[Federal Register Volume 87, Number 22 (Wednesday, February 2, 2022)]
[Notices]
[Pages 5910-5915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02084]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94089; File No. SR-EMERALD-2021-42]


Self-Regulatory Organizations; MIAX Emerald, LLC; Suspension of 
and Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove Proposed Rule Change To Amend the MIAX Emerald Fee Schedule 
To Adopt a Tiered Pricing Structure for Certain Connectivity Fees

January 27, 2022.

I. Introduction

    On December 1, 2021, MIAX Emerald, LLC (``MIAX Emerald'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change (File Number SR-EMERALD-2021-42) 
to amend the Exchange's Fee Schedule (``Fee Schedule'') to adopt a 
tiered pricing structure for certain connectivity fees. The proposed 
rule change was immediately effective upon filing with the Commission 
pursuant to Section 19(b)(3)(A) of the Act.\3\ The proposed rule change 
was published for comment in the Federal Register on December 20, 
2021.\4\ Under Section 19(b)(3)(C) of the Act,\5\ the Commission is 
hereby: (i) Temporarily suspending File Number SR-EMERALD-2021-42; and 
(ii) instituting proceedings to determine whether to approve or 
disapprove File Number SR-EMERALD-2021-42.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take 
effect upon filing with the Commission if it is designated by the 
exchange as ``establishing or changing a due, fee, or other charge 
imposed by the self-regulatory organization on any person, whether 
or not the person is a member of the self-regulatory organization.'' 
15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ See Securities Exchange Act Release No. 93776 (December 14, 
2021), 86 FR 71983 (``Notice'').
    \5\ 15 U.S.C. 78s(b)(3)(C).

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[[Page 5911]]

II. Background and Description of the Proposed Rule Change

    MIAX Emerald has a connectivity infrastructure that permits Members 
and non-Members to connect directly to the Exchange, and access the 
Exchange's trading platforms, market data systems, test systems, and 
disaster recovery facilities.\6\ Prior to implementation of the 
proposed rule change, a market participant connecting to the primary or 
secondary facility of the Exchange options platform via a 10 gigabit 
ultra-low latency (``10Gb ULL'') fiber connection was assessed a 
monthly fee of $10,000 per connection.\7\ The Exchange proposes to 
modify the Fee Schedule to adopt a tiered pricing structure for 10Gb 
ULL fiber connections as follows:
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    \6\ See Notice, supra note 4 at 71984.
    \7\ See id. 1Gb connections to the primary/secondary facility, 
and 1Gb and 10Gb connections to the disaster recovery facility are 
subject to separate monthly charges that are not affected by the 
proposed rule changes.
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     $9,000 each for the 1st and 2nd 10Gb ULL connections;
     $11,000 each for the 3rd and 4th 10Gb ULL connections; and
     $13,000 for each additional connection 10Gb ULL 
connection.\8\
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    \8\ The Exchange initially filed the proposed fee change on July 
30, 2021. See Securities Exchange Act Release No. 92645 (August 11, 
2021), 86 FR 46048 (August 17, 2021) (SR-EMERALD-2021-23). That 
filing was withdrawn by the Exchange. The Exchange filed new 
proposed fee changes with additional justification (SR-EMERALD-2021-
29), which were the subject of a Suspension of and Order Instituting 
Proceedings. See Securities Exchange Act Release No. 93644 (November 
22, 2021), 86 FR 67750 (November 29, 2021). The Exchange 
subsequently withdrew that filing and replaced it with the instant 
filing to provide additional information and a revised justification 
for the proposal, which is discussed herein. See Securities Exchange 
Act Release No. 93736 (December 7, 2021), 86 FR 70878 (December 13, 
2021) (Notice of Withdrawal); see also Notice, supra note 4 at 
71984.
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    These fees (the ``Proposed Access Fees'') are assessed in any month 
the Member or non-Member is credentialed to use any of the Exchange's 
APIs or market data feeds in the Exchange's production environment, 
pro-rated when a Member or non-Member adds or deletes a connection.\9\
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    \9\ See Notice, supra note 4, at 71985. The Exchange state that 
it deems connectivity fees to be access fees, and records these fees 
as part of its ``Access Fees'' revenue in its financial statements. 
Id. at 71985.
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III. Suspension of the Proposed Rule Changes

    Pursuant to Section 19(b)(3)(C) of the Act,\10\ at any time within 
60 days of the date of filing of an immediately effective proposed rule 
change pursuant to Section 19(b)(1) of the Act,\11\ the Commission 
summarily may temporarily suspend the change in the rules of a self-
regulatory organization (``SRO'') 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. As discussed below, the Commission believes a temporary 
suspension of the proposed rule changes is necessary and appropriate to 
allow for additional analysis of the proposed rule changes' consistency 
with the Act and the rules thereunder.
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    \10\ 15 U.S.C. 78s(b)(3)(C).
    \11\ 15 U.S.C. 78s(b)(1).
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    In support of the proposal, the Exchange argues that the proposed 
tiered pricing structure for 10Gb ULL connections is reasonable, 
equitable, and not unfairly discriminatory because the new tiers result 
in a majority of 10Gb ULL purchasers either saving money or paying the 
same amount.\12\ As discussed further below, the Exchange states that 
``a higher fee to a Member or non-Member that utilizes numerous 
connections is directly related to the increased costs the Exchange 
incurs in providing and maintaining those additional connections.'' 
\13\ The Exchange also maintains that the tiered pricing structure will 
encourage Members and non-Members to be more efficient and economical 
when determining how to connect to the Exchange and should better 
enable the Exchange to monitor and provide access to the Exchange's 
network to ensure sufficient capacity and headroom in the System.\14\
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    \12\ See Notice, supra note 4, at 71990. The Exchange states 
that approximately 60% of the firms that purchased at least one 10Gb 
ULL connection experienced a decrease in their monthly connectivity 
fees, while approximately 40% of firms experienced an increase in 
their monthly connectivity fees. See id. at 71991.
    \13\ See id.
    \14\ See Notice, supra note 4, at 71992.
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    In further support of the proposal, the Exchange argues that the 
Proposed Access Fees are reasonable because they will permit recovery 
of the Exchange's costs in providing the associated services and will 
not result in the Exchange generating a supra-competitive profit.\15\ 
Specifically, the Exchange states that the Proposed Access Fees are 
based on a ``cost-plus model,'' designed to result in ``cost recovery 
plus present the possibility of a reasonable return.'' \16\ According 
to the Exchange, employing a ``conservative methodology'' that 
``strictly considers only those costs that are most clearly directly 
related to the provision and maintenance of 10Gb ULL connectivity,'' it 
estimates the total projected 2021 cost to offer 10Gb ULL connections 
at $7.2 million, representing $1.7 million in third-party cost and $5.5 
million in internal cost.\17\ To arrive at these figures, the Exchange 
states that it undertook a thorough internal analysis of nearly every 
expense on each Exchange's general expense ledger to determine whether 
each such expense related to the Proposed Access Fees, and, if such 
expense did so relate, to determine what portion (or percentage) of 
such expense supported the access services.\18\ The Exchange states 
that this process entailed discussions with each Exchange department 
head to identify the expenses that support the access services 
associated with the Proposed Access Fees, review of the expenses 
holistically on an Exchange-wide level with assistance from the 
internal finance department, and then assessment of the total expense, 
with no expense allocated twice.\19\
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    \15\ See id. at 71985, 71987.
    \16\ See id. at 71986.
    \17\ See id. at 71986, 71987, 71988, 71989. The 2021 costs are 
projected because the Exchange's most recent Audited Unconsolidated 
Financial Statement is for 2020, with projections utilizing the same 
presentation methodology as used in their previously-filed Audited 
Financial Statements. See id. at 71986.
    \18\ See id. at 71986.
    \19\ See id. at 71987. The Exchange also states that the $7.2 
million in 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, and does not include general 
costs of operating matching engines and other trading technology. 
Id. at 71987.
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    The Exchange states that the $1.7 million projected 2021 third-
party expense is the sum of fees paid to: (1) Equinix, for data center 
services (approximately 62% of the Exchange's total applicable Equinix 
expense); (2) Zayo Group Holdings, Inc. for network services 
(approximately 62%); (3) various other services providers, including 
``Secure Financial Transaction Infrastructure'' (``SFTI'') 
(approximately 89%); and (4) various other hardware and software 
providers (approximately 51%).\20\ Likewise, the Exchange states that 
the $5.5 million projected 2021 internal expense, is the sum of: (1) 
Employee compensation and benefits expense allocated to the Proposed 
Access Fees ($3.2 million, which is 33% of the total projected expense 
of $9.7 million for employee compensation and benefits); \21\ (2)

[[Page 5912]]

depreciation and amortization expense allocated to the Proposed Access 
Fees ($2 million, which the Exchange estimated as 63% of the total 
projected expense of $3.1 million for depreciation and amortization); 
and (3) occupancy expense ($0.3 million, which the Exchange estimated 
as 53% of the Exchange's total projected expense of $0.5 million for 
occupancy). Converting the projected annualized expense figure to a 
monthly figure, the Exchange estimates an average monthly cost of 
offering the services associated with the Proposed Access Fees at 
$600,000.\22\
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    \20\ See id. at 71988-99.
    \21\ For employee compensation and benefit costs, for example, 
the Exchange included 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). 
See id. at 71989.
    \22\ See id. at 71990.
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    Regarding revenue, the Exchange represents that revenue for the 
month of October 2021 was approximately $1,146,714 (including pro-rated 
charges), attributable to the purchase of 100 10Gb ULL connections at 
the proposed tiered rates. Accordingly, the Exchange calculated a 
$546,714 monthly profit for October 2021 and a profit margin of 47%. As 
a baseline, the Exchange used revenue for July 2021 before introduction 
of the Proposed Access Fees, which it represented was $971,905, 
attributable to the purchases of a total of 98 10Gb ULL connections, to 
calculate the baseline monthly profit margin of 38%.
    The Exchange maintains that a 9% profit margin increase from July 
2021 (before introduction of the Proposed Access Fees) to October 2021 
(after the introduction of the Proposed Access Fees) is reasonable.\23\ 
The Exchange also argues that a 47% rate of return is reasonable 
because it will allow them to ``to continue to recoup its expenses and 
continue to invest in its technology infrastructure.'' \24\ The 
Exchange adds that this profit margin does not take into account: (i) 
Fluctuations in revenue as a result of Members and non-Members adding 
and dropping connections at any time based on their own business 
decisions, which they frequently do; (ii) future price increases from 
third parties; and (iv) inflationary pressure on capital items that it 
needs to purchase to maintain the Exchange's technology and systems, 
which have resulted in price increases upwards of 30% on network 
equipment due to supply chain shortages, and in turn result in higher 
overall costs associated with ongoing system maintenance.\25\ In 
addition, although the Exchange does not assert that competitive forces 
constrain the Proposed Access Fees, it maintains that the Proposed 
Access Fees are reasonable when compared to the fees of other options 
exchanges, as the Exchange's proposed fees for 10Gb ULL connections 
even at the proposed highest tier are lower than those of other options 
exchanges with similar market share.\26\
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    \23\ See id.
    \24\ Id.
    \25\ Id. at 71986-87 and 71990.
    \26\ Id. at 71992. The Exchange asserts that when compared to 
fees charged by and market shares (for the month of November 2021, 
as of November 26, 2021) for The NASDAQ Stock Market LLC 
(``Nasdaq''), Nasdaq ISE LLC (``ISE''), Nasdaq PHLX LLC (``Phlx''), 
and NYSE American LLC, the Exchange's proposed tiered pricing 
structure is ``significantly lower'' than these competing options 
exchanges with similar market share. Id. For example, the Exchange 
states that the affiliated exchanges Nasdaq, ISE and Phlx charge a 
monthly fee of $10,000 per 10Gb fiber connection and $15,000 per 
10Gb Ultra fiber connection, while the highest tier of the 
Exchange's proposed fee structure is $2,000 less per month. Id.
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    As noted above, the Exchange also argues that the tiered structure 
of the Proposed Access Fees results in an equitable allocation of fees 
that are not unfairly discriminatory, noting that after implementation 
of the Proposed Access Fees, a majority of 10Gb ULL purchasers either 
were saving money or paying the same amount.\27\ The Exchange further 
explains that firms that primarily route orders for best execution 
generally only need a limited number of connections to fulfill that 
obligation and connectivity costs will likely to be lower for these 
firms.\28\ Addressing the fee increases experienced by some 10Gb ULL 
purchasers, the Exchange urges that the increases for these firms are 
justified because the new fees ``apply to all Members and non-Members 
in the same manner based on the amount of 10Gb ULL connectivity they 
require based on their own business decisions and usage of Exchange 
resources.'' \29\ The Exchange explains that the firms experiencing 
higher fees are those engaged in advanced trading strategies that 
typically require multiple connections and generate higher costs for 
the Exchange by utilizing more of the Exchange's resources.\30\ 
Responding to prior comment that the Exchange had not demonstrated that 
a firm purchasing more than two or four 10Gb ULL connections would use 
Exchange resources at a greater rate per connection than those 
purchasing fewer, the Exchange states that ``more connections purchased 
by a firm likely results in greater expenditure of Exchange resources 
and increased cost to the Exchange.'' \31\ The Exchange describes firms 
that primarily route orders seeking best-execution and purchase only a 
limited number of connections as those that ``also generally send less 
orders and messages over those connections, resulting in less strain on 
Exchange resources.'' \32\ In contrast the Exchange describes firms 
that purchase more than two to four 10Gb ULL connections as those that 
``essentially do so for competitive reasons amongst themselves and 
choose to utilize numerous connections based on their business needs 
and desire to attempt to access the market quicker by using the 
connection with the least amount of latency.'' \33\ According to the 
Exchange, these firms are generally engaged in sending liquidity-
removing orders to the Exchange and seek to add more connections so 
they can access resting liquidity ahead of their competitors, and this 
type of usage of the 10Gb ULL connections is more costly to the 
Exchange, as a result of, among other things, frequently adding and 
dropping connections mid-month to determine which connections have the 
least latency, which results in increased costs to the Exchange to 
constantly make changes in the data center which results in 
``disproportionate pull on Exchange resources to provide the additional 
connectivity.'' \34\
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    \27\ See id. at 71991. The Exchange state that approximately 60% 
of the firms that purchased at least one 10Gb ULL connection 
experienced a decrease in their monthly connectivity fees, while 
approximately 40% of firms experienced an increase in their monthly 
connectivity fees as a result of the proposed tiered pricing 
structure when compared to the flat monthly fee structure. See id.
    \28\ See id. at 71991.
    \29\ See id.
    \30\ See id.
    \31\ See id.
    \32\ See id.
    \33\ See id.
    \34\ See id. at 71991-92.
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    To date, the Commission has not received any comment letters on the 
revised justifications for the Proposed Access Fees.
    When exchanges file their proposed rule changes with the 
Commission, including fee filings like the Exchange's present proposal, 
they are required to provide a statement supporting the proposal's 
basis under the Act and the rules and regulations thereunder applicable 
to the exchange.\35\ The instructions to Form 19b-4, on which exchanges 
file their proposed rule changes, specify that such statement ``should 
be sufficiently detailed and specific to support a finding that the 
proposed rule change is consistent with [those] requirements.'' \36\
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    \35\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory 
Organization's Statement of the Purpose of, and Statutory Basis for, 
the Proposed Rule Change'').
    \36\ Id.

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[[Page 5913]]

    Section 6 of the Act, including Sections 6(b)(4), (5), and (8), 
require the rules of an exchange to (1) provide for the equitable 
allocation of reasonable fees among members, issuers, and other persons 
using the exchange's facilities; \37\ (2) perfect the mechanism of a 
free and open market and a national market system, protect investors 
and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers; \38\ 
and (3) not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\39\
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    \37\ 15 U.S.C. 78f(b)(4).
    \38\ 15 U.S.C. 78f(b)(5).
    \39\ 15 U.S.C. 78f(b)(8).
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    In temporarily suspending the Exchange's fee changes, the 
Commission intends to further consider whether the proposals to modify 
fees for certain connectivity options and implement a tiered pricing 
fee structure is consistent with the statutory requirements applicable 
to a national securities exchange under the Act. In particular, the 
Commission will consider whether the proposed rule changes satisfy the 
standards under the Act and the rules thereunder requiring, among other 
things, that an exchange's rules provide for the equitable allocation 
of reasonable fees among members, issuers, and other persons using its 
facilities; not permit unfair discrimination between customers, 
issuers, brokers or dealers; and do not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\40\
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    \40\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule changes.\41\
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    \41\ For purposes of temporarily suspending the proposed rule 
changes, the Commission has considered the proposed rules' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change

    In addition to temporarily suspending the proposal, the Commission 
also hereby institutes proceedings pursuant to Sections 19(b)(3)(C) 
\42\ and 19(b)(2)(B) \43\ of the Act to determine whether the proposed 
rule change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change to inform the Commission's analysis of 
whether to approve or disapprove the proposed rule change.
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    \42\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \43\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\44\ the Commission is 
providing notice of the grounds for possible disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of whether the Exchange has sufficiently 
demonstrated how the proposed rule change is consistent with Sections 
6(b)(4),\45\ 6(b)(5),\46\ and 6(b)(8) \47\ of the Act. Section 6(b)(4) 
of the Act requires that the rules of a national securities exchange 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using its 
facilities. Section 6(b)(5) of the Act requires that the rules of a 
national securities exchange be designed, among other things, 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 not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers. Section 6(b)(8) of the Act 
requires that the rules of a national securities exchange not impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
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    \44\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
See id. The time for conclusion of the proceedings may be extended 
for up to 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding, or if the 
exchange consents to the longer period. See id.
    \45\ 15 U.S.C. 78f(b)(4).
    \46\ 15 U.S.C. 78f(b)(5).
    \47\ 15 U.S.C. 78f(b)(8).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice, in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following aspects of the proposals and asks 
commenters to submit data where appropriate to support their views:
    1. Cost Estimates and Allocation. The Exchange states that it is 
not asserting that the Proposed Access Fee are constrained by 
competitive forces, but rather sets forth a ``cost-plus model,'' 
employing a ``conservative methodology'' that ``strictly considers only 
those costs that are most clearly directly related to the provision and 
maintenance of 10Gb ULL connectivity to estimate such costs.'' \48\ 
Setting forth its costs in providing 10Gb ULL connectivity, and as 
summarized in greater detail above, the Exchange projects $7.2 million 
in aggregate annual estimated costs for 2021 as the sum of: (1) $1.7 
million in third-party expenses paid in total to Equinix (62% of the 
total applicable expense) for data center services; Zayo Group 
Holdings, for network services (62% of the total applicable expense); 
SFTI for connectivity support, Thompson Reuters, NYSE, Nasdaq, and 
Internap and others (89% of the total applicable expense) for content, 
connectivity services, and infrastructure services; and various other 
hardware and software providers (51% of the total applicable expense) 
supporting the production environment, and (2) $5.5 million in internal 
expenses, allocated to (a) employee compensation and benefit costs 
($3.2 million, approximately 33% of the Exchange's total applicable 
employee compensation and benefits expense); (b) depreciation and 
amortization ($2 million, approximately 63% of the Exchange's total 
applicable depreciation and amortization expense); and (c) occupancy 
costs ($0.3 million, approximately 53% of the Exchange's total 
applicable occupancy expense). Do commenters believe that the Exchange 
has provided sufficient detail about how it determined which costs are 
most clearly directly associated with providing and maintaining 10Gb 
ULL connectivity? The Exchange describes a process involving all 
Exchange department heads, including the finance department, but do not 
specify further what principles were applied in making these 
determinations or arriving at particular allocations. Do commenters 
believe further explanation is necessary? For employee compensation and 
benefit costs, for example, the Exchange calculated an allocation of 
employee time in several departments, including

[[Page 5914]]

Technology, Back Office, Systems Operations, Networking, Business 
Strategy Development, Trade Operations, Finance, and Legal, but did not 
provide the job titles and salaries of persons whose time was accounted 
for, or explain the methodology used to determine how much of an 
employee's time is devoted to that specific activity. What are 
commenters' views on whether the Exchange has provided sufficient 
detail on the identity and nature of services provided by third 
parties? Across all of the Exchange's projected costs, what are 
commenters' views on whether the Exchange has provided sufficient 
detail on the elements that go into connectivity costs, including how 
shared costs are allocated and attributed to connectivity expenses, to 
permit an independent review and assessment of the reasonableness of 
purported cost-based fees and the corresponding profit margin thereon? 
Should the Exchange be required to identify for what services or fees 
the remaining percentage of un-allocated expenses are attributable to 
(e.g., what services or fees are associated with the 37% of applicable 
depreciation and amortization expenses the Exchange does not allocate 
to the Proposed Access Fees)? Do commenters believe that the costs 
projected for 2021 are generally representative of expected costs going 
forward (to the extent commenters consider 2021 to be a typical or 
atypical year), or should an exchange present an estimated range of 
costs with an explanation of how profit margins could vary along the 
range of estimated costs?
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    \48\ See Notice, supra note 4, at 71986 and n.28.
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    2. Revenue Estimates and Profit Margin Range. The Exchange provides 
a single monthly revenue figure as the basis for calculating the profit 
margin of 47%. Do commenters believe this is reasonable? If not, why 
not? The Exchange states that their proposed fee structure is 
``designed to cover its costs with a limited return in excess of such 
costs,'' and believes that a 47% margin is such a limited return over 
such costs.\49\ The profit margin is also dependent on the accuracy of 
the cost projections which, if inflated (intentionally or 
unintentionally), may render the projected profit margin meaningless. 
The Exchange acknowledges that this margin may fluctuate from month to 
month due to changes in the number of connections purchased, and that 
costs may increase.\50\ The Exchange does not account for the 
possibility of cost decreases, however. What are commenters' views on 
the extent to which actual costs (or revenues) deviate from projected 
costs (or revenues)? Do commenters believe that the Exchange's 
methodology for estimating the profit margin is reasonable? Should the 
Exchange provide a range of profit margins that it believes are 
reasonably possible, and the reasons therefor?
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    \49\ See Notice, supra note 4, at 71986, 71990.
    \50\ See id.
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    3. Reasonable Rate of Return. Do commenters agree with the Exchange 
that its expected 47% profit margin would constitute a reasonable rate 
of return over cost for 10GB ULL connectivity? If not, what would 
commenters consider to be a reasonable rate of return and/or what 
methodology would they consider to be appropriate for determining a 
reasonable rate of return? What are commenters' views regarding what 
factors should be considered in determining what constitutes a 
reasonable rate of return for 10Gb ULL connectivity fees? Do commenters 
believe it relevant to an assessment of reasonableness that the 
Exchange's proposed fees for 10Gb ULL connections, even at the highest 
tier, are lower than those of other options exchanges to which the 
Exchange has compared the Proposed Access Fees? What are commenters' 
views regarding the difference in profit margins between the Exchange, 
at 47%, and that of its affiliates (MIAX and PEARL Options), at 21.3%? 
Do commenters believe that this profit margin difference between 
affiliates for the same Proposed Access Fees is appropriate given the 
Exchange's Proposed Access Fees are not for shared 10Gb ULL 
connectivity; why or why not? Should an assessment of reasonable rate 
of return include consideration of factors other than costs; and if so, 
what factors should be considered, and why?
    4. Periodic Reevaluation. The Exchange has not addressed whether it 
believes a material deviation from the anticipated profit margin would 
warrant the need to make a rule filing pursuant to Section 19(b) of the 
Act to increase or decrease the fees accordingly. In light of the 
impact that the number of subscribers has on connectivity profit 
margins, and the potential for costs to decrease (or increase) over 
time, what are commenters' views on the need for exchanges to commit to 
reevaluate, on an ongoing and periodic basis, their cost-based 
connectivity fees to ensure that they stay in line with their stated 
profitability target and do not become unreasonable over time, for 
example, by failing to adjust for efficiency gains, cost increases or 
decreases, and changes in subscribers? How formal should that process 
be, how often should that reevaluation occur, and what metrics and 
thresholds should be considered? How soon after a new connectivity fee 
change is implemented should an exchange assess whether its subscriber 
estimates were accurate and at what threshold should an exchange commit 
to file a fee change if its estimates were inaccurate? Should an 
initial review take place within the first 30 days after a connectivity 
fee is implemented? 60 days? 90 days? Some other period?
    5. Tiered Structure for 10Gb ULL Connections. The Exchange states 
that the proposed tiered fee structure is designed to decrease the 
monthly fees for those firms that connect to the Exchange as part of 
their best execution obligations and generally tend to send the least 
amount of orders and messages over those connections, because such 
firms generally only purchase a limited number of connections, and also 
``generally send less orders and messages over those connections, 
resulting in less strain on Exchange resources.'' \51\ According to the 
Exchange, 60% of firms have not experienced a fee increase as a result 
of the tiered structure. However, firms that purchase five or more 
connections will see a 30% increase in their fees for each connection 
above the fourth. Regarding these firms, the Exchange has not asserted 
that it is 30% more costly for the Exchange to offer such connections 
to these firms, but instead argue generally that these firms are 
``likely'' to result in greater expenditure of Exchange resources and 
increased cost to the Exchange.\52\ Do commenters believe that the 
price differences between the tiers are supported by the Exchange's 
assertion that it set the level of its proposed fees in a manner that 
it is equitable and not unfairly discriminatory? Do commenters believe 
the Exchange should demonstrate how the proposed tiered fee levels 
correlate with tiered costs (e.g., by providing cost information broken 
down by tier, messaging and order volumes through the additional 10Gb 
ULL connections by tier, and/or mid-month add/drop of connection rates 
by tier)? Do commenters believe that the Exchange should provide more 
detail about the costs that firms purchasing three or more or five or 
more 10Gb ULL connections impose on the Exchange, to permit an 
assessment of the Exchange's statement that the Proposed Access Fees 
``do not depend on any distinctions between Members, customers, broker-
dealers, or any other entity, because they are solely determined by the 
individual Member's or non-Member's

[[Page 5915]]

business needs and its impact on the Exchange resources?'' \53\
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    \51\ See Notice, supra note 4, at 71991.
    \52\ See id.
    \53\ See id.
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
[SRO] that proposed the rule change.'' \54\ The description of a 
proposed rule change, its purpose and operation, its effect, and a 
legal analysis of its consistency with applicable requirements must all 
be sufficiently detailed and specific to support an affirmative 
Commission finding,\55\ and any failure of an SRO to provide this 
information may result in the Commission not having a sufficient basis 
to make an affirmative finding that a proposed rule change is 
consistent with the Act and the applicable rules and regulations.\56\ 
Moreover, ``unquestioning reliance'' on an SRO's representations in a 
proposed rule change would not be sufficient to justify Commission 
approval of a proposed rule change.\57\
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    \54\ 17 CFR 201.700(b)(3).
    \55\ See id.
    \56\ See id.
    \57\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 446-47 (D.C. Cir. 2017) (rejecting the 
Commission's reliance on an SRO's own determinations without 
sufficient evidence of the basis for such determinations).
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    The Commission believes it is appropriate to institute proceedings 
to allow for additional consideration and comment on the issues raised 
herein, including as to whether the proposals are consistent with the 
Act, any potential comments or supplemental information provided by the 
Exchange, and any additional independent analysis by the Commission.

V. Request for Written Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. In particular, the Commission invites the written views of 
interested persons concerning whether the proposal is consistent with 
Sections 6(b)(4), 6(b)(5), and 6(b)(8), or any other provision of the 
Act, or the rules and regulations thereunder. The Commission asks that 
commenters address the sufficiency and merit of the Exchange's 
statements in support of the proposal, in addition to any other 
comments they may wish to submit about the proposed rule change. 
Although there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\58\
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    \58\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by an SRO. See Securities 
Acts Amendments of 1975, Report of the Senate Committee on Banking, 
Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th 
Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by February 23, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
March 9, 2022.
    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 No. SR-EMERALD-2021-42 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-2021-42. 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 changes that are filed 
with the Commission, and all written communications relating to the 
proposed rule changes 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 filings also will be available 
for inspection and copying at the principal office of each 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-2021-42 and should 
be submitted on or before February 23, 2022. Rebuttal comments should 
be submitted by March 9, 2022.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\59\ that File Number SR-EMERALD-2021-42 be, and hereby is, 
temporarily suspended. In addition, the Commission is instituting 
proceedings to determine whether the proposed rule change should be 
approved or disapproved.
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    \59\ 15 U.S.C. 78s(b)(3)(C).
    \60\ 17 CFR 200.30-3(a)(57) and (58).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\60\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02084 Filed 2-1-22; 8:45 am]
BILLING CODE 8011-01-P