[Federal Register Volume 85, Number 203 (Tuesday, October 20, 2020)]
[Notices]
[Pages 66636-66645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23149]
[[Page 66636]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90184; File No. SR-EMERALD-2020-12]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its Fee Schedule To Adopt Port Fees and Increase Certain Network
Connectivity Fees
October 14, 2020.
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 October 1, 2020, 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'').
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 to: (1) Adopt Port
fees; and (2) increase the Exchange's network connectivity fees for its
10 gigabit (``Gb'') ultra-low latency (``ULL'') fiber connection for
Members \3\ and non-Members (collectively, the ``Proposed Access
Fees''). On September 15, 2020, the Exchange issued a Regulatory
Circular which announced, among other things, that the Exchange would
adopt Port fees, thereby terminating the Waiver Period \4\ for such
fees, and increase the fees for its 10Gb ULL connection for Members and
non-Members, beginning October 1, 2020.\5\
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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\ ``Waiver Period'' means, for each applicable fee, the period
of time from the initial effective date of the MIAX Emerald Fee
Schedule until such time that the Exchange has an effective fee
filing establishing the applicable fee. The Exchange will issue a
Regulatory Circular announcing the establishment of an applicable
fee that was subject to a Waiver Period at least fifteen (15) days
prior to the termination of the Waiver Period and effective date of
any such applicable fee. See the Definitions Section of the Fee
Schedule.
\5\ See MIAX Emerald Regulatory Circular 2020-41 available at
https://www.miaxoptions.com/sites/default/files/circular-files/MIAX_Emerald_RC_2020_41.pdf.
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Port Fees
The Exchange proposes to adopt fees for ``Ports'', which are used
by Members and non-Members to access the Exchange. MIAX Emerald
provides four Port types: (i) The FIX Port, which allows Members to
electronically send orders in all products traded on the Exchange; (ii)
the MEI Port, which allows Market Makers to submit electronic orders
and quotes to the Exchange; (iii) the Clearing Trade Drop Port (``CTD
Port''),\6\ which provides real-time trade clearing information to the
participants to a trade on MIAX Emerald and to the participants'
respective clearing firms; and (iv) the FIX Drop Copy (``FXD
Port''),\7\ which provides a copy of real-time trade execution,
correction and cancellation information through a FIX Port to any
number of FIX Ports designated by an EEM to receive such messages. The
Exchange also proposes to increase the monthly fee for each additional
Limited Service MEI Port per matching engine for Market Makers over and
above the two (2) Limited Service MEI Ports per matching engine that
are allocated with the Full Service MEI Ports, as described below.
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\6\ ``CTD Port'' or ``Clearing Trade Drop Port'' provides an
Exchange Member with a real-time clearing trade updates. The updates
include the Member's clearing trade messages on a low latency, real-
time basis. The trade messages are routed to a Member's connection
containing certain information. The information includes, among
other things, the following: (i) Trade date and time; (ii) symbol
information; (iii) trade price/size information; (iv) Member type
(for example, and without limitation, Market Maker, Electronic
Exchange Member, Broker-Dealer); and (v) Exchange MPID for each side
of the transaction, including Clearing Member MPID. See the
Definitions Section of the Fee Schedule.
\7\ The FIX Drop Copy (``FXD'') Port is a messaging interface
that will provide a copy of real-time trade execution, trade
correction and trade cancellation information to FXD Port users who
subscribe to the service. FXD Port users are those users who are
designated by an EEM to receive the information and the information
is restricted for use by the EEM. FXD Port Fees will be assessed in
any month the Member is credentialed to use the FXD Port in the
production environment. See Fee Schedule, Section 4)d)iv).
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Since the launch of the Exchange, all Port fees have been waived by
the Exchange in order to incentivize market participants to connect to
the Exchange, except for additional Limited Service MEI Ports. However,
also at the launch, the Exchange introduced the structure of Port fees
on its Fee Schedule (without proposing the actual fee amounts), in
order to indicate to market participants that Port fees would
ultimately apply upon expiration of the Waiver Period. The Exchange now
proposes to assess monthly Port fees for Members and non-Members in
each month the market participant is credentialed to use a Port in the
production environment and based upon the number of credentialed Ports
that a user is entitled to use. MIAX Emerald has Primary and Secondary
Facilities and a Disaster Recovery Facility. Each type of Port provides
access to all Exchange facilities for a single fee. The Exchange notes
that, unless otherwise specifically set forth in the Fee Schedule, the
Port fees include the information communicated through the Port. That
is, unless otherwise specifically set forth in the Fee Schedule, there
is no additional charge for the information that is communicated
through the Port apart from what the user is assessed for each Port.
FIX Port Fees
Since the launch of the Exchange, fees for FIX Ports have been
waived for the Waiver Period. The Exchange now proposes to assess a
monthly FIX Port fee to Members in each month the Member is
credentialed to use a FIX Port in the production environment and based
upon the number of credentialed FIX Ports, as follows: $550 for the
first FIX Port; $350 for FIX Ports two through five; and $150 for each
FIX Port over five.
Below is the proposed table showing the FIX Port fees:
[[Page 66637]]
------------------------------------------------------------------------
MIAX Emerald monthly
port fees (includes
connectivity to the
FIX Port fees Primary, Secondary and
Disaster Recovery data
centers)
------------------------------------------------------------------------
1st FIX Port................................... $550.00
FIX Ports 2 through 5.......................... 350.00
Additional FIX Ports over 5.................... 150.00
------------------------------------------------------------------------
MEI Port Fees
MIAX Emerald offers different options of MEI Ports depending on the
services required by Market Makers. Since the launch of the Exchange,
fees for MEI Ports have been waived for the Waiver Period. The Exchange
now proposes to assess monthly MEI Port Fees to Market Makers based
upon the number of classes or class volume accessed by the Market
Maker. Market Makers are allocated two (2) Full Service MEI Ports \8\
and two (2) Limited Service MEI Ports \9\ per Matching Engine \10\ to
which they connect. The Full Service MEI Ports, Limited Service MEI
Ports and the additional Limited Service MEI Ports all include access
to the Exchange's Primary and Secondary data centers and its Disaster
Recovery center.
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\8\ Full Service MEI Ports means a port which provides Market
Makers with the ability to send Market Maker simple and complex
quotes, eQuotes, and quote purge messages to the MIAX Emerald
System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
\9\ Limited Service MEI Ports means a port which provides Market
Makers with the ability to send simple and complex eQuotes and quote
purge messages only, but not Market Maker Quotes, to the MIAX
Emerald System. Limited Service MEI Ports are also capable of
receiving administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching Engine. See the
Definitions Section of the Fee Schedule.
\10\ A ``matching engine'' is a part of the MIAX Emerald
electronic system that processes options quotes and trades on a
symbol-by-symbol basis. Some matching engines will process option
classes with multiple root symbols, and other matching engines will
be dedicated to one single option root symbol (for example, options
on SPY will be processed by one single matching engine that is
dedicated only to SPY). A particular root symbol may only be
assigned to a single designated matching engine. A particular root
symbol may not be assigned to multiple matching engines. See the
Definitions Section of the Fee Schedule.
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Specifically, the Exchange proposes to adopt MEI Port fees
assessable to Market Makers based upon the number of classes or class
volume accessed by the Market Maker. The Exchange proposes to adopt the
following MEI Port fees: (i) $5,000 for Market Maker Assignments in up
to 5 option classes or up to 10% of option classes by volume; (ii)
$10,000 for Market Maker Assignments in up to 10 option classes or up
to 20% of option classes by volume; (iii) $14,000 for Market Maker
Assignments in up to 40 option classes or up to 35% of option classes
by volume; (iv) $17,500 for Market Maker Assignments in up to 100
option classes or up to 50% of option classes by volume; and (v)
$20,500 for Market Maker Assignments in over 100 option classes or over
50% of option classes by volume up to all option classes listed on MIAX
Emerald.
The Exchange also proposes to adopt new footnote ``[ssquf]'' for
its MEI Port fees that will apply to the Market Makers who fall within
the following MEI Port fee levels, which represent the 4th and 5th
levels of the fee table: Market Makers who have (i) Assignments in up
to 100 option classes or up to 50% of option classes by volume and (ii)
Assignments in over 100 option classes or over 50% of option classes by
volume up to all option classes listed on MIAX Emerald. Specifically,
the Exchange proposes for these monthly MEI Port tier levels, if the
Market Maker's total monthly executed volume during the relevant month
is less than 0.025% of the total monthly executed volume reported by
OCC in the customer account type for MIAX Emerald-listed option classes
for that month, then the fee will be $14,500 instead of the fee
otherwise applicable to such level.
The purpose of this proposed lower monthly MEI Port fee is to
provide a lower fixed cost to those Market Makers who are willing to
quote the entire Exchange market (or substantial amount of the Exchange
market), as objectively measured by either number of classes assigned
or national ADV, but who do not otherwise execute a significant amount
of volume on the Exchange. The Exchange believes that, by offering
lower fixed costs to Market Makers that execute less volume, the
Exchange will retain and attract smaller-scale Market Makers, which are
an integral component of the option industry marketplace, but have been
decreasing in number in recent years, due to industry consolidation and
lower market maker profitability. Since these smaller-scale Market
Makers utilize less Exchange capacity due to lower overall volume
executed, the Exchange believes it is reasonable and appropriate to
offer such Market Makers a lower fixed cost. The Exchange notes that
other options exchanges assess certain of their fees at different
rates, based upon a member's participation on that exchange,\11\ and,
as such, this concept is not novel. The proposed changes to the MEI
Port fees for Market Makers who fall within the 4th and 5th levels of
the fee table are based upon a business determination of current Market
Maker assignments and trading volume.
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\11\ See, e.g., Cboe BZX Options Exchange (``BZX Options'')
assesses the Participant Fee, which is a membership fee, according
to a member's ADV. See Cboe BZX Options Exchange Fee Schedule under
``Membership Fees''. The Participant Fee is $500 if the member ADV
is less than 5000 contracts and $1,000 if the member ADV is equal to
or greater than 5,000 contracts.
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For the calculation of the monthly MEI Port Fees that apply to
Market Makers, the number of classes is defined as the greatest number
of classes the Market Maker was assigned to quote in on any given day
within the calendar month and the class volume percentage is based on
the total national average daily volume in classes listed on MIAX
Emerald in the prior calendar quarter.\12\ Newly listed option classes
are excluded from the calculation of the monthly MEI Port Fee until the
calendar quarter following their listing, at which time the newly
listed option classes will be included in both the per class count and
the percentage of total national average daily volume. The Exchange
proposes to assess Market Makers the monthly MEI Port Fees based on the
greatest number of classes listed on MIAX Emerald that the Market Maker
was assigned to quote in on any given day within a calendar month and
the applicable fee rate that is the lesser of either the per class
basis or percentage of total national average daily volume measurement.
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\12\ The Exchange will use the following formula to calculate
the percentage of total national average daily volume that the
Market Maker assignment is for purposes of the MEI Port Fee for a
given month:
Market Maker assignment percentage of national average daily
volume = [total volume during the prior calendar quarter in a class
in which the Market Maker was assigned]/[total national volume in
classes listed on MIAX in the prior calendar quarter].
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[[Page 66638]]
The Exchange currently charges $50 per month for each additional
Limited Service MEI Port per matching engine for Market Makers over and
above the two (2) Limited Service MEI Ports per matching engine that
are allocated with the Full Service MEI Ports. The Full Service MEI
Ports, Limited Service MEI Ports and the additional Limited Service MEI
Ports all include access to the Exchange's Primary and Secondary data
centers and its Disaster Recovery center. Currently, footnote ``*'' in
the MEI Port Fee table provides that the fees for Additional Limited
Service MEI Ports are not subject to the Waiver Period. Accordingly, in
connection with this proposal, the Exchange proposes to delete footnote
``*'' since the Exchange proposes to begin assessing MEI Port fees,
which will no longer be subject to the Waiver Period. The Exchange also
proposes to increase the monthly fee from $50 to $100 for each
additional Limited Service MEI Port per matching engine for Market
Makers over and above the two (2) Limited Service MEI Ports per
matching engine that are allocated with the Full Service MEI Ports.
Below is the proposed table showing the MEI Port fees:
------------------------------------------------------------------------
Market Maker Assignments (the lesser of
the applicable measurements below)
Monthly MIAX Emerald MEI -------------------------------------------
fees % of national
Per class average daily volume
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$5,000.00................... Up to 5 Classes..... Up to 10% of Classes
by volume.
$10,000.00.................. Up to 10 Classes.... Up to 20% of Classes
by volume.
$14,000.00.................. Up to 40 Classes.... Up to 35% of Classes
by volume.
$17,500.00 [ssquf].......... Up to 100 Classes... Up to 50% of Classes
by volume.
$20,500.00 [ssquf].......... Over 100 Classes.... Over 50% of Classes
by volume up to all
Classes listed on
MIAX Emerald.
------------------------------------------------------------------------
[ssquf] For these Monthly MIAX Emerald MEI Port tier levels, if the
Market Maker's total monthly executed volume during the relevant month
is less than 0.025% of the total monthly executed volume reported by
OCC in the customer account type for MIAX Emerald-listed option
classes for that month, then the fee will be $14,500 instead of the
fee otherwise applicable to such level.
Purge Port Fees
The Exchange also offers Market Makers the ability to request and
be allocated two (2) Purge Ports per Matching Engine to which it
connects. Purge Ports provide Market Makers with the ability to send
quote purge messages to the MIAX Emerald System. Purge Ports are not
capable of sending or receiving any other type of messages or
information. Since the launch of the Exchange, fees for Purge Ports
have been waived for the Waiver Period. The Exchange now proposes to
amend its Fee Schedule to adopt fees for Purge Ports. For each month in
which the MIAX Emerald Market Maker has been credentialed to use Purge
Ports in the production environment and has been assigned to quote in
at least one class, the Exchange proposes to assess the MIAX Emerald
Market Maker a flat fee $1,500, regardless of the number of Purge Ports
allocated to the MIAX Emerald Market Maker.
CTD Port Fees
The Exchange proposes to assess a CTD Port fee as a monthly fixed
amount, not tied to transacted volume of the Member. This fixed fee
structure is the same structure in place at Nasdaq PHLX with respect to
the proposed CTD Port Fees.\13\ Since the launch of the Exchange, CTD
Port Fees have been waived for the Waiver Period. CTD provides Exchange
members with real-time clearing trade updates. The updates include the
Member's clearing trade messages on a low latency, real-time basis. The
trade messages are routed to a Member's connection containing certain
information. The information includes, among other things, the
following: (i) Trade date and time; (ii) symbol information; (iii)
trade price/size information; (iv) Member type (for example, and
without limitation, Market Maker, Electronic Exchange Member, Broker-
Dealer); (v) Exchange Member Participant Identifier (``MPID'') for each
side of the transaction, including Clearing Member MPID; and (vi)
strategy specific information for complex transactions. CTD Port fees
will be assessed in any month the Member is credentialed to use the CTD
Port in the production environment. The Exchange proposes to assess a
CTD Port fee of $450 per month. Below is the proposed table for the CTD
Port fees:
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\13\ See Nasdaq PHLX Pricing Schedule, Options 7, Section 9,
Other Member Fees, B. Port Fees.
------------------------------------------------------------------------
Description Monthly fee
------------------------------------------------------------------------
Real-Time CTD Information..................... $450.00
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FXD Port Fee
The Exchange proposes to assess an FXD Port Fee as a monthly fixed
amount, not tied to transacted volume of the Member. This fixed fee
structure is the same structure in place at Nasdaq PHLX with respect to
FXD Port Fees.\14\ Since the launch of the Exchange, FXD Port Fees have
been waived for the Waiver Period. FXD is a messaging interface that
will provide a copy of real-time trade execution, trade correction and
trade cancellation information to FXD Port users who subscribe to the
service. FXD Port users are those users who are designated by an EEM to
receive the information and the information is restricted for use by
the EEM. FXD Port fees will be assessed in any month the Member is
credentialed to use the FXD Port in the production environment. The
Exchange proposes to assess an FXD Port fee of $500 per month. Below is
the proposed table for the FXD Port fees:
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\14\ Id.
[[Page 66639]]
------------------------------------------------------------------------
MIAX Emerald monthly
port fees (includes
connectivity to the
Description Primary, Secondary and
Disaster Recovery data
centers)
------------------------------------------------------------------------
FIX Drop Copy Port............................ $500.00
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10Gb ULL Connectivity Fee
The Exchange proposes to amend Sections 5a) and b) of the Fee
Schedule to increase the monthly network connectivity fees for the 10Gb
ULL fiber connection, which is charged to both Members and non-Members
of the Exchange for connectivity to the Exchange's primary/secondary
facility. The Exchange offers to both Members and non-Members two
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 now proposes to increase its monthly network connectivity
fee for its 10Gb ULL connection to $10,000 for Members and non-Members.
* * * * *
MIAX Emerald believes that exchanges, in setting fees of all types,
should meet very high standards of transparency to demonstrate why each
new fee or fee increase meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among members and markets. MIAX
Emerald believes this high standard is especially important when an
exchange imposes various access fees for market participants to access
an exchange's marketplace. MIAX Emerald deems Port fees and
Connectivity Fees to be access fees. The Exchange believes that it is
important to demonstrate that these fees are based on its costs and
reasonable business needs. Accordingly, the Exchange believes the
Proposed Access Fees will allow the Exchange to offset expense the
Exchange has and will incur, and that the Exchange is providing
sufficient transparency (as described below) into how the Exchange
determined to charge such fees. Accordingly, the Exchange is providing
an analysis of its revenues, costs, and profitability (before the
proposed changes), and the Exchange's revenues, costs, and
profitability (following the proposed changes) for the Proposed Access
Fees. This analysis includes information regarding its methodology for
determining the costs and revenues associated with the Proposed Access
Fees.
In order to determine the Exchange's costs associated with
providing the Proposed Access Fees, the Exchange conducted an extensive
cost review in which the Exchange analyzed every expense item in the
Exchange's general expense ledger to determine whether each such
expense relates to the Proposed Access Fees, and, if such expense did
so relate, what portion (or percentage) of such expense actually
supports the services included in the Proposed Access Fees. The sum of
all such portions of expenses represents the total cost of the Exchange
to provide the Proposed Access Fees. For the avoidance of doubt, no
expense amount was allocated twice. The Exchange is also providing
detailed information regarding the Exchange's cost allocation
methodology--namely, information that explains the Exchange's rationale
for determining that it was reasonable to allocate certain expenses
described in this filing towards the total cost to the Exchange to
provide the Proposed Access Fees.
In order to determine the Exchange's projected revenues associated
with providing the Proposed Access Fees, the Exchange analyzed the
number of Members and non-Members currently utilizing the Exchange's
services associated with the Proposed Access Fees during 2020, and,
utilizing a recently completed monthly billing cycle, extrapolated
annualized revenue on a going-forward basis.
The Exchange is presenting its revenue and expense associated with
the Proposed Access Fees in this filing in a manner that is consistent
with how the Exchange presents its revenue and expense in its Audited
Unconsolidated Financial Statements. The Exchange's most recent Audited
Unconsolidated Financial Statement is for 2019. However, since the
revenue and expense associated with the Proposed Access Fees were not
in place in 2019 or for the first three quarters of 2020, the Exchange
believes its 2019 Audited Unconsolidated Financial Statement is not
useful for analyzing the reasonableness of the total annual revenue and
costs associated with the Proposed Access Fees. Accordingly, the
Exchange believes it is more appropriate to analyze the Proposed Access
Fees utilizing its 2020 actual (9 months to date) and projected (3
months remaining) revenue and costs, as described herein, which utilize
the same presentation methodology as set forth in the Exchange's
previously-issued Audited Unconsolidated Financial Statements. Based on
this analysis, the Exchange believes that the Proposed Access Fees are
fair and reasonable because they will not result in excessive pricing
or supra-competitive profit when comparing the Exchange's total annual
expense associated with providing the services associated with the
Proposed Access Fees versus the total projected annual revenue the
Exchange will collect for providing those services.
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'').\15\ On May 21, 2019, the Commission issued the Staff Guidance
on SRO Rule Filings Relating to Fees.\16\ On December 20, 2019, the
Exchange adopted Connectivity Fees in a filing utilizing a cost-based
justification framework that is substantially similar to the cost-based
justification framework utilized for the instant Proposed Access
Fees.\17\ Accordingly, the Exchange believes that the Proposed Access
Fees 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 comprehensive
[[Page 66640]]
revenue and cost data and analysis) that they are fair and reasonable
because they not result in excessive pricing or supra-competitive
profit; and (iv) utilize a cost-based justification framework that is
substantially similar to a framework previously used by the Exchange to
establish Connectivity Fees. Accordingly, the Exchange believes that
the Commission should find that the Proposed Fees are consistent with
the Act.
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\15\ 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).
\16\ 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 (the ``Guidance'').
\17\ See Securities Exchange Act Release No. 87877 (December 31,
2019), 84 FR 738 (January 7, 2020) (SR-EMERALD-2019-39).
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The proposed rule change is immediately effective upon filing with
the Commission pursuant to Section 19(b)(3)(A) of the Act.
2. Statutory Basis
The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \18\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \19\ 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 \20\ 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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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(4).
\20\ 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.'' \21\
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\21\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
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Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
options transaction services. The Exchange is one of several options
venues to which market participants may direct their order flow, and it
represents a small percentage of the overall market. Within this
environment, market participants can freely and often do shift their
order flow among the Exchange and competing venues in response to
changes in their respective pricing schedules. There are currently 16
registered options exchanges competing for order flow. Based on
publicly-available information, and excluding index-based options, no
single exchange has more than approximately 16% of the market share of
executed volume of multiply-listed equity and exchange-traded fund
(``ETF'') options.\22\ Therefore, no exchange possesses significant
pricing power. More specifically, for the month of August 2020, the
Exchange had a market share of approximately 3.24% of executed
multiply-listed equity options.\23\
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\22\ The Options Clearing Corporation (``OCC'') publishes
options and futures volume in a variety of formats, including daily
and monthly volume by exchange, available here: https://www.theocc.com/market-data/volume/default.jsp.
\23\ See id.
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The Exchange also believes that the ever-shifting market share
among the exchanges from month to month demonstrates that market
participants can discontinue or reduce use of certain categories of
products, or shift order flow, in response to non-transaction and
transaction fee changes. For example, on February 28, 2019, the
Exchange's affiliate, MIAX PEARL, LLC (``MIAX PEARL'') filed with the
Commission a proposal to increase Taker fees in certain Tiers for
options transactions in certain Penny classes for Priority Customers
and decrease Maker rebates in certain Tiers for options transactions in
Penny classes for Priority Customers (which fee was to be effective
March 1, 2019).\24\ MIAX PEARL experienced a decrease in total market
share for the month of March 2019, after the proposal went into effect.
Accordingly, the Exchange believes that the MIAX PEARL March 1, 2019
fee change, to increase certain transaction fees and decrease certain
transaction rebates, may have contributed to the decrease in MIAX
PEARL's market share and, as such, the Exchange believes competitive
forces constrain the Exchange's, and other options exchanges, ability
to set transaction fees and non-transaction fees and market
participants can shift order flow based on fee changes instituted by
the exchanges.
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\24\ See Securities Exchange Act Release No. 85304 (March 13,
2019), 84 FR 10144 (March 19, 2019) (SR-PEARL-2019-07).
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The Exchange launched trading on March 1, 2019. The Exchange has
only a 3.24% market share of the U.S. options industry in August 2020
in equity option classes according to the OCC.\25\ The Exchange is not
aware of any evidence that a market share of approximately 3% provides
the Exchange with anti-competitive pricing power. If the Exchange were
to attempt to establish unreasonable pricing, then no market
participant would join or connect, and existing market participants
would disconnect.
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\25\ See supra note 22.
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Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections to an exchange (or
not connect to an exchange) if an exchange were to establish prices for
its non-transaction fees that, in the determination of such market
participant, did not make business or economic sense for such market
participant to connect to such exchange. 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 non-transaction fee pricing,
R2G Services LLC (``R2G'') filed a comment letter after BOX's proposed
rule changes to increase its connectivity fees (SR-BOX-2018-24, SR-BOX-
2018-37, and SR-BOX-2019-04).\26\ 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.'' \27\ Accordingly, this example
shows that if an exchange sets too high of a fee for connectivity and/
or other non-transaction fees for its relevant marketplace, market
participants can choose to disconnect from such exchange.
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\26\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman,
Acting Secretary, Commission, dated March 27, 2019 (the ``R2G
Letter'').
\27\ See id.
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The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the Proposed Access Fees will not result in
excessive or supra-competitive profit. The costs associated with
providing access to Exchange Members and non-Members, as well as the
general expansion of a state-of-the-art infrastructure, are extensive,
have increased year-over-year, and are projected to increase year-over-
year in the future. In particular, the Exchange has experienced a
material increase in its costs in 2020, in connection with a project to
make its network environment more transparent and deterministic, based
on customer
[[Page 66641]]
demand. This project will allow the Exchange to enhance its network
architecture with the intent of ensuring a best-in-class, transparent
and deterministic trading system while maintaining its industry leading
latency and throughput capabilities. In order to provide this greater
amount of transparency and higher determinism, MIAX Emerald has made
significant capital expenditures (``CapEx''), incurred increased
ongoing operational expenditures, and undertaken additional engineering
R&D in the following areas: (i) Implementing an improved network design
to ensure the minimum latency between multicast market data signals
disseminated by the Exchange across the extranet switches, improving
the unicast jitter profile to reduce the occurrence of message sequence
inversions from Members to the Exchange quoting gateway processors, and
introducing a new optical fiber network infrastructure that ensures the
optical fiber path for participants within extremely tight tolerances;
(ii) introducing a re-architected and engineered participant quoting
gateway that ensures the delivery of messages to the match engine with
absolute determinism, eliminating the message processing inversions
that can occur with messages received nanoseconds apart; and (iii)
designing an improved monitoring platform to better measure the
performance of the network and systems at extremely tight tolerances
and to provide Members with reporting on the performance of their
systems. Just the CapEx associated with phase 1 of this project in 2020
was approximately $1.85 million. This expense does not include the
significant increase in employee time and other resources necessary to
maintain and service this network, which expense is captured in the
operating expense (``OpEx'') discussed below. This project, which
results in a material increase in expense of the Exchange, is a primary
driver for the increase in network connectivity fees proposed by the
Exchange.
However, in order to provide more detail and to quantify the
Exchange's costs associated with providing access to the Exchange in
general, the Exchange notes that there are material costs associated
with providing the infrastructure and headcount to fully-support access
to the Exchange. The Exchange incurs technology expense 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. While some
of the expense is fixed, much of the expense is not fixed, and thus
increases as the services associated with the Proposed Access Fees
increase. For example, new 10Gb ULL connections and Ports 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. Further, as the total number of all
connections and Ports 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, the cost to MIAX Emerald and its affiliates is not fixed.
The Exchange believes the Proposed Access Fees are reasonable in order
to offset the costs to the Exchange associated with providing access to
its network infrastructure.
Further, because the costs of operating its own data center are
significant and not economically feasible for the Exchange at this
time, the Exchange does not operate its own data centers, and instead
contracts with a third-party data center provider. The Exchange notes
that other competing 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. The Proposed Access Fees,
which are charged for accessing the Exchange's data center network
infrastructure, are directly related to the network and offset such
costs.
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. In
fact, the Exchange often receives inquiries from other industry
participants regarding the status of networking issues outside of the
Exchange's own network environment that are impacting the industry as a
whole via the SIPs, including inquiries from regulators, because the
Exchange has a superior, state-of the-art network that, through its
enhanced monitoring and reporting solutions, often detects and
identifies industry-wide networking issues ahead of the SIPs. The
Exchange also incurs costs associated with the maintenance and
improvement of existing tools and the development of new tools.
Additionally, certain Exchange-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, routine R&D projects to improve the
performance of the network's hardware infrastructure result in
additional cost. In sum, the costs associated with maintaining and
enhancing a state-of-the-art exchange network 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 those costs through the Proposed Access Fees. 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 Proposed Access Fees that must
be charged to access it, in order to recover those costs.
The Exchange only has four primary sources of revenue: Transaction
fees, access fees (of which the Proposed Access Fees constitute 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 Access Fees are fair and reasonable because they will
not result in excessive pricing or supra-competitive profit, when
comparing the total annual expense of MIAX Emerald associated with
providing these services versus the total projected annual revenue that
the Exchange projects to collect. For 2020, the total annual expense
for providing the services associated with the Proposed Access Fees for
MIAX Emerald is projected to be approximately $9.3 million. The $9.3
million in projected total annual expense is comprised of the
following, all of which are directly related to the services associated
with the Proposed Access Fees: (1) Third-party expense, relating to
fees paid by MIAX Emerald to third-parties for certain products and
services; and (2) internal expense,
[[Page 66642]]
relating to the internal costs of MIAX Emerald to provide the services
associated with the Proposed Access Fees. The $9.3 million in projected
total annual expense is directly related to the services associated
with the Proposed Access Fees, and not any other product or service
offered by the Exchange. It does not include general costs of operating
matching systems and other trading technology, and no expense amount
was allocated twice.
As discussed, the Exchange conducted an extensive cost review in
which the Exchange analyzed every expense item in the Exchange's
general expense ledger (this includes over 150 separate and distinct
expense items) to determine whether each such expense relates to the
services associated with the Proposed Access Fees, and, if such expense
did so relate, what portion (or percentage) of such expense actually
supports those services, and thus bears a relationship that is, ``in
nature and closeness,'' directly related to those services. The sum of
all such portions of expenses represents the total cost of the Exchange
to provide services associated with the Proposed Access Fees.
For 2020, total third-party expense, relating to fees paid by MIAX
Emerald to third-parties for certain products and services for the
Exchange to be able to provide the services associated with the
Proposed Access Fees, is projected to be $1,932,519. 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 Emerald trading system infrastructure; (2) Zayo
Group Holdings, Inc. (``Zayo'') for network services (fiber and
bandwidth products and services) linking MIAX Emerald's office
locations in Princeton, NJ and Miami, FL to all data center locations;
(3) Secure Financial Transaction Infrastructure (``SFTI''),\28\ 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 network services; 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.).
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\28\ In fact, on October 22, 2019, the Exchange was notified by
SFTI that it is again raising its fees charged to the Exchange by
approximately 11%, without having to show that such fee change
complies with the Act by being reasonable, equitably allocated, and
not unfairly discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure services
provided by SFTI, that its fees are not required to be rule-filed
with the Commission pursuant to Section 19(b)(1) of the Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively.
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For clarity, only a portion of all fees paid to such third-parties
is included in the third-party expense herein, and no expense amount is
allocated twice. Accordingly, MIAX Emerald does not allocate its entire
information technology and communication costs to the services
associated with the Proposed Access Fees.
The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the services associated with the Proposed Access Fees. In
particular, the Exchange believes it is reasonable to allocate the
identified portion of the Equinix expense because Equinix operates the
data centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which continues to expand and increase in
cost, power to operate the network infrastructure, and cooling
apparatuses to ensure the Exchange's network infrastructure maintains
stability. Without these services from Equinix, the Exchange would not
be able to operate and support the network and provide the services
associated with the Proposed Access Fees to its Members and non-Members
and their customers. The Exchange did not allocate all of the Equinix
expense toward the cost of providing the services associated with the
Proposed Access Fees, only that portion which the Exchange identified
as being specifically mapped to providing the services associated with
the Proposed Access Fees, approximately 73% of the total Equinix
expense. The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the services
associated with the Proposed Access Fees, and not any other service, as
supported by its cost review.
The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking MIAX
Emerald with its affiliates, MIAX and MIAX PEARL, as well as the data
center and disaster recovery locations. As such, all of the trade data,
including the billions of messages each day per exchange, flow through
Zayo's infrastructure over the Exchange's network. Without these
services from Zayo, the Exchange would not be able to operate and
support the network and provide the services associated with the
Proposed Access Fees. The Exchange did not allocate all of the Zayo
expense toward the cost of providing the services associated with the
Proposed Access Fees, only the portion which the Exchange identified as
being specifically mapped to providing the Proposed Access Fees,
approximately 66% of the total Zayo expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the services associated with the Proposed Access Fees,
and not any other service, as supported by its cost review.
The Exchange believes it is reasonable to allocate the identified
portions of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry, as well as the content, connectivity services,
and infrastructure services for critical components of the network.
Without these services from SFTI and various other service providers,
the Exchange would not be able to operate and support the network and
provide access to its Members and non-Members and their customers. The
Exchange did not allocate all of the SFTI and other service providers'
expense toward the cost of providing the services associated with the
Proposed Access Fees, only the portions which the Exchange identified
as being specifically mapped to providing the services associated with
the Proposed Access Fees, approximately 94% of the total SFTI and other
service providers' expense. The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the services associated with the Proposed Access Fees.
The Exchange believes it is reasonable to allocate the identified
portion of the other hardware and software provider expense because
this includes costs for dedicated hardware licenses for switches and
servers, as well as dedicated software licenses for security monitoring
and reporting across the network. Without this hardware and software,
the Exchange would not be able to operate and support the network and
provide access to its Members and non-Members and their customers. The
Exchange did not allocate all of the hardware and software provider
expense toward the cost of providing
[[Page 66643]]
the services associated with the Proposed Access Fees, only the
portions which the Exchange identified as being specifically mapped to
providing the services associated with the Proposed Access Fees,
approximately 57% of the total hardware and software provider expense.
The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the services
associated with the Proposed Access Fees.
For 2020, total projected internal expense, relating to the
internal costs of MIAX Emerald to provide the services associated with
the Proposed Access Fees, is projected to be $7,367,259. This includes,
but is not limited to, costs associated with: (1) Employee compensation
and benefits for full-time employees that support the services
associated with the Proposed Access Fees, including staff in network
operations, trading operations, development, system operations,
business, as well as staff in general corporate departments (such as
legal, regulatory, and finance) that support those employees and
functions (including an increase as a result of the higher determinism
project); (2) depreciation and amortization of hardware and software
used to provide the services associated with the Proposed Access Fees,
including equipment, servers, cabling, purchased software and
internally developed software used in the production environment to
support the network for trading; and (3) occupancy costs for leased
office space for staff that provide the services associated with the
Proposed Access Fees. The breakdown of these costs is more fully-
described below. For clarity, only a portion of all such internal
expenses are included in the internal expense herein, and no expense
amount is allocated twice. Accordingly, MIAX Emerald does not allocate
its entire costs contained in those items to the services associated
with the Proposed Access Fees.
The Exchange believes it is reasonable to allocate such internal
expense described above towards the total cost to the Exchange to
provide the services associated with the Proposed Access Fees. In
particular, MIAX Emerald's employee compensation and benefits expense
relating to providing the services associated with the Proposed Access
Fees is projected to be $4,489,924, which is only a portion of the
$9,354,009 total projected expense for employee compensation and
benefits. The Exchange believes it is reasonable to allocate the
identified portion of such expense because this includes the time spent
by employees of several departments, including Technology, Back Office,
Systems Operations, Networking, Business Strategy Development (who
create the business requirement documents that the Technology staff use
to develop network features and enhancements), Trade Operations,
Finance (who provide billing and accounting services relating to the
network), and Legal (who provide legal services relating to the
network, such as rule filings and various license agreements and other
contracts). As part of the extensive cost review conducted by the
Exchange, the Exchange reviewed the amount of time spent by each
employee on matters relating to the provision of services associated
with the Proposed Access Fees. Without these employees, the Exchange
would not be able to provide the services associated with the Proposed
Access Fees to its Members and non-Members and their customers. The
Exchange did not allocate all of the employee compensation and benefits
expense toward the cost of the services associated with the Proposed
Access Fees, only the portions which the Exchange identified as being
specifically mapped to providing the services associated with the
Proposed Access Fees, approximately 48% of the total employee
compensation and benefits expense. The Exchange believes this
allocation is reasonable because it represents the Exchange's actual
cost to provide the services associated with the Proposed Access Fees,
and not any other service, as supported by its cost review.
MIAX Emerald's depreciation and amortization expense relating to
providing the services associated with the Proposed Access Fees is
projected to be $2,630,687, which is only a portion of the $3,812,590
total projected expense for depreciation and amortization. The Exchange
believes it is reasonable to allocate the identified portion of such
expense because such expense includes the actual cost of the computer
equipment, such as dedicated servers, computers, laptops, monitors,
information security appliances and storage, and network switching
infrastructure equipment, including switches and taps that were
purchased to operate and support the network and provide the services
associated with the Proposed Access Fees. Without this equipment, the
Exchange would not be able to operate the network and provide the
services associated with the Proposed Access Fees to its Members and
non-Members and their customers. The Exchange did not allocate all of
the depreciation and amortization expense toward the cost of providing
the services associated with the Proposed Access Fees, only the portion
which the Exchange identified as being specifically mapped to providing
the services associated with the Proposed Access Fees, approximately
69% of the total depreciation and amortization expense, as these
services would not be possible without relying on such equipment. The
Exchange believes this allocation is reasonable because it represents
the Exchange's actual cost to provide the services associated with the
Proposed Access Fees, and not any other service, as supported by its
cost review.
MIAX Emerald's occupancy expense relating to providing the services
associated with the Proposed Access Fees is projected to be $246,648,
which is only a portion of the $474,323 total projected expense for
occupancy. The Exchange believes it is reasonable to allocate the
identified portion of such expense because such expense represents the
portion of the Exchange's cost to rent and maintain a physical location
for the Exchange's staff who operate and support the network, including
providing the services associated with the Proposed Access Fees. This
amount consists primarily of rent for the Exchange's Princeton, NJ
office, as well as various related costs, such as physical security,
property management fees, property taxes, and utilities. The Exchange
operates its Network Operations Center (``NOC'') and Security
Operations Center (``SOC'') from its Princeton, New Jersey office
location. A centralized office space is required to house the staff
that operates and supports the network. The Exchange currently has
approximately 150 employees. Approximately two-thirds of the Exchange's
staff are in the Technology department, and the majority of those staff
have some role in the operation and performance of the services
associated with the Proposed Access Fees. Without this office space,
the Exchange would not be able to operate and support the network and
provide the services associated with the Proposed Access Fees to its
Members and non-Members and their customers. Accordingly, the Exchange
believes it is reasonable to allocate the identified portion of its
occupancy expense because such amount represents the Exchange's actual
cost to house the equipment and personnel who operate and support the
Exchange's network infrastructure and the services associated with the
Proposed Access Fees. The Exchange did not allocate all of the
occupancy expense toward the
[[Page 66644]]
cost of providing the services associated with the Proposed Access
Fees, only the portion which the Exchange identified as being
specifically mapped to operating and supporting the network,
approximately 52% of the total occupancy expense. The Exchange believes
this allocation is reasonable because it represents the Exchange's cost
to provide the services associated with the Proposed Access Fees, and
not any other service, as supported by its cost review [sic].
Accordingly, based on the facts and circumstances presented, the
Exchange believes that its provision of the services associated with
the Proposed Access Fees will not result in excessive pricing or supra-
competitive profit. To illustrate, for 2020, the Exchange's total
revenue for non-transaction fees--consisting of only 1Gb and 10Gb ULL
connectivity and MEI additional limited service port fees--for the
first 9 months of 2020, was approximately $3.9 million. Total projected
revenue associated with the Proposed Access Fees for the remaining
three months of 2020 is approximately $2.55 million. Therefore, total
projected revenue for the Exchange for 2020 for the provision of such
access fees is approximately $6.5 million. Total projected expense for
the Exchange for 2020 for the provision of access fees is approximately
$9.3 million. Accordingly, the provision of the services associated
with the Proposed Access Fees will not result in excessive pricing or
supra-competitive profit (rather, it will result in a loss of $2.8
million for 2020).
On a going-forward, fully-annualized basis, the Exchange projects
that its annualized revenue for providing the services associated with
the Proposed Access Fees would be approximately $10.2 million per
annum, based on a most recently completed billing cycle. The Exchange
projects that its annualized expense for providing the services
associated with the Proposed Access Fees would be approximately $9.3
million per annum. Accordingly, on a fully-annualized basis, the
Exchange believes its total projected revenue for the providing the
services associated with the Proposed Access Fees will not result in
excessive pricing or supra-competitive profit, as the Exchange will
make only a 9% profit margin on the Proposed Access Fees ($10.2 million
- 9.3 million = $900,000 per annum). This profit margin does not take
into account the cost of the CapEx the Exchange is projected to spend
in 2020 of $1.85 million, or the amounts the Exchange is projected to
spend each year on CapEx going forward.
For the avoidance of doubt, none of the expenses included herein
relating to the services associated with the Proposed Access Fees
relate to the provision of any other services offered by MIAX Emerald.
Stated differently, no expense amount of the Exchange is allocated
twice.
The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective percentages of each expense
category described above towards the total cost to the Exchange of
operating and supporting the network, including providing the services
associated with the Proposed Access Fees because the Exchange performed
a line-by-line item analysis of all the expenses of the Exchange, and
has determined the expenses that directly relate to operation and
support of the network. Further, the Exchange notes that, without the
specific third-party and internal items listed above, the Exchange
would not be able to operate and support the network, including
providing the services associated with the Proposed Access Fees to its
Members and non-Members and their customers. Each of these expense
items, including physical hardware, software, employee compensation and
benefits, occupancy costs, and the depreciation and amortization of
equipment, have been identified through a line-by-line item analysis to
be integral to the operation and support of the network. The Proposed
Access Fees are intended to recover the Exchange's costs of operating
and supporting the network. Accordingly, the Exchange believes that the
Proposed Access Fee Increases are fair and reasonable because they do
not result in excessive pricing or supra-competitive profit, when
comparing the actual network operation and support costs to the
Exchange versus the projected annual revenue from the Proposed Access
Fees, including the increased amount.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete.
Intra-Market Competition
The Exchange believes that the Proposed Access Fees do not place
certain market participants at a relative disadvantage to other market
participants because the Proposed Access Fees do not favor certain
categories of market participants in a manner that would impose a
burden on competition; rather, the allocation of the Proposed Access
Fees 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 Access Fees 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.
The Exchange had one of its member firms cancel its membership with the
Exchange as a direct result of the Proposed Access Fees. The Exchange
also notes that it has far less Members as compared to the much greater
number of members at other options exchanges. 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. There are a
number of large market makers and broker-dealers that are members of
other options exchange but not Members of MIAX Emerald. The Exchange is
also unaware of any assertion that its existing fee levels or the
Proposed Access 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, as
described above.
The Exchange operates in a highly competitive market in which
market participants can readily favor one of the 16 competing options
venues if they deem fee levels at a particular venue to be
excessive.\29\ Based on publicly-available information, and excluding
index-based options, no single exchange has more than 16% market share.
Therefore, no exchange possesses significant pricing power in the
execution of multiply-listed equity and ETF options order flow. For the
month of August 2020, the Exchange had a market share of approximately
3.24% of executed multiply-listed equity options \30\ and the Exchange
believes that the ever-shifting market share among exchanges from month
to month
[[Page 66645]]
demonstrates that market participants can discontinue or reduce use of
certain categories of products, or shift order flow, in response to fee
changes. In such an environment, the Exchange must continually adjust
its fees and fee waivers to remain competitive with other exchanges and
to attract order flow to the Exchange.
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\29\ See supra note 22.
\30\ Id.
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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,\31\ and Rule 19b-4(f)(2) \32\ 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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\31\ 15 U.S.C. 78s(b)(3)(A)(ii).
\32\ 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-EMERALD-2020-12 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-2020-12. 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-2020-12 and should be submitted
on or before November 10, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23149 Filed 10-19-20; 8:45 am]
BILLING CODE 8011-01-P