[Federal Register Volume 89, Number 84 (Tuesday, April 30, 2024)]
[Notices]
[Pages 34298-34311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09221]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100021; File No. SR-MEMX-2024-13]
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 and Application Session
Fees for MEMX Options
April 24, 2024.
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 April 12, 2024, MEMX LLC (``MEMX'' or the ``Exchange'') filed
with the Securities and Exchange Commission (the ``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend the Fee Schedule to: (i)
apply the Exchange's current Connectivity and
[[Page 34299]]
Application Session fees to MEMX Options Users, and (ii) make an
organizational change to its existing fee schedule for the Exchange's
pre-existing equities market (``MEMX Equities''), in order to create a
separate fee schedule for Connectivity Fees (for both MEMX Equities and
MEMX Options). The Exchange proposes to implement the changes to the
Fee Schedule pursuant to this proposal immediately. The text of the
proposed rule change is provided in Exhibit 5.
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 filing a proposal to amend the Fee Schedule to: (i)
apply the Exchange's current Connectivity and Application Session fees
to MEMX Options Users, and (ii) make an organizational change to its
existing fee schedule for the Exchange's pre-existing equities market
(``MEMX Equities''), in order to create a separate fee schedule for
Connectivity Fees (for both MEMX Equities and MEMX Options). The
Exchange believes that these changes will provide greater transparency
to Members about how the Exchange assesses fees, as well as allowing
Members to more easily validate their bills on a monthly basis. The
Exchange notes that none of these changes amend any existing fee
applicable to MEMX Equities. The Exchange is proposing to implement the
proposal immediately. The Exchange previously filed the proposal on
October 24, 2023 (SR-MEMX-2023-29) (the ``Initial Proposal''). The
Exchange withdrew the Initial Proposal and replaced the proposal with
SR-MEMX-2023-39 (the ``Second Proposal''). The Exchange withdrew the
Second Proposal and replaced it with SR-MEMX-2024-06 (the ``Third
Proposal''). The Exchange recently withdrew the Third Proposal and is
replacing it with the current filing (SR-MEMX-2024-13).
As set forth below, the Exchange believes that its proposal
provides a great deal of transparency regarding the cost of providing
connectivity services and anticipated revenue and that the proposal is
consistent with the Act and associated guidance. The Exchange is re-
filing this proposal promptly following the withdrawal of the Third
Proposal in order to provide additional explanations related to the
Cost Analysis.
(i) Fees for Connectivity to MEMX Options
As noted above, the Exchange is proposing to apply the current fees
it charges to Members and non-Members \3\ 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) to both Users of MEMX Equities and MEMX
Options.\4\ Specifically, the Exchange will continue to charge $6,000
per month for a physical connection in the data center where the
Exchange primarily operates under normal market conditions (``Primary
Data Center''), and $3,000 per month for a physical connection at the
geographically diverse data center, which is operated for backup and
disaster recovery purposes (``Secondary Data Center''). These physical
connections can be used to access both platforms, accordingly, a firm
that is a Member of both MEMX Equities and MEMX Options may use a
single physical connection to access its application sessions at both
MEMX Equities and MEMX Options. This differs from application sessions
in that a firm that is a Member of both MEMX Equities and MEMX Options
would need to purchase separate application sessions for each trading
platform in order to access each such trading platform. These
application session fees will continue to be $450 per month for an
application session used for order entry (``Order Entry Port'') and
$450 per month for an application session for receipt of drop copies
(``Drop Copy Port''), to the extent such ports are in the Primary Data
Center. As is true today for MEMX Equities, the Exchange will not
charge for Order Entry Ports or Drop Copy Ports in the Secondary Data
Center. The Exchange's proposal to apply the same fees to Equities and
Options stems from the same cost analysis it conducted in adopting
those fees to its Equities Members,\5\ which the Exchange has reviewed
and updated for 2024 as detailed below. Given that the Exchange has
only recently launched MEMX Options, however, and the fact that its
analysis is based on projections across all potential revenue streams,
the Exchange is committing to conduct a one-year review after these
fees are applied. The Exchange expects that it may propose to adjust
fees at that time, to increase fees in the event that revenues fail to
cover costs, or to decrease fees in the event that revenue materially
exceeds expectations.
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\3\ 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.
\4\ MEMX Options launched on September 27, 2023.
\5\ See Securities Exchange Act Release No. 59846 (September 27,
2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-026).
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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 to MEMX
Options, 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 services, 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,\6\
and Rule 19b-4 thereunder,\7\ with respect to the types of information
self-regulatory organizations (``SROs'') should provide when filing fee
changes,
[[Page 34300]]
and Section 6(b) of the Act,\8\ which requires, among other things,
that exchange fees be reasonable and equitably allocated,\9\ not
designed to permit unfair discrimination,\10\ and that they not impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.\11\ 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.\12\
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\6\ 15 U.S.C. 78s(b)(1).
\7\ 17 CFR 240.19b-4.
\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(4).
\10\ 15 U.S.C. 78f(b)(5).
\11\ 15 U.S.C. 78f(b)(8).
\12\ In 2019, Commission staff published guidance suggesting the
types of information that SROs may use to demonstrate that their fee
filings comply with the standards of the Exchange Act (``Fee
Guidance''). While MEMX understands that the Fee Guidance does not
create new legal obligations on SROs, the Fee Guidance is consistent
with MEMX's view about the type and level of transparency that
exchanges should meet to demonstrate compliance with their existing
obligations when they seek to charge new fees. See Staff Guidance on
SRO Rule Filings Relating to Fees (May 21, 2019) available at
https://www.sec.gov/tm/staff-guidancesro-rule-filings-fees.
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As detailed below, MEMX calculated its aggregate annual costs for
providing physical connectivity to both MEMX Equities and MEMX Options
in 2024 at $14,970,454 and its aggregate annual costs for providing
application sessions at $7,185,273. In order to cover the aggregate
costs of providing connectivity to its Options and Equities Users (both
Members and non-Members) going forward and to make a modest profit, as
described below, the Exchange is proposing to modify its Fee Schedule,
pursuant to MEMX Rules 15.1(a) and (c), to charge a fee to Options
Users, as it currently does to Equities Users, of $6,000 per month for
each physical connection in the Primary Data Center and of $3,000 per
month for each physical connection in the Secondary Data Center. The
Exchange also proposes to modify its Fee Schedule, pursuant to MEMX
Rules 15.1(a) and (c), to charge a fee to Options Users, as it
currently does to Equities Users, of $450 per month for each Order
Entry Port and Drop Copy Port in the Exchange's Primary Data Center, as
further described below.\13\
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\13\ 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.
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Cost Analysis
Background on Cost Analysis
In February 2024, MEMX completed an updated study of its aggregate
projected costs to produce market data and connectivity across both its
Equities and Options platforms in 2024 (the ``Cost Analysis'').\14\ 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 and trading permits, regulatory services, physical
connectivity, and application sessions (which provide order entry,
cancellation and modification functionality, risk functionality,
ability to receive drop copies, and other functionality). 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 certain general and administrative
expenses (``cost drivers''). Next, MEMX adopted an allocation
methodology with various principles to guide how much of a particular
cost should be allocated to each core service. For instance, fixed
costs that are not driven by client activity (e.g., message rates),
such as data center costs, were allocated more heavily to the provision
of physical connectivity (80%), with smaller allocations to logical
ports (11%), and the remainder to the provision of transaction
execution, regulatory services, and market data services (9%).\15\ In
contrast, costs that are driven largely by client activity (e.g.,
message rates), were not allocated to physical connectivity at all but
were allocated primarily to the provision of transaction execution and
market data services (80%) with a smaller allocation to application
sessions (20%). The allocation methodology was decided through
conversations with senior management familiar with each area of the
Exchange's operations. After adopting this allocation methodology, the
Exchange then applied an estimated allocation of each cost driver to
each core service, resulting in the cost allocations described below.
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\14\ The updated Cost Analysis completed in February 2024 is
based on the same principles applied to the Cost Analysis completed
in September 2023 that was included in the Initial Proposal but
contains updated figures now that MEMX Options has been operational
for several months.
\15\ The Exchange notes that these allocation percentages differ
from the allocations noted in the 2021 Cost Analysis, and the
reasons for these differences are explained more specifically below.
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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. The Exchange also notes that as a general matter each of these
sources of revenue is based on services that are interdependent. For
instance, the Exchange's system for executing transactions is dependent
on physical hardware and connectivity; only Members and parties that
they sponsor to participate directly on the Exchange may submit orders
to the Exchange; many Members (but not all) consume market data from
the Exchange in order to trade on the Exchange; and the Exchange
consumes market data from external sources in order to comply with
regulatory obligations. Accordingly, given this interdependence, the
allocation of costs to each service or revenue source required judgment
of the Exchange and was weighted based on estimates of the Exchange
that the Exchange believes are reasonable, as set forth below.
Through the Exchange's extensive Cost Analysis, 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 application sessions, while certain
costs were only allocated to such services at a very low percentage or
not at all, using consistent allocation methodologies as described
above. Based on this analysis, MEMX estimates that the cost drivers to
provide connectivity services in 2024, including both physical
connections and application sessions, will result in an aggregate
annual cost of $22,155,727, as further detailed below. The Exchange
notes that it utilized the same principles to generate the 2021 Cost
Analysis, applicable to Equities only, and at that time, the estimated
annual aggregate cost to provide connectivity services
[[Page 34301]]
was $13,724,580. The differences between such estimated costs and the
overall analysis are primarily based on: (1) the addition of MEMX
Options, (ii) increased, and in some cases decreased, costs projected
by the Exchange, (iii) and changes made to reallocate certain costs
into categories that more closely align the Exchange's audited
financial statements, as further described below.
Costs Related to Offering Physical Connectivity
The following chart details the individual line-item costs
considered by MEMX to be related to offering physical connectivity as
well as the percentage of the Exchange's overall costs such costs
represent for such area (e.g., as set forth below, the Exchange
allocated approximately 18% of its overall Human Resources cost to
offering physical connectivity).
[GRAPHIC] [TIFF OMITTED] TN30AP24.024
Below are additional details regarding each of the line-item costs
considered by MEMX to be related to offering physical connectivity, as
well as any relevant discussion of how the costs projected for 2024
differ, if any, from the Exchange's previous Cost Analysis conducted in
2021 in adopting Connectivity Fees for its Equities platform, which are
the same fees the Exchange is proposing to apply for its Options
platform in this filing.\16\
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\16\ See supra note 5.
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Human Resources
In allocating personnel (Human Resources) costs, in order to not
double count any allocations, the Exchange first excluded any employee
time allocated towards options regulation in order to recoup costs via
the Options Regulatory Fee (``ORF'').\17\ Of the remaining employee
time left over, MEMX then 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) and for which the
Exchange allocated 80% of each employee's time. The Exchange also
allocated Human Resources costs to provide physical connectivity to a
limited subset of personnel with ancillary functions related to
establishing and maintaining such connectivity (such as information
security and finance personnel), for which the Exchange allocated cost
on an employee-by-employee basis (i.e., only including those personnel
who do support functions related to providing physical connectivity)
and then applied a smaller allocation to such employees (30%).\18\ The
Exchange notes that it has fewer than 100 employees and each department
leader has direct knowledge of the time spent by those spent by each
employee with respect to the various tasks necessary to operate the
Exchange. The estimates of Human Resources cost were therefore
determined by consulting with such department leaders, determining
which employees are involved in tasks related to providing physical
connectivity, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing physical
connectivity. The Exchange notes that senior level executives were only
allocated Human Resources costs to the extent the Exchange believed
they are involved in overseeing tasks related to providing physical
connectivity. 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.
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\17\ See Securities Exchange Act Release No. 99259 (January 2,
2024), 89 FR 965 (January 8, 2024) (SR-MEMX-2023-38).
\18\ To reiterate, these allocations are applied to the
percentage of employee time left over after the ORF allocation. As
such, if 10% of an employee's time was allocated towards options
regulation, the percentage of time allocated to physical
connectivity in this example would apply to the 90% of the
employee's time left over.
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In 2021, 13.8% of the Exchange's Human Resources costs were
allocated towards the provision of physical connectivity, which is
slightly lower than the 18% allocation in the current Cost Analysis.
The Exchanges notes that this increase is due to additional hiring
necessary to support network infrastructure, and that in advance of the
launch of MEMX Options, this hiring started at the beginning of 2023.
Connectivity
The Connectivity cost includes external fees paid to connect to
other exchanges and third parties. The Exchange notes that its
connectivity to external markets is required in order to receive market
data to run the Exchange's matching engine and basic operations
compliant with existing regulations, primarily Regulation NMS.
Approximately 75% of the Exchange's connectivity costs are allocated
towards the provision of physical connectivity, which is the same
percentage identified in the 2021 Cost Analysis. Of note, the 2021 Cost
Analysis allocated approximately $162,000 per month of connectivity
costs towards physical connectivity, which is notably higher than the
$61,018 \19\ per month allocated under the current Cost Analysis. The
Exchange notes that this is due to a substantial redesign in the
Exchange's connectivity plan which achieved the cost savings noted.
Additionally, in the
[[Page 34302]]
2021 Cost Analysis, certain costs were included in the Connectivity
category that have since been moved into the broader Technology
category.
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\19\ This figure is arrived at by dividing the annual allocated
Connectivity costs in the table on page 12 ($732,216) by 12.
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Data Center
Data Center costs include an allocation of the costs the Exchange
incurs to provide physical connectivity in the third-party data centers
where it maintains its equipment (such as dedicated space, security
services, cooling and power). The Exchange notes that it does not own
the Primary Data Center or the Secondary Data Center, but instead,
leases space in data centers operated by third parties. The Exchange
has allocated a high percentage of the Data Center cost (80%) to
physical connectivity because the third-party data centers and the
Exchange's physical equipment contained therein is the most direct cost
in providing physical access to the Exchange. In other words, for the
Exchange to operate in a dedicated space with connectivity of
participants to a physical trading platform, the data centers are a
very tangible cost, and in turn, if the Exchange did not maintain such
a presence then physical connectivity would be of no value to market
participants. This slight increase over the allocation of Data Center
costs to physical connectivity from 2021 (75%) is due to the Exchange's
determination that the Data Center is more directly linked to physical
connectivity than any other core service provided by the Exchange. The
Exchange notes that its Data Center costs are fixed and do not vary
based upon any individual Member's or group of Members' physical
connectivity. Accordingly, the Exchange believes that 80% is a more
accurate representation of the percentage of costs to the Exchange in
order to provide physical connectivity to market participants.
Technology
The Technology category includes the Exchange's network
infrastructure, other hardware, software, and software licenses used to
operate and monitor physical assets necessary to offer physical
connectivity to the Exchange. Of note, certain of these costs were
included in the Connectivity and a separate Hardware and Software
Licenses category in the 2021 Cost Analysis; however, in order to align
more closely with the Exchange's audited financial statements these
costs were combined into the broader Technology category. The Exchange
allocated approximately 25% of its Technology costs to physical
connectivity in 2024.
Depreciation
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. Thus, the depreciation cost primarily relates to servers
necessary to operate the Exchange, some of which are owned by the
Exchange and some of which are leased by the Exchange in order to allow
efficient periodic technology refreshes. As noted above, the Exchange
allocated 39% of all depreciation costs to providing physical
connectivity. This is a higher percentage than was allocated to
providing physical connectivity in 2021 (18.5%), and this increase is
due to a high amount of capital expenditures required to build the
Exchange's options platform, none of which began to depreciate until
the launch of options in September 2023. The Exchange notes, however,
that it did not allocate depreciation costs for any internally
developed software to build the Exchange's trading platforms to
physical connectivity, as such software does not impact the provision
of physical connectivity.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange notes that it did not allocate any External Market Data
fees to the provision of physical connectivity as market data is not
related to such services.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to physical connectivity 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 (e.g., occupancy and overhead expenses),
utilities, recruiting and training, marketing and advertising costs,
professional fees for legal, tax and accounting services (including
external and internal audit expenses), and telecommunications costs.
The Exchange notes that the cost of paying directors to serve on its
Board of Directors is also included in the Exchange's general shared
expenses, and thus a portion of such overall cost amounting to 7% of
the overall cost for directors was allocated to providing physical
connectivity.
As a final part of the Exchange's analysis related to physical
connectivity, the Exchange determined the total monthly cost of
providing physical connections, (i.e., the annual cost of $14,970,454
noted in the table above divided by 12), $1,247,537.83, and projected
average monthly revenue for physical connections under the proposed
pricing herein of approximately $1,413,500.\20\ Thus, the Exchange
calculated an average monthly profit of $165,962, resulting in a
physical connectivity profit margin of approximately 11.7%.\21\ The
Exchange notes that this projected profit margin represents an increase
over the projected profit margin noted in the 2021 Cost Analysis
related to physical connectivity,\22\ which is in part due to certain
cost savings noted above associated with a redesign in the Exchange's
external connectivity plan. Nevertheless, the Exchange believes that
the projected profit margin is reasonable and well within the range of
where a similarly situated company would expect to be after three years
of growth, especially upon launching a new trading platform that
provides scale. While the Exchange does not anticipate a significant
change to physical connectivity during 2024 (i.e., neither a
significant increase nor a significant decrease), it is possible that
participants will shift the way that they connect to the Exchange and a
reduction occurs or that additional connectivity is established,
resulting in an increase.
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\20\ This projection was based off of actuals earned in January
and February 2024 and revenue projections for the remainder of the
year based off the number of primary and secondary connections
maintained as of February 1, 2024, in both Equities and Options. The
Exchange notes that it previously utilized a different method to
estimate potential profit, specifically by dividing the cost of
providing physical connectivity by the number of physical
connections maintained as of the date of proposed pricing, and then
subtracting that number from the cost [sic] of the provision of
physical connectivity. At this time, however, due to the
complexities associated with the pricing of physical connections
(i.e., not all physical connections cost $6,000), and the fact that
the Exchange did not begin charging for physical connections used
solely for Options until March 1, 2024, the Exchange believes the
method utilized in this proposal provides a more accurate estimation
of projected profit and resulting profit margin.
\21\ The Exchange calculated margin by dividing the total profit
($165,962) by the total revenue ($1,413,500) and multiplying by 100.
\22\ The 2021 Cost Analysis projected a profit margin for
physical connections of 8%.
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Costs Related to Offering Application Sessions
The following chart details the individual line-item costs
considered by MEMX to be related to offering
[[Page 34303]]
application sessions as well as the percentage of the Exchange's
overall costs such costs represent for such area (e.g., as set forth
below, the Exchange allocated approximately 11% of its overall Human
Resources cost to offering application sessions).
[GRAPHIC] [TIFF OMITTED] TN30AP24.025
Human Resources
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
estimates of Human Resources cost were again determined by consulting
with department leaders, determining which employees are involved in
tasks related to providing application sessions and maintaining
performance thereof, and confirming that the proposed allocations were
reasonable based on an understanding of the percentage of their time
such employees devote to tasks related to providing application
sessions and maintaining performance thereof. The Exchange notes that
senior level executives were only allocated Human Resources costs to
the extent the Exchange believed they are involved in overseeing tasks
related to providing application sessions and maintaining performance
thereof. 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. As shown in
the table above, for 2024, the Exchange allocated approximately 11% of
its Human Resources costs to providing application sessions, which is
higher than the 7.7% it allocated in 2021. This increase is again due
to additional hiring needed to support the addition of MEMX Options.
Connectivity
The Connectivity cost includes external fees paid to connect to
other exchanges, as described above. The Exchange allocated
approximately 4% of its Connectivity costs to providing application
sessions, which represents a slight increase over the 2.6% allocated in
the 2021 Cost Analysis. The Exchange notes this increase reflects that
application sessions require information ultimately obtained from other
exchanges through such Connectivity and the Exchange's costs increased
with respect to such Connectivity in order to provide Members the
ability to access both MEMX Equities and MEMX Options. Thus, the
Exchange believes that 4% is a more accurate reflection of the costs
required to provide Members with the ability to access each platform.
Data Center
Data Center costs include 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). As
shown in the table, the Exchange allocated 11% of its Data Center costs
to application sessions in the current Cost Analysis, which represents
an increase over the 2.6% it allocated in the 2021 Cost Analysis. The
Exchange believes this increased allocation is a more accurate
representation of the resources in the Data Center which are used to
support application sessions because Data Center costs are fixed costs
and without devoting significant time and resources to maintaining the
Data Center and the hardware maintained therein, Members' use of
application sessions could not be properly supported.
Technology
The Technology category includes the Exchange's network
infrastructure, other hardware, software, and software licenses used to
monitor the health of the order entry services provided by the
Exchange. The Exchange allocated 12% of its Technology costs to the
provision of application sessions, which represents a slight increase
over the 10.1% it allocated in the 2021 Cost Analysis.
External Market Data
External Market Data includes fees paid to third parties, including
other exchanges, to receive and consume market data from other markets.
The Exchange allocated 20% of External Market Data fees to the
provision of application sessions as such market data is necessary to
offer certain services related to such sessions, such as validating
orders on entry against the National Best Bid and National Best Offer
(``NBBO'') and checking for other conditions (e.g., whether a symbol is
halted or subject to a short sale circuit breaker). Thus, as market
data from other exchanges is consumed at the application session level
in order to validate orders before additional processing occurs with
respect to such orders, the Exchange believes it is reasonable to
allocate a small amount of such costs to application sessions. The
increase in allocation of External Market Data costs to the provision
of application sessions compared to the 2021 Cost Analysis, in which
7.5% of its
[[Page 34304]]
External Market Data costs were allocated, is due to a restructuring of
the category. Specifically, in 2021, External Market Data only included
those costs incurred to receive data from other exchanges, while costs
to receive the SIP feeds and other non-exchange data feeds were
categorized under Hardware and Software Licenses. These costs are now
all categorized under External Market Data.
Depreciation
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. Thus, the depreciation cost primarily relates to servers
necessary to operate 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. The Exchange allocated 14% of
all depreciation costs to providing application sessions, which
represents an increase over the 8.3% allocated in the 2021 Cost
Analysis. In contrast to physical connectivity, described above, the
Exchange did allocate depreciation costs for depreciated internally
developed software to build the Exchange's platforms to application
sessions because such software is related to the provision of such
connectivity.
Allocated Shared Expenses
Finally, a limited portion of general shared expenses was allocated
to overall application session costs as without these general shared
costs the Exchange would not be able to operate in the manner that it
does and provide application sessions. The costs included in general
shared expenses include general expenses of the Exchange, including
office space and office expenses (e.g., occupancy and overhead
expenses), utilities, recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services (including external and internal audit expenses), and
telecommunications costs. The Exchange again notes that the cost of
paying directors to serve on its Board of Directors is included in the
calculation of Allocated Shared Expenses, and thus a portion of such
overall cost amounting to less than 5% of the overall cost for
directors was allocated to providing application sessions.
Lastly, the Exchange determined the total monthly cost of providing
application sessions, (i.e., the annual cost of $7,185,273 noted in the
table above divided by 12), $598,772.75, and estimated an average
monthly revenue from application sessions under the proposed pricing
herein of $662,738. Thus, the Exchange calculated an average monthly
profit of $63,965, resulting in an application session profit margin of
approximately 9.7%.\23\ This profit margin for application sessions is
slightly higher than the projected profit margin noted in the 2021 Cost
Analysis,\24\ which the Exchange believes is reasonable and well within
the range of where the Exchange would expect it to be at this time.
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\23\ The Exchange calculated margin by dividing the total profit
($63,965) by the total revenue ($662,738) and multiplying by 100.
\24\ The 2021 Cost Analysis projected an application session
profit margin of approximately 8%.
---------------------------------------------------------------------------
Cost Analysis--Additional Discussion
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 recently
submitted proposing the establishment of an ORF.\25\ For instance, in
calculating the Human Resources expenses to be allocated to physical
connections, the Exchange has a team of employees dedicated to network
infrastructure and with respect to such employees the Exchange
allocated network infrastructure personnel with a high percentage of
the time of such personnel (80%) given their focus on functions
necessary to provide physical connections. The time of those same
personnel were allocated only 4% to application sessions and the
remaining 16% was allocated to transactions and market data. Of note,
this allocation applied only to the network infrastructure employee's
time that was left over after allocating for options regulation
support. The Exchange did not allocate any other Human Resources
expense for providing physical connections to any other employee group
outside of a smaller allocation (30%) of the employee time associated
with certain specified personnel who work closely with and support
network infrastructure personnel. In contrast, the Exchange allocated
much smaller percentages of employee time (15% 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.
---------------------------------------------------------------------------
\25\ See supra note 17.
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In total, the Exchange allocated 18% of its Human Resources costs
to providing physical connections and 11% of its Human Resources costs
to providing application sessions, for a total allocation of 29% of its
Human Resources expense to provide connectivity services. In turn, the
Exchange allocated the remaining 71% of its Human Resources expense to
Regulatory Services (21%), membership (2%) and transactions and market
data (48%). 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 53% of the Exchange's overall depreciation and
amortization expense to connectivity services (39% attributed to
physical connections and 14% to application sessions). The Exchange
allocated the remaining depreciation and amortization expense
(approximately 47%) toward regulatory services (approximately 6%), and
to providing transaction services and market data (approximately 41%).
Looking at the Exchange's operations holistically, the estimated
total monthly costs to the Exchange for offering core services in 2024
is $5,299,754, compared to the $3,954,537 noted in the 2021 Cost
Analysis. Based on its projections, the Exchange expects to collect
approximately $2,076,238 on a monthly basis for connectivity services.
[[Page 34305]]
Incorporating this amount into the Exchange's overall projected
revenue, including projections related to the ORF, the Exchange
anticipates monthly revenue of approximately $6,080,631 from all
sources (i.e., connectivity fees and membership fees, transaction fees,
ORF, and revenue from market data, both through the fees adopted in
April 2022 \26\ 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 13%
margin on its operations as a whole. The Exchange believes that this
amount is reasonable.
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\26\ See Securities Exchange Act Release No. 97130 (March 13,
2013), 88 FR 16491 (March 17, 2023) (SR-MEMX-2023-04).
---------------------------------------------------------------------------
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 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 options 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.
The Exchange notes that the Cost Analysis was based on the
Exchange's current operations and projections for the remainder of
2024. As such, the Exchange believes that its costs will remain
relatively similar in future years (as demonstrated by the comparison
of the 2021 Cost Analysis to the 2024 Cost Analysis). 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 is committing to conduct a
one-year review after implementation of these fees. The Exchange
expects that it may propose to adjust fees at that time, to increase
fees in the event that revenues fail to cover costs and a reasonable
mark-up of such costs. Similarly, the Exchange would propose to
decrease fees in the event that revenue materially exceeds our current
projections. In addition, the Exchange will periodically conduct a
review to inform its decision making on whether a fee change is
appropriate (e.g., to monitor for costs increasing/decreasing or
subscribers increasing/decreasing in ways that suggest the then-current
fees are becoming dislocated from the prior cost-based analysis) and
would propose to increase fees in the event that revenues fail to cover
its costs and a reasonable mark-up, or decrease fees in the event that
revenue or the mark-up materially exceeds our current projections. In
the event that the Exchange determines to propose a fee change, the
results of a timely review, including an updated cost estimate, will be
included in the rule filing proposing the fee change. More generally,
the Exchange believes that it is appropriate for an exchange to refresh
and update information about its relevant costs and revenues in seeking
any future changes to fees, and the Exchange commits to do so.
Proposed Fees
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) \27\ 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 (for
both equities and options) as of October 1, 2023, ranges from one (1)
to 46, 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. Separate
physical connections are not required to access the Exchange's Options
and Equities platforms, as such, a User could use a single connection
to access both platforms. The Exchange notes that 50% 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 21 members, or 27.6% have either one or two
physical ports to connect to the Exchange in the Primary Data
Center.\28\ Thus, only a limited number of Members, (17 members, or
22%), maintain three or more physical ports to connect to the Exchange
in the Primary Data Center.\29\
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\27\ See supra note 4.
\28\ Of those 21 members, four (4) have designated certain of
their physical ports will be used to connect to MEMX Options.
\29\ Of those 17 members, thirteen (13) have designated certain
of their physical ports will be used to connect to MEMX Options.
---------------------------------------------------------------------------
As described above, the Exchange has previously justified its
pricing with respect to MEMX Equities and believes the most fair
approach, absent a significant differentiation between application
costs to Equities and Options, is to apply the same pricing to all
participants of either platform. As such, in order to cover the
aggregate costs of providing physical connectivity to Options and
Equities Users and make a modest profit, as described below, 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 for
connections to its Options platform, as it currently charges for
connections to its Equities platform. 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. Further, as noted above, existing Equities
Members may choose to use their existing physical connection(s) to
access the Exchange's Options platform.
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 designated Members are still able to
use third-party providers of connectivity to access the
[[Page 34306]]
Exchange at its Secondary Data Center, and that for its Equities
platform, one of eight such designated Members does use a third-party
provider instead of connecting directly to the Secondary Data Center
through connectivity provided by the Exchange. 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 for its Options platform, as it currently charges for
Equities. The Exchange notes that its costs related to operating the
Secondary Data Center were not separately calculated for purposes of
this proposal, but instead, all costs related to providing physical
connections were considered in the aggregate. The Exchange believes
this is appropriate because had the Exchange calculated such costs
separately and then determined the fee per physical connection that
would be necessary for the Exchange to cover its costs for operating
the Secondary Data Center, the costs would likely be much higher than
those proposed for connectivity at the Primary Data Center because
Members maintain significantly fewer connections at the Secondary Data
Center. The Exchange believes that charging a higher fee for physical
connections at the Secondary Data Center would be inconsistent with its
objective of encouraging Members to connect at such data center and is
inconsistent with the fees charged by other exchanges, which also
provide connectivity for disaster recovery purposes at a discounted
rate.\30\
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\30\ See, e.g., the BZX options fee schedule, available at:
https://www.cboe.com/us/options/membership/fee_schedule/bzx/.
---------------------------------------------------------------------------
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 profit
margin (approximately 11.7%), which would also 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 and the need
for the Exchange to maintain a highly performant and stable platform to
allow Members to transact with determinism.
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 immediately.
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) \31\ 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 1, 2024, ranges from one (1) to
more than 300 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. The same application session cannot
be used to access both MEMX Equities and MEMX Options, as such, Users
will need to purchase separate application sessions for MEMX Options,
which differs from physical connections.
---------------------------------------------------------------------------
\31\ See supra note 3.
---------------------------------------------------------------------------
As described above, in order to cover the aggregate costs of
providing application sessions to Options Users and to make a modest
profit, as described below, 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 for Options application sessions, which is the same
fee it currently charges for Equities application sessions. 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, again, which it does not
charge for Equities Users. The Exchange has proposed to continue to
provide Order Entry Ports and Drop Copy Ports in the Secondary Data
Center for Options 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 profit margin (approximately 9.7%), which would also help
fund future expenditures (increased costs, improvements, etc.).
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
[[Page 34307]]
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. In contrast, other exchanges maintain certain
thresholds that limit the amount of message traffic that a single
logical port can handle.\32\ 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.
---------------------------------------------------------------------------
\32\ See, e.g., Cboe US Options BOE Specification, available at:
https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf (describing a 5,000 message per
second Port Order Rate Threshold on Cboe BOE ports).
---------------------------------------------------------------------------
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.\33\
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\33\ 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 immediately.
Proposed Fees--Additional Discussion
As discussed above, the proposed fees for connectivity services do
not by design apply differently to different types or sizes of Members.
As discussed in more detail in the Statutory Basis section, the
Exchange believes that the likelihood of higher fees for certain
Members subscribing to connectivity services usage than others is not
unfairly discriminatory because it is based on objective differences in
usage of connectivity services among different Members. The Exchange's
incremental aggregate costs for all connectivity services are
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the
Exchange, as such Members: (1) consume the most bandwidth and resources
of the network; (2) transact the vast majority of the volume on the
Exchange; and (3) require the high-touch network support services
provided by the Exchange and its staff, including network monitoring,
reporting and support services, resulting in a much higher cost to the
Exchange to provide such connectivity services. For these reasons, MEMX
believes it is not unfairly discriminatory for the Members with higher
message traffic and/or Members with more complicated connections to pay
a higher share of the total connectivity services fees. While Members
with a business model that results in higher relative inbound message
activity or more complicated connections are projected to pay higher
fees, the level of such fees is based solely on the number of physical
connections and/or application sessions deemed necessary by the Member
and not on the Member's business model or type of Member. The Exchange
notes that the correlation between message traffic and usage of
connectivity services is not completely aligned because Members
individually determine how many physical connections and application
sessions to request, and Members may make different decisions on the
appropriate ways based on facts unique to their individual businesses.
Based on the Exchange's architecture, as described above, the Exchange
believes that a Member even with high message traffic would be able to
conduct business on the Exchange with a relatively small connectivity
services footprint.
Finally, the fees for connectivity services will help to encourage
connectivity services usage in a way that aligns with the Exchange's
regulatory obligations. As a national securities exchange, the Exchange
is subject to Regulation Systems Compliance and Integrity (``Reg
SCI'').\34\ 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.\35\
By encouraging Users to be efficient with their usage of connectivity
services, the proposed fee will support the Exchange's Reg SCI
obligations in this regard by ensuring that unused application sessions
are available to be allocated based on individual User needs and as the
Exchange's overall order and trade volumes increase. Additionally,
because the Exchange will charge a lower rate for a physical connection
to the Secondary Data Center and will not charge any fees for
application sessions at the Secondary Data Center or its Test Facility,
the proposed fee structure will further support the Exchange's Reg SCI
compliance by reducing the potential impact of a disruption should the
Exchange be required to switch to its Disaster Recovery Facility and
encouraging Members to engage in any necessary system testing with low
or no cost imposed by the Exchange.\36\
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\34\ 17 CFR 242.1000-1007.
\35\ 17 CFR 242.1001(a).
\36\ While some Members might directly connect to the Secondary
Data Center and incur the proposed $3,000 per month fee, there are
other ways to connect to the Exchange, such as through a service
bureau or extranet, and because the Exchange is not imposing fees
for application sessions in the Secondary Data Center, a Member
connecting through another method would not incur any fees charged
directly by the Exchange. However, the Exchange notes that a third-
party service provider providing connectivity to the Exchange likely
would charge a fee for providing such connectivity; such fees are
not set by or shared in by the Exchange.
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(ii) Organizational Fee Schedule Changes
The Exchange is proposing to more clearly separate Connectivity
Fees from the Exchange's current fee schedule. Currently, the Exchange
has separate transaction fee schedules for Equities and Options, and
the current Connectivity Fees appear solely on the Equities fee
schedule. The Exchange proposes to remove the Connectivity Fees section
from the Equities fee schedule, and add hyperlinks at the bottom of the
Equities and Options fee schedules that direct the User to a single
Connectivity fee schedule. The Exchange believes this format is
appropriate given that the same Connectivity Fees apply to both
Equities and Options Users, and separating out the fee schedule for
Connectivity Fees will reduce potential confusion (e.g., as to which
fees a Member that participates on both MEMX Equities and MEMX
[[Page 34308]]
Options must pay on a monthly basis to maintain connectivity to the
Exchange).
The Exchange also proposes to add two additional bullet points to
the new Connectivity Fee Schedule related to MEMX Options. The first
will notify Members that a physical connection can be used to access
MEMX Equities and/or MEMX Options. The second will clarify that an
application session can only be used to access one MEMX platform, i.e.,
MEMX Equities or MEMX Options.\37\ The Exchange notes that the existing
bullet points related to Connectivity and application sessions will be
included on the proposed separate Connectivity Fee Schedule, (i.e.,
detailing the Exchange's billing practices, and making clear that that
the Exchange does not 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.
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\37\ The Initial, Second, and Third Proposals included proposed
waivers of Options Connectivity Fees that have since expired, and
most recently, on March 1, 2024, the Exchange filed a proposed rule
change to implement a waiver of Application Session fees used solely
for participation on MEMX Options until April 1, 2024. Given that
the Application Session fee waiver period has passed, the Exchange
is proposing to delete that language from the Options Connectivity
Fee Schedule in connection with this proposal. See Securities
Exchange Act Release No. 99699 (March 8, 2024), 89 FR 18687 (March
14, 2024) (SR-MEMX-2024-08).
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2. Statutory Basis
The Exchange believes that the proposed fees for connectivity
services to MEMX Options 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.
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 regard to reasonableness, the Exchange understands that when
appropriate given the context of a proposal the Commission has 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.
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 $2,076,238
providing cost recovery to the Exchange for the aggregate costs of
offering connectivity services, based on a methodology that narrowly
limits the cost drivers that are allocated cost to those closely and
directly related to the particular service. 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.
The Exchange also believes the proposed fee is a reasonable means of
encouraging Users to be efficient in the connectivity services they
reserve for use, with the benefits to overall system efficiency to the
extent Members and non-Members consolidate their usage of connectivity
services or discontinue subscriptions to unused physical connectivity.
The Exchange further believes that the proposed fees, as they
pertain to purchasers of each type of connectivity alternative,
constitute an equitable allocation of reasonable fees charged to the
Exchange's Members and non-Members and are allocated fairly amongst the
types of market participants using the facilities of the Exchange.
As described above, the Exchange believes the proposed fees are
equitably allocated because the Exchange's incremental aggregate costs
for all connectivity services are disproportionately related to Members
with higher message traffic and/or Members with more complicated
connections established with the Exchange, as such Members: (1) consume
the most bandwidth and resources of the network; (2) transact the vast
majority of the volume on the Exchange; and (3) require the high-touch
network support services provided by the Exchange and its staff,
including network monitoring, reporting and support services, resulting
in a much higher cost to the Exchange to provide such connectivity
services.
Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering
whether an exchange's proposed fees are consistent with the Act.\38\ 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 margin (approximately 11.7% for physical connectivity and 9.7%
for application sessions), which would also help fund future
expenditures (increased costs, improvements, etc.). While the Fee
Guidance did not establish a guideline as to what constitutes supra-
competitive pricing through analyzing margin (nor does the Exchange
believe it should
[[Page 34309]]
have), the Exchange does not believe that it would be reasonable to
consider the aforementioned margins to constitute supra-competitive
pricing. As noted above, the increase in margin for connectivity
services is primarily driven by certain cost savings that the Exchange
has been able to achieve as compared to the 2021 Cost Analysis, and the
Exchange does not believe it should be penalized, and instead should be
rewarded for identifying and realizing such savings. Of course, should
the Exchange find opportunities to dramatically reduce costs or
increase revenues such that it believes the cost it is charging for
physical connections or applications sessions is inconsistent with the
cost of providing such connectivity or resulting in unreasonable
margin, the Exchange will seek to lower its fees in order to pass
savings on to its constituents. Thus, the Exchange believes that its
proposed pricing for Connectivity Fees is fair, reasonable, and
equitable. Further, the Exchange notes that certain of its competitors
have connectivity fees that were approved without the presentation of a
cost-based analysis, but it is reasonable to assume that certain of
those competitors with significantly higher fees also operate with
significantly higher profit margins. Accordingly, the Exchange believes
that its proposal is consistent with Section 6(b)(4) \39\ 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.
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\38\ See Fee Guidance, supra note 13.
\39\ 15 U.S.C. 78f(b)(4).
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The proposed fees for Options 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 monthly costs to provide
connectivity services at $1,846,310.58. Based on current connectivity
services usage, the Exchange would generate monthly revenues of
approximately $2,076,238. This represents a modest profit when compared
to the cost of providing connectivity services and that profit
represents a modest increase over the profit estimated in the 2021 Cost
Analysis (a reasonable goal for a newly formed business, i.e., growing
from non-profitable, to break-even to modestly profitable).\40\ 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.
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\40\ Specifically, in the 2021 Cost Analysis, the Exchange
estimated the total costs to provide connectivity services at
$1,143,715 and estimated monthly revenues of $1,233,750.
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As noted above, when incorporating the projected revenue from
connectivity services into the Exchange's overall projected revenue,
including projections related to recently adopted market data fees, the
Exchange anticipates monthly revenue of $6,080,631 from all sources. As
such, applying the Exchange's holistic Cost Analysis to a holistic view
of anticipated revenues, the Exchange would earn approximately 13%
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.
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.\41\ With respect to
physical connections, MIAX Options (``MIAX''), MIAX Pearl, LLC (``MIAX
Pearl''), MIAX Emerald, LLC (``MIAX Emerald''), each of the Nasdaq
Stock Market LLC (``Nasdaq'') options exchanges,\42\ NYSE American
Options (``NYSE American''), NYSE Arca Options (``NYSE Arca''), Cboe
Exchange, Inc. (``Cboe Options''), Cboe BZX Options (``BZX Options''),
and Cboe EDGX Options (``EDGX Options'') charge between $7,000-$22,000
per month for physical connectivity at their primary data centers that
is comparable to that offered by the Exchange.\43\ Nasdaq, NYSE
American and NYSE Arca also charge installation fees, which are not
proposed to be charged by the Exchange. With respect to application
sessions, BX, PHLX, GEMX, MRX, BOX Options (``BOX''), Cboe Options, BZX
Options and EDGX charge between $500-$800 per month for order entry and
drop ports.\44\ 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.\45\ While the Exchange's proposed
Options Connectivity Fees are lower than certain of the fees charged by
the Nasdaq options exchanges, MIAX Options, MIAX Pearl, MIAX Emerald,
NYSE American, NYSE Arca, BOX, Cboe, BZX and EDGX, MEMX believes that
it offers significant value to
[[Page 34310]]
Members over these other exchanges in terms of bandwidth available over
such connectivity services, which the Exchange believes is a
competitive advantage, and differentiates its connectivity versus
connectivity to other exchanges.\46\ 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.\47\ 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.
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\41\ 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.
\42\ Including Nasdaq PHLX (``PHLX''), Nasdaq Options Market
(``NOM''), Nasdaq BX Options (``BX''), Nasdaq ISE (``ISE''), Nasdaq
GEMX (``GEMX''), and Nasdaq MRX (``MRX'').
\43\ See the MIAX fee schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX__Options__Fee__Schedule_10022023.pdf; the MIAX Pearl fee
schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Fee_Schedule_09122023.pdf; the MIAX Emerald fee
schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Emerald_Fee_Schedule_10122023_3.pdf;
the Nasdaq Options markets fee schedule, at http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2; the NYSE
Connectivity fee schedule, at: https://www.nyse.com/publicdocs/Wireless_Connectivity_Fees_and_Charges.pdf; the Cboe fee schedule,
at: https://www.cboe.com/us/options/membership/fee_schedule/cone/;
the BZX Options fee schedule, available at: https://www.cboe.com/us/options/membership/fee_schedule/bzx/; the EDGX Options fee schedule,
available at: https://www.cboe.com/us/options/membership/fee_schedule/edgx/, and the BOX Options fee schedule, available at:
https://boxoptions.com/fee-schedule/. 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.
\44\ See id.
\45\ See id.
\46\ 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. In contrast to other exchanges, MEMX has not
proposed different types of physical connections with higher pricing
for those with greater capacity. See supra note 41. The Exchange
also reiterates that 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, in contrast to competitors that have imposed message
rate thresholds. See supra note 33 and accompanying text.
\47\ See supra note 43.
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In conclusion, the Exchange submits that its proposed fee structure
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act
\48\ 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.
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\48\ 15 U.S.C. 78f(b)(4) and (5).
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The Exchange believes that the proposed reorganization of its fee
schedule to establish a separate fee schedule for Connectivity Fees is
reasonable and equitable because it is a non-substantive change and
does not involve changing any existing fees or rebates that apply to
trading activity on MEMX Equities. Further, the changes are designed to
make the fee schedule easier to read and for Members to validate the
bills they receive from the Exchange. The Exchange also believes this
reorganization is non-discriminatory because it applies uniformly to
all Members. The Exchange believes the proposed fee schedule will be
clearer and less confusing for Members of the Exchange and will
eliminate potential Member confusion, thereby removing impediments to
and perfecting the mechanism of a free and open market and a national
market, and in general, protecting investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\49\ the Exchange
does not believe that the proposed rule change would impose any burden
on competition that is not necessary or appropriate in furtherance of
the purposes of the Act.
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\49\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition
The Exchange does not believe that the proposed rule change to
apply the same Connectivity Fees to Options Users as it does to
Equities Users would place certain market participants at the Exchange
at a relative disadvantage compared 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 noted above, the Exchange
has previously justified its pricing with respect to MEMX Equities and
believes the most fair approach, absent a significant differentiation
between application costs to Equities and Options, is to apply the same
pricing to all participants of either platform. The Exchange believes
its proposed pricing is reasonable and lower than what other options
exchanges charge and, when coupled with the availability of third-party
providers that also offer connectivity solutions, that participation on
the Exchange is affordable for all market participants, including
smaller trading firms. Therefore, the fees may stimulate intramarket
competition by attracting additional firms to become Members of MEMX
Options. As described above, the connectivity services purchased by
market participants typically increase based on their additional
message traffic and/or the complexity of their operations. The market
participants that utilize more connectivity services typically utilize
the most bandwidth, and those are the participants that consume the
most resources from the network. Accordingly, the proposed fees for
connectivity services do not favor certain categories of market
participants in a manner that would impose a burden on competition;
rather, the allocation of the proposed Connectivity Fees reflects the
network resources consumed by the various size of market participants
and the costs to the Exchange of providing such connectivity services.
As it relates to the reorganization of the fee schedule, as
discussed above, the Exchange does not believe that the proposed change
would impose any burden on competition because such change serves to
create an easier to read fee schedule to avoid any Member confusion.
Intermarket Competition
The Exchange does not believe the proposed fees for Options
Connectivity place an undue burden on competition on other SROs that is
not necessary or appropriate. Additionally, other exchanges have
similar connectivity alternatives for their participants, but with
higher rates to connect.\50\ The Exchange is also unaware of any
assertion that the proposed fees for connectivity services would
somehow unduly impair its competition with other exchanges. As a new
entrant in an already highly competitive environment for equity options
trading, MEMX does not have the market power necessary to set prices
for services that are unreasonable or unfairly discriminatory in
violation of the Exchange Act. In sum, MEMX's proposed Connectivity
Fees for Options Members are comparable to and generally lower than
fees charged by other options exchanges for the same or similar
services.
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\50\ See supra notes 42-47 and accompanying text.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \51\ and Rule 19b-4(f)(2) \52\ thereunder.
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\51\ 15 U.S.C. 78s(b)(3)(A)(ii).
\52\ 17 CFR 240.19b-4(f)(2).
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[[Page 34311]]
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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-MEMX-2024-13 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-2024-13. 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 (https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-MEMX-2024-13 and should be
submitted on or before May 21, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09221 Filed 4-29-24; 8:45 am]
BILLING CODE 8011-01-P