[Federal Register Volume 87, Number 54 (Monday, March 21, 2022)]
[Notices]
[Pages 16046-16057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-05842]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94419; File No. SR-MEMX-2022-02]


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

March 15, 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 March 1, 2022, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 March 1, 2022. The text of the proposed 
rule change is provided in Exhibit 5.
---------------------------------------------------------------------------

    \3\ See Exchange Rule 1.5(p).
---------------------------------------------------------------------------

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 Exchange is re-filing its proposal to amend the Fee Schedule 
regarding fees the Exchange charges 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 is proposing to implement the proposed fees on 
March 1, 2022.
    The Exchange filed its Initial Proposal on December 30, 2021,\4\ 
and began

[[Page 16047]]

charging fees for connectivity services for the first time in January 
of 2022. On February 28, 2022, the Commission suspended the Initial 
Proposal and asked for comments on several questions.\5\ The Exchange 
has collected fees for connectivity services for two months now and is 
thus able to supplement its filing with additional details that were 
not available at the time of filing of the Initial Proposal and is also 
able to respond to certain questions raised in the OIP. As set forth 
below, the Exchange believes that the Initial Proposal provided a great 
deal of transparency regarding the cost of providing connectivity 
services and anticipated revenue and that the Initial Proposal was 
consistent with the Act and associated guidance. The Exchange is re-
filing this proposal promptly with the intention of maintaining the 
existing fees for connectivity services while at the same time 
providing additional details responsive to certain questions raised in 
the OIP. The Exchange believes that this approach is appropriate and 
fair for competitive reasons as several other exchanges currently 
charge for similar services, as described below, and because others 
have followed a similar approach when adopting fees.\6\
---------------------------------------------------------------------------

    \4\ The Exchange received one comment letter on the Initial 
Proposal, which asserted that the Exchange did not address the 
Exchange's ownership structure and that revenues from connectivity 
services could have a ``disparate impact'' on certain Members. See 
Letter from Tyler Gellasch, Healthy Markets Association, dated 
January 26, 2022. The Exchange notes that the ownership of an 
exchange by members is not unprecedented and that the ownership 
structure of the Exchange and related issues were addressed during 
the process of the Exchange's registration as a national securities 
exchange. See Securities Exchange Act Release No. 88806 (May 4, 
2020), 85 FR 27451 (May 8, 2020) (approval order related to the 
application of MEMX LLC to register as a national securities 
exchange). The Exchange does not believe that the Initial Proposal 
or this proposal raises any new issues that have not been previously 
addressed.
    \5\ See Securities Exchange Act Release No. 94332 (February 28, 
2022) (SR-MEMX-2021-22) (Suspension of and Order Instituting 
Proceedings to Determine Whether to Approve or Disapprove Proposed 
Rule Change to Amend the Exchange's Fee Schedule to Adopt 
Connectivity Fees) (the ``OIP'').
    \6\ See, e.g., Securities Exchange Act Release No. 87875 
(December 31, 2019), 85 FR 770 (January 7, 2020) (SR-MIAX-2019-51) 
(notice of filing and immediate effectiveness of changes to the 
Miami International Securities Exchange LLC, or ``MIAX'', fee 
schedule). The Exchange notes that the MIAX filing was the eighth 
filing by MIAX to adopt the fees proposed for certain connectivity 
services following multiple times of withdrawing and re-filing the 
proposal. The Exchange notes that MIAX charged the applicable fees 
throughout this period while working to develop a filing that met 
the new standards being applied to fee filings. See also Fee 
Guidance, infra note 13.
---------------------------------------------------------------------------

    As set forth in the Initial Proposal and this filing, the Exchange 
does incur significant costs related to the provision of connectivity 
services and believes it should be permitted to continue charging for 
such services while also providing additional time for public comment 
on the level of detail contained in this proposal and other questions 
posed in the OIP. Finally, the Exchange does not believe that the 
ability to charge fees for connectivity services or the level of the 
Exchange's proposed fees are at issue, but rather, that the level of 
detail required to be included by the Exchange when adopting such fees 
is at issue. For these reasons, the Exchange believes it is appropriate 
to re-file this proposal and to continue charging for connectivity 
services.
    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.
    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 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,\7\ and Rule 19b-4 
thereunder,\8\ with respect to the types of information self-regulatory 
organizations (``SROs'') should provide when filing fee changes, and 
Section 6(b) of the Act,\9\ which requires, among other things, that 
exchange fees be reasonable and equitably allocated,\10\ not designed 
to permit unfair discrimination,\11\ and that they not impose a burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act.\12\ 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.\13\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(1).
    \8\ 17 CFR 240.19b-4.
    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(8).
    \13\ 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.
---------------------------------------------------------------------------

    Prior to January 3, 2022, MEMX did 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 \14\) 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

[[Page 16048]]

Data Center, as further described below.\15\
---------------------------------------------------------------------------

    \14\ 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.
    \15\ 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. MEMX will 
not return pro-rated fees even if a product is not used for an 
entire month.
---------------------------------------------------------------------------

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).\16\ 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.
---------------------------------------------------------------------------

    \16\ The Exchange is not proposing to adopt fees for market data 
in this filing but anticipates filing for such fees in the near 
future. In the meantime, the Exchange has proposed noting in Exhibit 
5 that the Exchange does not charge for market data. MEMX notes that 
it has separately filed a proposal to modify transaction pricing 
(though such changes are not directly related to the costs described 
in this filing), which is also to be effective March 1, 2022.
---------------------------------------------------------------------------

    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.
    The following chart details the individual line-item costs 
considered by MEMX to be related to offering physical connectivity.

------------------------------------------------------------------------
                        Costs drivers                            Costs
------------------------------------------------------------------------
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
                                                             -----------
  Total.....................................................     795,789
------------------------------------------------------------------------

    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 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.

------------------------------------------------------------------------
                        Costs drivers                            Costs
------------------------------------------------------------------------
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
                                                             -----------
  Total.....................................................     347,926
------------------------------------------------------------------------

    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

[[Page 16049]]

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 any core services (including 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 and used the same Cost 
Analysis to form the basis of this proposal and the filing it intends 
to submit proposing fees for proprietary data feeds offered by the 
Exchange. 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 salaries of those same personnel were 
allocated only 2.5% to application sessions and the remaining 22.5% was 
allocated to transactions and market data. 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. In turn, the 
Exchange allocated the remaining 78.5% of its Human Resources expense 
to membership (less than 1%) and transactions and market data (77.5%). 
Thus, again, the Exchange's allocations of cost across core services 
were based on real costs of operating the Exchange and were not double-
counted across the core services or their associated revenue streams.
    As another example, the Exchange allocated depreciation expense to 
all core services, including 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 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 
allocated the remaining depreciation and amortization expense 
(approximately 73%) toward the cost of providing transaction services 
and market data.
    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.
    Looking at the Exchange's operations holistically, the total 
monthly costs to the Exchange for offering core services is $3,954,537. 
Based on the initial two months of billing for connectivity services, 
the Exchange expects to collect its original estimate of $1,233,750 on 
a monthly basis for such services.\17\ Incorporating this amount into 
the Exchange's overall projected revenue, including projections related 
to market data fees that have not yet been proposed and which the 
Exchange will not begin collecting until April 2022, subject to filing 
the necessary proposal to adopt such fees, the Exchange anticipates 
monthly revenue ranging from $4,296,950 to $4,546,950 from all sources 
(i.e., connectivity fees and membership fees that were introduced in 
January 2022, transaction fees, and revenue from market data, both 
through the fees anticipated to be adopted in April 2022 and through 
the revenue received from the SIPs). As such, applying the Exchange's 
holistic Cost Analysis to a holistic view of anticipated revenues, the 
Exchange would earn approximately 8.5% to 15% margin on its operations 
as a whole. The Exchange believes that this amount is reasonable.
---------------------------------------------------------------------------

    \17\ The Exchange notes that it has charged connectivity 
services for two months and so far the average amount expected 
(because not all February bills have yet been paid) is very close to 
the estimated revenue provided in the Initial Proposal. 
Specifically, the Exchange has earned an estimated $1,229,125 for 
connectivity services on an average basis over January and February. 
As such, the Exchange will continue to use its original estimated 
revenue of $1,233,750 in this proposal.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimates are based on 
projections across all potential revenue streams and will only be 
realized to the extent such revenue streams actually produce the 
revenue estimated. As a new entrant to the hyper-competitive exchange 
environment, and an exchange focused on driving competition, the 
Exchange does not yet know whether such

[[Page 16050]]

expectations will be realized. For instance, in order to generate the 
revenue expected from connectivity, the Exchange will have to be 
successful in retaining existing clients that wish to maintain physical 
connectivity and/or application sessions or in obtaining new clients 
that will purchase such services. Similarly, the Exchange will have to 
be successful in retaining a positive net capture on transaction fees 
in order to realize the anticipated revenue from transaction pricing.
    To the extent the Exchange is successful in gaining market share, 
improving its net capture on transaction fees, encouraging new clients 
to connect directly to the Exchange, and other developments that would 
help to increase Exchange revenues, the Exchange does not believe it 
should be penalized for such success. The Exchange, like other 
exchanges, is, after all, a for-profit business. Accordingly, while the 
Exchange believes in transparency around costs and potential margins, 
the Exchange does not believe that these estimates should form the sole 
basis of whether or not a proposed fee is reasonable or can be adopted. 
Instead, the Exchange believes that the information should be used 
solely to confirm that an Exchange is not earning supra-competitive 
profits, and the Exchange believes its Cost Analysis and related 
projections demonstrate this fact.
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 \18\) 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 February 28, 2022, 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.
---------------------------------------------------------------------------

    \18\ See supra note 14.
---------------------------------------------------------------------------

    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 did not charge any fees for connectivity services prior to 
January 2022, 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 March 1, 2022. The Exchange has separately 
proposed to make certain changes to Exchange transaction fees effective 
March 1, 2022, and intends to propose in a separate filing market data 
fees effective April 1, 2022.

[[Page 16051]]

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 \19\) 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 February 28, 2022, 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.
---------------------------------------------------------------------------

    \19\ See supra note 14.
---------------------------------------------------------------------------

    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.
    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 did not charge any fees for 
connectivity services prior to January 2022, 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.\20\
---------------------------------------------------------------------------

    \20\ 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.
---------------------------------------------------------------------------

    The proposed fee for application sessions is effective on filing 
and will become operative on March 1, 2022. The Exchange has separately 
proposed to make certain changes to Exchange transaction fees effective 
March 1, 2022, and intends to propose in a separate filing market data 
fees effective April 1, 2022.
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 total connectivity services fees. While Members 
with a business model that

[[Page 16052]]

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.
    Because the Exchange has already adopted fees for connectivity 
services, the Exchange has initial results of the impact such fees have 
had on Member and non-Member usage of connectivity services. Since the 
fees went into effect as set forth in the Initial Proposal, nine (9) 
customers with physical connectivity to the Exchange have canceled one 
or more of their physical connections. In each instance, the customer 
told the Exchange that its reason for cancelling its connectivity was 
the imposition of fees. Of these customers, two (2) customers canceled 
services entirely, three (3) maintained at least one physical 
connection provided directly by the Exchange, and the remaining four 
(4) customers migrated to alternative sources of connectivity through a 
third-party provider. As such, some market participants (one market 
data provider and one extranet) determined that they no longer wanted 
to connect to the Exchange directly or through a third party as it was 
not necessary for their business and their initial connection was only 
worthwhile so long as services were provided free of charge. Other 
market participants (one market data provider, one extranet and one 
Member) determined that they still wished to be directly connected to 
the Exchange but did not need as many connections. Finally, some market 
participants (one market data provider, one service bureau and two 
trading participants) determined that there was a more affordable 
alternative through a third party provider of connectivity services. As 
a general matter, the customers that discontinued use of physical 
connectivity or transitioned to a third party provider of connectivity 
services were either connected purely to consume market data for their 
own purposes or distribution to others, were themselves extranets or 
service bureaus providing alternatives to the Exchange's connectivity 
services, or were smaller trading firms.
    Additionally, since the Exchange began charging for application 
sessions, five (5) customers have canceled a total of thirty (30) 
application sessions due to the fees adopted by the Exchange. As a 
general matter, these customers determined that the number of 
application sessions that they maintained was not necessary in order to 
participate on the Exchange.
    Based on its experience since adopting the proposed fees in 
January, the Exchange believes that there is ample evidence showing 
that it is subject to competitive forces when setting fees for physical 
connectivity and application sessions. Indeed, the evidence shows that 
firms can choose not to purchase those services, reduce consumption, or 
rely on external third-party providers in response to proposed fees. 
These competitive forces ensure that the Exchange cannot charge supra-
competitive fees for connectivity services. In fact, as a new entrant 
to the exchange industry, the Exchange is particularly subject to 
competitive forces and has carefully crafted its current and proposed 
fees with the goal of growing its business. In this environment, the 
Exchange has no ability to set fees at levels that would be deemed 
supra-competitive as doing so would limit the Exchange's ability to 
compete with its larger, established competitors.
    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'').\21\ 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.\22\ 
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. As noted above, 
based on early results, the adoption of fees has led to certain firms 
reducing the number of application sessions maintained now that such 
sessions are no longer provided free of charge. 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.\23\
---------------------------------------------------------------------------

    \21\ 17 CFR 242.1000-1007.
    \22\ 17 CFR 242.1001(a).
    \23\ 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.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) \24\ of the Act in general, and 
furthers the objectives of Section 6(b)(4) \25\ 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) \26\ 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.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f.
    \25\ 15 U.S.C. 78f(b)(4).
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has repeatedly expressed its preference for 
competition

[[Page 16053]]

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.'' \27\ 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.\28\
---------------------------------------------------------------------------

    \27\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \28\ See infra notes 35-40 and accompanying text.
---------------------------------------------------------------------------

    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 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

[[Page 16054]]

the number of application sessions maintained.
    As described above, the Exchange has seen certain Members and non-
Members discontinue or change their usage of connectivity services 
provided by the Exchange in response to the fees adopted by the 
Exchange. Specifically, nine (9) participants reduced or discontinued 
use of connectivity services provided directly by the Exchange and five 
(5) participants reduced the number of application sessions used to 
participate on the Exchange. The Exchange believes that this 
demonstrates that not all market participants are required to use 
connectivity services provided by the Exchange but can instead choose 
to participate on the Exchange through a third-party provider of 
connectivity services, indirectly through another Member of the 
Exchange, or not at all. The Exchange also notes that of the 
participants that reduced or discontinued their use of connectivity 
services, several were in fact third-party providers of connectivity 
services, which demonstrates that such providers will connect to the 
Exchange to the extent they have sufficient clients to whom they can 
provide connectivity services and make a profit but they will not 
connect if this is not the case.
    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 approximately 
4.3% market share of the U.S. equities industry in February 2022.\29\ 
The Exchange is not aware of any evidence that a market share of 
approximately 4% provides the Exchange with supra-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.
---------------------------------------------------------------------------

    \29\ Market share percentage calculated as of February 28, 2022. 
The Exchange receives and processes data made available through 
consolidated data feeds (i.e., CTS and UTDF).
---------------------------------------------------------------------------

    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.\30\ If all market 
participants were required to be Members of the 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.
---------------------------------------------------------------------------

    \30\ 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/.
---------------------------------------------------------------------------

    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. The Exchange 
reiterates that several Members and non-Members did in fact reduce or 
discontinue use of connectivity services provided directly by the 
Exchange in response to the fees adopted by the Exchange. 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 supra-competitive 
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.
    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

[[Page 16055]]

proposed fees but, as discussed, several market participants have in 
fact modified the way that they connect to the Exchange in response to 
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 supra-
competitive 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.\31\ 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.
---------------------------------------------------------------------------

    \31\ See supra note 17.
---------------------------------------------------------------------------

    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 supra-
competitive profits is one of several potential factors in considering 
whether an exchange's proposed fees are consistent with the Act.\32\ As 
described in the Fee Guidance, the term ``supra-competitive 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 supra-competitive 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) 
\33\ of the Act because the proposed fees will permit recovery of the 
Exchange's costs and will not result in excessive pricing or supra-
competitive profit.
---------------------------------------------------------------------------

    \32\ See Fee Guidance, supra note 13.
    \33\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    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 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.\34\ 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 now that 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 supra-competitive 
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. As noted 
above, when incorporating the projected revenue from connectivity 
services into the Exchange's overall projected revenue, including 
projections related to market data fees that have not yet been proposed 
and which the Exchange will not begin collecting until April 2022, 
subject to filing the necessary proposal to adopt such fees, the 
Exchange anticipates monthly revenue ranging from $4,296,950 to 
$4,546,950 from all sources. As such, applying the Exchange's holistic 
Cost Analysis to a holistic view of anticipated revenues, the Exchange 
would earn approximately 8.5% to 15% margin on its operations as a 
whole. The Exchange believes that this amount is reasonable and is 
again evidence that the Exchange will not earn a supra-competitive 
profit.
---------------------------------------------------------------------------

    \34\ See supra note 17.

---------------------------------------------------------------------------

[[Page 16056]]

    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.\35\ 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.\36\ 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.\37\ 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.\38\ 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.\39\ 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.\40\ 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.
---------------------------------------------------------------------------

    \35\ 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.
    \36\ 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.
    \37\ See id.
    \38\ See id.
    \39\ 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.
    \40\ See supra note 36.
---------------------------------------------------------------------------

    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 
\41\ 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.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\42\ 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.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

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 did not officially proposed fees until late December of 
2021 when it filed the Initial Proposal, Exchange personnel had 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) for several months leading up to that 
time. The Exchange received no official complaints from Members, non-
Members (extranets or service bureaus), third-parties that purchase the 
Exchange's connectivity and resell it, and customers of those 
resellers, that the Exchange's fees or the proposed fees for 
connectivity services would negatively impact their abilities to 
compete with other market participants or that they are placed at a 
disadvantage.
    As expected, the Exchange did, however, have several market 
participants reduce or discontinue use of connectivity services 
provided directly by the Exchange in response to the fees adopted by 
the Exchange. 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

[[Page 16057]]

Exchange of providing such connectivity services.
Inter-Market Competition
    The Exchange does not believe 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.\43\ 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.
---------------------------------------------------------------------------

    \43\ See supra notes 35-40 and accompanying text.
---------------------------------------------------------------------------

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 \44\ and Rule 19b-4(f)(2) \45\ thereunder.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \45\ 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-2022-02 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-2022-02. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-MEMX-2022-02 and should be submitted on 
or before April 11, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
---------------------------------------------------------------------------

    \46\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05842 Filed 3-18-22; 8:45 am]
BILLING CODE 8011-01-P