[Federal Register Volume 86, Number 18 (Friday, January 29, 2021)]
[Notices]
[Pages 7582-7590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01940]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90981; File No. SR-PEARL-2021-01]


Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX 
PEARL Options Fee Schedule for Member and Non-Member Monthly Network 
Connectivity Fees

January 25, 2021.
    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 January 13, 2021, 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'') for the Exchange's options market.\3\
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    \3\ The Commission notes that the Exchange initially filed the 
proposed Fee Schedule amendment on December 31, 2020 (SR-PEARL-2020-
39). On January 13, 2021, the Exchange withdrew that filing and 
submitted this filing.

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[[Page 7583]]

    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 proposes to amend the Fee Schedule to increase the 
Exchange's network connectivity fees for its 10 gigabit (``Gb'') ultra-
low latency (``ULL'') fiber connection for Members \4\ and non-Members 
(the ``Proposed Access Fees'').
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    \4\ The term ``Member'' means an individual or organization that 
is registered with the Exchange pursuant to Chapter II of these 
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 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) $1,400 for the 1Gb 
connection; (b) $6,100 for the 10Gb connection; and (c) $9,300 for the 
10Gb ULL connection.
    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, Miami International Securities Exchange, LLC (``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 now proposes to increase the monthly 
network connectivity fees for its 10Gb ULL connections for both Members 
and non-Members from $9,300 to $10,000 per connection.
* * * * *
    The Exchange believes that exchanges, in setting fees of all types, 
should meet very high standards of transparency to demonstrate why each 
new fee or fee increase meets the 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. The 
Exchange believes this high standard is especially important when an 
exchange imposes various access fees for market participants to access 
an exchange's marketplace. The Exchange deems 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 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 
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 for the first 11 
months and projected for the final 1 month) 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

[[Page 7584]]

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'').\5\ On May 21, 2019, the Commission 
issued the Staff Guidance on SRO Rule Filings Relating to Fees.\6\
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    \5\ 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).
    \6\ 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'').
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    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 data and analysis), constrained by significant 
competitive forces; and (iv) are supported by specific 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 supra-competitive profit. 
Accordingly, the Exchange believes that the Commission should find that 
the Proposed Access Fees are consistent with 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 \7\ in general, and furthers 
the objectives of Section 6(b)(4) of the Act \8\ 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 \9\ 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 customers, issuers, 
brokers and dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ 15 U.S.C. 78f(b)(5).
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    For November 2020, the Exchange had only a 3.39% market share of 
the U.S. options industry.\10\ The Exchange is not aware of any 
evidence that a market share of approximately 3-4% 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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    \10\ See 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.
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    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their connections and cease being 
Members of the Exchange if the Exchange were to establish unreasonable 
and uncompetitive price increases for its connectivity alternatives. 
Market participants choose to connect to a particular exchange and 
because it is a choice, the Exchange 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, 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).\11\ 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.
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    \11\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman, 
Acting Secretary, Commission, dated March 27, 2019 (the ``R2G 
Letter'').
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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.
    The Exchange believes the proposed increase to the 10Gb ULL 
connection is an equitable allocation of reasonable fees because 10Gb 
ULL purchasers: (1) Consume the most bandwidth and resources of the 
network; (2) transact the vast majority of the volume on the Exchange; 
and (3) require the high touch network support services provided by the 
Exchange and its staff, including more costly network monitoring, 
reporting and support services, resulting in a much higher cost to the 
Exchange.
    The Exchange believes that the proposed increase to the 10Gb ULL 
fees are equitably allocated among users of the network connectivity 
alternatives, as the users of the 10Gb ULL connections consume the most 
bandwidth and resources of the network. Specifically, the Exchange 
notes that these users account for approximately greater than 99% of 
message traffic over the network, while the users of the 1Gb 
connections account for approximately less than 1% of message traffic 
over the network. In the Exchange's experience, users of the 1Gb 
connections do not have a business need for the high performance 
network solutions required by 10Gb ULL users. The Exchange's high 
performance network solutions and supporting infrastructure (including 
employee support), provides unparalleled system throughput with the 
network ability to support access to several distinct options markets 
and the capacity to handle approximately 38 million quote messages per 
second. On an average day, the Exchange and MIAX handle over 
approximately 8,304,500,000 billion total messages. Of that total, 
users of the 10Gb ULL connections generate approximately 8.3 billion 
messages, and users of the 1Gb connections generate approximately 4.5 
million messages. However, in order to achieve a consistent, premium 
network performance, the Exchange must build out and maintain a network 
that has the capacity to handle the message rate requirements of its 
most heavy network consumers. These billions of messages per day 
consume the Exchange's resources and significantly contribute to the 
overall network connectivity expense for storage and network transport 
capabilities. Given this difference in network utilization rate, the 
Exchange believes that it is reasonable, equitable, and not unfairly 
discriminatory that the 10Gb ULL users pay for the vast majority of the 
shared network resources from which all Member and non-Member users 
benefit, but is designed and maintained from a capacity standpoint to 
specifically handle the message rate and performance requirements of 
10Gb and 10Gb ULL users.

[[Page 7585]]

    The Exchange also believes that the connectivity fees are equitably 
allocated amongst users of the network connectivity alternatives, when 
these fees are viewed in the context of the overall trading volume on 
the Exchange. To illustrate, the purchasers of the 10Gb ULL 
connectivity account for approximately 94% of the volume on the 
Exchange for the month of November 2020. This overall volume percentage 
(94% of total Exchange volume) is in line with the amount of network 
connectivity revenue collected from 10Gb ULL purchasers (98% of total 
Exchange connectivity revenue). For example, utilizing the same 
recently completed billing cycle described above, Exchange Members and 
non-Members that purchased 10Gb ULL connections accounted for 
approximately 87% of the total network connectivity revenue collected 
by the Exchange from all connectivity alternatives; and Members and 
non-Members that purchased 1Gb and 10Gb connections accounted for 
approximately 13% of the revenue collected by the Exchange from all 
connectivity alternatives.
    The Exchange further believes that the fees are equitably 
allocated, as the amount of the fees for the various connectivity 
alternatives are directly related to the actual costs associated with 
providing the respective connectivity alternatives. That is, the cost 
to the Exchange of providing a 1Gb network connection is significantly 
lower than the cost to the Exchange of providing a 10Gb or 10Gb ULL 
network connection. Pursuant to its extensive cost review described 
above, the Exchange believes that the average cost to provide a 10Gb 
ULL network connection is approximately 8 times more than the average 
cost to provide a 1Gb connection. The simple hardware and software 
component costs alone of a 10Gb ULL connection is not 8 times more than 
the 1Gb connection. Rather, it is the associated premium-product level 
network monitoring, reporting, and support services costs that 
accompany a 10Gb ULL connection which causes it to be 8 times more 
costly to provide than the 1Gb connection. Accordingly, the Exchange 
believes it is equitable to allocate those network infrastructure costs 
that accompany a 10Gb ULL connection to the purchasers of those 
connections, and not to purchasers of 1Gb connections.
    As discussed above, the Exchange differentiates itself by offering 
a ``premium-product'' network experience, as an operator of a high 
performance, ultra-low latency network with unparalleled system 
throughput, which network can support access to three distinct options 
markets and multiple competing market-makers having affirmative 
obligations to continuously quote over 750,000 distinct trading 
products (per exchange), and the capacity to handle approximately 10.7 
million quote messages per second. The ``premium-product'' network 
experience enables users of 10Gb and 10Gb ULL connections to receive 
the network monitoring and reporting services for those approximately 
750,000 distinct trading products. There is a significant, quantifiable 
amount of research and development (``R&D'') effort, employee 
compensation and benefits expense, and other expense associated with 
providing the high touch network monitoring and reporting services that 
are utilized by the 10Gb and 10Gb ULL connections offered by the 
Exchange. These value add services are fully-discussed herein, and the 
actual costs associated with providing these services are the basis for 
the differentiated amount of the fees for the various connectivity 
alternatives.
    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 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. 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 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

[[Page 7586]]

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.
    For the avoidance of doubt, none of the expenses included herein 
relating to the services associated with the Proposed Access Fees also 
relate to the provision of any other services offered by the Exchange. 
Stated differently, no expense amount of the Exchange is allocated 
twice. The Exchange notes that it made certain representations in a 
previous filing \12\ regarding its expense allocation for the provision 
of additional limited service ports. The Exchange represents that none 
of the expenses allocated to the provision of additional limited 
service ports are also allocated to the services associated with the 
Proposed Access Fees--that is, there is no overlap of any such expenses 
that are included in the costs associated with services the Exchange 
provides for the Proposed Access Fees and for the services the Exchange 
provides for ports. Lastly, the Exchange notes that, with respect to 
the MIAX PEARL expenses included herein, those expenses only cover the 
MIAX PEARL options market; expenses associated with the MIAX PEARL 
equities market are accounted for separately and are not included 
within the scope of this filing.
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    \12\ See Securities Exchange Act Release No. 90812 (December 29, 
2020) (SR-PEARL-2020-35).
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    The Exchange only has four primary sources of revenue: Transaction 
fees, access fees (which includes the Proposed Access Fees), regulatory 
fees, and market data fees. Accordingly, the Exchange must cover all of 
its expenses from these four primary sources of revenue.
    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 total annual expense of MIAX 
PEARL and MIAX associated with providing these services versus the 
total projected annual revenue for both exchanges from these services. 
For 2020, the total annual expense for providing network connectivity 
services (that is, the shared network connectivity of MIAX PEARL and 
MIAX, but excluding MIAX Emerald) is projected to be approximately 
$17.9 million. The $17.9 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 for MIAX PEARL and 
MIAX: (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 services associated with the Proposed Access Fees. As 
noted above, the Exchange believes it is more appropriate to analyze 
the Proposed Access Fees utilizing its 2020 (actual for the first 11 
months and projected for the final 1 month) revenue and costs, which 
utilize the same presentation methodology as set forth in the 
Exchange's previously-issued Audited Unconsolidated Financial 
Statements.\13\ The $17.9 million in projected total annual expense is 
directly related to the services associated with providing network 
connectivity services, 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 to 
the Exchange to provide the services associated with the Proposed 
Access Fees.
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    \13\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the 
information technology and communication costs line item under the 
section titled ``Operating Expenses Incurred Directly or Allocated 
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing 
its financial statements for 2018. See Securities Exchange Act 
Release No. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020) 
(SR-PEARL-2019-36). Accordingly, the third-party expense described 
in this filing is attributed to the same line item for the 
Exchange's 2020 Form 1 Amendment, which will be filed in 2021.
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    For 2020, 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, is 
projected to be $4,079,910. 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''),\14\ 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.).
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    \14\ 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 PEARL and MIAX do not allocate their 
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.

[[Page 7587]]

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 network connectivity services, only that 
portion which the Exchange identified as being specifically mapped to 
providing network connectivity services, approximately 68% 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 
PEARL with its affiliates, MIAX and MIAX Emerald, 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 to its Members and non-Members and their 
customers. The Exchange did not allocate all of the Zayo expense toward 
the cost of providing network connectivity services, only that portion 
which the Exchange identified as being specifically mapped to providing 
network connectivity services, approximately 62% 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 
portion 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 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 SFTI and other service providers' expense toward 
the cost of providing network connectivity services, only that portion 
which the Exchange identified as being specifically mapped to providing 
network connectivity services, approximately 89% 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, and not 
any other service, as supported by its cost review.
    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 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 hardware and software provider expense toward the 
cost of providing network connectivity services, only that portion 
which the Exchange identified as being specifically mapped to providing 
network connectivity services, approximately 54% 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, and not any 
other service, as supported by its cost review.
    For 2020, total projected internal expense, relating to the 
internal costs of MIAX PEARL and MIAX to provide network connectivity 
services, is projected to be $13,831,434. 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; (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, the Exchange and MIAX do not allocate their 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 Fee. In 
particular, MIAX PEARL's and MIAX's combined employee compensation and 
benefits expense relating to providing network connectivity services is 
projected to be approximately $6,892,689, which is only a portion of 
the $9,727,857 (for MIAX PEARL) and $11,811,796 (for MIAX) 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 operate and 
support the network and provide 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 employee 
compensation and benefits expense toward the cost of providing network 
connectivity services, only the portions which the Exchange identified

[[Page 7588]]

as being specifically mapped to providing network connectivity 
services, approximately 32% 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 PEARL's and MIAX's combined depreciation and amortization 
expense relating to providing network connectivity services is 
projected to be $6,378,337, which is only a portion of the $3,342,621 
(for MIAX PEARL) and $5,276,753 (for MIAX) 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 network connectivity services, 
only the portion which the Exchange identified as being specifically 
mapped to providing network connectivity services, approximately 74% 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 PEARL's and MIAX's combined occupancy expense relating to 
providing network connectivity services is projected to be $560,408, 
which is only a portion of the $528,425 (for MIAX PEARL) and $615,264 
(for MIAX) 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 cost of 
providing network connectivity services, only that portion which the 
Exchange identified as being specifically mapped to providing the 
services associated with the Proposed Access Fees, approximately 49% of 
the total occupancy 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's monthly projected revenue for the Proposed Access 
Fees is based on MIAX PEARL and MIAX Members and non-Members purchasing 
140 10Gb ULL connections, based on a recent billing cycle. Accordingly, 
based on current assumptions and approximations, the Exchange and MIAX 
PEARL project total combined monthly revenue from 10Gb ULL connections 
of approximately $1,400,000.\15\
---------------------------------------------------------------------------

    \15\ The Exchange also projects an additional $215,000 in 
monthly revenue through non-10Gb ULL connections, however the 
Exchange is not proposing to adjust the fees for those connections 
at this time.
---------------------------------------------------------------------------

    On a going-forward, fully-annualized basis, the Exchange and MIAX 
project that their annualized revenue for providing the services 
associated with the Proposed Access Fees to be approximately $16.8 
million per annum, based on a most recently completed billing cycle. 
The Exchange and MIAX project that their annualized revenue for 
providing network connectivity services (all connectivity alternatives) 
to be approximately $19.4 million per annum.\16\ The Exchange and MIAX 
project that their annualized expense for providing network 
connectivity services (all connectivity alternatives) to be 
approximately $17.9 million per annum. Accordingly, on a fully-
annualized basis, the Exchange believes its total projected revenue for 
the providing network connectivity services (all additional 
connectivity alternatives) will not result in excessive pricing or 
supra-competitive profit, as the Exchange will make only an 8% profit 
margin on network connectivity services ($19.4 million - $17.9 million 
= $1.5 million per annum). Additionally, this profit margin does not 
take into account the cost of capital expenditures (``CapEX'') the 
Exchange and MIAX are projected to spend in each year on CapEx going 
forward.
---------------------------------------------------------------------------

    \16\ See id.
---------------------------------------------------------------------------

    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

[[Page 7589]]

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 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 Access Fees 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 Access Fees 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 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 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. 
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 or MIAX. 
There are a number of large market makers and broker-dealers that are 
members of other options exchange but not Members of MIAX PEARL or 
MIAX. Additionally, other exchanges have similar connectivity 
alternatives for their participants, including similar low-latency 
connectivity, but with much higher rates to connect. 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.
    While the Exchange recognizes the distinction between connecting to 
an exchange and trading at the exchange, the Exchange notes that it 
operates in a highly competitive options market in which market 
participants can readily connect and trade with venues they desire. In 
such an environment, the Exchange must continually adjust its fees to 
remain competitive with other exchanges. The Exchange believes that the 
proposed changes reflect this competitive environment.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\17\ and Rule 19b-4(f)(2) \18\ 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.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \18\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-PEARL-2021-01 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-2021-01. 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-2021-01 and

[[Page 7590]]

should be submitted on or before February 19, 2021.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01940 Filed 1-28-21; 8:45 am]
BILLING CODE 8011-01-P