[Federal Register Volume 84, Number 173 (Friday, September 6, 2019)]
[Notices]
[Pages 46988-46997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19218]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86837; File No. SR-PEARL-2019-25]


Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX 
PEARL Fee Schedule

August 30, 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 August 23, 2019, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the MIAX PEARL Fee 
Schedule (the ``Fee Schedule'') to modify certain of the Exchange's 
system connectivity fees.
    The Exchange previously filed the proposal on June 26, 2019 (SR-
PEARL-2019-21). That filing has been withdrawn and replaced with the 
current filing (SR-PEARL-2019-25).
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
PEARL's principal office, and at the Commission's Public Reference 
Room.

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

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

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

1. Purpose
    The Exchange is refiling its proposal to amend the Fee Schedule 
regarding connectivity to the Exchange in order to provide greater 
detail and clarity concerning the Exchange's cost allocation, as it 
pertains to the Exchange's expenses for network connectivity services. 
In order to determine the Exchange's costs associated with providing 
network connectivity services, the Exchange conducted an extensive cost 
allocation review process in which the Exchange did a line-by-line 
analysis of the Exchange's general expense ledger to determine which of 
those expenses relate to the provision of network connectivity 
services, and, if related, what portion (or allocation) of such expense 
should be attributed to the cost of providing network connectivity 
services. The Exchange is now presenting the results of the cost 
allocation review in a way that corresponds directly with income 
statement expense line items to provide greater transparency into its 
actual costs associated with providing network connectivity services. 
Based on this analysis, the Exchange believes that its proposed fee 
increases are fair and reasonable because they will permit recovery of 
less than all of the Exchange's costs for providing

[[Page 46989]]

connectivity and will not result in excessive pricing or 
supracompetitive profit, when comparing the Exchange's total annual 
expense associated with providing the network connectivity services 
versus the total projected annual revenue the Exchange projects to 
collect for providing the network connectivity services.
    Specifically, the Exchange proposes to amend Sections 5(a) and (b) 
of the Fee Schedule to increase the network connectivity fees for the 1 
Gigabit (``Gb'') fiber connection, the 10Gb 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 increase the network connectivity fees for the 1Gb and 10Gb fiber 
connections for connectivity to the Exchange's disaster recovery 
facility. Each of these connections are shared connections, and thus 
can be utilized to access both the Exchange and the Exchange's 
affiliate, Miami International Securities Exchange, LLC (``MIAX''). 
These proposed fee increases are collectively referred to herein as the 
``Proposed Fee Increases.''
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    \3\ The term ``Member'' means an individual or organization that 
is registered with the Exchange pursuant to Chapter II of the 
Exchange's Rules for purposes of trading on the Exchange as an 
``Electronic Exchange Member'' or ``Market Maker.'' Members are 
deemed ``members'' under the Exchange Act. See Exchange Rule 100.
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    The Exchange initially filed the Proposed Fee Increases on July 31, 
2018, designating the Proposed Fee Increases effective August 1, 
2018.\4\ The First Proposed Rule Change was published for comment in 
the Federal Register on August 13, 2018.\5\ The Commission received one 
comment letter on the proposal.\6\ The Proposed Fee Increases remained 
in effect until they were temporarily suspended pursuant to a 
suspension order (the ``Suspension Order'') issued by the Commission on 
September 17, 2018.\7\ The Suspension Order also instituted proceedings 
to determine whether to approve or disapprove the First Proposed Rule 
Change.\8\
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    \4\ See Securities Exchange Act Release No. 83785 (August 7, 
2018), 83 FR 40101 (August 13, 2018) (SR-PEARL-2018-16) (the ``First 
Proposed Rule Change'').
    \5\ Id.
    \6\ See Letter from Tyler Gellasch, Executive Director, The 
Healthy Markets Association, to Brent J. Fields, Secretary, 
Commission, dated September 4, 2018 (``Healthy Markets Letter'').
    \7\ See Securities Exchange Act Release No. 34-84177 (September 
17, 2018).
    \8\ Id.
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    The Healthy Markets Letter argued that the Exchange did not provide 
sufficient information in its filing to support a finding that the 
proposal is consistent with the Act. Specifically, the Healthy Markets 
Letter objected to the Exchange's reliance on the fees of other 
exchanges to demonstrate that its fee increases are consistent with the 
Act. In addition, the Healthy Markets Letter argued that the Exchange 
did not offer any details to support its basis for asserting that the 
Proposed Fee Increases are consistent with the Act.
    On October 5, 2018, the Exchange withdrew the First Proposed Rule 
Change.\9\ The Exchange refiled the Proposed Fee Increases on September 
18, 2018, designating the Proposed Fee Increases immediately 
effective.\10\ The Second Proposed Rule Change was published for 
comment in the Federal Register on October 10, 2018.\11\ The Commission 
received one comment letter on the proposal.\12\ The Proposed Fee 
Increases remained in effect until they were temporarily suspended 
pursuant to a suspension order (the ``Second Suspension Order'') issued 
by the Commission on October 3, 2018.\13\ The Second Suspension Order 
also instituted proceedings to determine whether to approve or 
disapprove the Second Proposed Rule Change.\14\
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    \9\ See Securities Exchange Act Release No. 84397 (October 10, 
2018), 83 FR 52272 (October 16, 2018) (SR-PEARL-2018-16).
    \10\ See Securities Exchange Act Release No. 84358 (October 3, 
2018), 83 FR 51022 (October 10, 2018) (SR-PEARL-2018-19) (the 
``Second Proposed Rule Change'').
    \11\ Id.
    \12\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, and Ellen Greene, Managing Director 
Financial Services Operations, The Securities Industry and Financial 
Markets Association (``SIFMA''), to Brent J. Fields, Secretary, 
Commission, dated October 15, 2018 (``SIFMA Letter'').
    \13\ See supra note 10.
    \14\ Id.
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    The SIFMA Letter argued that the Exchange did not provide 
sufficient information in its filing to support a finding that the 
proposal should be approved by the Commission after further review of 
the proposed fee increases. Specifically, the SIFMA Letter objected to 
the Exchange's reliance on the fees of other exchanges to justify its 
own fee increases. In addition, the SIFMA Letter argued that the 
Exchange did not offer any details to support its basis for asserting 
that the Proposed Fee Increases are reasonable. On November 23, 2018, 
the Exchange withdrew the Second Proposed Rule Change.\15\
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    \15\ See Securities Exchange Act Release No. 84651 (November 26, 
2018), 83 FR 61687 (November 30, 2018) (SR-PEARL-2018-19).
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    The Exchange refiled the Proposed Fee Increases on March 1, 2019, 
designating the Proposed Fee Increases immediately effective.\16\ The 
Third Proposed Rule Change was published for comment in the Federal 
Register on March 20, 2019.\17\ The Third Proposed Rule Change provided 
new information, including additional detail about the market 
participants impacted by the Proposed Fee Increases, as well as the 
additional costs incurred by the Exchange associated with providing the 
connectivity alternatives, in order to provide more transparency and 
support relating to the Exchange's belief that the Proposed Fee 
Increases are reasonable, equitable, and non-discriminatory, and to 
provide sufficient information for the Commission to determine that the 
Proposed Fee Increases are consistent with the Act.
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    \16\ See Securities Exchange Act Release No. 85317 (March 14, 
2019), 84 FR 10380 (March 20, 2019) (SR-PEARL-2019-08) (the ``Third 
Proposed Rule Change'') (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Fee 
Schedule).
    \17\ 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'').\18\ 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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    \18\ 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 Third Proposed Rule Change.\19\
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    \19\ 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 (``IEX''), 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 Third Proposed Rule

[[Page 46990]]

Change to support a finding that the proposal should be approved by the 
Commission after further review of the proposed fee increases. 
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 Third 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 Third 
Proposed Rule Change. Despite the objection to the Proposed Fee 
Increases, 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.'' \20\ The IEX Letter 
specifically argued that the Proposed Fee Increases 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 considered changes to 
transaction fees as an alternative to offsetting exchange costs.
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    \20\ See IEX Letter, pg. 1.
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    The Second Healthy Markets Letter did not object to the Third 
Proposed Rule Change and the information provided by the Exchange in 
support of the Proposed Fee Increases. Specifically, the Second Healthy 
Markets Letter stated that the Third 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.\21\
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    \21\ See Second Healthy Markets Letter, pg. 2.

    On April 29, 2019, the Exchange withdrew the Third Proposed Rule 
Change.\22\
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    \22\ See SR-PEARL-2019-08.
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    The Exchange refiled the Proposed Fee Increases on April 30, 2019, 
designating the Proposed Fee Increases immediately effective.\23\ The 
Fourth Proposed Rule Change was published for comment in the Federal 
Register on May 16, 2019.\24\ The Fourth Proposed Rule Change provided 
further cost analysis information 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 
Fee Increases are reasonable, equitable, and non-discriminatory, and 
that the Commission should find that the Proposed Fee Increases are 
consistent with the Act.
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    \23\ See Securities Exchange Act Release No. 85837 (May 10, 
2019), 84 FR 22214 (May 16, 2019) (SR-PEARL-2019-17) (the ``Fourth 
Proposed Rule Change'') (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Fee 
Schedule).
    \24\ Id.
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    On May 21, 2019, the Commission issued the Staff Guidance on SRO 
Rule Filings Relating to Fees (the ``Guidance'').\25\
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    \25\ See Staff Guidance on SRO Rule Filings Relating to Fees 
(May 21, 2019), at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.
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    The Commission received two comment letters on the Fourth Proposed 
Rule Change, after the Guidance was released.\26\ The Second IEX Letter 
and the Third SIFMA Letter argued that the Exchange did not provide 
sufficient information in its Fourth Proposed Rule Change to justify 
the Proposed Fee Increases based on the Guidance and the BOX Order. Of 
note, however, is that unlike their previous comment letter, the Third 
SIFMA Letter did not call for the Commission to suspend the Fourth 
Proposed Rule Change. Also, Healthy Markets did not comment on the 
Fourth Proposed Rule Change.
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    \26\ See Letter from John Ramsay, Chief Market Policy Officer, 
Investors Exchange LLC, to Vanessa Countryman, Acting Secretary, 
Commission, dated June 5, 2019 (the ``Second IEX Letter'') and 
Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, and Ellen Greene, Managing Director, SIFMA, to 
Vanessa Countryman, Acting Secretary, Commission, dated June 6, 2019 
(the ``Third SIFMA Letter'').
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    On June 26, 2019, the Exchange withdrew the Fourth Proposed Rule 
Change.\27\
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    \27\ See SR-PEARL-2019-17.
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    The Exchange refiled the Proposed Fee Increases on June 26, 2019, 
designating the Proposed Fee Increases immediately effective.\28\ The 
Fifth Proposed Rule Change was published for comment in the Federal 
Register on July 16, 2019.\29\ The Fifth Proposed Rule Change bolstered 
the Exchange's previous cost-based discussion to support its claim that 
the Proposed Fee Increases are fair and reasonable because they will 
permit recovery of the Exchange's costs and will not result in 
excessive pricing or supracompetitive profit, in light of the Guidance 
issued by Commission staff subsequent to the Fourth Proposed Rule 
Change, and primarily through the inclusion of anticipated revenue 
figures associated with the provision of network connectivity services.
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    \28\ See Securities Exchange Act Release No. 86343 (July 10, 
2019), 84 FR 34003 (July 16, 2019) (SR-PEARL-2019-21) (the ``Fifth 
Proposed Rule Change'').
    \29\ Id.
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    The Commission received three comment letters on the Fifth Proposed 
Rule Change.\30\
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    \30\ See Letter from John Ramsay, Chief Market Policy Officer, 
IEX, to Vanessa Countryman, Acting Secretary, Commission, dated 
August 8, 2019 (``Third IEX Letter''); Letter from Tyler Gellasch, 
Executive Director, Healthy Markets, to Vanessa Countryman, Acting 
Secretary, Commission, dated August 5, 2019 (``Third Healthy Markets 
Letter''); and Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel and Ellen Greene, Managing Director 
Financial Services Operations, SIFMA, to Vanessa Countryman, Acting 
Secretary, Commission, dated August 5, 2019 (``Fourth SIFMA 
Letter'').
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    Neither the Third Healthy Markets Letter nor the Fourth SIFMA 
Letter called for the Commission to suspend or disapprove the Proposed 
Fee Increases. In fact, the Third Healthy Markets Letter acknowledged 
that ``it appears as though MIAX [PEARL] is operating in good faith to 
provide what the Commission, its staff, and market participants the 
information needed to appropriately assess the filings.'' The Third IEX 
Letter only reiterated points from the Second IEX Letter and failed to 
address any of the new information in the Fifth Proposed Rule Change 
concerning the Exchange's revenue figures, cost allocation or that the 
Proposed Fee Increases did not result in excessive pricing or a 
supracompetitive profit for the Exchange.
    On August 23, 2019, the Exchange withdrew the Fifth Proposed Rule 
Change.\31\
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    \31\ See SR-PEARL-2019-21.
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    The Exchange is now refiling the Proposed Fee Increases to provide 
greater detail and clarity concerning the Exchange's cost allocation, 
as it pertains to the Exchange's expense relating to the provision of 
network connectivity services. The Exchange believes that the Proposed 
Fee Increases are consistent with the Act because they (i) are 
reasonable, equitably allocated, not unfairly discriminatory, and not 
an undue burden on competition; (ii) comply with the BOX Order and the 
Guidance; (iii) are supported by evidence (including data and 
analysis), constrained by significant competitive forces; and (iv) are 
supported by specific

[[Page 46991]]

information (including quantitative information), fair and reasonable 
because they will permit recovery of the Exchange's costs (less than 
all) and will not result in excessive pricing or supracompetitive 
profit. Accordingly, the Exchange believes that the Commission should 
find that the Proposed Fee Increases 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.
    The Exchange currently offers various bandwidth alternatives for 
connectivity to the Exchange to its primary and secondary facilities, 
consisting of a 1Gb fiber connection, a 10Gb 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 currently assesses the following monthly network 
connectivity fees to both Members and non-Members for connectivity to 
the Exchange's primary/secondary facility: (a) $1,100 for the 1Gb 
connection; (b) $5,500 for the 10Gb connection; and (c) $8,500 for the 
10Gb ULL connection. The Exchange also assesses to both Members and 
non-Members a monthly per connection network connectivity fee of $500 
for each 1Gb connection to the disaster recovery facility and a monthly 
per connection network connectivity fee of $2,500 for each 10Gb 
connection to the disaster recovery facility.
    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 both the Exchange and its 
affiliate, MIAX, via a single, shared connection. Members and non-
Members utilizing the MENI to connect to the trading platforms, market 
data systems, test systems and disaster recovery facilities of the 
Exchange and MIAX 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.
    The Exchange proposes to increase the monthly network connectivity 
fees for such connections for both Members and non-Members. The network 
connectivity fees for connectivity to the Exchange's primary/secondary 
facility will be increased as follows: (a) From $1,100 to $1,400 for 
the 1Gb connection; (b) from $5,500 to $6,100 for the 10Gb connection; 
and (c) from $8,500 to $9,300 for the 10Gb ULL connection. The network 
connectivity fees for connectivity to the Exchange's disaster recovery 
facility will be increased as follows: (a) From $500 to $550 for the 
1Gb connection; and (b) from $2,500 to $2,750 for the 10Gb connection 
[sic].
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \32\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \33\ 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 \34\ 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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    \32\ 15 U.S.C. 78f(b).
    \33\ 15 U.S.C. 78f(b)(4).
    \34\ 15 U.S.C. 78f(b)(5).
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    The Commission has repeatedly expressed its preference for 
competition over regulatory intervention in determining prices, 
products, and services in the securities markets. In Regulation NMS, 
the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \35\
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    \35\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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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 Fee Increases are 
fair, equitable and not unreasonably discriminatory, because the fees 
for the connectivity alternatives available on the Exchange, as 
proposed to be increased, are constrained by significant competitive 
forces. 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 
PEARL as compared to the much greater number of members at other 
options exchanges (as further detailed below). Not only does MIAX PEARL 
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 PEARL. Further, of the number of 
Members that connect directly to MIAX PEARL, many such Members do not 
purchase market data from MIAX PEARL. There are a number of large 
market makers and broker-dealers that are members of other options 
exchange but not Members of MIAX PEARL. For example, the following are 
not Members of MIAX PEARL: 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 PEARL, 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 (10Gb or 10Gb ULL) 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 and 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

[[Page 46992]]

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 
PEARL or its affiliates, MIAX and MIAX Emerald, they do not purchase 
connectivity to MIAX PEARL, and they do not purchase market data from 
MIAX PEARL. 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 PEARL, the Exchange provides information about the Exchange's 
available connectivity alternatives in a Connectivity Guide, which 
contains detailed specifications regarding, among other things, 
throughput and latency for each available connection.\36\ 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 either the 10Gb or 10Gb ULL connection. The 1Gb connection is 
too small to support those data feed products. MIAX PEARL notes that 
there are twelve (12) Members that only 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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    \36\ 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 PEARL and its affiliates. MIAX PEARL competes with nine (9) 
non-Members who resell MIAX PEARL connectivity. These are resellers of 
MIAX PEARL connectivity--they are not arrangements between broker-
dealers to share connectivity costs, as SIFMA suggests. Those non-
Members resell that connectivity to multiple market participants over 
that same connection, including both Members and non-Members of MIAX 
PEARL (typically extranets and service bureaus). When connectivity is 
re-sold by a third-party, MIAX PEARL 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 PEARL to set its 
connectivity pricing as indirect connectivity is a substitute for 
direct connectivity. There are currently nine (9) non-Members that 
purchase connectivity to MIAX PEARL and/or MIAX. Those non-Members 
resell that connectivity to eleven (11) customers, some of whom are 
agency broker-dealers that have tens of customers of their own. Some of 
those eleven (11) customers also purchase connectivity directly from 
MIAX PEARL and/or MIAX. Accordingly, indirect connectivity is a viable 
alternative that is already being used by non-Members of MIAX PEARL, 
constraining the price that MIAX PEARL is able to charge for 
connectivity to its Exchange.
    The Exchange \37\ and MIAX \38\ are comprised of 41 distinct 
Members between the two exchanges, excluding any additional affiliates 
of such Members that are also Members of MIAX PEARL, MIAX, or both. Of 
those 41 distinct Members, 33 Members have purchased the 1Gb, 10Gb, 
10Gb ULL connections or some combination of multiple various 
connections. Furthermore, every Member who has purchased at least one 
connection also trades on the Exchange, MIAX, or both. The 8 remaining 
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 8 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.
---------------------------------------------------------------------------

    \37\ MIAX PEARL has 36 distinct Members, excluding affiliated 
entities. See MIAX PEARL Exchange Member Directory, available at 
https://www.miaxoptions.com/exchange-members/pearl.
    \38\ MIAX has 38 distinct Members, excluding affiliated 
entities. See MIAX Exchange Member Directory, available at https://www.miaxoptions.com/exchange-members.
---------------------------------------------------------------------------

    The Exchange believes that the Proposed Fee Increases 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 three direct 
connectivity alternatives and various indirect connectivity (via third-
party) alternatives, as described above. MIAX PEARL 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 direct 
connectivity alternative. Because it is 1/10th of the size, it does not 
offer access to many of the products and services offered by the 
Exchange, such as the ability to quote or receive certain market data 
products. Thus, the value of the 1Gb alternative is much lower than the 
value of a 10Gb alternative, when measured based on the type of 
Exchange access it offers, which is the basis for difference in price 
between a 1Gb connection and a 10Gb connection. Approximately just less 
than half of MIAX PEARL and MIAX Members that connect (14 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 
and, therefore, consume less resources from the network. 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 Fee Increases ($9,300 for a 10Gb ULL 
connection versus $1,400 for a 1Gb connection) are reasonable based on 
the network resources consumed by the market participants--lowest 
bandwidth

[[Page 46993]]

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 and is 
approximately single digit microseconds faster in round trip time for 
connection oriented traffic to the Exchange than the 10Gb connection. 
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. Market participants that are less 
latency sensitive can purchase 10Gb direct connections and quote in all 
products on the Exchange and consume all market data feeds, and such 
10Gb direct connections are priced lower than the 10Gb ULL direct 
connections, offering smaller sized market makers a lower cost 
alternative.
    With respect to options trading, the Exchange had only 5.08% market 
share of the U.S. options industry in Equity/ETF classes according to 
the OCC in July 2019.\39\ For July of 2019, the Exchange's affiliate, 
MIAX, had only 3.61% market share of the U.S. options industry in 
Equity/ETF classes according to the OCC.\40\ For July 2019, the 
Exchange's affiliate, MIAX Emerald, had only 0.68% market share of the 
U.S. options industry in Equity/ETF classes according to the OCC.\41\ 
The Exchange is aware of no evidence that a combined market share of 
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.
---------------------------------------------------------------------------

    \39\ See Exchange Market Share of Equity Products--2019, The 
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
    \40\ Id.
    \41\ Id.
---------------------------------------------------------------------------

    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 PEARL 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. As 
evidence of the fact that market participants can and do disconnect 
from exchanges based on connectivity pricing, see the R2G Services LLC 
(``R2G'') letter based on BOX's proposed rule changes to increase its 
connectivity fees (SR-BOX-2018-24, SR-BOX-2018-37, and SR-BOX-2019-
04).\42\ The R2G Letter stated, ``[w]hen BOX instituted a $10,000/month 
price increase for connectivity; we had no choice but to terminate 
connectivity into them as well as terminate our market data 
relationship. The cost benefit analysis just didn't make any sense for 
us at those new levels.'' Accordingly, this example shows that if an 
exchange sets too high of a fee for connectivity and/or market data 
services for its relevant marketplace, market participants can choose 
to disconnect from the exchange.
---------------------------------------------------------------------------

    \42\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman, 
Acting Secretary, Commission, dated March 27, 2019 (the ``R2G 
Letter'').
---------------------------------------------------------------------------

    Several market participants choose not to be Members of the 
Exchange and choose not to access the Exchange, and several market 
participants also access the Exchange indirectly through another market 
participant. To illustrate, the Exchange has only 41 Members (including 
all such Members' affiliate Members). However, Cboe Exchange, Inc. 
(``Cboe'') has over 200 members,\43\ Nasdaq ISE, LLC has approximately 
100 members,\44\ and NYSE American LLC has over 80 members.\45\ 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 41 Members (inclusive of Members' affiliates).
---------------------------------------------------------------------------

    \43\ 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).
    \44\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
    \45\ See https://www.nyse.com/markets/american-options/membership#directory.
---------------------------------------------------------------------------

    The Exchange finds it compelling that all of the Exchange's 
existing Members continued to purchase the Exchange's connectivity 
services during the period for which the Proposed Fee Increases took 
effect in August 2018, particularly in light of the R2G disconnection 
example cited above.\46\ In particular, the Exchange believes that the 
Proposed Fee Increases are reasonable because the Exchange did not lose 
any Members (or the number of connections each Member purchased) or 
non-Member connections due to the Exchange increasing its connectivity 
fees through the First Proposed Rule Change, which fee increase became 
effective August 1, 2018. For example, in July 2018, fourteen (14) 
Members purchased 1Gb connections, ten (10) Members purchased 10Gb 
connections, and fifteen (15) Members purchased 10Gb ULL connections. 
(The Exchange notes that 1Gb connections are purchased primarily by EEM 
Members; 10Gb ULL connections are purchased primarily by higher volume 
Market Makers quoting all products across both MIAX PEARL and MIAX; and 
10Gb connections are purchased by higher volume EEMs and lower volume 
Market Makers.) The vast majority of those Members purchased multiple 
such connections with the actual number of connections depending on the 
Member's 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 
number of Members purchased the same number of connections.\47\ 
Furthermore, the total number of connections did not decrease from July 
to August 2018, and in fact one Member even purchased two (2) 
additional 10Gb ULL connections in August 2018, after the fee increase.
---------------------------------------------------------------------------

    \46\ See supra note 42.
    \47\ The Exchange notes that one Member downgraded one 
connection in July of 2018, however such downgrade was done well 
ahead of notice of the Proposed Fee Increase and was the result of a 
change to the Member's business operation that was completely 
independent of, and unrelated to, the Proposed Fee Increases.
---------------------------------------------------------------------------

    Also, in July 2018, four (4) non-Members purchased 1Gb connections, 
two (2) non-Members purchased 10Gb connections, and one (1) non-Member 
purchased 10Gb ULL connections. After the fee increase, beginning 
August 1, 2018, the same non-Members purchased the same number of 
connections across all available alternatives and two (2) additional 
non-Members purchased three (3) more connections after the fee 
increase. These non-Members freely purchased their connectivity with 
the Exchange 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.

[[Page 46994]]

MIAX PEARL did not experience any noticeable change (increase or 
decrease) in order flow sent by its market participants as a result of 
the fee increase.
    Of those Members and non-Members that bought multiple connections, 
no firm dropped any connections beginning August 1, 2018, when the 
Exchange increased its fees. Nor did the Exchange lose any Members. 
Furthermore, the Exchange did not receive any comment letters or 
official complaints from any Member or non-Member purchaser of 
connectivity regarding the increased fees regarding how the fee 
increase 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 and market 
participants can disconnect if pricing is set too high (the R2G 
example),\48\ 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 Exchange believes that the Proposed Fee 
Increases are fair, equitable, and non-discriminatory, as the fees are 
competitive.
---------------------------------------------------------------------------

    \48\ See supra note 42.
---------------------------------------------------------------------------

    The Exchange believes that the Proposed Fee Increases are equitably 
allocated among Members and non-Members, as evidenced by the fact that 
the fee increases are allocated across all connectivity alternatives, 
and there is not a disproportionate number of Members purchasing any 
alternative--fourteen (14) Members purchased 1Gb connections, ten (10) 
Members purchased 10Gb connections, fifteen (15) Members purchased 10Gb 
ULL connections, four (4) non-Members purchased 1Gb connections, two 
(2) non-Members purchased 10Gb connections, and one (1) non-Member 
purchased 10Gb ULL connections. The Exchange recognizes that the 
relative fee increases are 27% for the 1Gb connection, 10.9% for the 
10Gb connection, and 9.4% for the 10Gb ULL connection, but the Exchange 
believes that percentage increase differentiation is appropriate, given 
the different levels of service provided and the largest percentage 
increase being associated with the lowest cost connection. Further, the 
Exchange believes that the fees are reasonably allocated as the users 
of the higher bandwidth connections consume the most resources of the 
Exchange's network. It is these firms that also account for the vast 
majority of the Exchange's trading volume. The purchasers of the 10Gb 
ULL connectivity account for approximately 82% of the volume on the 
Exchange. For example, for all of July 2019, approximately 14.9 million 
contracts of the approximately 18.1 million contracts executed were 
done by the top market making firms of the Exchange's total volume.
    Second, the Exchange believes that its proposal is consistent with 
Section 6(b)(4) of the Act because the Proposed Fee Increases will 
permit recovery of the Exchange's costs and will not result in 
excessive pricing or supracompetitive profit. The Proposed Fee 
Increases will allow the Exchange to recover a portion (less than all) 
of the increased costs incurred by the Exchange associated with 
providing and maintaining the necessary hardware and other network 
infrastructure to support this technology since Exchange launched 
operations in February 2017. Put simply, the costs of the Exchange to 
provide these services have increased considerably over this time, as 
more fully-detailed and quantified below. The Exchange believes that it 
is reasonable and appropriate to increase its fees charged for use of 
its connectivity to partially offset the increased costs the Exchange 
incurred during this time associated with maintaining and enhancing a 
state-of-the-art exchange network infrastructure in the U.S. options 
industry.
    In particular, the Exchange's increased costs associated with 
supporting its network are due to several factors, including increased 
costs associated with maintaining and expanding a team of highly-
skilled network engineers (the Exchange also hired additional network 
engineering staff in 2017 and 2018), increasing 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 
increased costs, the Exchange notes that increased costs are associated 
with the infrastructure and increased headcount to fully-support the 
advances in infrastructure and expansion of network level services, 
including customer monitoring, alerting and reporting. Additional 
technology expenses were incurred related to expanding its Information 
Security services, network monitoring and customer reporting, as well 
as Regulation SCI mandated processes associated with network 
technology. All of these additional expenses have been incurred by the 
Exchange since became operational in February 2017.
    Additionally, 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, 10Gb, 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 PEARL 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 PEARL 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, the cost to MIAX PEARL and its affiliates is not 
entirely fixed. Just the initial fixed cost buildout of the network 
infrastructure of MIAX PEARL and its affiliates, including both 
primary/secondary sites and disaster recovery, was over $30 million. 
These costs have increased over 10% since the Exchange became 
operational in February 2017. As these network connectivity-related 
expenses increase, MIAX PEARL and its affiliates look to offset those 
costs through increased connectivity fees.
    A more detailed breakdown of the expense increases since February 
2017 include 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 increased cost, this is 
the cost associated with MIAX PEARL consuming connectivity/content from 
the equities markets in order to operate the Exchange, causing MIAX 
PEARL to effectively pay its competitors for this connectivity. While 
the Exchange and MIAX have incurred a total increase in connectivity 
expenses since January 2017 (the last time connectivity fees were 
raised) of approximately $1.5 million per year (as described above), 
the total increase in connectivity revenue amount as a result of the

[[Page 46995]]

Proposed Fee Increases is projected to be approximately $1.2 million 
per year for MIAX PEARL and MIAX. Accordingly, the total projected MIAX 
PEARL and MIAX connectivity revenue as a result of the proposed 
increase, on an annualized basis, is less than the total annual actual 
MIAX PEARL and MIAX connectivity expense. Accordingly, the Proposed Fee 
Increases are fair and reasonable because they will not result in 
excessive pricing or supracompetitive profit, when comparing the 
increase in actual costs to the Exchange (since February 2017) versus 
the projected increase in annual revenue. The Exchange also incurred 
additional significant capital expenditures over this same period to 
upgrade and enhance the underlying technology components, as more 
fully-detailed below.
    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 and 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. As a result, the Exchange 
is subject to fee increases from its data center provider, which the 
Exchange experienced in 2017 and 2018 of approximately 10%, as cited 
above. Connectivity fees, which are charged for accessing the 
Exchange's data center network infrastructure, are directly related to 
the network and offset such costs.
    Further, the Exchange invests significant resources in network R&D, 
which are not included in direct expenses 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 costs 
associated with the maintenance and improvement of existing tools and 
the development of new tools resulted in significant increased cost to 
the Exchange since February 2017 and are loss leaders for the Exchange 
to provide these added benefits for Members and non-Members.
    Certain recently developed network aggregation and monitoring tools 
provide the Exchange with the ability to measure network traffic with a 
much 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, the 
Exchange routinely conducts R&D projects to improve the performance of 
the network's hardware infrastructure. As an example, in the last year, 
the Exchange's 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 
continues to increase, and thus the Exchange believes that it is 
reasonable to offset a portion of those increased costs by increasing 
its network connectivity fees, as proposed herein. 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. As detailed in 
the Exchange's 2018 audited financial statements which are publicly 
available as part of the Exchange's Form 1 Amendment, the Exchange only 
has four primary sources of revenue: Transaction fees, access fees (of 
which network connectivity constitutes the majority), regulatory fees, 
and market data fees. Accordingly, the Exchange must cover all of its 
expenses from these four primary sources of revenue.
    The Proposed Fee Increases are fair and reasonable because they 
will not result in excessive pricing or supracompetitive profit, when 
comparing the total annual expense of MIAX PEARL and MIAX collected for 
providing network connectivity services versus the total projected 
annual revenue of both exchanges associated with providing network 
connectivity services. For 2018, the total annual expense associated 
with providing network connectivity services (that is, the shared 
network connectivity of MIAX PEARL and MIAX, but excluding MIAX 
Emerald) was approximately $19.3 million. The $19.3 million in total 
annual expense is comprised of the following, all of which is directly 
related to the provision of network connectivity services by MIAX PEARL 
and MIAX to their respective Members and non-Members: (1) Third-party 
expense, relating to fees paid by MIAX PEARL and MIAX to third-parties 
for certain products and services; and (2) internal expense, relating 
to the internal costs of MIAX PEARL and MIAX to provide the network 
connectivity services. All such expenses are more fully-described 
below, and are mapped to the MIAX PEARL and MIAX 2018 Statements of 
Operations and Member's Deficit (the ``2018 Financial Statements'') 
which are filed with the Commission as part of the Form 1 Amendments of 
MIAX PEARL and MIAX, and are available to the public.
    For 2018, total third-party expense, relating to fees paid by MIAX 
PEARL and MIAX to third-parties for certain products and services for 
the Exchange to be able to provide network connectivity services, was 
$5,052,346. This includes, but is not limited to, a portion of the fees 
paid to: (1) Equinix, for data center services, for the primary, 
secondary, and disaster recovery locations of the MIAX PEARL and MIAX 
trading system infrastructure; (2) Zayo Group Holdings, Inc. (``Zayo'') 
for connectivity services (fiber and bandwidth connectivity) linking 
MIAX PEARL and MIAX office locations in Princeton, NJ and Miami, FL to 
all data center locations; (3) Secure Financial Transaction 
Infrastructure (``SFTI''), which supports connectivity and feeds for 
the entire U.S. options industry; (4) various other services providers 
(including Thompson Reuters, NYSE, Nasdaq, and Internap), which provide 
content, connectivity services, and infrastructure services for 
critical components of options connectivity; and (5) various other 
hardware and software providers (including Dell and Cisco, which 
support the production environment in which Members and non-Members 
connect to the network to trade, receive market data, etc.).
    All of the third-party expense described above is contained in the 
information technology and communication costs line item under the 
section titled ``Operating Expenses Incurred Directly or Allocated From 
Parent'' of the 2018 Financial Statements. For clarity, only a portion 
of all fees paid to such third-parties is included in the third-party 
expense herein (only the portion of the expense

[[Page 46996]]

relating to the provision of network connectivity services). 
Accordingly, MIAX PEARL and MIAX do not allocate their entire 
information technology and communication costs to the provision of 
network connectivity services.
    For 2018, total internal expense, relating to the internal costs of 
MIAX PEARL and MIAX to provide the network connectivity services, was 
$14,271,870. This includes, but is not limited to, costs associated 
with: (1) Employee compensation and benefits for full-time employees 
that support network connectivity services, including staff in network 
operations, trading operations, development, system operations, 
business, etc., as well as staff in general corporate departments (such 
as legal, regulatory, and finance) that support those employees and 
functions; (2) depreciation and amortization of hardware and software 
used to provide network connectivity services, including equipment, 
servers, cabling, purchased software and internally developed software 
used in the production environment to support the provision of network 
connectivity for trading; and (3) occupancy costs for leased office 
space for staff that support the provision of network connectivity 
services. The breakdown of these costs is more fully-described below.
    All of the internal expenses described above are contained in the 
following line items under the section titled ``Operating Expenses 
Incurred Directly or Allocated From Parent'' in the 2018 Financial 
Statements: (1) Employee compensation and benefits; (2) Depreciation 
and amortization; and (3) Occupancy costs. For clarity, only a portion 
of all such internal expenses are included in the internal expense 
herein (only the portion of the expense relating to the provision of 
network connectivity services). Accordingly, MIAX PEARL and MIAX do not 
allocate their entire costs contained in those line items to the 
provision of network connectivity services.
    MIAX's and MIAX PEARL's combined employee compensation and benefits 
expense relating to providing network connectivity services was 
$5,264,151, which is only a portion of the $11,997,098 (for MIAX) and 
$8,545,540 (for MIAX PEARL) total expense for employee compensation and 
benefits that is stated in the 2018 Financial Statements. MIAX's and 
MIAX PEARL's combined depreciation and amortization expense relating to 
providing network connectivity services was $8,269,048, which is only a 
portion of the $6,179,506 (for MIAX) and $4,783,245 (for MIAX PEARL) 
total expense for depreciation and amortization that is stated in the 
2018 Financial Statements. MIAX's and MIAX PEARL's combined occupancy 
expense relating to providing network connectivity services was 
$738,669, which is only a portion of the $945,431 (for MIAX) and 
$581,783 (for MIAX PEARL) total expense for occupancy that is stated in 
the 2018 Financial Statements.
    Accordingly, the total projected MIAX and MIAX PEARL combined 
revenue for providing network connectivity services, reflective of the 
proposed increase, on an annualized basis, of $14.5 million, is less 
than total annual actual MIAX PEARL and MIAX combined expense for 
providing network connectivity services during 2018 of approximately 
$19.3 million. MIAX PEARL and MIAX project comparable combined expenses 
for providing network connectivity services for 2019, as compared to 
2018.
    For the avoidance of doubt, none of the expenses included herein 
relating to the provision of network connectivity services relate to 
the provision of any other services offered by MIAX PEARL and MIAX.
    Accordingly, the Proposed Fee Increases are fair and reasonable 
because they do not result in excessive pricing or supracompetitive 
profit, when comparing the actual network connectivity costs to the 
Exchange versus the projected network connectivity annual revenue, 
including the increased amount. Additional information on overall 
revenue and expense of the Exchange can be found in the Exchange's 2018 
Financial Statements, which are publicly available as part of the 
Exchange's Form 1 Amendment filed with the Commission on June 30, 2019.
    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.\49\ The 
Exchange further notes that Phlx, ISE, Arca and NYSE American each 
charge higher rates for such similar connectivity to primary and 
secondary facilities.\50\ While MIAX PEARL's proposed connectivity fees 
are substantially lower than the fees charged by Phlx, ISE, Arca and 
NYSE American, MIAX PEARL believes that it offers significant value to 
Members over other exchanges in terms of network monitoring and 
reporting, which MIAX PEARL 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.\51\
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    \49\ 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.
    \50\ Id.
    \51\ 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 PEARL 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.
Intra-Market Competition
    The Exchange does not believe that the proposed rule change would 
place certain market participants at the Exchange at a relative 
disadvantage compared to other market participants or affect the 
ability of such market participants to compete. In particular, the 
Exchange has received no official complaints from Members, non-Members 
(extranets and service bureaus), third-parties that purchase the 
Exchange's connectivity and resell it, and customers of those 
resellers, that the Exchange's fees or the Proposed Fee Increases are 
negatively impacting or would negatively impact their abilities to 
compete with other market participants or that they are placed at a 
disadvantage. The Exchange believes that the Proposed Fee Increases do 
not place certain market participants at a relative disadvantage to 
other market participants 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. As 
described above, the less expensive 1Gb direct

[[Page 46997]]

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 
Proposed Fee Increases do not favor certain categories of market 
participants in a manner that would impose a burden on competition; 
rather, the allocation of the Proposed Fee Increases reflects the 
network resources consumed by the various size of 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.
Inter-Market Competition
    The Exchange believes the Proposed Fee Increases do not place an 
undue burden on competition on other SROs that is not necessary or 
appropriate. 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 PEARL as compared to the much 
greater number of members at other options exchanges (as described 
above). Not only does MIAX PEARL 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 PEARL. 
There are a number of large market makers and broker-dealers that are 
members of other options exchange but not Members of MIAX PEARL. 
Additionally, other exchanges have similar connectivity alternatives 
for their participants, including similar low-latency connectivity, but 
with much higher rates to connect.\52\ The Exchange is also unaware of 
any assertion that its existing fee levels or the Proposed Fee 
Increases 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.
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    \52\ See supra note 49.
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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,\53\ and Rule 19b-4(f)(2) \54\ 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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    \53\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \54\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-PEARL-2019-25 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-PEARL-2019-25. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-PEARL-2019-25 and should be submitted on 
or before September 27, 2019.
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    \55\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\55\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19218 Filed 9-5-19; 8:45 am]
BILLING CODE 8011-01-P