assigned to each User as of August 31, 2022, ranges from one (1) to 
more than 150 depending on the scope and scale of the Member's trading 
activity on the Exchange (either through a direct connection or through 
a service bureau) as determined by the Member. For example, by using 
multiple sessions, Members can segregate order flow from different 
internal desks, business lines, or customers. The Exchange does not 
impose any minimum or maximum requirements for how many application 
sessions a Member or service bureau can maintain, and it is not 
proposing to impose any minimum or maximum session requirements for its 
Members or their service bureaus. The same application session cannot 
be used to access both MEMX Equities and MEMX Options, as such, Users 
will need to purchase separate application sessions for MEMX Options, 
which differs from physical connections.
---------------------------------------------------------------------------

    \26\ See supra note 4.
---------------------------------------------------------------------------

    As described above, in order to cover the aggregate costs of 
providing application sessions to Options Users and to make a modest 
profit, as described below, the Exchange is proposing to charge a fee 
of $450 per month for each Order Entry Port and Drop Copy Port in the 
Primary Data Center for Options application sessions, which is the same 
fee it currently charges for Equities application sessions. The 
Exchange notes that it does not propose to charge for: (1) Order Entry 
Ports or Drop Copy Ports in the Secondary Data Center, or (2) any Test 
Facility Ports or MEMOIR Gap Fill Ports, again, which it does not 
charge for Equities Users. The Exchange has proposed to continue to 
provide Order Entry Ports and Drop Copy Ports in the Secondary Data 
Center for Options free of charge in order to encourage Members to 
connect to the Exchange's backup trading systems. Similarly, because 
the Exchange wishes to encourage Members to conduct appropriate testing 
of their use of the Exchange, the Exchange has not proposed to charge 
for Test Facility Ports. With respect to MEMOIR Gap Fill ports, such 
ports are exclusively used in order to receive information when a 
market data recipient has temporarily lost its view of MEMX market 
data. The Exchange has not proposed charging for such ports because the 
costs of providing and maintaining such ports is more directly related 
to producing market data.
    The proposed fee of $450 per month for each Order Entry Port and 
Drop Copy Port in the Primary Data Center is designed to permit the 
Exchange to cover the costs allocated to providing application sessions 
with a modest markup (approximately 17%), which would also help fund 
future expenditures (increased costs, improvements, etc.).
    The proposed fee is also designed to encourage Users to be 
efficient with their application session usage, thereby resulting in a 
corresponding increase in the efficiency that the Exchange would be 
able to realize in managing its aggregate costs for providing 
connectivity services. There is no requirement that any Member maintain 
a specific number of application sessions and a Member may choose to 
maintain as many or as few of such ports as each Member deems 
appropriate. The Exchange has designed its platform such that Order 
Entry Ports can handle a significant amount of message traffic (i.e., 
over 50,000 orders

[[Page 78438]]

per second), and has no application flow control or order throttling. 
In contrast, other exchanges maintain certain thresholds that limit the 
amount of message traffic that a single logical port can handle.\27\ As 
such, while several Members maintain a relatively high number of ports 
because that is consistent with their usage on other exchanges and is 
preferable for their own reasons, the Exchange believes that it has 
designed a system capable of allowing such Members to significantly 
reduce the number of application sessions maintained.
---------------------------------------------------------------------------

    \27\ See, e.g., Cboe US Options BOE Specification, available at: 
https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf (describing a 5,000 message per 
second Port Order Rate Threshold on Cboe BOE ports).
---------------------------------------------------------------------------

    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
application sessions a User requests, based upon factors deemed 
relevant by each User (either a Member or service bureau on behalf of a 
Member). The Exchange believes these factors include the costs to 
maintain connectivity and choices Members make in how to segment or 
allocate their order flow.\28\
---------------------------------------------------------------------------

    \28\ The Exchange understands that some Members (or service 
bureaus) may also request more Order Entry Ports to enable the 
ability to send a greater number of simultaneous order messages to 
the Exchange by spreading orders over more Order Entry Ports, 
thereby increasing throughput (i.e., the potential for more orders 
to be processed in the same amount of time). The degree to which 
this usage of Order Entry Ports provides any throughput advantage is 
based on how a particular Member sends order messages to MEMX, 
however the Exchange notes that its architecture reduces the impact 
or necessity of such a strategy. All Order Entry Ports on MEMX 
provide the same throughput, and as noted above, the throughput is 
likely adequate even for a Member sending a significant amount of 
volume at a fast pace, and is not artificially throttled or limited 
in any way by the Exchange.
---------------------------------------------------------------------------

    The proposed fee for application sessions is effective on filing 
and will become operative immediately, subject to the proposed waiver 
described below.
Proposed Fees--Additional Discussion
    As discussed above, the proposed fees for connectivity services do 
not by design apply differently to different types or sizes of Members. 
As discussed in more detail in the Statutory Basis section, the 
Exchange believes that the likelihood of higher fees for certain 
Members subscribing to connectivity services usage than others is not 
unfairly discriminatory because it is based on objective differences in 
usage of connectivity services among different Members. The Exchange's 
incremental aggregate costs for all connectivity services are 
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the 
Exchange, as such Members: (1) consume the most bandwidth and resources 
of the network; (2) transact the vast majority of the volume on the 
Exchange; and (3) require the high-touch network support services 
provided by the Exchange and its staff, including network monitoring, 
reporting and support services, resulting in a much higher cost to the 
Exchange to provide such connectivity services. For these reasons, MEMX 
believes it is not unfairly discriminatory for the Members with higher 
message traffic and/or Members with more complicated connections to pay 
a higher share of the total connectivity services fees. While Members 
with a business model that results in higher relative inbound message 
activity or more complicated connections are projected to pay higher 
fees, the level of such fees is based solely on the number of physical 
connections and/or application sessions deemed necessary by the Member 
and not on the Member's business model or type of Member. The Exchange 
notes that the correlation between message traffic and usage of 
connectivity services is not completely aligned because Members 
individually determine how many physical connections and application 
sessions to request, and Members may make different decisions on the 
appropriate ways based on facts unique to their individual businesses. 
Based on the Exchange's architecture, as described above, the Exchange 
believes that a Member even with high message traffic would be able to 
conduct business on the Exchange with a relatively small connectivity 
services footprint.
    Finally, the fees for connectivity services will help to encourage 
connectivity services usage in a way that aligns with the Exchange's 
regulatory obligations. As a national securities exchange, the Exchange 
is subject to Regulation Systems Compliance and Integrity (``Reg 
SCI'').\29\ Reg SCI Rule 1001(a) requires that the Exchange establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure (among other things) that its Reg SCI systems have 
levels of capacity adequate to maintain the Exchange's operational 
capability and promote the maintenance of fair and orderly markets.\30\ 
By encouraging Users to be efficient with their usage of connectivity 
services, the proposed fee will support the Exchange's Reg SCI 
obligations in this regard by ensuring that unused application sessions 
are available to be allocated based on individual User needs and as the 
Exchange's overall order and trade volumes increase. Additionally, 
because the Exchange will charge a lower rate for a physical connection 
to the Secondary Data Center and will not charge any fees for 
application sessions at the Secondary Data Center or its Test Facility, 
the proposed fee structure will further support the Exchange's Reg SCI 
compliance by reducing the potential impact of a disruption should the 
Exchange be required to switch to its Disaster Recovery Facility and 
encouraging Members to engage in any necessary system testing with low 
or no cost imposed by the Exchange.\31\
---------------------------------------------------------------------------

    \29\ 17 CFR 242.1000-1007.
    \30\ 17 CFR 242.1001(a).
    \31\ While some Members might directly connect to the Secondary 
Data Center and incur the proposed $3,000 per month fee, there are 
other ways to connect to the Exchange, such as through a service 
bureau or extranet, and because the Exchange is not imposing fees 
for application sessions in the Secondary Data Center, a Member 
connecting through another method would not incur any fees charged 
directly by the Exchange. However, the Exchange notes that a third-
party service provider providing connectivity to the Exchange likely 
would charge a fee for providing such connectivity; such fees are 
not set by or shared in by the Exchange.
---------------------------------------------------------------------------

(ii) Options Connectivity Fee Waiver
    To encourage new participants to join the Exchange as Members in 
order to participate in MEMX Options, the Exchange is proposing to 
waive all Connectivity Fees used solely for MEMX Options until January 
1, 2024. As noted above, physical connections may be used to access 
both Equities and Options, and as such, the Exchange will internally 
verify whether new connections are being used solely for Options 
connections in order to determine whether such connection qualifies for 
this waiver. Separately, Members specify the Exchange to which their 
requested application sessions should connect, and as such, any new 
application sessions for MEMX Options will qualify for this waiver.
(iii) Organizational Fee Schedule Changes
    The Exchange is proposing to more clearly separate Connectivity 
Fees from the Exchange's current fee schedule. Currently, the Exchange 
has separate transaction fee schedules for Equities and Options, and 
the current Connectivity fees appear solely on the Equities fee 
schedule. The Exchange proposes to remove the Connectivity fees section 
from the Equities fee schedule, and add hyperlinks at the bottom of the 
Equities and Options fee

[[Page 78439]]

schedules that direct the User to a single Connectivity fee schedule. 
The Exchange believes this format is appropriate given that the same 
Connectivity Fees apply to both Equities and Options Users, and 
separating out the fee schedule for Connectivity Fees will reduce 
potential confusion (e.g., as to which fees a Member that participates 
on both MEMX Equities and MEMX Options must pay on a monthly basis to 
maintain connectivity to the Exchange).
    The Exchange also proposes to add three additional bullet points to 
the new Connectivity Fee Schedule related to MEMX Options. The first 
will notify Members that a physical connection can be used to access 
MEMX Equities and/or MEMX Options. The second will clarify that an 
application session can only be used to access one MEMX platform, i.e., 
MEMX Equities or MEMX Options. The third will note that Connectivity 
and application session fees solely related to participation on MEMX 
Options are waived until January 1, 2024. The Exchange notes that the 
existing bullet points related to Connectivity and application sessions 
will be included on the proposed separate Connectivity Fee Schedule, 
(i.e., detailing the Exchange's billing practices, and making clear 
that that the Exchange does not charge for: (1) Order Entry Ports or 
Drop Copy Ports in the Secondary Data Center, or (2) any Test Facility 
Ports or MEMOIR Gap Fill Ports).
2. Statutory Basis
    The Exchange believes that the proposed fees for connectivity 
services to MEMX Options are reasonable, equitable and not unfairly 
discriminatory because, as described above, the proposed pricing for 
connectivity services is directly related to the relative costs to the 
Exchange to provide those respective services and does not impose a 
barrier to entry to smaller participants.
    The Exchange recognizes that there are various business models and 
varying sizes of market participants conducting business on the 
Exchange. The Exchange's incremental aggregate costs for all 
connectivity services are disproportionately related to Members with 
higher message traffic and/or Members with more complicated connections 
established with the Exchange, as such Members: (1) consume the most 
bandwidth and resources of the network; (2) transact the vast majority 
of the volume on the Exchange; and (3) require the high-touch network 
support services provided by the Exchange and its staff, including 
network monitoring, reporting and support services, resulting in a much 
higher cost to the Exchange to provide such connectivity services. 
Accordingly, the Exchange believes the allocation of the proposed fees 
that increase based on the number of physical connections or 
application sessions is reasonable based on the resources consumed by 
the respective type of market participant (i.e., lowest resource 
consuming Members will pay the least, and highest resource consuming 
Members will pay the most), particularly since higher resource 
consumption translates directly to higher costs to the Exchange.
    With regard to reasonableness, the Exchange understands that when 
appropriate given the context of a proposal the Commission has taken a 
market-based approach to examine whether the SRO making the proposal 
was subject to significant competitive forces in setting the terms of 
the proposal. In looking at this question, the Commission considers 
whether the SRO has demonstrated in its filing that: (i) there are 
reasonable substitutes for the product or service; (ii) ``platform'' 
competition constrains the ability to set the fee; and/or (iii) revenue 
and cost analysis shows the fee would not result in the SRO taking 
supra-competitive profits. If the SRO demonstrates that the fee is 
subject to significant competitive forces, the Commission will next 
consider whether there is any substantial countervailing basis to 
suggest the fee's terms fail to meet one or more standards under the 
Exchange Act. If the filing fails to demonstrate that the fee is 
constrained by competitive forces, the SRO must provide a substantial 
basis, other than competition, to show that it is consistent with the 
Exchange Act, which may include production of relevant revenue and cost 
data pertaining to the product or service.
    MEMX believes the proposed fees for connectivity services are fair 
and reasonable as a form of cost recovery for the Exchange's aggregate 
costs of offering connectivity services to Members and non-Members. The 
proposed fees are expected to generate monthly revenue of $1,768,800 
providing cost recovery to the Exchange for the aggregate costs of 
offering connectivity services, based on a methodology that narrowly 
limits the cost drivers that are allocated cost to those closely and 
directly related to the particular service. In addition, this revenue 
will allow the Exchange to continue to offer, to enhance, and to 
continually refresh its infrastructure as necessary to offer a state-
of-the-art trading platform. The Exchange believes that, consistent 
with the Act, it is appropriate to charge fees that represent a 
reasonable markup over cost given the other factors discussed above. 
The Exchange also believes the proposed fee is a reasonable means of 
encouraging Users to be efficient in the connectivity services they 
reserve for use, with the benefits to overall system efficiency to the 
extent Members and non-Members consolidate their usage of connectivity 
services or discontinue subscriptions to unused physical connectivity.
    The Exchange further believes that the proposed fees, as they 
pertain to purchasers of each type of connectivity alternative, 
constitute an equitable allocation of reasonable fees charged to the 
Exchange's Members and non-Members and are allocated fairly amongst the 
types of market participants using the facilities of the Exchange.
    As described above, the Exchange believes the proposed fees are 
equitably allocated because the Exchange's incremental aggregate costs 
for all connectivity services are disproportionately related to Members 
with higher message traffic and/or Members with more complicated 
connections established with the Exchange, as such Members: (1) consume 
the most bandwidth and resources of the network; (2) transact the vast 
majority of the volume on the Exchange; and (3) require the high-touch 
network support services provided by the Exchange and its staff, 
including network monitoring, reporting and support services, resulting 
in a much higher cost to the Exchange to provide such connectivity 
services.
    Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering 
whether an exchange's proposed fees are consistent with the Act.\32\ As 
described in the Fee Guidance, the term ``supra-competitive profits'' 
refers to profits that exceed the profits that can be obtained in a 
competitive market. The proposed fee structure would not result in 
excessive pricing or supra-competitive profits for the Exchange. The 
proposed fee structure is merely designed to permit the Exchange to 
cover the costs allocated to providing connectivity services with a 
modest markup (on average, approximately 18%), which would also help 
fund future expenditures (increased costs, improvements, etc.). The 
Exchange believes that this is fair, reasonable, and equitable. 
Accordingly, the Exchange believes that its proposal is consistent

[[Page 78440]]

with section 6(b)(4) \33\ of the Act because the proposed fees will 
permit recovery of the Exchange's costs and will not result in 
excessive pricing or supra-competitive profit.
---------------------------------------------------------------------------

    \32\ See Fee Guidance, supra note 13.
    \33\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The proposed fees for Options connectivity services will allow the 
Exchange to cover certain costs incurred by the Exchange associated 
with providing and maintaining necessary hardware and other network 
infrastructure as well as network monitoring and support services; 
without such hardware, infrastructure, monitoring and support the 
Exchange would be unable to provide the connectivity services. The 
Exchange routinely works to improve the performance of the network's 
hardware and software. The costs associated with maintaining and 
enhancing a state-of-the-art exchange network is a significant expense 
for the Exchange, and thus the Exchange believes that it is reasonable 
and appropriate to help offset those costs by adopting fees for 
connectivity services. As detailed above, the Exchange has four primary 
sources of revenue that it can potentially use to fund its operations: 
transaction fees, fees for connectivity services, membership and 
regulatory fees, and market data fees. Accordingly, the Exchange must 
cover its expenses from these four primary sources of revenue. The 
Exchange's Cost Analysis estimates the costs to provide connectivity 
services at $1,447,000. Based on current connectivity services usage, 
the Exchange would generate monthly revenues of approximately 
$1,768,800. This represents a modest profit when compared to the cost 
of providing connectivity services and that profit represents a modest 
increase over the profit estimated in the 2021 Cost Analysis (a 
reasonable goal for a newly formed business, i.e., growing from non-
profitable, to break-even to modestly profitable).\34\ Even if the 
Exchange earns that amount or incrementally more, the Exchange believes 
the proposed fees for connectivity services are fair and reasonable 
because they will not result in excessive pricing or supra-competitive 
profit, when comparing the total expense of MEMX associated with 
providing connectivity services versus the total projected revenue of 
the Exchange associated with network connectivity services. As noted 
above, when incorporating the projected revenue from connectivity 
services into the Exchange's overall projected revenue, including 
projections related to recently adopted market data fees, the Exchange 
anticipates monthly revenue of $5,988,620 from all sources. As such, 
applying the Exchange's holistic Cost Analysis to a holistic view of 
anticipated revenues, the Exchange would earn approximately 23% margin 
on its operations as a whole. The Exchange believes that this amount is 
reasonable and is again evidence that the Exchange will not earn a 
supra-competitive profit.
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    \34\ Specifically, in the 2021 Cost Analysis, the Exchange 
estimated the total costs to provide connectivity services at 
$1,143,715 and estimated monthly revenues of $1,233,750.
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    The Exchange notes that other exchanges offer similar connectivity 
options to market participants and that the Exchange's fees are a 
discount as compared to the majority of such fees.\35\ With respect to 
physical connections, MIAX Options (``MIAX''), MIAX Pearl, LLC (``MIAX 
Pearl''), MIAX Emerald, LLC (``MIAX Emerald''), each of the Nasdaq 
Stock Market LLC (``Nasdaq'') options exchanges,\36\ NYSE American 
Options (``NYSE American''), NYSE Arca Options (``NYSE Arca''), Cboe 
Exchange, Inc. (``Cboe Options''), Cboe BZX Options (``BZX Options''), 
and Cboe EDGX Options (``EDGX Options'') charge between $7,000-$22,000 
per month for physical connectivity at their primary data centers that 
is comparable to that offered by the Exchange.\37\ Nasdaq, NYSE 
American and NYSE Arca also charge installation fees, which are not 
proposed to be charged by the Exchange. With respect to application 
sessions, BX, PHLX, GEMX, MRX, BOX Options (``BOX''), Cboe Options, BZX 
Options and EDGX charge between $500-$800 per month for order entry and 
drop ports.\38\ The Exchange further notes that several of these 
exchanges each charge for other logical ports that the Exchange will 
continue to provide for free, such as application sessions for testing 
and disaster recovery purposes.\39\ While the Exchange's proposed 
Options connectivity fees are lower than certain of the fees charged by 
the Nasdaq options exchanges, MIAX Options, MIAX Pearl, MIAX Emerald, 
NYSE American, NYSE Arca, BOX, Cboe, BZX and EDGX, MEMX believes that 
it offers significant value to Members over these other exchanges in 
terms of bandwidth available over such connectivity services, which the 
Exchange believes is a competitive advantage, and differentiates its 
connectivity versus connectivity to other exchanges.\40\ Additionally, 
the Exchange's proposed connectivity fees to its disaster recovery 
facility are within the range of the fees charged by other exchanges 
for similar connectivity alternatives.\41\ The Exchange believes that 
its proposal to offer certain application sessions free of charge is 
reasonable, equitably allocated and not unfairly discriminatory because 
such proposal is intended to encourage Member connections and use of 
backup and testing facilities of the Exchange, and, with respect to 
MEMOIR Gap Fill ports, such ports are used exclusively in connection 
with the receipt and

[[Page 78441]]

processing of market data from the Exchange.
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    \35\ One significant differentiation between the Exchanges is 
that while it offers different types of physical connections, 
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does 
not propose to charge different prices for such connections. In 
contrast, most of the Exchange's competitors provide scaled pricing 
that increases depending on the size of the physical connection. The 
Exchange does not believe that its costs increase incrementally 
based on the size of a physical connection but instead, that 
individual connections and the number of such separate and disparate 
connections are the primary drivers of cost for the Exchange.
    \36\ Including Nasdaq PHLX (``PHLX''), Nasdaq Options Market 
(``NOM''), Nasdaq BX Options (``BX''), Nasdaq ISE (``ISE''), Nasdaq 
GEMX (``GEMX''), and Nasdaq MRX (``MRX'').
    \37\ See the MIAX fee schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX__Options__Fee__Schedule_10022023.pdf; the MIAX Pearl fee 
schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Fee_Schedule_09122023.pdf; the MIAX Emerald fee 
schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Emerald_Fee_Schedule_10122023_3.pdf; 
the Nasdaq Options markets fee schedule, at http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2; the NYSE 
Connectivity fee schedule, at: https://www.nyse.com/publicdocs/Wireless_Connectivity_Fees_and_Charges.pdf ; the Cboe fee schedule, 
at: https://www.cboe.com/us/options/membership/fee_schedule/cone/ ; 
the BZX Options fee schedule, available at: https://www.cboe.com/us/options/membership/fee_schedule/bzx/; the EDGX Options fee schedule, 
available at: https://www.cboe.com/us/options/membership/fee_schedule/edgx/, and the BOX Options fee schedule, available at: 
https://boxoptions.com/fee-schedule/. This range is based on a 
review of the fees charged for 10-40Gb connections at each of these 
exchanges and relates solely to the physical port fee or connection 
charge, excluding co-location fees and other fees assessed by these 
exchanges. The Exchange notes that it does not offer physical 
connections with lower bandwidth than 10Gb and that Members and non-
Members with lower bandwidth requirements typically access the 
Exchange through third-party extranets or service bureaus.
    \38\ See id.
    \39\ See id.
    \40\ As noted above, all physical connections offered by MEMX 
are at least 10Gb capable and physical connections provided with 
larger bandwidth capabilities will be provided at the same rate as 
such connections. In contrast to other exchanges, MEMX has not 
proposed different types of physical connections with higher pricing 
for those with greater capacity. See supra note 33. The Exchange 
also reiterates that MEMX application sessions are capable of 
handling significant amount of message traffic (i.e., over 50,000 
orders per second), and have no application flow control or order 
throttling, in contrast to competitors that have imposed message 
rate thresholds. See supra note 26 and accompanying text.
    \41\ See supra note 24.
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    In conclusion, the Exchange submits that its proposed fee structure 
satisfies the requirements of sections 6(b)(4) and 6(b)(5) of the Act 
\42\ for the reasons discussed above in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
its Members and other persons using its facilities, does not permit 
unfair discrimination between customers, issuers, brokers, or dealers, 
and is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and in general to protect investors 
and the public interest, particularly as the proposal neither targets 
nor will it have a disparate impact on any particular category of 
market participant.
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    \42\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that the waiver of Connectivity Fees for 
physical connections and application sessions used solely for Options 
until January 1, 2024 is reasonable, equitable, and not unfairly 
discriminatory in that it will apply uniformly to all Options Users. 
The Exchange is proposing the waiver to provide an incentive for 
options trading firms to apply for membership to MEMX Options, which 
has recently launched. The options markets are quote-driven markets and 
are dependent on liquidity providers for liquidity and price discovery. 
The proposal will be of particular importance in encouraging liquidity 
providers to become members of the Exchange, which may result in more 
trading opportunities, enhanced competition, and improved overall 
market quality on the Exchange.
    The Exchange believes that the proposed reorganization of its fee 
schedule to establish a separate fee schedule for Connectivity Fees is 
reasonable and equitable because it is a non-substantive change and 
does not involve changing any existing fees or rebates that apply to 
trading activity on MEMX Equities. Further, the changes are designed to 
make the fee schedule easier to read and for Members to validate the 
bills they receive from the Exchange. The Exchange also believes this 
reorganization is non-discriminatory because it applies uniformly to 
all Members. The Exchange believes the proposed fee schedule will be 
clearer and less confusing for Members of the Exchange and will 
eliminate potential Member confusion, thereby removing impediments to 
and perfecting the mechanism of a free and open market and a national 
market, and in general, protecting investors and the public interest.
    advance notice of any changes to the ORF imposed by the 
Exchange.[sic]

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

    The [sic] In accordance with section 6(b)(8) of the Act,\43\ the 
Exchange does not believe that the proposed rule change would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \43\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition
    The Exchange does not believe that the proposed rule change to 
apply the same connectivity fees to Options Users as it does to 
Equities Users would place certain market participants at the Exchange 
at a relative disadvantage compared 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. As noted above, the Exchange 
has previously justified its pricing with respect to MEMX Equities and 
believes the most fair approach, absent a significant differentiation 
between application costs to Equities and Options, is to apply the same 
pricing to all participants of either platform. The Exchange believes 
its proposed pricing is reasonable and lower than what other options 
exchanges charge 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. Therefore, the fees may stimulate intramarket 
competition by attracting additional firms to become Members of MEMX 
Options. 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.
    As it relates to the reorganization of the fee schedule and the 
Options Connectivity Fee Waiver, as discussed above, the Exchange does 
not believe that the proposed changes would impose any burden on 
intramarket competition because such changes would encourage new 
participants to participate on the Exchange, thereby enhancing 
liquidity and market quality on the Exchange, as well as enhancing the 
attractiveness of the Exchange as a trading venue. The Exchange 
believes this would encourage market participants to direct order flow 
to the Exchange.
    The Exchange does not believe that the proposed changes would 
impose any burden on intramarket competition because such changes will 
incentivize new participants to join MEMX Options and the majority of 
the Exchange's current Equities members joined at a time when MEMX 
Equities did not charge connectivity fees (also to incentivize such 
participants to join), and thus have already received this benefit. The 
options markets are quote-driven markets and are dependent on liquidity 
providers for liquidity and price discovery. The proposal will be of 
particular importance in encouraging liquidity providers to become 
members of the Exchange, which may result in more trading 
opportunities, enhanced competition, and improved overall market 
quality on the Exchange. For the foregoing reasons, the Exchange 
believes the proposed changes would not impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Intermarket Competition
    The Exchange does not believe the proposed fees for Options 
Connectivity place an undue burden on competition on other SROs that is 
not necessary or appropriate. Additionally, other exchanges have 
similar connectivity alternatives for their participants, but with 
higher rates to connect.\44\ The Exchange is also unaware of any 
assertion that the proposed fees for connectivity services would 
somehow unduly impair its competition with other exchanges. As a new 
entrant in an already highly competitive environment for equity options 
trading, MEMX does not have the market power necessary to set prices 
for services that are unreasonable or unfairly discriminatory in 
violation of the Exchange Act. In sum, MEMX's proposed Connectivity

[[Page 78442]]

Fees for Options Members are comparable to and generally lower than 
fees charged by other options exchanges for the same or similar 
services.
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    \44\ See supra notes 34-38 and accompanying text.
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    Additionally, as described above, the proposed reorganization of 
the fee schedule and Connectivity Fee Waiver will incentive market 
participants to join the Exchange during the Fee Waiver period. 
Accordingly, the Exchange believes the proposal would not burden, but 
rather promote, intermarket competition by enabling it to better 
compete with other options exchanges.

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

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

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A)(ii) of the Act \45\ and Rule 19b-4(f)(2) \46\ thereunder.
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    \45\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \46\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-MEMX-2023-29 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-MEMX-2023-29. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-MEMX-2023-29 and should be 
submitted on or before December 6, 2023.
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    \47\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
Christina Z. Milnor,
Assistant Secretary.
[FR Doc. 2023-25102 Filed 11-14-23; 8:45 am]
BILLING CODE 8011-01-P


