[Federal Register Volume 86, Number 156 (Tuesday, August 17, 2021)]
[Notices]
[Pages 46048-46055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17539]



[[Page 46048]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92645; File No. SR-EMERALD-2021-23]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the MIAX Emerald Fee Schedule To Adopt a Tiered-Pricing Structure for 
Certain Connectivity Fees

August 11, 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 July 30, 2021, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange''), 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the MIAX Emerald Fee 
Schedule (the ``Fee Schedule'') to amend certain connectivity fees.
    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 adopt a tiered-
pricing structure for the 10 gigabit (``Gb'') ultra-low latency 
(``ULL'') fiber connection available to Members \3\ and non-Members. 
The Exchange believes a tiered-pricing structure will encourage Members 
and non-Members to be more efficient and economical when determining 
how to connect to the Exchange. This should also enable the Exchange to 
better monitor and provide access to the Exchange's network to ensure 
sufficient capacity and headroom in the System.\4\
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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\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
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10Gb ULL Tiered-Pricing Structure
    The Exchange proposes to amend Sections (5)(a)-(b) of the Fee 
Schedule to provide for a tiered-pricing structure for 10Gb ULL 
connections for Members and non-Members. Currently, the Exchange 
assesses Members and non-Members a flat monthly fee of $10,000 per 10Gb 
ULL connection for access to the Exchange's primary and secondary 
facilities.
    The Exchange now proposes to move from a flat monthly fee per 
connection to a tiered-pricing structure per connection under which the 
monthly fee would vary depending on the number of 10Gb ULL connections 
each Member or non-Member elects to purchase per exchange. 
Specifically, the Exchange proposes to decrease the fee for the first 
and second 10Gb ULL connections for each Member and non-Member from the 
current flat monthly fee of $10,000 to $9,000 per connection. To 
encourage more efficient connectivity usage, the Exchange proposes to 
increase the per connection fee for Members and non-Members that 
purchase more than two 10Gb ULL connections. Specifically, (i) the 
third and fourth 10Gb ULL connections for each Member or non-Member 
will increase from the current flat monthly fee of $10,000 to $11,000 
per connection; and (ii) for the fifth 10Gb ULL connection, and for 
each 10Gb ULL connection for each Member and non-Member purchased 
thereafter, the fee will increase from the flat monthly fee of $10,000 
to $13,000 per connection. The proposed 10Gb ULL tiered-pricing 
structure and fees are collectively referred to herein as the 
``Proposed Access Fees.''
    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the MIAX Emerald APIs or market data feeds in the production 
environment. The Exchange proposes to pro-rate the fees when a Member 
or non-Member makes a change to the connectivity (by adding or deleting 
connections) with such pro-rated fees based on the number of trading 
days that the Member or non-Member has been credentialed to utilize any 
of the MIAX Emerald APIs or market data feeds in the production 
environment through such connection, divided by the total number of 
trading days in such month multiplied by the applicable monthly rate. 
The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the disaster recovery 
facility in each month during which the Member or non-Member has 
established connectivity with the disaster recovery facility.
Implementation Date
    The proposed fee changes will become effective on August 1, 2021.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule 
is consistent with Section 6(b) of the Act \5\ in general, and furthers 
the objectives of Section 6(b)(4) of the Act \6\ 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 \7\ 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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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(4).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor

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competing venues if they deem fee levels at a particular venue to be 
excessive. In such an environment, the Exchange must continually adjust 
its fees for services and products, in addition to order flow, to 
remain competitive with other exchanges. The Exchange believes that the 
proposed changes reflect this competitive environment.
    The Exchange believes the proposal to move from a flat fee per 
month for the 10Gb ULL connection to a tiered-pricing structure is 
reasonable, equitably allocated and not unfairly discriminatory because 
the Exchange believes the proposed structure would encourage firms to 
be more economical and efficient in the number of connections they 
purchase. The Exchange believes this will enable the Exchange to better 
monitor and provide access to the Exchange's network to ensure 
sufficient capacity and headroom in the System.
    The Exchange believes that the proposal to move to a tiered-pricing 
structure for its 10Gb ULL connections is reasonable, equitably 
allocated and not unfairly discriminatory because the majority of 
Members and non-Members that purchase 10Gb ULL connections will either 
save money or pay the same amount after the tiered-pricing structure is 
implemented. Based on a recently completed billing cycle, of the firms 
that purchased at least one 10Gb ULL connection, approximately 60% will 
see a proposed decrease in their monthly fees and approximately 40% 
will see a proposed increase in their monthly fees as a result of the 
proposed tiered-pricing structure versus the current flat monthly fee 
structure. To illustrate, firms that purchase only one 10Gb ULL 
connection per month currently pay the flat rate of $10,000 per month 
for that one 10Gb ULL connection. Pursuant to the proposed tiered-
pricing structure, these firms will now pay $9,000 per month for that 
one 10Gb ULL connection, saving $1,000 per month or $12,000 annually. 
Further, firms that purchase two 10Gb ULL connections per month 
currently pay the flat rate of $20,000 per month ($10,000 x 2) for 
those two 10Gb ULL connections. Pursuant to the proposed tiered-pricing 
structure, these firms will now pay $18,000 per month ($9,000 x 2) for 
those two 10Gb ULL connections, saving $2,000 per month or $24,000 
annually.
    The Exchange also notes that, for firms that primarily route orders 
seeking best-execution, a limited number of connections are needed. 
Therefore, the connectivity costs will likely be lower for these firms 
based on the proposed tiered-pricing structure. The firms that engage 
in advanced trading strategies typically require multiple connections 
and, therefore, generate higher costs by utilizing more of the 
Exchange's resources. These firms will absorb the increased 
connectivity cost based on the proposed tiered-pricing structure, as 
shown by the 40% of firms that will likely see an increase in their 
monthly fees. Additionally, the firms that purchase a higher amount of 
10Gb ULL connections tend to have specific business oriented market 
making and taking strategies, as opposed to firms simply engaging in 
best-execution order routing business.
    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 market participants. 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 to be access 
fees. It records these fees as part of its ``Access Fees'' revenue in 
its financial statements. The Exchange believes that it is important to 
demonstrate that these fees are based on its costs and reasonable 
business needs. 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 associated with 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 to provide the access 
services associated with 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 access services. The sum of all such 
portions of expenses represents the total cost of the Exchange to 
provide the access services associated with 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 cost to the Exchange to provide the access services 
associated with the Proposed Access Fees.
    In order to determine the Exchange's projected revenue associated 
with the Proposed Access Fees, the Exchange analyzed the number of 
Members and non-Members currently utilizing the 10Gb ULL fiber 
connection, and, utilizing a recent monthly billing cycle 
representative of 2021 monthly revenue, extrapolated annualized revenue 
on a going-forward basis. The Exchange does not believe it is 
appropriate to factor into its analysis future revenue growth or 
decline into its projections for purposes of these calculations, given 
the uncertainty of such projections due to the continually changing 
access needs of market participants, discounts that can be achieved due 
to lower trading volume and vice versa, market participant 
consolidation, etc. Additionally, the Exchange similarly does not 
factor into its analysis future cost growth or decline. 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 2020. However, since the revenue and expense 
associated with the Proposed Access Fees were not in place in 2020 or 
for the first seven months of 2021, the Exchange believes its 2020 
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 2021 
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

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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'').\8\ On May 21, 2019, the Commission issued the Staff Guidance 
on SRO Rule Filings Relating to Fees.\9\ 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 revenue and cost data and analysis) that they 
are fair and reasonable because they will 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, and its affiliates Miami International 
Securities Exchange, LLC (``MIAX'') and MIAX PEARL, LLC (``MIAX 
Pearl''), to establish or increase other non-transaction fees.\10\ 
Accordingly, the Exchange believes that the Proposed Access Fees are 
consistent with the Act.
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    \8\ 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).
    \9\ 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'').
    \10\ See Securities Exchange Act Release Nos. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01) (proposal to 
increase connectivity fees); 90980 (January 25, 2021), 86 FR 7602 
(January 29, 2021) (SR-MIAX-2021-02) (proposal to increase 
connectivity fees).
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* * * * *
    As of July 29, 2021, the Exchange had a market share of only 3.90% 
of the U.S. equity options industry for the month of July 2021.\11\ 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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    \11\ See ``The market at a glance,'' available at https://
www.miaxoptions.com/ (last visited July 27, 2021).
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    Separately, the Exchange is not aware of any reason why market 
participants could not simply drop their access (or not initially 
access 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 access 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 drop their access to 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). 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.'' Similarly, the Exchange noted 
in a recent filing that once MIAX Emerald issued a notice that it was 
instituting MEI Port fees, among other non-transaction fees, one MIAX 
Emerald Member dropped its access to MIAX Emerald as a result of those 
fees.\12\ Accordingly, these examples show 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 drop their 
access to such exchange.
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    \12\ See Securities Exchange Act Release No. 91460 (April 2, 
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network 
Connectivity Fees, and Increase the Number of Additional Limited 
Service MIAX Emerald Express Interface Ports Available to Market 
Makers) (adopting tiered MEI Port fee structure ranging from $5,000 
to $20,500 per month).
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    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 Members to the Exchange may require the 
purchase of additional hardware to support those Members as well as 
enhanced monitoring and reporting of customer performance that the 
Exchange and its affiliates provide. Further, as the total number 
Members increases, the Exchange and its affiliates may 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 the Exchange and its affiliates to provide 
access to its Members is not fixed. The Exchange believes the Proposed 
Access Fees are reasonable in order to offset a portion of the costs to 
the Exchange associated with providing access to its network 
infrastructure.
    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 that the 
Exchange projects to incur in connection with providing these access 
services versus the total annual revenue that the Exchange projects to 
collect in connection with services associated with the Proposed Access 
Fees. For 2021,\13\ the total annual expense for providing the access 
services associated with the Proposed Access Fees is projected to be 
approximately $7.2 million. The approximately $7.2 million in projected 
total annual expense is comprised of the following, all of which are 
directly related to the access services associated with the Proposed 
Access Fees: (1) Third-party expense, relating to fees paid by the 
Exchange to third-parties for certain products and services; and (2) 
internal expense, relating to the internal costs of the Exchange to 
provide the services associated with the Proposed Access Fees.\14\ As 
noted above, the Exchange believes it is more appropriate to analyze 
the Proposed Access Fees utilizing its 2021 revenue

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and costs, which utilize the same presentation methodology as set forth 
in the Exchange's previously-issued Audited Unconsolidated Financial 
Statements.\15\ The $7.2 million in projected total annual expense is 
directly related to the access 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.
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    \13\ The Exchange has not yet finalized its 2021 year end 
results.
    \14\ The percentage allocations used in this proposed rule 
change may differ from past filings from the Exchange or its 
affiliates due to, among other things, changes in expenses charged 
by third-parties, adjustments to internal resource allocations, and 
different system architecture of the Exchange as compared to its 
affiliates.
    \15\ 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. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020) 
(SR-EMERALD-2019-39). Accordingly, the third-party expense described 
in this filing is attributed to the same line item for the 
Exchange's 2021 Form 1 Amendment, which will be filed in 2022.
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    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 
access 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 access services associated with the Proposed 
Access Fees.
    For 2021, total third-party expense, relating to fees paid by the 
Exchange to third-parties for certain products and services for the 
Exchange to be able to provide the access services associated with the 
Proposed Access Fees, is projected to be $1.7 million. 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 Exchange's trading system infrastructure; (2) Zayo 
Group Holdings, Inc. (``Zayo'') for network services (fiber and 
bandwidth products and services) linking the Exchange's and its 
affiliates' office locations in Princeton, New Jersey and Miami, 
Florida, to all data center locations; (3) Secure Financial Transaction 
Infrastructure (``SFTI''),\16\ 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 connect to the network to trade, receive market data, 
etc.).
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    \16\ 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, the Exchange does not allocate its entire 
information technology and communication costs to the access services 
associated with the Proposed Access Fees. Further, the Exchange notes 
that expenses associated with its affiliates, MIAX and MIAX Pearl, are 
accounted for separately and are not included within the scope of this 
filing.
    The Exchange believes it is reasonable to allocate such third-party 
expense described above towards the total cost to the Exchange to 
provide the access 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 access 
services associated with the Proposed Access Fees to its Members and 
their customers. The Exchange did not allocate all of the Equinix 
expense toward the cost of providing the access services associated 
with the Proposed Access Fees, only that portion which the Exchange 
identified as being specifically mapped to providing the access 
services associated with the Proposed Access Fees, approximately 62% of 
the total applicable Equinix expense. The Exchange believes this 
allocation is reasonable because it represents the Exchange's actual 
cost to provide the access 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 the 
Exchange with its affiliates, MIAX Pearl and MIAX, 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 access services associated with the 
Proposed Access Fees. The Exchange did not allocate all of the Zayo 
expense toward the cost of providing the access 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 62% of the total applicable Zayo expense. 
The Exchange believes this allocation is reasonable because it 
represents the Exchange's actual cost to provide the access 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 their customers. The Exchange did not 
allocate all of the SFTI and other service providers' expense toward 
the cost of providing the access services associated with the Proposed 
Access Fees, only the portions which the Exchange identified as being 
specifically mapped to providing the access services associated with 
the Proposed Access Fees, approximately 89% of the total applicable 
SFTI and other service providers' expense. The

[[Page 46052]]

Exchange believes this allocation is reasonable because it represents 
the Exchange's actual cost to provide the access 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 their customers. The Exchange did not 
allocate all of the hardware and software provider expense toward the 
cost of providing the access services associated with the Proposed 
Access Fees, only the portions which the Exchange identified as being 
specifically mapped to providing the access services associated with 
the Proposed Access Fees, approximately 51% of the total applicable 
hardware and software provider expense. The Exchange believes this 
allocation is reasonable because it represents the Exchange's actual 
cost to provide the access services associated with the Proposed Access 
Fees.
    For 2021, total projected internal expense, relating to the 
internal costs of the Exchange to provide the access services 
associated with the Proposed Access Fees, is projected to be 
approximately $5.5 million. This includes, but is not limited to, costs 
associated with: (1) Employee compensation and benefits for full-time 
employees that support the access 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 access 
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 access 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 does not allocate its entire costs contained 
in those items to the access 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 access services associated with the Proposed Access Fees. 
In particular, the Exchange's employee compensation and benefits 
expense relating to providing the access services associated with the 
Proposed Access Fees is projected to be approximately $3.2 million, 
which is only a portion of the approximately $9.7 million 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 access services associated with the Proposed Access 
Fees. Without these employees, the Exchange would not be able to 
provide the access services associated with the Proposed Access Fees to 
its Members and their customers. The Exchange did not allocate all of 
the employee compensation and benefits expense toward the cost of the 
access services associated with the Proposed Access Fees, only the 
portions which the Exchange identified as being specifically mapped to 
providing the access services associated with the Proposed Access Fees, 
approximately 33% of the total applicable employee compensation and 
benefits expense. The Exchange believes this allocation is reasonable 
because it represents the Exchange's actual cost to provide the access 
services associated with the Proposed Access Fees, and not any other 
service, as supported by its cost review.
    The Exchange's depreciation and amortization expense relating to 
providing the services associated with the Proposed Access Fees is 
projected to be $2 million, which is only a portion of the $3.1 million 
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 access 
services associated with the Proposed Access Fees. Without this 
equipment, the Exchange would not be able to operate the network and 
provide the access services associated with the Proposed Access Fees to 
its Members and their customers. The Exchange did not allocate all of 
the depreciation and amortization expense toward the cost of providing 
the access services associated with the Proposed Access Fees, only the 
portion which the Exchange identified as being specifically mapped to 
providing the access services associated with the Proposed Access Fees, 
approximately 63% of the total applicable depreciation and amortization 
expense, as these access services would not be possible without relying 
on such. The Exchange believes this allocation is reasonable because it 
represents the Exchange's actual cost to provide the access services 
associated with the Proposed Access Fees, and not any other service, as 
supported by its cost review.
    The Exchange's occupancy expense relating to providing the services 
associated with the Proposed Access Fees is projected to be 
approximately $0.3 million, which is only a portion of the $0.5 million 
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 access 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

[[Page 46053]]

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 
access 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 access services associated with the Proposed 
Access Fees to its 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 access services 
associated with the Proposed Access Fees. The Exchange did not allocate 
all of the occupancy expense toward the cost of providing the access 
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 53% of the total applicable 
occupancy expense. The Exchange believes this allocation is reasonable 
because it represents the Exchange's cost to provide the access 
services associated with the Proposed Access Fees, and not any other 
service, as supported by its cost review.
    The Exchange notes that a material portion of its total overall 
expense is allocated to the provision of access services (including 
connectivity, ports, and trading permits). The Exchange believes this 
is reasonable and in line, as the Exchange operates a technology-based 
business that differentiates itself from its competitors based on its 
trading systems that rely on access to a high performance network, 
resulting in significant technology expense. Over two-thirds of 
Exchange staff are technology-related employees. The majority of the 
Exchange's expense is technology-based. As described above, the 
Exchange has only four primary sources of fees to recover their costs; 
thus, the Exchange believes it is reasonable to allocate a material 
portion of their total overall expense towards access fees.
    Accordingly, based on the facts and circumstances presented, the 
Exchange believes that its provision of the access services associated 
with the Proposed Access Fees will not result in excessive pricing or 
supra-competitive profit. To illustrate, on a going-forward, fully-
annualized basis, the Exchange projects that annualized revenue for 
providing the access services associated with the Proposed Access Fees 
would be approximately $14.6 million per annum, based on a recent 
billing cycle.\17\ The Exchange projects that their annualized revenue 
for providing network connectivity services (all connectivity 
alternatives) to be approximately $14.63 million per annum. The 
Exchange projects that their annualized expense for providing network 
connectivity services (all connectivity alternatives) to be 
approximately $7.2 million per annum. Accordingly, on a fully-
annualized basis, the Exchange believes its total projected revenue for 
the providing the access services associated with the Proposed Access 
Fees will not result in excessive pricing or supra-competitive profit, 
as the Exchange will make a profit margin of only approximately 51% 
inclusive of the Proposed Access Fees and all other connectivity 
alternatives ($14.63 million in total connectivity revenue minus $7.2 
million in expense = $7.43 million in profit per annum). Additionally, 
this profit margin does not take into account the cost of capital 
expenditures (``CapEx'') the Exchange historically spent or is 
projected to spend each year on CapEx going forward.
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    \17\ The Exchange also projects approximately $2,800 in monthly 
revenue through 1Gb connections; however, the Exchange does not 
propose to adjust the fees for those connections at this time.
---------------------------------------------------------------------------

    For the avoidance of doubt, none of the expenses included herein 
relating to the access services associated with the Proposed Access 
Fees 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 expenses associated with the 
Exchange's affiliates, MIAX and MIAX Pearl, are accounted for 
separately and are not included within the scope of this filing. Stated 
differently, no expense amount of the Exchange is also allocated to 
MIAX or MIAX Pearl.
    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 access 
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 
providing access to the Exchange. Further, the Exchange notes that, 
without the specific third-party and internal items listed above, the 
Exchange would not be able to provide the access services associated 
with the Proposed Access Fees to its 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 providing access services. The Proposed 
Access Fees are intended to recover the costs of providing access to 
its System. Accordingly, the Exchange believes that the Proposed Access 
Fees are fair and reasonable because they do not result in excessive 
pricing or supra-competitive profit, when comparing the actual costs to 
the Exchange versus the projected annual revenue from the Proposed 
Access Fees.
    The Exchange believes the proposed changes are reasonable, 
equitably allocated and not unfairly discriminatory, and do not result 
in a ``supra-competitive'' \18\ profit. Of note, the Guidance defines 
``supra-competitive profit'' as profits that exceed the profits that 
can be obtained in a competitive market.\19\ With the proposed changes, 
the Exchange anticipates it will have a profit margin of approximately 
51%, inclusive of the Proposed Access Fees and all other connectivity 
alternatives. Based on the 2020 Audited Financial Statements of 
competing options exchanges (since the 2021 Audited Financial 
Statements will likely not become publicly available until early July 
2022, after the Exchange has submitted this filing), the Exchange's 
profit margin is similar to or below the operating profit margins of 
other competing exchanges. For example, Nasdaq ISE, LLC's (``ISE'') 
operating profit margin for all of 2020 was approximately 85%; Nasdaq 
PHLX LLC's (``PHLX'') operating profit margin for all of 2020 was 
approximately 49%; the Nasdaq Stock Market LLC's (``Nasdaq'') operating 
profit margin for all of 2020 was approximately 62%; NYSE Arca, Inc.'s 
(``Arca'') operating profit margin for all of 2020 was approximately 
55%; NYSE American LLC's (``Amex'') operating profit margin for all of 
2020 was approximately 59%; Cboe Exchange, Inc.'s (``Cboe'') operating 
profit margin for all of 2020 was approximately 74%; and Cboe BZX 
Exchange, Inc.'s (``BZX'') operating profit margin for all of 2020 was 
approximately 52%.
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    \18\ See supra note 9.
    \19\ See id.

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[[Page 46054]]

    The Exchange believes that the Proposed Access Fees are reasonable, 
equitably allocated and not unfairly discriminatory because, for one 
10Gb ULL connection, the Exchange provides each Member or non-Member 
access to all twelve matching engines on MIAX Emerald. Under the 
proposed pricing-structure, the Exchange will assess each Member or 
non-Member $9,000 for the first 10Gb ULL connection. For that $9,000 
monthly fee, each Member or non-Member has access to all twelve 
matching engines each month. This results in a per matching engine 
connectivity cost of only $750 ($9,000 divided by 12). The Exchange 
believes its connectivity cost to be less than or similar to 
connectivity fees charged by competing options exchanges.\20\
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    \20\ See The Nasdaq Stock Market LLC (``NASDAQ'') Rules, General 
8: Connectivity, Section 1. Co-Location Services (charging a monthly 
fee of $10,000 per 10Gb fiber connection, $15,000 per 10Gb Ultra 
fiber connection, and $20,000 per 40Gb fiber connection, plus 
installation fees ranging from $1,000 to $1,500). The Exchange notes 
that the same connectivity fees described above for NASDAQ also 
apply to its affiliates, Nasdaq ISE, LLC and NASDAQ PHLX LLC. See 
Nasdaq ISE Rules, General 8: Connectivity and NASDAQ PHLX Rules, 
General 8: Connectivity (both incorporating by reference the fees in 
NASDAQ Rules, General 8: Connectivity). See also NYSE American LLC 
Options Fee Schedule, Section IV (charging the following 
connectivity fees: $6,000 per connection initial charge plus $5,000 
monthly per 1Gb circuit connection; $15,000 per connection initial 
charge plus $22,000 monthly per 10Gb LX LCN circuit connection; and 
$15,000 per connection initial charge plus $22,000 monthly charge 
per 40Gb LCN circuit connection).
---------------------------------------------------------------------------

    The Exchange further believes its proposed fees are reasonable, 
equitably allocated and not unfairly discriminatory because the 
Exchange believes that it benefits overall competition in the 
marketplace to allow relatively new entrants like the Exchange and its 
affiliates, MIAX Pearl and MIAX, to propose fees that may help these 
new entrants recoup their substantial investment in building out costly 
infrastructure. The Exchange and its affiliates have historically set 
their fees purposefully low in order to attract business and market 
share, and the proposed tiered-pricing structure will help make the 
rates consistent with other exchanges while not raising costs for a 
majority of the Exchange's Members and non-Members.
    The Guidance provides that in determining whether a proposed fee is 
constrained by significant competitive forces, the Commission will 
consider whether there are reasonable substitutes for the product or 
service that is the subject of a proposed fee. As described below, the 
Exchange believes substitute products and services are available to 
market participants, including, among other things, other options 
exchanges that market participants may connect to in lieu of the 
Exchange, indirect connectivity to the Exchange via a third-party 
reseller and/or trading of any options products, including proprietary 
products, in the Over-the-Counter (``OTC'') markets.
    There is also no regulatory requirement that any market participant 
connect to any one options exchange, that any market participant 
connect at a particular connection speed or act in a particular 
capacity on the Exchange, or trade any particular product offered on an 
exchange. Moreover, membership is not a requirement to participate on 
the Exchange. A market participant may submit orders to the Exchange 
via a Sponsored User.\21\ Indeed, the Exchange is unaware of any one 
options exchange whose membership includes every registered broker-
dealer. Based on a recent analysis conducted by the Cboe Exchange, Inc. 
(``Cboe''), as of October 21, 2020, only three (3) of the broker-
dealers, out of approximately 250 broker-dealers, were members of at 
least one exchange that lists options for trading and were members of 
all 16 options exchanges.\22\ Additionally, the Cboe Fee Filing found 
that several broker-dealers were members of only a single exchange that 
lists options for trading and that the number of members at each 
exchange that trades options varies greatly.\23\
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    \21\ See Exchange Rule 210. The Sponsored User is subject to the 
fees, if any, of the Sponsoring Member. The Exchange notes that the 
Sponsoring Member is not required to publicize, let alone justify or 
file with the Commission its fees, and as such could charge the 
Sponsored User any fees it deems appropriate, even if such fees 
would otherwise be considered supra-competitive, or otherwise 
potentially unreasonable or uncompetitive.
    \22\ See Securities Exchange Act Release No. 90333 (November 4, 
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105) (the 
``Cboe Fee Filing''). The Cboe Fee Filing cited to the October 2020 
Active Broker Dealer Report, provided by the Commission's Office of 
Managing Executive, on October 8, 2020.
    \23\ Id.
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    The Exchange notes that non-Member third-parties, such as Service 
Bureaus and Extranets, resell the Exchange's connectivity. This 
indirect connectivity is another viable alternative for market 
participants to trade on the Exchange without connecting directly to 
the Exchange (and thus not pay the Exchange's connectivity fees), which 
alternative is already being used by non-Members and further constrains 
the price that the Exchange is able to charge for connectivity and 
other access fees to its market. The Exchange notes that it could, but 
chooses not to, preclude market participants from reselling its 
connectivity. The Exchange also chooses not to adopt fees that would be 
assessed to third-party resellers on a per customer basis (i.e., fees 
based on the number of firms that connect to the Exchange indirectly 
via the third-party). Indeed, the Exchange does not receive any 
connectivity revenue when connectivity is resold by a third-party, 
which often is resold to multiple customers, some of whom are agency 
broker-dealers that have numerous customers of their own.\24\ In sum, 
the Exchange believes this creates and fosters a competitive 
environment and subjects the Exchange to competitive forces in pricing 
its connectivity and access fees. Particularly, in the event that a 
market participant views the Exchange's direct connectivity and access 
fees as more or less attractive than competing markets, that market 
participant can choose to connect to the Exchange indirectly or may 
choose not to connect to the Exchange and connect instead to one or 
more of the other 15 options markets. Accordingly, the Exchange 
believes that the Proposed Access Fees are fair and reasonable and do 
not result in excessive pricing or supra-competitive profit.
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    \24\ The Exchange notes that resellers are not required to 
publicize, let alone justify or file with the Commission their fees, 
and as such could charge the market participant any fees it deems 
appropriate (including connectivity fees higher than the Exchange's 
connectivity fees), even if such fees would otherwise be considered 
potentially unreasonable or uncompetitive fees.
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    With respect to 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. As stated above, the Exchange does not believe 
its proposed pricing will impose a barrier to entry to smaller 
participants and notes that its proposed connectivity pricing structure 
for its 10Gb ULL connections is associated with relative usage of the 
various market participants. Further, the majority of firms that 
purchase 10Gb ULL connections may either save money or pay the same 
amount after the tiered-pricing structure is implemented. While total 
cost may be increased for market participants with larger capacity 
needs or for business/

[[Page 46055]]

technical preferences, such options provide far more capacity and are 
purchased by those that consume more resources from the network. 
Accordingly, the proposed tiered-pricing structure does not favor 
certain categories of market participants in a manner that would impose 
a burden on competition; rather, the allocation reflects the network 
resources consumed by the various usage 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.
    The Exchange also does not believe that the proposed rule change 
will result in any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, options market participants are not forced to connect 
to all options exchanges. The Exchange operates in a highly competitive 
environment, and as discussed above, its ability to price access and 
connectivity is constrained by competition among exchanges and third 
parties. There are other options markets of which market participants 
may connect to trade options. There is also a possible range of 
alternative strategies, including routing to the exchange through 
another participant or market center or accessing the Exchange 
indirectly. For example, there are 15 other U.S. options exchanges, 
which the Exchange must consider in its pricing discipline in order to 
compete for market participants. In this competitive environment, 
market participants are free to choose which competing exchange or 
reseller to use to satisfy their business needs. As a result, the 
Exchange believes this proposed rule change permits fair competition 
among national securities exchanges. Accordingly, the Exchange does not 
believe its proposed fee changes impose any burden on competition that 
is not necessary or appropriate in furtherance of the purposes of the 
Act.

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,\25\ and Rule 19b-4(f)(2) \26\ 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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    \25\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \26\ 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-EMERALD-2021-23 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-2021-23. 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-2021-23 and should be submitted 
on or before September 7, 2021.
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    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17539 Filed 8-16-21; 8:45 am]
BILLING CODE 8011-01-P