[Federal Register Volume 84, Number 95 (Thursday, May 16, 2019)]
[Notices]
[Pages 22192-22199]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10118]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85839; File No. SR-EMERALD-2019-20]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt 
System Connectivity Fees

May 10, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 30, 2019, MIAX Emerald, LLC (``MIAX Emerald'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the MIAX Emerald Fee 
Schedule (the ``Fee Schedule'') to adopt the Exchange's system 
connectivity fees.
    The Exchange initially filed the proposal on March 1, 2019 (SR-
EMERALD-2019-11). That filing has been withdrawn and replaced with the 
current filing (SR-EMERALD-2019-20).
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/emerald, at MIAX's 
principal office, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend the Fee Schedule regarding 
connectivity to the Exchange. Specifically, the Exchange proposes to 
amend Sections 5a) and b) of the Fee Schedule to adopt the network 
connectivity fees for the 1 Gigabit (``Gb'') fiber connection and the 
10Gb ultra-low latency (``ULL'') fiber connection, which are charged to 
both Members \3\ and non-Members of the Exchange for connectivity to 
the Exchange's primary/secondary facility. The Exchange also proposes 
to adopt network connectivity fees for the 1Gb and 10Gb fiber 
connections for connectivity to the Exchange's disaster recovery 
facility. Each of these connections (with the exception of the 10Gb 
ULL) are shared connections (collectively, the ``Shared Connections''), 
and thus can be utilized to access the Exchange and both of the 
Exchange's affiliates, Miami International Securities Exchange, LLC 
(``MIAX'') and MIAX PEARL, LLC (``MIAX PEARL''). The 10Gb ULL 
connection is a dedicated connection (``Dedicated Connection''), which 
provides network connectivity solely to the trading platforms, market 
data systems, and test system facilities of MIAX Emerald. These 
proposed fees are collectively referred to herein as the ``Proposed 
Fees.'' The amounts of the Proposed Fees for the Shared Connections are 
the same amounts that are currently in place at MIAX and MIAX PEARL.\4\ 
While the Exchange is new and only launched trading on March 1, 2019, 
since: (i) All of the Proposed Fees (except for the fee relating to the 
10Gb ULL connection) relate to Shared Connections, and thus are the 
same amounts as are currently in place at MIAX and MIAX PEARL; (ii) all 
of the Members of MIAX Emerald are also members of either MIAX and/or 
MIAX PEARL, and most of those Members already have connectivity to the 
Exchange via existing Shared Connections (without paying any new 
incremental connectivity fees), the Exchange is providing similar 
information to that which was provided in the MIAX and PEARL Fee 
Filings, including providing detail about the market participants 
impacted by the Proposed Fees, as well as the costs incurred by the 
Exchange associated with providing the connectivity alternatives, in 
order to provide transparency and support relating to the Exchange's 
belief that the Proposed Fees are reasonable, equitable, and non-
discriminatory, and to provide sufficient information for the 
Commission to determine that the Proposed Fees are consistent with the 
Act.
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    \3\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \4\ See SR-MIAX-2019-23 and SR-PEARL-2019-17 (the ``MIAX and 
PEARL Fee Filings'').
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    The Exchange initially filed the Proposed Fees on March 1, 2019, 
designating the Proposed Fees immediately effective.\5\ The First 
Proposed Rule Change was published for comment in the Federal Register 
on March 20, 2019.\6\ The First Proposed Rule Change provided 
information about the market participants impacted

[[Page 22193]]

by the Proposed Fees, as well as the additional costs incurred by the 
Exchange associated with providing the connectivity alternatives, in 
order to provide transparency and support relating to the Exchange's 
belief that the Proposed Fees are reasonable, equitable, and non-
discriminatory, and to provide sufficient information for the 
Commission to determine that the Proposed Fees are consistent with the 
Act.
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    \5\ See Securities Exchange Act Release No. 85316 (March 14, 
2019), 84 FR 10350 (March 20, 2019) (SR-EMERALD-2019-11) (the 
``First Proposed Rule Change'').
    \6\ Id.
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    On March 29, 2019, the Commission issued its Order Disapproving 
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC 
Options Facility to Establish BOX Connectivity Fees for Participants 
and Non-Participants Who Connect to the BOX Network (the ``BOX 
Order'').\7\ In the BOX Order, the Commission highlighted a number of 
deficiencies it found in three separate rule filings by BOX Exchange 
LLC (``BOX'') to increase BOX's connectivity fees that prevented the 
Commission from finding that BOX's proposed connectivity fees were 
consistent with the Act. These deficiencies relate to topics that the 
Commission believes should be discussed in a connectivity fee filing.
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    \7\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04).
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    After the BOX Order was issued, the Commission received four 
comment letters on the First Proposed Rule Change.\8\
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    \8\ See Letter from Joseph W. Ferraro III, SVP & Deputy General 
Counsel, MIAX, to Vanessa Countryman, Acting Secretary, Commission, 
dated April 5, 2019 (``MIAX Letter''); Letter from Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA, to Vanessa 
Countryman, Acting Secretary, Commission, dated April 10, 2019 
(``Second SIFMA Letter''); Letter from John Ramsay, Chief Market 
Policy Officer, Investors Exchange LLC, to Vanessa Countryman, 
Acting Secretary, Commission, dated April 10, 2019 (``IEX Letter''); 
and Letter from Tyler Gellasch, Executive Director, Healthy Markets, 
to Brent J. Fields, Secretary, Commission, dated April 18, 2019 
(``Second Healthy Markets Letter'').
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    The Second SIFMA Letter argued that the Exchange did not provide 
sufficient information in its First Proposed Rule Change to support a 
finding that the proposal should be approved by the Commission after 
further review of the Proposed Fees. Specifically, the Second SIFMA 
Letter argued that the Exchange's market data fees and connectivity 
fees were not constrained by competitive forces, the Exchange's filing 
lacked sufficient information regarding cost and competition, and that 
the Commission should establish a framework for determining whether 
fees for exchange products and services are reasonable when those 
products and services are not constrained by significant competitive 
forces.
    The IEX Letter argued that the Exchange did not provide sufficient 
information in its First Proposed Rule Change to support a finding that 
the proposal should be approved by the Commission and that the 
Commission should extend the time for public comment on the First 
Proposed Rule Change. Despite the objection to the Proposed Fees, the 
IEX Letter did find that ``MIAX has provided more transparency and 
analysis in these filings than other exchanges have sought to do for 
their own fee increases.'' \9\ The IEX Letter specifically argued that 
the Proposed Fees were not constrained by competition, the Exchange 
should provide data on the Exchange's actual costs and how those costs 
relate to the product or service in question, and whether and how MIAX 
Emerald and its affiliates considered changes to transaction fees as an 
alternative to offsetting exchange costs.
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    \9\ See IEX Letter, pg. 1.
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    The Second Healthy Markets Letter did not object to the First 
Proposed Rule Change and the information provided by the Exchange in 
support of the Proposed Fees. Specifically, the Second Healthy Markets 
Letter stated that the First Proposed Rule Change was ``remarkably 
different,'' and went on to further state as follows:

    The instant MIAX filings--along with their April 5th 
supplement--provide much greater detail regarding users of 
connectivity, the market for connectivity, and costs than the 
Initial MIAX Filings. They also appear to address many of the issues 
raised by the Commission staff's BOX disapproval order. This third 
round of MIAX filings suggests that MIAX is operating in good faith 
to provide what the Commission and staff seek.\10\
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    \10\ See Second Healthy Markets Letter, pg. 2.

    On April 29, 2019, the Exchange withdrew the First Proposed Rule 
Change.\11\ The Exchange is now re-filing the Proposed Fees to squarely 
and comprehensively address each and every topic raised for discussion 
in the BOX Order, the IEX Letter and the Second SIFMA Letter to ensure 
that the Proposed Fees are reasonable, equitable, and non-
discriminatory, and that the Commission should find that the Proposed 
Fees are consistent with the Act. The proposed rule change is 
immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Act.
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    \11\ See SR-EMERALD-2019 11.
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    The Exchange proposes to offer to both Members and non-Members 
various bandwidth alternatives for connectivity to the Exchange, to its 
primary and secondary facilities, consisting of a 1Gb fiber connection 
and a 10Gb ULL fiber connection. The 10Gb ULL offering uses an ultra-
low latency switch, which provides faster processing of messages sent 
to it in comparison to the switch used for the other types of 
connectivity. The Exchange also proposes to offer to both Members and 
non-Members various bandwidth alternatives for connectivity to the 
Exchange, to its disaster recovery facility, consisting of a 1Gb fiber 
connection and a 10Gb connection.
    For the Shared Connections, the Exchange's MIAX Express Network 
Interconnect (``MENI'') can be configured to provide Members and non-
Members of the Exchange network connectivity to the trading platforms, 
market data systems, test systems, and disaster recovery facilities of 
the Exchange and its affiliates, MIAX and MIAX PEARL, via a single, 
shared connection. Any Member or non-Member can purchase a Shared 
Connection.
    For the Dedicated Connection, the Exchange's MENI is configured to 
provide Members and non-Members of the Exchange network connectivity to 
the trading platforms, market data systems, test systems, and disaster 
recovery facilities of the Exchange. Any Member or non-Member can 
purchase a Dedicated Connection. The Exchange determined to design its 
network architecture in a manner that offered 10Gb ULL connections as 
dedicated connections (as opposed to shared connections) in order to 
provide cost saving opportunities for itself and for its Members, by 
reducing the amount of equipment that the Exchange would have to 
purchase and to which the Members would have to connect.
    For the Shared Connections, Members and non-Members utilizing the 
MENI to connect to the trading platforms, market data systems, test 
systems and disaster recovery facilities of the Exchange, MIAX, and 
MIAX PEARL via a single, shared connection are assessed only one 
monthly network connectivity fee per connection, regardless of the 
trading platforms, market data systems, test systems, and disaster 
recovery facilities accessed via such connection. Thus, since all of 
the Members of MIAX Emerald are also members of either MIAX and/or MIAX 
PEARL, and most of those Members already have connectivity to the 
Exchange via existing Shared Connections, most Members of MIAX Emerald 
have instant connectivity to the Exchange without paying any new 
incremental

[[Page 22194]]

connectivity fees, as more fully-detailed below.
    The Exchange proposes to establish the monthly network connectivity 
fees for such connections for both Members and non-Members. As 
discussed above, the amounts of the Proposed Fees for the Shared 
Connections are the same amounts that are currently in place at MIAX 
and MIAX PEARL. The amount of the Proposed Fee for the Dedicated 
Connection is offered at a substantial discount to the amount currently 
in place at MIAX and MIAX PEARL. The reason for the substantial 
discount is that the Dedicated Connection offers access to only a 
single market (the Exchange), whereas the 10Gb ULL connection offered 
by MIAX and MIAX PEARL offers access to two markets (MIAX and MIAX 
PEARL). The network connectivity fees for connectivity to the 
Exchange's primary/secondary facility will be as follows: (a) 1,400 for 
the 1Gb connection; and (b) $6,000 for the 10Gb ULL connection. The 
network connectivity fees for connectivity to the Exchange's disaster 
recovery facility will be as follows: (a) $550 for the 1Gb connection; 
and (b) $2,750 for the 10Gb connection.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \12\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \13\ in 
particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among Exchange Members and 
issuers and other persons using any facility or system which the 
Exchange operates or controls. The Exchange also believes the proposal 
furthers the objectives of Section 6(b)(5) of the Act \14\ in that it 
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 and is not designed to permit unfair 
discrimination between customer, issuers, brokers and dealers.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4).
    \14\ 15 U.S.C. 78f(b)(5).
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    First, the Exchange believes that its proposal is consistent with 
Section 6(b)(4) of the Act, in that the Proposed Fees are fair, 
equitable and not unreasonably discriminatory, because the fees for the 
connectivity alternatives available on the Exchange, as proposed, are 
competitive and market-driven. The U.S. options markets are highly 
competitive (there are currently 16 options markets) and a reliance on 
competitive markets is an appropriate means to ensure equitable and 
reasonable prices.
    The Exchange acknowledges that there is no regulatory requirement 
that any market participant connect to the Exchange, or that any 
participant connect at any specific connection speed. The rule 
structure for options exchanges are, in fact, fundamentally different 
from those of equities exchanges. In particular, options market 
participants are not forced to connect to (and purchase market data 
from) all options exchanges, as shown by the number of Members of MIAX 
Emerald as compared to the much greater number of members at other 
options exchanges (as further detailed below). MIAX Emerald is a brand 
new exchange, having only commenced operations in March 2019. Not only 
does MIAX Emerald have less than half the number of members as certain 
other options exchanges, but there are also a number of the Exchange's 
Members that do not connect directly to MIAX Emerald. Further, of the 
number of Members that connect directly to MIAX Emerald, many such 
Members do not purchase market data from MIAX Emerald. There are a 
number of large market makers and broker-dealers that are members of 
other options exchanges but not Members of MIAX Emerald. For example, 
the following are not Members of MIAX Emerald: The D. E. Shaw Group, 
CTC, XR Trading LLC, Hardcastle Trading AG, Ronin Capital LLC, 
Belvedere Trading, LLC, Bluefin Trading, and HAP Capital LLC. In 
addition, of the market makers that are connected to MIAX Emerald, it 
is the individual needs of the market maker that require whether they 
need one connection or multiple connections to the Exchange. The 
Exchange has market maker Members that only purchase one connection and 
the Exchange has market maker Members that purchase multiple 
connections. It is all driven by the business needs of the market 
maker. Market makers that are consolidators that target resting order 
flow tend to purchase more connectivity than market makers that simply 
quote all symbols on the Exchange. Even though non-Members purchase and 
resell 10Gb ULL connections to both Members and non-Members, no market 
makers currently connect to the Exchange indirectly through such 
resellers.
    SIFMA's argument that all broker-dealers are required to connect to 
all exchanges is not true in the options markets. The options markets 
have evolved differently than the equities markets both in terms of 
market structure and functionality. For example, there are many order 
types that are available in the equities markets that are not utilized 
in the options markets, which relate to mid-point pricing and pegged 
pricing which require connection to the SIPs and each of the equities 
exchanges in order to properly execute those orders in compliance with 
best execution obligations. In addition, in the options markets there 
is a single SIP (OPRA) versus two SIPs in the equities markets, 
resulting in fewer hops and thus alleviating the need to connect 
directly to all the options exchanges. Additionally, in the options 
markets, the linkage routing and trade through protection are handled 
by the exchanges, not by the individual members. Thus not connecting to 
an options exchange or disconnecting from an options exchange does not 
potentially subject a broker-dealer to violate order protection 
requirements as suggested by SIFMA. Gone are the days when the retail 
brokerage firms (the Fidelity's, the Schwab's, the eTrade's) were 
members of the options exchanges--they are not members of MIAX Emerald 
or its affiliates, MIAX and MIAX PEARL, they do not purchase 
connectivity to MIAX Emerald, and they do not purchase market data from 
MIAX Emerald. The Exchange further recognizes that the decision of 
whether to connect to the Exchange is separate and distinct from the 
decision of whether and how to trade on the Exchange. The Exchange 
acknowledges that many firms may choose to connect to the Exchange, but 
ultimately not trade on it, based on their particular business needs.
    To assist prospective Members or firms considering connecting to 
MIAX Emerald, the Exchange provides information about the Exchange's 
available connectivity alternatives.\15\ The decision of which type of 
connectivity to purchase, or whether to purchase connectivity at all 
for a particular exchange, is based on the business needs of the firm. 
For example, if the firm wants to receive the top-of-market data feed 
product or depth data feed product, due to the amount/size of data 
contained in those feeds, such firm would need to purchase a 10Gb ULL 
connection. The 1Gb connection is too small to support those data feed 
products. MIAX Emerald notes that there are twelve (12) Members that 
only

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purchase the 1Gb connectivity alternative. Thus, while there is a 
meaningful percentage of purchasers of only 1Gb connections (12 of 33), 
by definition, those twelve (12) members purchase connectivity that 
cannot support the top-of-market data feed product or depth data feed 
product and thus they do not purchase such data feed products. 
Accordingly, purchasing market data is a business decision/choice, and 
thus the pricing for it is constrained by competition.
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    \15\ See the MIAX Connectivity Guide at https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Connectivity_Guide_v3.6_01142019.pdf.
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    Contrary to SIFMA's argument, there is competition for connectivity 
to MIAX Emerald and its affiliates. MIAX Emerald competes with eight 
(8) non-Members, who resell MIAX Emerald connectivity. Those non-
Members resell that connectivity to multiple market participants over 
that same connection, including both Members and non-Members of MIAX 
Emerald (typically extranets and service bureaus). When connectivity is 
re-sold by a third-party, MIAX Emerald does not receive any 
connectivity revenue from that sale. It is entirely between the third-
party and the purchaser, thus constraining the ability of MIAX Emerald 
to set its connectivity pricing as indirect connectivity is a 
substitute for direct connectivity. In fact, there are currently seven 
(7) non-Members that purchase 1Gb direct connectivity that are able to 
access MIAX Emerald, MIAX and MIAX PEARL. Those non-Members resell that 
connectivity to eight (8) customers, some of whom are agency broker-
dealers that have tens of customers of their own. Some of those eight 
(8) customers also purchase connectivity directly from MIAX Emerald 
and/or its affiliates, MIAX and MIAX PEARL. Accordingly, indirect 
connectivity is a viable alternative used by non-Members of MIAX 
Emerald, constraining the price that MIAX Emerald is able to charge for 
connectivity to its Exchange.
    The Exchange,\16\ MIAX,\17\ and MIAX PEARL \18\ are comprised of 41 
distinct members amongst all three exchanges, excluding any additional 
affiliates of such members that are also members of the Exchange, MIAX, 
MIAX PEARL, or any combination thereof. Of those 41 distinct members, 
28 of those distinct members are Members of MIAX Emerald. (Currently, 
there are no Members of MIAX Emerald that are not also members of MIAX 
or MIAX PEARL, or both.) Of those 28 distinct Members of MIAX Emerald, 
there are 6 Members that have no connectivity to the Exchange. Members 
are not forced to purchase connectivity to the Exchange, and these 
Members have elected not to purchase such connectivity. Of note, these 
same 6 Members also do not have connectivity to either MIAX or MIAX 
PEARL. These Members either trade indirectly through other Members or 
non-Members that have connectivity to the Exchange, or do not trade and 
conduct another type of business on the Exchange. Of the remaining 22 
distinct Members of MIAX Emerald, all 22 of those distinct Members 
already had connectivity to the Exchange via existing Shared 
Connections, thus providing all such 22 MIAX Emerald Members with 
instant connectivity to the Exchange without paying any new incremental 
connectivity fees.
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    \16\ The Exchange has 28 distinct Members, excluding affiliated 
entities. See MIAX Emerald Exchange Member Directory, available at 
https://www.miaxoptions.com.
    \17\ MIAX has 38 distinct Members, excluding affiliated 
entities. See MIAX Exchange Member Directory, available at https://www.miaxoptions.com.
    \18\ MIAX PEARL has 36 distinct Members, excluding affiliated 
entities. See MIAX PEARL Exchange Member Directory, available at 
https://www.miaxoptions.com.
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    Further, of those 22 Members, 14 of such Members elected to 
purchase additional connectivity to the Exchange, including additional 
Shared Connections and additional Dedicated Connections. The Exchange 
made available in advance to all of its prospective Members its 
proposed connectivity pricing (subject to regulatory clearance), in 
order for those prospective Members to make an informed decision about 
whether to become a Member of the Exchange and whether to purchase 
connectivity to the Exchange. Accordingly, each such Member made the 
decision to become a Member of the Exchange and to purchase 
connectivity to the Exchange, knowing in advance the connectivity 
pricing. And the vast majority of the additional connectivity purchased 
by those Members were for Dedicated Connections, the most expensive 
connectivity option.
    As a result, of those 22 Members, through existing Shared 
Connections, newly purchased Shared Connections, and newly purchased 
Dedicated Connections: 14 Members have 1Gb (primary/secondary) 
connections; 13 Members have 10Gb ULL (primary/secondary) connections; 
3 Members have 10Gb (disaster recovery) connections; and 10 Members 
have 1Gb (disaster recovery) connections, or some combination of 
multiple various connections. All such Members with those Shared 
Connections and Dedicated Connections trade on MIAX Emerald.
    The 6 Members who have not purchased any connectivity to the 
Exchange are still able to trade on the Exchange indirectly through 
other Members or non-Member service bureaus that are connected. These 6 
Members who have not purchased connectivity are not forced or compelled 
to purchase connectivity, and they retain all of the other benefits of 
membership with the Exchange. Accordingly, Members have the choice to 
purchase connectivity and are not compelled to do so in any way.
    In addition, there are 5 non-Member service bureaus that already 
have connectivity to the Exchange via existing Shared Connections, thus 
providing all 5 of those non-Member service bureaus with instant 
connectivity to the Exchange without paying any new incremental 
connectivity fees. These non-Members freely purchased their 
connectivity from one of the Exchange's affiliates, either MIAX or MIAX 
PEARL, in order to offer trading services to other firms and customers, 
as well as access to the market data services that their connections to 
the Exchange provide them, but they are not required or compelled to 
purchase any of the Exchange's connectivity options.
    The Exchange believes that the Proposed Fees are fair, equitable 
and not unreasonably discriminatory because the connectivity pricing is 
associated with relative usage of the various market participants and 
does not impose a barrier to entry to smaller participants. 
Accordingly, the Exchange offers two direct connectivity alternatives 
and various indirect connectivity (via third-party) alternatives, as 
described above. MIAX Emerald recognizes that there are various 
business models and varying sizes of market participants conducting 
business on the Exchange. The 1Gb direct connectivity alternative is 1/
10th the size of the 10Gb ULL direct connectivity alternative. 
Approximately just less than half of MIAX Emerald, MIAX and MIAX PEARL 
Members that connect (15 out of 33) purchase 1Gb connections. The 1Gb 
direct connection can support the sending of orders and the consumption 
of all market data feed products, other than the top-of-market data 
feed product or depth data feed product (which require a 10Gb 
connection). The 1Gb direct connection is generally purchased by market 
participants that utilize less bandwidth. The market participants that 
purchase 10Gb ULL direct connections utilize the most bandwidth, and 
those are the participants that consume the most resources from the 
network. Accordingly, the Exchange believes the allocation of the 
Proposed Fees ($6,000 for a 10Gb ULL connection versus $1,400 for a 1Gb 
connection) are

[[Page 22196]]

reasonable based on the network resources consumed by the market 
participants--lowest bandwidth consuming members pay the least, and 
highest bandwidth consuming members pays the most, particularly since 
higher bandwidth consumption translates to higher costs to the 
Exchange. The 10Gb ULL connection offers optimized connectivity for 
latency sensitive participants. This lower latency is achieved through 
more advanced network equipment, such as advanced hardware and 
switching components, which translates to increased costs to the 
Exchange.
    The Exchange launched trading on March 1, 2019. Thus, at the time 
that the 14 Members who elected to purchase connectivity to the 
Exchange, the Exchange was untested and unproven, and had 0% market 
share of the U.S. options industry. For all of 2018, the Exchange's 
affiliate, MIAX, had only 4.39% market share of the U.S. options 
industry in 2018 in Equity/ETF classes according to the OCC.\19\ For 
all of 2018, the Exchange's affiliate, MIAX PEARL, had only 4.82% 
market share of the U.S. options industry in Equity/ETF classes 
according to the OCC.\20\ The Exchange is not aware of any evidence 
that a combined market share less than 10% provides the Exchange with 
anti-competitive pricing power. This, in addition to the fact that not 
all broker-dealers are required to connect to all options exchanges, 
supports the Exchange's conclusion that its pricing is constrained by 
competition. Certainly, an untested and unproven exchange, with 0% 
market share, and no rule or requirement that a market participant must 
join or connect to it, does not have anti-competitive pricing power, 
with respect to setting the pricing for the Dedicated Connections or 
the Shared Connections. If the Exchange were to attempt to establish 
unreasonable connectivity pricing, then no market participant would 
join or connect. Therefore, since 28 distinct Members joined MIAX 
Emerald and 14 of those distinct Members purchased additional 
connectivity to the Exchange, all knowing, in advance, the connectivity 
fees, the Exchange believes the Proposed Fees are reasonable, 
equitable, and not unfairly discriminatory.
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    \19\ See Exchange Market Share of Equity Products--2018, The 
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
    \20\ Id.
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    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
Members of the Exchange if the Exchange were to establish unreasonable 
and uncompetitive price increases for its connectivity alternatives. 
Market participants choose to connect to a particular exchange and 
because it is a choice, MIAX Emerald must set reasonable connectivity 
pricing, otherwise prospective members would not connect and existing 
members would disconnect or connect through a third-party reseller of 
connectivity. No options market participant is required by rule, 
regulation, or competitive forces to be a Member of the Exchange. 
Several market participants choose not to be Members of the Exchange 
and choose not to access the Exchange, and several market participants 
are proposing to access the Exchange indirectly through another market 
participant. To illustrate, the Exchange has only 34 total Members 
(including all such Members' affiliate Members). However, Cboe 
Exchange, Inc. (``Cboe'') has over 200 members,\21\ Nasdaq ISE, LLC has 
approximately 100 members,\22\ and NYSE American LLC has over 80 
members.\23\ If all market participants were required to be Members of 
the Exchange and connect directly to the Exchange, the Exchange would 
have over 200 Members, in line with Cboe's total membership. But it 
does not. The Exchange only has 34 Members.
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    \21\ See Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002831.pdf); Form 1/A, filed August 30, 
2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002833.pdf); 
Form 1/A, filed July 24, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002781.pdf); Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/data/1473845/999999999718007832/9999999997-18-007832-index.htm).
    \22\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
    \23\ See https://www.nyse.com/markets/american-options/membership#directory.
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    Further, since there are 41 distinct members amongst all three 
exchanges, and only 28 of those distinct members decided to become 
Members of MIAX Emerald, there were 13 distinct members that decided 
not to become Members of MIAX Emerald. This further reinforces the fact 
that all market participants are not required to be Members of the 
Exchange and are not required to connect to the Exchange. It is a 
choice whether to join and it is a choice to connect. Therefore, the 
Exchange believes that the Proposed Fees are fair, equitable, and non-
discriminatory, as the fees are competitive.
    With respect to the now MIAX Emerald Members that had Shared 
Connections in place as of August 1, 2018 (via a previously purchased 
Shared Connection from MIAX or MIAX PEARL), the Exchange finds it 
compelling that all of those Members continued to purchase those Shared 
Connections after August 1, 2018, when MIAX and MIAX PEARL increased 
the connectivity fees for the Shared Connections to the current amounts 
proposed by the Exchange herein. In particular, the Exchange believes 
that the Proposed Fees for the Shared Connections are reasonable 
because MIAX and MIAX PEARL, which charge the same amount for the 
Shared Connections, did not lose any Members (or the number of Shared 
Connections each Member purchased) or non-Member Shared Connections 
when MIAX and MIAX PEARL proposed to increase the connectivity fees for 
the Shared Connections on August 1, 2018. For example, with respect to 
the Shared Connections maintained by now Members of MIAX Emerald who 
had Shared Connections in place as of July 2018, 12 Members purchased 
1Gb connections. The vast majority of those Members purchased multiple 
such connections, the number of connections depending on their 
throughput requirements based on the volume of their quote/order 
traffic and market data needs associated with their business model. 
After the fee increase, beginning August 1, 2018, the same 12 Members 
purchased 1Gb connections. Furthermore, the total number of connections 
did not decrease from July to August.
    Further, with respect to the Shared Connections maintained by now 
Members of MIAX Emerald who had Shared Connections in place as of July 
2018, of those Members and non-Members that bought multiple 
connections, no firm dropped any connections beginning August 1, 2018, 
when MIAX and MIAX PEARL increased its fees. Furthermore, the Exchange 
understands that MIAX and MIAX PEARL did not receive any official 
comment letters or complaints from any now Members of MIAX Emerald who 
had Shared Connections in place as of July 2018 regarding the increased 
fees regarding how the change was unreasonable, unduly burdensome, or 
would negatively impact their competitiveness amongst other market 
participants. These facts, coupled with the discussion above, showing 
that it is not necessary to join and/or connect to all options 
exchanges, demonstrate that the Exchange's fees are constrained by 
competition and are reasonable and not contrary to the Law of Demand as 
SIFMA suggests. Therefore, the

[[Page 22197]]

Exchange believes that the Proposed Fees are fair, equitable, and non-
discriminatory, as the fees are competitive.
    The Exchange believes that the Proposed Fees are equitably 
allocated among Members and non-Members, as evidenced by the fact that 
the fees are allocated across all connectivity alternatives, and there 
is not a disproportionate number of Members purchasing any 
alternative--14 Members have 1Gb (primary/secondary) connections; 14 
Members have 10Gb ULL (primary/secondary) connections; 3 Members have 
10Gb (disaster recovery) connections; and 11 Members have 1Gb (disaster 
recovery) connections, or some combination of multiple various 
connections.
    Second, the Exchange believes that its proposal is consistent with 
Section 6(b)(4) of the Act because the Proposed Fees allow the Exchange 
to recover a portion (less than all) of the costs incurred by the 
Exchange associated with providing and maintaining the necessary 
hardware and other infrastructure to support this technology. The 
Exchange believes that it is reasonable and appropriate to establish 
its fees charged for use of its connectivity at a level that will 
partially offset the costs to the Exchange associated with maintaining 
and enhancing a state-of-the-art exchange network infrastructure in the 
U.S. options industry.
    The costs associated with making the network accessible to Exchange 
Members and non-Members, through the expansion associated with new 
Shared Connections and Dedicated Connections, as well as the general 
expansion of a state-of-the-art infrastructure, are extensive, have 
increased year-over-year in the past two years, and are projected to 
increase year-over-year in the future. This is due to several factors, 
including costs associated with maintaining and expanding a team of 
highly-skilled network engineers, fees charged by the Exchange's third-
party data center operator, and costs associated with projects and 
initiatives designed to improve overall network performance and 
stability, through the Exchange's research and development (``R&D'') 
efforts.
    In order to provide more detail and to quantify the Exchange's 
costs, the Exchange notes that costs are associated with the 
infrastructure and headcount to fully-support the advances in 
infrastructure and expansion of network level services, including 
customer monitoring, alerting and reporting. The Exchange incurs 
technology expenses related to establishing and maintaining Information 
Security services, enhanced network monitoring and customer reporting, 
as well as Regulation SCI mandated processes, associated with its 
network technology. Additionally, the Exchange incurred costs in the 
expansion/buildout of the network leading up to the launch of 
operations, and the network maintenance costs continue to increase 
year-over-year. While some of the expense is fixed, much of the expense 
is not fixed, and thus increases as the number of connections increase. 
For example, new 1Gb and 10Gb ULL connections require the purchase of 
additional hardware to support those connections as well as enhanced 
monitoring and reporting of customer performance that MIAX Emerald and 
its affiliates provide. And 10Gb ULL connections require the purchase 
of specialized, more costly hardware. Further, as the total number of 
all connections increase, MIAX Emerald and its affiliates need to 
increase their data center footprint and consume more power, resulting 
in increased costs charged by their third-party data center provider. 
Accordingly, cost to MIAX Emerald and its affiliates is not entirely 
fixed. Just the initial fixed cost buildout of the network 
infrastructure of MIAX Emerald and its affiliates, including both 
primary/secondary sites and disaster recovery, was over $30 million. 
The current annual operational expense (which relates 100% to the 
network infrastructure, associated data center processing equipment 
required to support various connections, network monitoring systems and 
associated software required to support the various forms of 
connectivity) is approximately $8.5 million. This does not include 
additional indirect expenses that the Exchange incurs that are 
allocated to the support of network infrastructure of the Exchange. As 
these operational expenses increase, MIAX Emerald and its affiliates 
look to offset those costs through increased connectivity fees.
    A more detailed breakdown of the operational expense increases, 
since the initial phases of the buildout of the Exchange over two years 
ago include the following: With respect to the network, there has been 
an approximate 70% increase in technology-related personnel costs in 
infrastructure, due to expansion of services/support (increase of 
approximately $800,000); an approximate 10% increase in datacenter 
costs due to price increases and footprint expansion (increase of 
approximately $500,000); an approximate 5% increase in vendor-supplied 
dark fiber due to price increases and expanded capabilities (increase 
of approximately $25,000); and a 30% increase in market data 
connectivity fees (increase of approximately $200,000). Of note, 
regarding market data connectivity fee cost, this is the cost 
associated with MIAX Emerald consuming connectivity/content from the 
equities markets in order to operate the Exchange, causing MIAX Emerald 
to effectively pay its competitors for this connectivity. There was 
also significant capital expenditures over this same period to upgrade 
and enhance the underlying technology components. The Exchange believes 
that it is reasonable and appropriate to establish its fees charged for 
use of its connectivity at a level that will partially offset the costs 
to the Exchange associated with the buildout, maintenance, and 
enhancement of its network infrastructure.
    Further, because the costs of operating a data center are 
significant and not economically feasible for the Exchange, the 
Exchange does not operate its own data centers, and instead contracts 
with a third-party data center provider. The Exchange notes that 
larger, dominant exchange operators own/operate their data centers, 
which offers them greater control over their data center costs. Because 
those exchanges own and operate their data centers as profit centers, 
the Exchange is subject to additional costs. Connectivity fees, which 
are charged for accessing the Exchange's data center network 
infrastructure, are directly related to the network and offset costs 
such costs.
    Further, the Exchange invests significant resources in network R&D 
to improve the overall performance and stability of its network. For 
example, the Exchange has a number of network monitoring tools (some of 
which were developed in-house, and some of which are licensed from 
third-parties), that continually monitor, detect, and report network 
performance, many of which serve as significant value-adds to the 
Exchange's Members and enable the Exchange to provide a high level of 
customer service. These tools detect and report performance issues, and 
thus enable the Exchange to proactively notify a Member (and the SIPs) 
when the Exchange detects a problem with a Member's connectivity. The 
Exchange also incurs costs associated with the maintenance and 
improvement of existing tools and the development of new tools.
    Certain recently developed network aggregation and monitoring tools 
provide the Exchange with the ability to measure network traffic with a 
much

[[Page 22198]]

more granular level of variability. This is important as Exchange 
Members demand a higher level of network determinism and the ability to 
measure variability in terms of single digit nanoseconds. Also, routine 
R&D projects to improve the performance of the network's hardware 
infrastructure result in additional cost. As an example, in the last 
year, R&D efforts resulted in a performance improvement, requiring the 
purchase of new equipment to support that improvement, and thus 
resulting in increased costs in the hundreds of thousands of dollars 
range. In sum, the costs associated with maintaining and enhancing a 
state-of-the-art exchange network infrastructure in the U.S. options 
industry is a significant expense for the Exchange that also increases 
year-over-year, and thus the Exchange believes that it is reasonable to 
offset a portion of those costs through establishing network 
connectivity fees, as proposed herein. Overall, the Proposed Fees are 
projected to offset only a portion of the Exchange's network 
connectivity costs. The Exchange invests in and offers a superior 
network infrastructure as part of its overall options exchange services 
offering, resulting in significant costs associated with maintaining 
this network infrastructure, which are directly tied to the amount of 
the connectivity fees that must be charged to access it, in order to 
recover those costs.
    The Exchange also believes its proposal to offer 10Gb ULL 
connections as dedicated connections furthers the objectives of Section 
6(b)(5) of the Act \24\ in that it 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 and is not 
designed to permit unfair discrimination between customer, issuers, 
brokers and dealers. In particular, for the Dedicated Connection, the 
Exchange's MENI is configured to provide Members and non-Members of the 
Exchange network connectivity to the trading platforms, market data 
systems, test systems, and disaster recovery facilities of the 
Exchange. Any Member or non-Member can purchase a Dedicated Connection. 
The Exchange determined to design its network architecture in a manner 
that offered 10Gb ULL connections as dedicated connections (as opposed 
to shared connections) in order to provide cost saving opportunities 
for itself and for its Members, by reducing the amount of equipment 
that the Exchange would have to purchase and to which the Members would 
have to connect. A dedicated 10Gb ULL connection does not offer any 
unfair advantage over a shared 10GB ULL connection, as is being offered 
solely as a cost-saving measure to the Exchange and its Members.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange notes that other exchanges have similar connectivity 
alternatives for their participants, including similar low-latency 
connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE Arca, Inc. 
(``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq ISE, LLC 
(``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet 
connectivity alternatives to each of their participants.\25\ The 
Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities,\26\ however the Exchange also notes that the 
Exchange's 10Gb ULL connection is dedicated solely to one market (the 
Exchange) whereas the Exchange believes that other exchanges offer a 
shared 10Gb ULL connection to multiple markets. While MIAX Emerald's 
proposed connectivity fees are substantially lower than the fees 
charged by Phlx, ISE, Arca and NYSE American, MIAX Emerald believes 
that it offers significant value to Members over other exchanges in 
terms of network monitoring and reporting, which MIAX Emerald believes 
is a competitive advantage, and differentiates its connectivity versus 
connectivity to other exchanges. 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.\27\
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    \25\ See Phlx and ISE Rules, General Equity and Options Rules, 
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of 
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and 
$15,000 for each 10Gb Ultra connection, which the equivalent of the 
Exchange's 10Gb ULL connection. See also NYSE American Fee Schedule, 
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE 
American and Arca each charge a monthly fee of $5,000 for each 1Gb 
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX 
circuit, which the equivalent of the Exchange's 10Gb ULL connection.
    \26\ Id.
    \27\ See Nasdaq ISE, Options Rules, Options 7, Pricing Schedule, 
Section 11.D. (charging $3,000 for disaster recovery testing & 
relocation services); see also Cboe Exchange, Inc. (``Cboe'') Fees 
Schedule, p. 14, Cboe Command Connectivity Charges (charging a 
monthly fee of $2,000 for a 1Gb disaster recovery network access 
port and a monthly fee of $6,000 for a 10Gb disaster recovery 
network access port).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    MIAX Emerald does not believe that the proposed rule changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In particular, the Exchange has 
received no official comment letters or complaints from Members or 
others who connect to it that its Proposed Fees are negatively 
impacting or would negatively impact their abilities to compete with 
other market participants. Further, the Exchange is unaware of any 
assertion that its Proposed Fees would somehow unduly impair its 
competition with other options exchanges. To the contrary, if the fees 
charged are deemed too high by market participants, they can simply 
disconnect.
    While the Exchange recognizes the distinction between connecting to 
an exchange and trading at the exchange, the Exchange notes that it 
operates in a highly competitive options market in which market 
participants can readily connect and trade with venues they desire. In 
such an environment, the Exchange must continually adjust its fees to 
remain competitive with other exchanges. The Exchange believes that the 
proposed changes reflect this competitive environment.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\28\ and Rule 19b-4(f)(2) \29\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act. If the Commission takes such 
action, the Commission shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.
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    \28\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \29\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and

[[Page 22199]]

arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-EMERALD-2019-20 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-EMERALD-2019-20. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-EMERALD-2019-20 and should be submitted 
on or before June 6, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10118 Filed 5-15-19; 8:45 am]
 BILLING CODE 8011-01-P