[Federal Register Volume 87, Number 10 (Friday, January 14, 2022)]
[Notices]
[Pages 2466-2475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-00642]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93937; File No. SR-MEMX-2021-22]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend the
Exchange's Fee Schedule To Adopt Connectivity Fees
January 10, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 30, 2021, MEMX LLC (``MEMX'' or the ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission'')
the 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 with the Commission a proposed rule change
to amend the Exchange's fee schedule applicable to Members \3\ and non-
Members (the ``Fee Schedule'') pursuant to Exchange Rules 15.1(a) and
(c). The Exchange proposes to implement the changes to the Fee Schedule
pursuant to this proposal on January 3, 2022. The text of the proposed
rule change is provided in Exhibit 5.
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\3\ See Exchange Rule 1.5(p).
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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
Background
The purpose of the proposed rule change is to amend the Fee
Schedule to adopt fees the Exchange will charge to Members and non-
Members for physical connectivity to the Exchange and for application
sessions (otherwise known as ``logical ports'') that a Member utilizes
in connection with their participation on the Exchange (together with
physical connectivity, collectively referred to in this proposal as
``connectivity services,'' as described in greater detail below and in
Exhibit 5).
The Exchange has not previously imposed any fees for connectivity
services necessary to access and participate on its market. In general,
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 Exchange Act requirements that fees
be reasonable, equitably allocated, not unfairly discriminatory, and
not create an undue burden on competition among members and markets. In
particular, the Exchange believes that each exchange should take extra
care to be able to demonstrate that these fees are based on its costs
and reasonable business needs. The Exchange is proposing to implement
the proposed fee on January 3, 2022.
In proposing to charge fees for connectivity services, the Exchange
has sought to be especially diligent in assessing those fees in a
transparent way against its own aggregate costs of providing the
related service, and also carefully and transparently assessing the
impact on Members--both generally and in relation to other Members,
i.e., to assure the fee will not create a financial burden on any
participant and will not
[[Page 2467]]
have an undue impact in particular on smaller Members and competition
among Members in general. The Exchange believes that this level of
diligence and transparency is called for by the requirements of Section
19(b)(1) under the Act,\4\ and Rule 19b-4 thereunder,\5\ with respect
to the types of information self-regulatory organizations (``SROs'')
should provide when filing fee changes, and Section 6(b) of the Act,\6\
which requires, among other things, that exchange fees be reasonable
and equitably allocated,\7\ not designed to permit unfair
discrimination,\8\ and that they not impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.\9\
This rule change proposal addresses those requirements, and the
analysis and data in each of the sections that follow are designed to
clearly and comprehensively show how they are met.\10\
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(4).
\8\ 15 U.S.C. 78f(b)(5).
\9\ 15 U.S.C. 78f(b)(8).
\10\ In 2019, Commission staff published guidance suggesting the
types of information that SROs may use to demonstrate that their fee
filings comply with the standards of the Exchange Act (``Fee
Guidance''). While MEMX understands that the Fee Guidance does not
create new legal obligations on SROs, the Fee Guidance is consistent
with MEMX's view about the type and level of transparency that
exchanges should meet to demonstrate compliance with their existing
obligations when they seek to charge new fees. See Staff Guidance on
SRO Rule Filings Relating to Fees (May 21, 2019) available at
https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees.
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As noted above, MEMX currently does not charge fees for
connectivity to the Exchange, including fees for physical connections
or application sessions for order entry purposes or receipt of drop
copies. The objective of this approach was to eliminate any fee-based
barriers to connectivity for Members when MEMX launched as a national
securities exchange in 2020, and it was successful in achieving this
objective in that a significant number of Members are directly or
indirectly connected to the Exchange. As detailed below, MEMX recently
calculated its aggregate monthly costs for providing physical
connectivity to the Exchange at $795,789 and its aggregate monthly
costs for providing application sessions at $347,936. Because MEMX has
to date offered all connectivity free of charge, MEMX has borne 100% of
all connectivity costs. In order to cover the aggregate costs of
providing connectivity to its Users (both Members and non-Members) \11\
and to recoup some of the costs already borne by the Exchange to create
and offer its services, the Exchange is proposing to modify its Fee
Schedule, pursuant to MEMX Rules 15.1(a) and (c), to charge a fee of
$6,000 per month for each physical connection in the data center where
the Exchange primarily operates under normal market conditions
(``Primary Data Center'') and a fee of $3,000 per month for each
physical connection in the Exchange's geographically diverse data
center, which is operated for backup and disaster recovery purposes
(``Secondary Data Center''), each as further described below. The
Exchange also proposes to modify its Fee Schedule, pursuant to MEMX
Rules 15.1(a) and (c), to charge a fee of $450 per month for each
application session used for order entry (``Order Entry Port'') and
application session for receipt of drop copies (``Drop Copy Port'') in
the Exchange's Primary Data Center, as further described below.\12\
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\11\ Types of market participants that obtain connectivity
services from the Exchange but are not Members include service
bureaus and extranets. Service bureaus offer technology-based
services to other companies for a fee, including order entry
services to Members, and thus, may access application sessions on
behalf of one or more Members. Extranets offer physical connectivity
services to Members and non-Members.
\12\ As proposed, fees for connectivity services would be
assessed based on each active connectivity service product at the
close of business on the first day of each month. If a product is
cancelled by a Member's submission of a written request or via the
MEMX User Portal prior to such fee being assessed then the Member
will not be obligated to pay the applicable product fee. In order to
provide an opportunity for Users to disconnect any of their assigned
connectivity services, if they choose to do so, thereby reducing the
fee to be charged, the Exchange proposes to allow such Users to
discontinue use of any connectivity service product without charge
if they provide notice of intent to cancel use of such product
within two weeks of receipt of the first bill for connectivity
services in the first month in which the Exchange will commence
charging for such services and discontinue use of the product before
the beginning of the next month. As proposed, after the first month
of billing, MEMX will not return pro-rated fees even if a product is
not used for an entire month.
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Cost Analysis
In October 2021, MEMX completed a study of its aggregate costs to
produce market data and connectivity (the ``Cost Analysis''). The Cost
Analysis required a detailed analysis of MEMX's aggregate baseline
costs, including a determination and allocation of costs for core
services provided by the Exchange--transaction execution, market data,
membership services, physical connectivity, and application sessions
(which provide order entry, cancellation and modification
functionality, risk functionality, ability to receive drop copies, and
other functionality).\13\ MEMX separately divided its costs between
those costs necessary to deliver each of these core services, including
infrastructure, software, human resources (i.e., personnel), and
selling, general and administrative expenses (``cost drivers''). Next,
MEMX applied an estimated allocation of each cost driver to each core
service. By allocating segmented costs to each core service, MEMX was
able to estimate by core service the potential margin it might earn
based on different fee models. The Exchange notes that as a non-listing
venue it has four primary sources of revenue that it can potentially
use to fund its operations: Transaction fees, fees for connectivity
services, membership and regulatory fees, and market data fees.
Accordingly, the Exchange must cover its expenses from these four
primary sources of revenue.
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\13\ The Exchange is not proposing to adopt fees for market data
at this time and has proposed noting in Exhibit 5 that the Exchange
does not charge for market data. MEMX notes that it has separately
filed proposals to adopt membership fees and to modify transaction
pricing (though such changes are not directly related to the costs
described in this filing). Each of these changes, as proposed, is
also to be effective January 3, 2022.
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Based on the analysis described above, MEMX estimates that the cost
drivers to provide connectivity services, including both physical
connections and application sessions, result in an aggregate monthly
cost of $1,143,715. MEMX currently does not charge fees for
connectivity services and therefore generates no revenue in connection
with such services.
The following chart details the individual line-item costs
considered by MEMX to be related to offering physical connectivity.
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Costs drivers Costs
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Human Resources.............................................. $262,129
Infrastructure and Connectivity Technology (servers, 162,000
switches, etc.).............................................
Data Center Costs............................................ 219,000
Hardware and Software Licenses............................... 4,507
Monthly Depreciation......................................... 99,328
Allocated Shared Expenses.................................... 48,826
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Total.................................................... 795,789
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For personnel costs (Human Resources), MEMX calculated an
allocation of employee time for employees whose functions include
providing and maintaining physical connectivity and performance thereof
(primarily the MEMX network infrastructure team, which spends most of
their time performing functions necessary to provide physical
connectivity) as well as a limited subset of personnel with ancillary
functions
[[Page 2468]]
related to establishing and maintaining such connectivity (such as
information security and finance personnel). The Human Resources cost
was calculated using a blended rate of compensation reflecting salary,
equity and bonus compensation, benefits, payroll taxes, and 401(k)
matching contributions. The Infrastructure and Connectivity Technology
cost includes servers, switches and related hardware required to
provide physical access to the Exchange, some of which is owned by the
Exchange and some of which is leased by the Exchange in order to allow
efficient periodic technology refreshes. Data Center costs includes an
allocation of the costs the Exchange incurs to provide physical
connectivity in the third party data centers where it maintains its
equipment as well as related costs (the Exchange does not own the
Primary Data Center or the Secondary Data Center, but instead, leases
space in data centers operated by third parties). Hardware and Software
Licenses includes hardware and software licenses used to operate and
monitor physical assets necessary to offer physical connectivity to the
Exchange. All physical assets and software, which also includes assets
used for testing and monitoring of Exchange infrastructure, were valued
at cost, depreciated or leased over periods ranging from three to five
years. Finally, a limited portion of general shared expenses was
allocated to overall physical connectivity costs as without these
general shared costs the Exchange would not be able to operate in the
manner that it does and provide physical connectivity. The costs
included in general shared expenses include general expenses of the
Exchange, including office space and office expenses, utilities,
recruiting and training, marketing and advertising costs, professional
fees for legal, tax and accounting services, and telecommunications
costs. The total monthly cost of $795,789 was divided by the number of
physical connections the Exchange maintains (143), to arrive at a cost
of approximately $5,565 per month, per physical connection.
The following chart details the individual line-item costs
considered by MEMX to be related to offering application sessions.
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Costs drivers Costs
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Human Resources.............................................. $147,029
Infrastructure and Connectivity Technology (servers, 33,358
switches, etc.).............................................
Data Center Costs............................................ n/a
Hardware and Software Licenses............................... 108,138
Monthly Depreciation......................................... n/a
Allocated Shared Expenses.................................... 59,400
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Total.................................................... 347,926
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With respect to application sessions, MEMX calculated Human
Resources cost by taking an allocation of employee time for employees
whose functions include providing application sessions and maintaining
performance thereof (including a broader range of employees such as
technical operations personnel, market operations personnel, and
software engineering personnel) as well as a limited subset of
personnel with ancillary functions related to maintaining such
connectivity (such as sales, membership, and finance personnel). The
Human Resources cost was again calculated using a blended rate of
compensation reflecting salary, equity and bonus compensation,
benefits, payroll taxes, and 401(k) matching contributions. The
Infrastructure and Connectivity Technology cost includes servers and
switches, and related hardware, and the allocation of cost was limited
to those specifically supporting the provision of application sessions.
Hardware and Software Licenses includes hardware and software licenses
used to monitor the health of the order entry services provided by the
Exchange. All physical assets and software, which also includes assets
used for testing and monitoring of order entry infrastructure, were
valued at cost, depreciated or leased over periods ranging from three
to five years. Finally, a limited portion of general shared expenses
was allocated to overall application session costs as without these
general shared costs the Exchange would not be able to operate in the
manner that it does and provide application sessions. The costs
included in general shared expenses include general expenses of the
Exchange, including office space and office expenses, utilities,
recruiting and training, marketing and advertising costs, professional
fees for legal, tax and accounting services, and telecommunications
costs. The total monthly cost of $347,926 was divided by the number of
application sessions the Exchange maintains (835), to arrive at a cost
of approximately $417 per month, per application session.
As discussed above, the Exchange conducted an extensive Cost
Analysis in which the Exchange analyzed every expense item in the
Exchange's general expense ledger to determine whether each such
expense relates to the provision of connectivity services, and, if such
expense did so relate, what portion (or percentage) of such expense
actually supports the provision of connectivity services, and thus
bears a relationship that is, ``in nature and closeness,'' directly
related to network connectivity services. In turn, the Exchange
allocated certain costs more to physical connectivity and others to
applications, while certain costs were only allocated to such services
at a very low percentage or not at all. The sum of all such portions of
expenses represents the total actual baseline cost of the Exchange to
provide connectivity services, or a monthly expense of $1,143,715.
In conducting its Cost Analysis, the Exchange did not allocate any
of its expenses in full to either physical connectivity or application
sessions and did not double-count any expenses. Instead, as described
above, the Exchange allocated applicable cost drivers across its core
services. For instance, in calculating the Human Resources expenses to
be allocated to physical connections, the Exchange allocated network
infrastructure personnel with a high percentage of the cost of such
personnel (75%) given their focus on functions necessary to provide
physical connections. The Exchange did not allocate any other Human
Resources expense for providing physical connections to any other
employee group outside of a smaller allocation (19%) of the cost
associated with certain specified personnel who work closely with and
support network infrastructure personnel. In contrast, the Exchange
allocated much smaller percentages of costs (11% or less) across a
wider range of personnel groups in order to allocate Human Resources
costs to providing application sessions. This is because a much wider
range of personnel are involved in functions necessary to offer,
monitor and maintain application sessions but the tasks necessary to do
so are not a primary or full-time function. In total, the Exchange
allocated 13.8% of its personnel costs to providing physical
connections and 7.7% of its personnel costs to providing application
sessions, for a total allocation of 21.5% Human Resources expense to
provide connectivity services.
As another example, the Exchange allocated depreciation expense to
both physical connections and application sessions but in different
amounts. 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
[[Page 2469]]
to operate and support the network. Without this equipment, the
Exchange would not be able to operate the network and provide
connectivity services to its Members and non-Members and their
customers. However, the Exchange did not allocate all of the
depreciation and amortization expense toward the cost of providing
connectivity services, but instead allocated approximately 27% of the
Exchange's overall depreciation and amortization expense to
connectivity services (19% attributed to physical connections and 8% to
application sessions).
The Exchange notes that the Cost Analysis was based on the
Exchange's first year of operations and projections for the next year.
As such, the Exchange believes that its costs will remain relatively
similar in future years. It is possible however that such costs will
either decrease or increase. To the extent the Exchange sees growth in
use of connectivity services it will receive additional revenue to
offset future cost increases. However, if use of connectivity services
is static or decreases, the Exchange might not realize the revenue that
it anticipates or needs in order to cover applicable costs.
Accordingly, the Exchange commits to periodically review the costs
applicable to providing connectivity services and to propose changes to
its fees as appropriate.
Physical Connectivity Fees
MEMX offers its Members the ability to connect to the Exchange in
order to transmit orders to and receive information from the Exchange.
Members can also choose to connect to MEMX indirectly through physical
connectivity maintained by a third-party extranet. Extranet physical
connections may provide access to one or multiple Members on a single
connection. Users of MEMX physical connectivity services (both Members
and non-Members) \14\ seeking to establish one or more connections with
the Exchange submit a request to the Exchange via the MEMX User Portal
or directly to Exchange personnel. Upon receipt of the completed
instructions, MEMX establishes the physical connections requested by
the User. The number of physical connections assigned to each User as
of November 30, 2021, ranges from one to ten, depending on the scope
and scale of the Member's trading activity on the Exchange as
determined by the Member, including the Member's determination of the
need for redundant connectivity. The Exchange notes that 44% of its
Members do not maintain a physical connection directly with the
Exchange in the Primary Data Center (though many such Members have
connectivity through a third party provider) and another 44% have
either one or two physical ports to connect to the Exchange in the
Primary Data Center. Thus, only a limited number of Members, 12%,
maintain three or more physical ports to connect to the Exchange in the
Primary Data Center.
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\14\ See supra note 11.
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As described above, in order to cover the aggregate costs of
providing physical connectivity to Users and to recoup some of the
costs already borne by the Exchange to provide physical connectivity,
the Exchange is proposing to charge a fee of $6,000 per month for each
physical connection in the Primary Data Center and a fee of $3,000 per
month for each physical connection in the Secondary Data Center. There
is no requirement that any Member maintain a specific number of
physical connections and a Member may choose to maintain as many or as
few of such connections as each Member deems appropriate. The Exchange
notes, however, that pursuant to Rule 2.4 (Mandatory Participation in
Testing of Backup Systems), the Exchange does require a small number of
Members to connect and participate in functional and performance
testing as announced by the Exchange, which occurs at least once every
12 months. Specifically, Members that have been determined by the
Exchange to contribute a meaningful percentage of the Exchange's
overall volume must participate in mandatory testing of the Exchange's
backup systems (i.e., such Members must connect to the Secondary Data
Center). The Exchange notes that Members that have been designated are
still able to use third party providers of connectivity to access the
Exchange at its Secondary Data Center. Nonetheless, because some
Members are required to connect to the Secondary Data Center pursuant
to Rule 2.4 and to encourage Exchange Members to connect to the
Secondary Data Center generally, the Exchange has proposed to charge
one-half of the fee for a physical connection in the Primary Data
Center.
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
physical connections a User requests, based upon factors deemed
relevant by each User (either a Member, service bureau or extranet).
The Exchange believes these factors include the costs to maintain
connectivity, business model and choices Members make in how to
participate on the Exchange, as further described below.
The proposed fee of $6,000 per month for physical connections at
the Primary Data Center is designed to permit the Exchange to cover the
costs allocated to providing connectivity services with a modest markup
(approximately 8%), which would also account for costs the Exchange has
previously borne completely on its own and help fund future
expenditures (increased costs, improvements, etc.). The Exchange
believes it is appropriate to charge fees that represent a reasonable
markup over cost given the other factors discussed above, including the
lack of other costs to participate on the Exchange and the need for the
Exchange to maintain a highly performant and stable platform to allow
Members to transact with determinism. The Exchange also reiterates that
the Exchange has not previously charged any fees for connectivity
services and its allocation of costs to physical connections was part
of a holistic allocation that also allocated costs to other core
services without double-counting any expenses. As such, the proposal
only truly constitutes a ``markup'' to the extent the Exchange recovers
the initial costs of building the network and infrastructure necessary
to offer physical connectivity and operating the Exchange for over a
year without connectivity fees.
As noted above, the Exchange proposes a discounted rate of $3,000
per month for physical connections at its Secondary Data Center. The
Exchange has proposed this discounted rate for Secondary Data Center
connectivity in order to encourage Members to establish and maintain
such connections. Also, as noted above, a small number of Members are
required pursuant to Rule 2.4 to connect and participate in testing of
the Exchange's backup systems, and the Exchange believes it is
appropriate to provide a discounted rate for physical connections at
the Secondary Data Center given this requirement.
The Exchange notes that this rate is well below the cost of
providing such services and the Exchange will operate its network and
systems at the Secondary Data Center without recouping the full amount
of such cost through connectivity services.
The proposed fee for physical connections is effective on filing
and will become operative on January 3, 2021[sic]. The Exchange is not
proposing to assess any fees for market data at this time, has
separately proposed a fee for membership and has also separately
proposed to make certain changes to Exchange transaction fees.
[[Page 2470]]
Application Session Fees
Similar to other exchanges, MEMX offers its Members application
sessions, also known as logical ports, for order entry and receipt of
trade execution reports and order messages. Members can also choose to
connect to MEMX indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one
or multiple Members on a single session. Users of MEMX connectivity
services (both Members and non-Members) \15\ seeking to establish one
or more application sessions with the Exchange submit a request to the
Exchange via the MEMX User Portal or directly to Exchange personnel.
Upon receipt of the completed instructions, MEMX assigns the User the
number of sessions requested by the User. The number of sessions
assigned to each User as of November 30, 2021, ranges from one to more
than 100, depending on the scope and scale of the Member's trading
activity on the Exchange (either through a direct connection or through
a service bureau) as determined by the Member. For example, by using
multiple sessions, Members can segregate order flow from different
internal desks, business lines, or customers. The Exchange does not
impose any minimum or maximum requirements for how many application
sessions a Member or service bureau can maintain, and it is not
proposing to impose any minimum or maximum session requirements for its
Members or their service bureaus.
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\15\ See supra note 11.
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As described above, in order to cover the aggregate costs of
providing application sessions to Users and to recoup some of the costs
already borne by the Exchange to provide application sessions, the
Exchange is proposing to charge a fee of $450 per month for each Order
Entry Port and Drop Copy Port in the Primary Data Center. The Exchange
notes that it does not propose to charge for: (1) Order Entry Ports or
Drop Copy Ports in the Secondary Data Center, or (2) any Test Facility
Ports or MEMOIR Gap Fill Ports. The Exchange has proposed to provide
Order Entry Ports and Drop Copy Ports in the Secondary Data Center free
of charge in order to encourage Members to connect to the Exchange's
backup trading systems. Similarly, because the Exchange wishes to
encourage Members to conduct appropriate testing of their use of the
Exchange, the Exchange has not proposed to charge for Test Facility
Ports. With respect to MEMOIR Gap Fill ports, such ports are
exclusively used in order to receive information when a market data
recipient has temporarily lost its view of MEMX market data. The
Exchange has not proposed charging for such ports because the costs of
providing and maintaining such ports is more directly related to
producing market data, and the Exchange is not proposing to charge for
market data at this time.
The proposed fee of $450 per month for each Order Entry Port and
Drop Copy Port in the Primary Data Center is designed to permit the
Exchange to cover the costs allocated to providing application sessions
with a modest markup (approximately 8%), which would also account for
costs the Exchange has previously borne completely on its own and help
fund future expenditures (increased costs, improvements, etc.). The
Exchange also reiterates that the Exchange has not previously charged
any fees for connectivity services and its allocation of costs to
application sessions was part of a holistic allocation that also
allocated costs to other core services without double-counting any
expenses. As such, the proposal only truly constitutes a ``markup'' to
the extent the Exchange recovers the initial costs of building the
network and infrastructure necessary to offer application sessions and
operating the Exchange for over a year without connectivity fees.
The proposed fee is also designed to encourage Users to be
efficient with their application session usage, thereby resulting in a
corresponding increase in the efficiency that the Exchange would be
able to realize in managing its aggregate costs for providing
connectivity services. There is no requirement that any Member maintain
a specific number of application sessions and a Member may choose to
maintain as many or as few of such ports as each Member deems
appropriate. The Exchange has designed its platform such that Order
Entry Ports can handle a significant amount of message traffic (i.e.,
over 50,000 orders per second), and has no application flow control or
order throttling. As such, while several Members maintain a relatively
high number of ports because that is consistent with their usage on
other exchanges and is preferable for their own reasons, the Exchange
believes that it has designed a system capable of allowing such Members
to significantly reduce the number of application sessions maintained.
The proposed fee will not apply differently based upon the size or
type of the market participant, but rather based upon the number of
application sessions a User requests, based upon factors deemed
relevant by each User (either a Member or service bureau on behalf of a
Member). The Exchange believes these factors include the costs to
maintain connectivity and choices Members make in how to segment or
allocate their order flow.\16\
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\16\ The Exchange understands that some Members (or service
bureaus) may also request more Order Entry Ports to enable the
ability to send a greater number of simultaneous order messages to
the Exchange by spreading orders over more Order Entry Ports,
thereby increasing throughput (i.e., the potential for more orders
to be processed in the same amount of time). The degree to which
this usage of Order Entry Ports provides any throughput advantage is
based on how a particular Member sends order messages to MEMX,
however the Exchange notes that its architecture reduces the impact
or necessity of such a strategy. All Order Entry Ports on MEMX
provide the same throughput, and as noted above, the throughput is
likely adequate even for a Member sending a significant amount of
volume at a fast pace, and is not artificially throttled or limited
in any way by the Exchange.
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The proposed fee for application sessions is effective on filing
and will become operative on January 3, 2021[sic]. The Exchange is not
proposing to assess any fees for market data at this time, has
separately proposed a fee for membership and has also separately
proposed to make certain changes to Exchange transaction fees.
Additional Discussion
As discussed above, the proposed fees for connectivity services do
not by design apply differently to different types or sizes of Members.
As discussed in more detail in the Statutory Basis section, the
Exchange believes that the likelihood of higher fees for certain
Members subscribing to connectivity services usage than others is not
unfairly discriminatory because it is based on objective differences in
usage of connectivity services among different Members. The Exchange's
incremental aggregate costs for all connectivity services are
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the
Exchange, as such Members: (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 network monitoring,
reporting and support services, resulting in a much higher cost to the
Exchange to provide such connectivity services. For these reasons, MEMX
believes it is not unfairly discriminatory for the Members with higher
message traffic and/or Members with more complicated connections to pay
a higher share of the
[[Page 2471]]
total connectivity services fees. While Members with a business model
that results in higher relative inbound message activity or more
complicated connections are projected to pay higher fees, the level of
such fees is based solely on the number of physical connections and/or
application sessions deemed necessary by the Member and not on the
Member's business model or type of Member. The Exchange notes that the
correlation between message traffic and usage of connectivity services
is not completely aligned because Members individually determine how
many physical connections and application sessions to request, and
Members may make different decisions on the appropriate ways based on
facts unique to their individual businesses. Based on the Exchange's
architecture, as described above, the Exchange believes that a Member
even with high message traffic would be able to conduct business on the
Exchange with a relatively small connectivity services footprint.
Finally, the fees for connectivity services will help to encourage
connectivity services usage in a way that aligns with the Exchange's
regulatory obligations. As a national securities exchange, the Exchange
is subject to Regulation Systems Compliance and Integrity (``Reg
SCI'').\17\ Reg SCI Rule 1001(a) requires that the Exchange establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure (among other things) that its Reg SCI systems have
levels of capacity adequate to maintain the Exchange's operational
capability and promote the maintenance of fair and orderly markets.\18\
By encouraging Users to be efficient with their usage of connectivity
services, the proposed fee will support the Exchange's Reg SCI
obligations in this regard by ensuring that unused application sessions
are available to be allocated based on individual User needs and as the
Exchange's overall order and trade volumes increase. Additionally,
because the Exchange will charge a lower rate for a physical connection
to the Secondary Data Center and will not charge any fees for
application sessions at the Secondary Data Center or its Test Facility,
the proposed fee structure will further support the Exchange's Reg SCI
compliance by reducing the potential impact of a disruption should the
Exchange be required to switch to its Disaster Recovery Facility and
encouraging Members to engage in any necessary system testing with low
or no cost imposed by the Exchange.\19\
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\17\ 17 CFR 242.1000-1007.
\18\ 17 CFR 242.1001(a).
\19\ While some Members might directly connect to the Secondary
Data Center and incur the proposed $3,000 per month fee, there are
other ways to connect to the Exchange, such as through a service
bureau or extranet, and because the Exchange is not imposing fees
for application sessions in the Secondary Data Center, a Member
connecting through another method would not incur any fees charged
directly by the Exchange. However, the Exchange notes that a third
party service provider providing connectivity to the Exchange likely
would charge a fee for providing such connectivity; such fees are
not set by or shared in by the Exchange.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b) \20\ of the Act in general, and
furthers the objectives of Section 6(b)(4) \21\ of the Act, in
particular, in that it is designed to provide for the equitable
allocation of reasonable dues, fees and other charges among its Members
and other persons using its facilities. Additionally, the Exchange
believes that the proposed fees are consistent with the objectives of
Section 6(b)(5) \22\ of the Act in that they are designed to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to a free and open market and
national market system, and, in general, to protect investors and the
public interest, and, particularly, are not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
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\20\ 15 U.S.C. 78f.
\21\ 15 U.S.C. 78f(b)(4).
\22\ 15 U.S.C. 78f(b)(5).
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The Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. In Regulation NMS,
the Commission highlighted the importance of market forces in
determining prices and SRO revenues and also recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \23\ One of the primary
objectives of MEMX is to provide competition and to reduce fixed costs
imposed upon the industry. Consistent with this objective, the Exchange
believes that this proposal reflects a simple, competitive, reasonable,
and equitable pricing structure designed to permit the Exchange to
cover certain fixed costs that it incurs for providing connectivity
services, which are discounted when compared to products and services
offered by competitors.\24\
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\23\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
\24\ See infra notes 30-34 and accompanying text.
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Commission staff noted in its Fee Guidance that, as an initial step
in assessing the reasonableness of a fee, staff considers whether the
fee is constrained by significant competitive forces. To determine
whether a proposed fee is constrained by significant competitive
forces, staff has said that it considers whether the evidence
demonstrates that there are reasonable substitutes for the product or
service that is the subject of a proposed fee. There is no regulatory
requirement that any market participant connect to the Exchange, that
any participant connect in a particular manner, or that any participant
maintain a certain number of connections to the Exchange. The Exchange
reiterates that a small number of Members are required to connect to
the Exchange for participation in mandatory testing of backup systems
but such connectivity does not have to be obtained directly from the
Exchange but instead can be through a third party provider that
provides connectivity to the Exchange.
The Exchange also acknowledges that certain market participants
operate businesses that do, in fact, require them to be connected to
all U.S. equity exchanges. For instance, certain Members operate as
routing brokers for other market participants. As an equities exchange
with 4% volume, these routing brokers likely need to maintain a
connection to the Exchange on behalf of their clients. However, it is
connectivity services provided by the Exchange that allow such
participants to offer their clients a service for which they can be
compensated (and allowing their clients not to directly connect but
still to access the Exchange), and, as such, the Exchange believes it
is reasonable, equitably allocated and not unfairly discriminatory to
charge such Members for connectivity services.
As a new entrant to the equities market, the Exchange does not have
as Members many market participants that actively trade equities on
other exchanges nor are such market participants directly connected to
the Exchange. There are also a number of the Exchange's Members that do
not connect directly to MEMX. For instance, of the number of Members
that maintain application sessions to participate directly on the
Exchange, many such Members do not maintain physical connectivity but
instead access the
[[Page 2472]]
Exchange through a service bureau or extranet. In addition, of the
Members that are directly connected to MEMX, it is generally the
individual needs of the Member that require whether they need one or
multiple physical connections to the Exchange as well as the number of
application sessions that they will maintain. It is all driven by the
business needs of the Member, and as described above, the Exchange
believes it offers technology that will enable Members to maintain a
smaller connectivity services footprint than they do on other markets.
The potential argument that all broker-dealers are required to
connect to all exchanges is not true given the Exchange's experience as
a new entrant to the market over the past year. Instead, many market
participants awaited the Exchange growing to a certain percentage of
market share before they would join as a Member or connect to the
Exchange. In addition, many market participants still have not
connected despite the Exchange's growth in one year to more than 4% of
the overall equities market share. Thus, the Exchange recognizes that
the decision of whether to connect to the Exchange is separate and
distinct from the decision of whether and how to trade on the Exchange.
This is because there are multiple alternatives to directly
participating on the Exchange (such as use of a third-party routing
broker to access the Exchange) or directly connecting to the Exchange
(such as use of an extranet or service bureau). The Exchange
acknowledges that many firms may choose to connect to the Exchange, but
ultimately not trade on it, based on their particular business needs.
The decision of which type of connectivity to purchase, or whether to
purchase connectivity at all, is based on the business needs of each
individual firm.
There is also competition for connectivity to the Exchange. For
instance, the Exchange competes with certain non-Members who provide
connectivity and access to the Exchange, namely extranets and service
bureaus. These are resellers of MEMX connectivity--they are not
arrangements between broker-dealers to share connectivity costs. Those
non-Members resell that connectivity to multiple market participants
over the same connection. When physical connectivity is re-sold by a
third-party, the Exchange will not receive any connectivity revenue
from that sale, and without connectivity fees for the past year, such
third parties have been able to re-sell something they receive for
free. Such arrangements are entirely between the third-party and the
purchaser, thus constraining the ability of MEMX to set its
connectivity pricing as indirect connectivity is a substitute for
direct connectivity. Indirect connectivity is a viable alternative that
is already being used by Members and non-Members of MEMX, constraining
the price that the Exchange is able to charge for connectivity to its
Exchange. As set forth above, nearly half of the Exchange's Members do
not have a physical connection provided by the Exchange and instead
must use a third party provider. Members who have not established any
connectivity to the Exchange are still able to trade on the Exchange
indirectly through other Members or non-Member extranets or service
bureaus that are connected. These Members will not be forced or
compelled to purchase physical connectivity services, and they retain
all of the other benefits of membership with the Exchange. Accordingly,
Members have the choice to purchase physical connectivity and are not
compelled to do so. The Exchange notes that without an application
session, specifically an Order Entry Port, a Member could not submit
orders to the Exchange. As such, while application sessions too can be
obtained from a third party reseller (i.e., a service bureau) the
Exchange will receive revenue either from the Member or the third party
service bureau for each application session. However, as noted
elsewhere, the Exchange has designed its platform such that Order Entry
Ports can handle a significant amount of message traffic (i.e., over
50,000 orders per second), and has no application flow control or order
throttling. As such, the Exchange believes that it has designed a
system capable of allowing such Members to significantly reduce the
number of application sessions maintained.
The Exchange believes that the proposed fees for connectivity
services are reasonable, equitable and not unfairly discriminatory
because, as described above, the proposed pricing for connectivity
services is directly related to the relative costs to the Exchange to
provide those respective services, and does not impose a barrier to
entry to smaller participants. Accordingly, the Exchange offers direct
connectivity alternatives and various indirect connectivity (via third-
party) alternatives, as described above.
The Exchange recognizes that there are various business models and
varying sizes of market participants conducting business on the
Exchange. The Exchange's incremental aggregate costs for all
connectivity services are disproportionately related to Members with
higher message traffic and/or Members with more complicated connections
established with the Exchange, as such Members: (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
network monitoring, reporting and support services, resulting in a much
higher cost to the Exchange to provide such connectivity services.
Accordingly, the Exchange believes the allocation of the proposed fees
that increase based on the number of physical connections or
application sessions is reasonable based on the resources consumed by
the respective type of market participant (i.e., lowest resource
consuming Members will pay the least, and highest resource consuming
Members will pay the most), particularly since higher resource
consumption translates directly to higher costs to the Exchange.
With respect to equities trading, the Exchange had a 4.16% market
share of the U.S. equities industry in November 2021.\25\ The Exchange
is not aware of any evidence that a market share of approximately 4%
provides the Exchange with anti-competitive pricing power because, as
shown above, market participants that choose to connect to the Exchange
have various choices in determining how to do so, including third party
alternatives. This, in addition to the fact that not all broker-dealers
are required to connect to the Exchange, supports the Exchange's
conclusion that its pricing is constrained by competition.
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\25\ Market share percentage calculated as of November 30, 2021.
The Exchange receives and processes data made available through
consolidated data feeds (i.e., CTS and UTDF).
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Several market participants choose not to be Members of the
Exchange and choose not to access the Exchange, and several market
participants also access the Exchange indirectly through another market
participant. To illustrate, the Exchange currently has 66 Members.
However, based on publicly available information regarding a sample of
the Exchange's competitors, the New York Stock Exchange LLC (``NYSE'')
has 142 members, Cboe BZX Exchange, Inc. (``BZX'') has 140 members, and
Investors Exchange LLC (``IEX'') has 133 members.\26\ If all market
participants were required to be Members of the
[[Page 2473]]
Exchange and connect directly to the Exchange, the Exchange would have
over 130 Members, in line with these other exchanges. But it does not.
The Exchange currently has approximately half of the number of members
as compared to these other exchanges.
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\26\ See NYSE Membership Directory, available at: https://www.nyse.com/markets/nyse/membership; BZX Form 1 filed November 19,
2021, available at: https://www.sec.gov/Archives/edgar/vprr/2100/21009368.pdf; IEX Current Members list, available at: https://exchange.iex.io/resources/trading/current-membership/.
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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 prices for its connectivity services. Market
participants choose to connect to a particular exchange and because it
is a choice, MEMX must set reasonable pricing for connectivity
services, otherwise prospective Members would not connect and existing
Members would disconnect, connect through a third-party reseller of
connectivity, or otherwise access the Exchange indirectly. No market
participant is required by rule or regulation to be a Member of or
connect directly to the Exchange, though again, the Exchange
acknowledges that certain types of broker-dealers might be compelled by
their business model to connect and also notes that pursuant to Rule
2.4, certain Members with significant volume on the Exchange are
required to connect to the Exchange's backup systems for testing on at
least an annual basis.
With regard to reasonableness, the Exchange understands that the
Commission has traditionally taken a market-based approach to examine
whether the SRO making the proposal was subject to significant
competitive forces in setting the terms of the proposal. In looking at
this question, the Commission considers whether the SRO has
demonstrated in its filing that: (i) There are reasonable substitutes
for the product or service; (ii) ``platform'' competition constrains
the ability to set the fee; and/or (iii) revenue and cost analysis
shows the fee would not result in the SRO taking supracompetitive
profits. If the SRO demonstrates that the fee is subject to significant
competitive forces, the Commission will next consider whether there is
any substantial countervailing basis to suggest the fee's terms fail to
meet one or more standards under the Exchange Act. If the filing fails
to demonstrate that the fee is constrained by competitive forces, the
SRO must provide a substantial basis, other than competition, to show
that it is consistent with the Exchange Act, which may include
production of relevant revenue and cost data pertaining to the product
or service. The Exchange has not previously charged fees for
connectivity services, so it does not have MEMX-specific data to
support whether or not competitive forces would constrain its ability
to set fees for connectivity services. However, as described above, the
Exchange believes that competitive forces are in effect and that if the
proposed fees for connectivity services were unreasonable that the
Exchange would lose current or prospective Members and market share.
The Exchange does not yet have comprehensive data of the impact of the
proposed fees and will not have such data until the fees are actually
imposed but the Exchange is aware of several Members that are
considering modifying the way that they connect to the Exchange given
the Exchange's pricing proposal. Further, the Exchange has conducted a
comprehensive Cost Analysis in order to determine the reasonability of
its proposed fees, including that the Exchange will not take
supracompetitive profits.
MEMX believes the proposed fees for connectivity services are fair
and reasonable as a form of cost recovery for the Exchange's aggregate
costs of offering connectivity services to Members and non-Members. The
proposed fees are expected to generate monthly revenue of $1,233,750
providing cost recovery to the Exchange for the aggregate costs of
offering connectivity services, based on a methodology that narrowly
limits the aggregate cost elements considered to those closely and
directly related to the particular product offering. In addition, this
revenue will allow the Exchange to continue to offer, to enhance, and
to continually refresh its infrastructure as necessary to offer a
state-of-the-art trading platform. The Exchange believes that,
consistent with the Act, it is appropriate to charge fees that
represent a reasonable markup over cost given the other factors
discussed above, including the lack of other costs to participate on
the Exchange and the need for the Exchange to maintain a highly
performant and stable platform to allow Members to transact with
determinism. The Exchange also believes the proposed fee is a
reasonable means of encouraging Users to be efficient in the
connectivity services they reserve for use, with the benefits to
overall system efficiency to the extent Members and non-Members
consolidate their usage of connectivity services or discontinue
subscriptions to unused physical connectivity.
The Exchange further believes that the proposed fees, as they
pertain to purchasers of each type of connectivity alternative,
constitute an equitable allocation of reasonable fees charged to the
Exchange's Members and non-Members and are allocated fairly amongst the
types of market participants using the facilities of the Exchange.
As described above, the Exchange believes the proposed fees are
equitably allocated because the Exchange's incremental aggregate costs
for all connectivity services are disproportionately related to Members
with higher message traffic and/or Members with more complicated
connections established with the Exchange, as such Members: (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 network monitoring, reporting and support services, resulting
in a much higher cost to the Exchange to provide such connectivity
services.
Commission staff previously noted that the generation of
supracompetitive profits is one of several potential factors in
considering whether an exchange's proposed fees are consistent with the
Act.\27\ As described in the Fee Guidance, the term ``supracompetitive
profits'' refers to profits that exceed the profits that can be
obtained in a competitive market. The proposed fee structure would not
result in excessive pricing or supracompetitive profits for the
Exchange. The proposed fee structure is merely designed to permit the
Exchange to cover the costs allocated to providing connectivity
services with a modest markup (approximately 8%), which would also
account for costs the Exchange has previously borne completely on its
own and help fund future expenditures (increased costs, improvements,
etc.). The Exchange believes that this is fair, reasonable, and
equitable. Accordingly, the Exchange believes that its proposal is
consistent with Section 6(b)(4) \28\ of the Act because the proposed
fees will permit recovery of the Exchange's costs and will not result
in excessive pricing or supracompetitive profit. The proposed fees for
connectivity services will allow the Exchange to cover certain costs
incurred by the Exchange associated with providing and maintaining
necessary hardware and other network infrastructure as well as network
monitoring and support services; without such hardware, infrastructure,
monitoring and support the Exchange would be unable to provide the
connectivity services. The Exchange routinely works to improve
[[Page 2474]]
the performance of the network's hardware and software. The costs
associated with maintaining and enhancing a state-of-the-art exchange
network is a significant expense for the Exchange, and thus the
Exchange believes that it is reasonable and appropriate to help offset
those costs by adopting fees for connectivity services. As detailed
above, the Exchange has four primary sources of revenue that it can
potentially use to fund its operations: Transaction fees, fees for
connectivity services, membership and regulatory fees, and market data
fees. Accordingly, the Exchange must cover its expenses from these four
primary sources of revenue. The Exchange's Cost Analysis estimates the
costs to provide connectivity services at $1,143,715. Based on current
connectivity services usage, the Exchange would generate monthly
revenues of approximately $1,233,750. This represents a modest profit
when compared to the cost of providing connectivity services. However,
the Exchange does anticipate (and encourages) Members and non-Members
to more closely evaluate their connectivity services usage once such
services are no longer free, and thus, it is possible that the revenue
actually received by the Exchange will be less than $1,233,750. Even if
the Exchange earns that amount or incrementally more, the Exchange
believes the proposed fees for connectivity services are fair and
reasonable because they will not result in excessive pricing or
supracompetitive profit, when comparing the total expense of MEMX
associated with providing connectivity services versus the total
projected revenue of the Exchange associated with network connectivity
services.
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\27\ See Fee Guidance, supra note 10.
\28\ 15 U.S.C. 78f(b)(4).
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The Exchange notes that other exchanges offer similar connectivity
options to market participants and that the Exchange's fees are a
discount as compared to the majority of such fees.\29\ With respect to
physical connections, each of the Nasdaq Stock Market LLC (``Nasdaq''),
NYSE, NYSE Arca, Inc. (``Arca''), BZX and Cboe EDGX Exchange, Inc.
(``EDGX'') charges between $7,500-$22,000 per month for physical
connectivity at their primary data centers that is comparable to that
offered by the Exchange.\30\ Nasdaq, NYSE and Arca also charge
installation fees, which are not proposed to be charged by the
Exchange. With respect to application sessions, each of Nasdaq, NYSE,
Arca, BZX and EDGX charges between $500-$575 per month for order entry
and drop ports.\31\ The Exchange further notes that several of these
exchanges each charge for other logical ports that the Exchange will
continue to provide for free, such as application sessions for testing
and disaster recovery purposes.\32\ While the Exchange's proposed
connectivity fees are lower than the fees charged by Nasdaq, NYSE,
Arca, BZX and EDGX, MEMX believes that it offers significant value to
Members over these other exchanges in terms of bandwidth available over
such connectivity services, which the Exchanges believes is a
competitive advantage, and differentiates its connectivity versus
connectivity to other exchanges.\33\ Additionally, the Exchange's
proposed connectivity fees to its disaster recovery facility are within
the range of the fees charged by other exchanges for similar
connectivity alternatives.\34\ The Exchange believes that its proposal
to offer certain application sessions free of charge is reasonable,
equitably allocated and not unfairly discriminatory because such
proposal is intended to encourage Member connections and use of backup
and testing facilities of the Exchange, and, with respect to MEMOIR Gap
Fill ports, such ports are used exclusively in connection with the
receipt and processing of market data from the Exchange, and the
Exchange is not proposing market data fees at this time.
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\29\ One significant differentiation between the Exchanges is
that while it offers different types of physical connections,
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does
not propose to charge different prices for such connections. In
contrast, most of the Exchange's competitors provide scaled pricing
that increases depending on the size of the physical connection. The
Exchange does not believe that its costs increase incrementally
based on the size of a physical connection but instead, that
individual connections and the number of such separate and disparate
connections are the primary drivers of cost for the Exchange.
\30\ See the Nasdaq equities fee schedule, available at: http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2; the NYSE fee
schedule, available at: https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf; the NYSE Arca equities fee
schedule, available at: https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf; the BZX equities
fee schedule, available at: https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/; the EDGX equities fee schedule,
available at: https://markets.cboe.com/us/equities/membership/fee_schedule/edgx/. This range is based on a review of the fees
charged for 10-40Gb connections at each of these exchanges and
relates solely to the physical port fee or connection charge,
excluding co-location fees and other fees assessed by these
exchanges. The Exchange notes that it does not offer physical
connections with lower bandwidth than 10Gb and that Members and non-
Members with lower bandwidth requirements typically access the
Exchange through third-party extranets or service bureaus.
\31\ See id.
\32\ See id.
\33\ As noted above, all physical connections offered by MEMX
are at least 10Gb capable and physical connections provided with
larger bandwidth capabilities will be provided at the same rate as
such connections. MEMX application sessions are capable of handling
significant amount of message traffic (i.e., over 50,000 orders per
second), and have no application flow control or order throttling.
\34\ See supra note 30.
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In conclusion, the Exchange submits that its proposed fee structure
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act
\35\ for the reasons discussed above in that it provides for the
equitable allocation of reasonable dues, fees and other charges among
its Members and other persons using its facilities, does not permit
unfair discrimination between customers, issuers, brokers, or dealers,
and 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, particularly as the proposal neither targets
nor will it have a disparate impact on any particular category of
market participant. As described more fully below in the Exchange's
statement regarding the burden on competition, the Exchange believes
that it is subject to significant competitive forces, and that the
proposed fee structure is an appropriate effort to address such forces.
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\35\ 15 U.S.C. 78f(b)(4) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\36\ the Exchange
does not believe that the proposed rule change would impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.
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\36\ 15 U.S.C. 78f(b)(8).
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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, while
the Exchange has not officially proposed fees until now, Exchange
personnel have been informally discussing potential fees for
connectivity services with a diverse group of market participants that
are connected to the Exchange (including large and small firms, firms
with large connectivity service footprints and small connectivity
service footprints, as well as extranets and service bureaus). The
Exchange has received no official complaints from Members, non-Members
(extranets or service bureaus),
[[Page 2475]]
third-parties that purchase the Exchange's connectivity and resell it,
and customers of those resellers, that the Exchange's fees or the
proposed fees for connectivity services would negatively impact their
abilities to compete with other market participants or that they are
placed at a disadvantage. The Exchange does not believe that the
proposed fees for connectivity services place certain market
participants at a relative disadvantage to other market participants
because the proposed connectivity pricing is associated with relative
usage of the Exchange by each market participant and does not impose a
barrier to entry to smaller participants. As described above, the
connectivity services purchased by market participants typically
increase based on their additional message traffic and/or the
complexity of their operations. The market participants that utilize
more connectivity services typically utilize the most bandwidth, and
those are the participants that consume the most resources from the
network. Accordingly, the proposed fees for connectivity services do
not favor certain categories of market participants in a manner that
would impose a burden on competition; rather, the allocation of the
proposed connectivity fees reflects the network resources consumed by
the various size of market participants and the costs to the Exchange
of providing such connectivity services.
Inter-Market Competition
The Exchange does not believes the proposed fees place an undue
burden on competition on other SROs that is not necessary or
appropriate. In particular, market participants are not forced to
connect to all exchanges, as shown by the number of Members of the
Exchange as compared to the much greater number of members at other
exchanges, as described above. Not only does MEMX have less than half
the number of members as certain other exchanges, but there are also a
number of the Exchange's Members that do not connect directly to the
Exchange. Additionally, other exchanges have similar connectivity
alternatives for their participants, but with higher rates to
connect.\37\ The Exchange is also unaware of any assertion that the
proposed fees for connectivity services would somehow unduly impair its
competition with other exchanges. To the contrary, if the fees charged
are deemed too high by market participants, they can simply disconnect.
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\37\ See supra notes 30-34 and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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 \38\ and Rule 19b-4(f)(2) \39\ thereunder.
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\38\ 15 U.S.C. 78s(b)(3)(A)(ii).
\39\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
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 change should be approved or
disapproved.
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-MEMX-2021-22 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-MEMX-2021-22. 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; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-MEMX-2021-22 and should be
submitted on or before February 4, 2022.
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\40\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00642 Filed 1-13-22; 8:45 am]
BILLING CODE 8011-01-P