[Federal Register Volume 88, Number 240 (Friday, December 15, 2023)]
[Notices]
[Pages 86951-86979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27531]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99140; File No. SR-PEARL-2023-64]


Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX 
Pearl Options Exchange Fee Schedule To Modify Certain Connectivity and 
Port Fees

December 11, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 27, 2023, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'') 
filed with the

[[Page 86952]]

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

    The Exchange is filing a proposal to amend the MIAX Pearl Options 
Exchange Fee Schedule (the ``Fee Schedule'') to amend certain 
connectivity and port fees.\3\
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    \3\ All references to the ``Exchange'' in this filing mean MIAX 
Pearl Options. Any references to the equities trading facility of 
MIAX PEARL, LLC, will specifically be referred to as ``MIAX Pearl 
Equities.''
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    The text of the proposed rule change is available on the Exchange's 
website at https://www.miaxoptions.com/rule-filings, at MIAX Pearl's 
principal office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the Fee Schedule as follows: (1) 
increase the fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') 
fiber connection for Members \4\ and non-Members; (2) amend the 
calculation of fees for MIAX Express Network Full Service (``MEO'') \5\ 
Ports (Bulk and Single); and (3) amend the fees for Full Service MEO 
Ports (Bulk and Single). The Exchange and its affiliate, Miami 
International Securities Exchange, LLC (``MIAX'') operated 10Gb ULL 
connectivity on a single shared network that provided access to both 
exchanges via a single 10Gb ULL connection. The Exchange last increased 
fees for 10Gb ULL connections from $9,300 to $10,000 per month on 
January 1, 2021.\6\ At the same time, MIAX also increased its 10Gb ULL 
connectivity fee from $9,300 to $10,000 per month.\7\ The Exchange and 
MIAX shared a combined cost analysis in those filings due to the single 
shared 10Gb ULL connectivity network for both exchanges. In those 
filings, the Exchange and MIAX allocated a combined total of $17.9 
million in expenses to providing 10Gb ULL connectivity.\8\
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    \4\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \5\ The term ``MEO Interface'' or ``MEO'' means a binary order 
interface for certain order types as set forth in Rule 516 into the 
MIAX Pearl System. See the Definitions Section of the Fee Schedule 
and Exchange Rule 100.
    \6\ See Securities Exchange Act Release No. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
    \7\ See Securities Exchange Act Release No. 90980 (January 25, 
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
    \8\ See id.
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    Beginning in late January 2023, the Exchange also recently 
determined a substantial operational need to no longer operate 10Gb ULL 
connectivity on a single shared network with MIAX. The Exchange 
bifurcated 10Gb ULL connectivity due to ever-increasing capacity 
constraints and to enable it to continue to satisfy the anticipated 
access needs for Members and other market participants.\9\ Since the 
time of the 2021 increase discussed above,\10\ the Exchange experienced 
ongoing increases in expenses, particularly internal expenses.\11\ As 
discussed more fully below, the Exchange recently calculated increased 
annual aggregate costs of $11,567,509 for providing 10Gb ULL 
connectivity on a single unshared network (an overall increase over its 
prior cost to provide 10Gb ULL connectivity on a shared network with 
MIAX) and $1,644,132 for providing Full Service MEO Ports.\12\
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    \9\ See MIAX Options and MIAX Pearl Options--Announce planned 
network changes related to shared 10G ULL extranet, issued August 
12, 2022, available at https://www.miaxglobal.com/alert/2022/08/12/miax-options-and-miax-pearl-options-announce-planned-network-changes-0. The Exchange will continue to provide access to both the 
Exchange and MIAX over a single shared 1Gb connection. See 
Securities Exchange Act Release Nos. 96553 (December 20, 2022), 87 
FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 (December 20, 
2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-48).
    \10\ The Exchange notes it last filed to amend the fees for Full 
Service MEO Ports in 2018 (excluding filings made in July 2021 
through early 2022), prior to which the Exchange provided Full 
Service MEO Ports free of charge since the it launched operations in 
2017 and absorbed all costs since that time. See Securities Exchange 
Act Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) 
(SR-PEARL-2018-07).
    \11\ For example, the New York Stock Exchange, Inc.'s (``NYSE'') 
Secure Financial Transaction Infrastructure (``SFTI'') network, 
which contributes to the Exchange's connectivity cost, increased its 
fees by approximately 9% since 2021. Similarly, since 2021, the 
Exchange, and its affiliates, experienced an increase in data center 
costs of approximately 17% and an increase in hardware and software 
costs of approximately 19%. These percentages are based on the 
Exchange's actual 2021 and proposed 2023 budgets.
    \12\ For the avoidance of doubt, all references to costs in this 
filing, including the cost categories discussed below, refer to 
costs incurred by MIAX Pearl Options only and not MIAX Pearl 
Equities, the equities trading facility.
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    Much of the cost relates to monitoring and analysis of data and 
performance of the network via the subscriber's connection with 
nanosecond granularity, and continuous improvements in network 
performance with the goal of improving the subscriber's experience. The 
costs associated with maintaining and enhancing a state-of-the-art 
network is a significant expense for the Exchange, and thus the 
Exchange believes that it is reasonable and appropriate to help offset 
those increased costs by amending fees for connectivity services. 
Subscribers expect the Exchange to provide this level of support so 
they continue to receive the performance they expect. This 
differentiates the Exchange from its competitors.
    The Exchange now proposes to amend the Fee Schedule to amend the 
fees for 10Gb ULL connectivity and Full Service MEO Ports (Bulk and 
Single) in order to recoup cost related to bifurcating 10Gb 
connectivity to the Exchange and MIAX as well as the ongoing costs and 
increase in expenses set forth below in the Exchange's cost 
analysis.\13\ The Exchange proposes to implement the changes to the Fee 
Schedule pursuant to this proposal immediately. The Exchange initially 
filed the proposal on December 30, 2022 (SR-PEARL-2022-62) (the 
``Initial Proposal'').\14\ On February 23, 2023, the Exchange withdrew 
the Initial Proposal and replaced it with a revised proposal (SR-PEARL-
2023-08) (the ``Second Proposal'').\15\ On April 20, 2023, the Exchange 
withdrew the Second Proposal and replaced it with a revised proposal 
(SR-PEARL-2023-19) (the ``Third Proposal'').\16\ On June 16, 2023, the 
Exchange withdrew the Third Proposal and replaced it with a revised

[[Page 86953]]

proposal (SR-PEARL-2023-27) (the ``Fourth Proposal'').\17\ On August 8, 
2023, the Exchange withdrew the Fourth Proposal and replaced it with a 
revised proposal (SR-PEARL-2023-35) (the ``Fifth Proposal'').\18\ Since 
a U.S. government shutdown was avoided, on October 2, 2023, the 
Exchange withdrew the Fifth Proposal and replaced it with a further 
revised proposal (SR-PEARL-2023-55) (the ``Sixth Proposal'').\19\ On 
November 27, 2023, the Exchange withdrew the Sixth Proposal and 
replaced it with this further revised proposal (SR-PEARL-2023-64) (the 
``Seventh Proposal'').
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    \13\ The Exchange notes that MIAX will make a similar filing to 
increase its 10Gb ULL connectivity fees.
    \14\ See Securities Exchange Act Release No. 96632 (January 10, 
2023), 88 FR 2707 (January 17, 2023) (SR-PEARL-2022-62).
    \15\ See Securities Exchange Act Release No. 97082 (March 8, 
2023), 88 FR 15825 (March 14, 2023) (SR-PEARL-2023-05).
    \16\ See Securities Exchange Act Release No. 97420 (May 2, 
2023), 88 FR 29701 (May 8, 2023) (SR-PEARL-2023-19).
    \17\ The Exchange met with Commission Staff to discuss the Third 
Proposal during which the Commission Staff provided feedback and 
requested additional information, including, most recently, 
information about total costs related to certain third party 
vendors. Such vendor cost information is subject to confidentiality 
restrictions. The Exchange provided this information to Commission 
Staff under separate cover with a request for confidentiality. While 
the Exchange will continue to be responsive to Commission Staff's 
information requests, the Exchange believes that the Commission 
should, at this point, issue substantially more detailed guidance 
for exchanges to follow in the process of pursuing a cost-based 
approach to fee filings, and that, for the purposes of fair 
competition, detailed disclosures by exchanges, such as those that 
the Exchange is providing now, should be consistent across all 
exchanges, including for those that have resisted a cost-based 
approach to fee filings, in the interests of fair and even 
disclosure and fair competition. See Securities Exchange Act Release 
No. 97815 (June 27, 2023), 88 FR 42759 (July 3, 2023) (SR-PEARL-
2023-27).
    \18\ See Securities Exchange Act Release No. 98180 (August 21, 
2023), 88 FR 58404 (August 25, 2023) (SR-PEARL-2023-35). Due to the 
prospect of a U.S. government shutdown, the Commission suspended the 
Fifth Proposal on September 29, 2023. See Securities Exchange Act 
Release No. 98658 (September 29, 2023) (SR-PEARL-2023-35).
    \19\ See Securities Exchange Act Release No. 98753 (October 13, 
2023), 88 FR 72142 (October 19, 2023) (SR-PEARL-2023).
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    The Exchange previously included a cost analysis in the Initial, 
Second, Third, Fourth, Fifth, and Sixth Proposals. As described more 
fully below, the Exchange provides an updated cost analysis that 
includes, among other things, additional descriptions of how the 
Exchange allocated costs among it and its affiliated exchanges 
(separately among MIAX Pearl Options and MIAX Pearl Equities, MIAX and 
MIAX Emerald \20\ (together with MIAX and MIAX Pearl Equities, the 
``affiliated markets'')) to ensure no cost was allocated more than 
once, as well as additional detail supporting its cost allocation 
processes and explanations as to why a cost allocation in this proposal 
may differ from the same cost allocation in a similar proposal 
submitted by one of its affiliated markets. Although the baseline cost 
analysis used to justify the proposed fees was made in the Initial, 
Second, Third, Fourth, Fifth, and Sixth Proposals, the fees themselves 
have not changed since the Initial, Second, Third, Fourth, Fifth, or 
Sixth Proposals and the Exchange still proposes fees that are intended 
to cover the Exchange's cost of providing 10Gb ULL connectivity and 
Full Service MEO Ports with a reasonable mark-up over those costs.
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    \20\ The term ``MIAX Emerald'' means MIAX Emerald, LLC. See 
Exchange Rule 100.
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* * * * *
    Starting in 2017, following the United States Court of Appeals for 
the District of Columbia's Susquehanna Decision \21\ and various other 
developments, the Commission began to undertake a heightened review of 
exchange filings, including non-transaction fee filings that was 
substantially and materially different from it prior review process 
(hereinafter referred to as the ``Revised Review Process''). In the 
Susquehanna Decision, the D.C. Circuit Court stated that the Commission 
could not maintain a practice of ``unquestioning reliance'' on claims 
made by a self-regulatory organization (``SRO'') in the course of 
filing a rule or fee change with the Commission.\22\ Then, on October 
16, 2018, the Commission issued an opinion in Securities Industry and 
Financial Markets Association finding that exchanges failed both to 
establish that the challenged fees were constrained by significant 
competitive forces and that these fees were consistent with the 
Act.\23\ On that same day, the Commission issued an order remanding to 
various exchanges and national market system (``NMS'') plans challenges 
to over 400 rule changes and plan amendments that were asserted in 57 
applications for review (the ``Remand Order'').\24\ The Remand Order 
directed the exchanges to ``develop a record,'' and to ``explain their 
conclusions, based on that record, in a written decision that is 
sufficient to enable us to perform our review.'' \25\ The Commission 
denied requests by various exchanges and plan participants for 
reconsideration of the Remand Order.\26\ However, the Commission did 
extend the deadlines in the Remand Order ``so that they d[id] not begin 
to run until the resolution of the appeal of the SIFMA Decision in the 
D.C. Circuit and the issuance of the court's mandate.'' \27\ Both the 
Remand Order and the Order Denying Reconsideration were appealed to the 
D.C. Circuit.
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    \21\ See Susquehanna International Group, LLP v. Securities & 
Exchange Commission, 866 F.3d 442 (D.C. Circuit 2017) (the 
``Susquehanna Decision'').
    \22\ Id.
    \23\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 84432, 2018 WL 5023228 (October 16, 2018) (the ``SIFMA 
Decision'').
    \24\ See Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 84433, 2018 WL 5023230 (Oct. 16, 2018). See 15 U.S.C. 
78k-1, 78s; see also Rule 608(d) of Regulation NMS, 17 CFR 
242.608(d) (asserted as an alternative basis of jurisdiction in some 
applications).
    \25\ Id. at page 2.
    \26\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 85802, 2019 WL 2022819 (May 7, 2019) (the ``Order 
Denying Reconsideration'').
    \27\ Order Denying Reconsideration, 2019 WL 2022819, at *13.
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    While the above appeal to the D.C. Circuit was pending, on March 
29, 2019, the Commission issued an order disapproving a proposed fee 
change by BOX Exchange LLC (``BOX'') to establish connectivity fees 
(the ``BOX Order''), which significantly increased the level of 
information needed for the Commission to believe that an exchange's 
filing satisfied its obligations under the Act with respect to changing 
a fee.\28\ Despite approving hundreds of access fee filings in the 
years prior to the BOX Order (described further below) utilizing a 
``market-based'' test, the Commission changed course and disapproved 
BOX's proposal to begin charging connectivity at one-fourth the rate of 
competing exchanges' pricing.
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    \28\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to 
Amend the Fee Schedule on the BOX Market LLC Options Facility to 
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network). The Commission noted 
in the BOX Order that it ``historically applied a `market-based' 
test in its assessment of market data fees, which [the Commission] 
believe[s] present similar issues as the connectivity fees proposed 
herein.'' Id. at page 16. Despite this admission, the Commission 
disapproved BOX's proposal to begin charging $5,000 per month for 
10Gb connections (while allowing legacy exchanges to charge rates 
equal to 3-4 times that amount utilizing ``market-based'' fee 
filings from years prior).
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    Also while the above appeal was pending, on May 21, 2019, the 
Commission Staff issued guidance ``to assist the national securities 
exchanges and FINRA . . . in preparing Fee Filings that meet their 
burden to demonstrate that proposed fees are consistent with the 
requirements of the Securities Exchange Act.'' \29\ In the Staff 
Guidance, the Commission Staff states that, ``[a]s an initial step in 
assessing the reasonableness of a fee, staff considers whether the fee 
is constrained by significant competitive forces.'' \30\ The Staff 
Guidance also states that, ``. . . even where an SRO cannot 
demonstrate, or does not assert, that significant

[[Page 86954]]

competitive forces constrain the fee at issue, a cost-based discussion 
may be an alternative basis upon which to show consistency with the 
Exchange Act.'' \31\
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    \29\ See Staff Guidance on SRO Rule Filings Relating to Fees 
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Staff Guidance'').
    \30\ Id.
    \31\ Id.
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    Following the BOX Order and Staff Guidance, on August 6, 2020, the 
D.C. Circuit vacated the Commission's SIFMA Decision in NASDAQ Stock 
Market, LLC v. SEC \32\ and remanded for further proceedings consistent 
with its opinion.\33\ That same day, the D.C. Circuit issued an order 
remanding the Remand Order to the Commission for reconsideration in 
light of NASDAQ. The court noted that the Remand Order required the 
exchanges and NMS plan participants to consider the challenges that the 
Commission had remanded in light of the SIFMA Decision. The D.C. 
Circuit concluded that because the SIFMA Decision ``has now been 
vacated, the basis for the [Remand Order] has evaporated.'' \34\ 
Accordingly, on August 7, 2020, the Commission vacated the Remand Order 
and ordered the parties to file briefs addressing whether the holding 
in NASDAQ v. SEC that Exchange Act Section 19(d) does not permit 
challenges to generally applicable fee rules requiring dismissal of the 
challenges the Commission previously remanded.\35\ The Commission 
further invited ``the parties to submit briefing stating whether the 
challenges asserted in the applications for review . . . should be 
dismissed, and specifically identifying any challenge that they contend 
should not be dismissed pursuant to the holding of Nasdaq v. SEC.'' 
\36\ Without resolving the above issues, on October 5, 2020, the 
Commission issued an order granting SIFMA and Bloomberg's request to 
withdraw their applications for review and dismissed the 
proceedings.\37\
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    \32\ NASDAQ Stock Mkt., LLC v. SEC, No 18-1324, --- Fed. App'x -
--, 2020 WL 3406123 (D.C. Cir. June 5, 2020). The court's mandate 
was issued on August 6, 2020.
    \33\ Nasdaq v. SEC, 961 F.3d 421, at 424, 431 (D.C. Cir. 2020). 
The court's mandate issued on August 6, 2020. The D.C. Circuit held 
that Exchange Act ``Section 19(d) is not available as a means to 
challenge the reasonableness of generally-applicable fee rules.'' 
Id. The court held that ``for a fee rule to be challengeable under 
Section 19(d), it must, at a minimum, be targeted at specific 
individuals or entities.'' Id. Thus, the court held that ``Section 
19(d) is not an available means to challenge the fees at issue'' in 
the SIFMA Decision. Id.
    \34\ Id. at *2; see also id. (``[T]he sole purpose of the 
challenged remand has disappeared.'').
    \35\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 89504, 2020 WL 4569089 (August 7, 2020) (the ``Order 
Vacating Prior Order and Requesting Additional Briefs'').
    \36\ Id.
    \37\ Sec. Indus. & Fin. Mkts. Ass'n, Securities Exchange Act 
Release No. 90087 (October 5, 2020).
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    As a result of the Commission's loss of the NASDAQ vs. SEC case 
noted above, the Commission never followed through with its intention 
to subject the over 400 fee filings to ``develop a record,'' and to 
``explain their conclusions, based on that record, in a written 
decision that is sufficient to enable us to perform our review.'' \38\ 
As such, all of those fees remained in place and amounted to a baseline 
set of fees for those exchanges that had the benefit of getting their 
fees in place before the Commission Staff's fee review process 
materially changed. The net result of this history and lack of 
resolution in the D.C. Circuit Court resulted in an uneven competitive 
landscape where the Commission subjects all new non-transaction fee 
filings to the new Revised Review Process, while allowing the 
previously challenged fee filings, mostly submitted by incumbent 
exchanges prior to 2019, to remain in effect and not subject to the 
``record'' or ``review'' earlier intended by the Commission.
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    \38\ See supra note 32, at page 2.
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    While the Exchange appreciates that the Staff Guidance articulates 
an important policy goal of improving disclosures and requiring 
exchanges to justify that their market data and access fee proposals 
are fair and reasonable, the practical effect of the Revised Review 
Process, Staff Guidance, and the Commission's related practice of 
continuous suspension of new fee filings, is anti-competitive, 
discriminatory, and has put in place an un-level playing field, which 
has negatively impacted smaller, nascent, non-legacy exchanges (``non-
legacy exchanges''), while favoring larger, incumbent, entrenched, 
legacy exchanges (``legacy exchanges'').\39\ The legacy exchanges all 
established a significantly higher baseline for access and market data 
fees prior to the Revised Review Process. From 2011 until the issuance 
of the Staff Guidance in 2019, national securities exchanges filed, and 
the Commission Staff did not abrogate or suspend (allowing such fees to 
become effective), at least 92 filings \40\ to amend exchange 
connectivity or port fees (or similar access fees). The support for 
each of those filings was a simple statement by the relevant exchange 
that the fees were constrained by competitive forces.\41\ These fees 
remain in effect today.
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    \39\ Commission Chair Gary Gensler recently reiterated the 
Commission's mandate to ensure competition in the equities markets. 
See ``Statement on Minimum Price Increments, Access Fee Caps, Round 
Lots, and Odd-Lots'', by Chair Gary Gensler, dated December 14, 2022 
(stating ``[i]n 1975, Congress tasked the Securities and Exchange 
Commission with responsibility to facilitate the establishment of 
the national market system and enhance competition in the securities 
markets, including the equity markets'' (emphasis added)). In that 
same statement, Chair Gary Gensler cited the five objectives laid 
out by Congress in 11A of the Exchange Act (15 U.S.C. 78k-1), 
including ensuring ``fair competition among brokers and dealers, 
among exchange markets, and between exchange markets and markets 
other than exchange markets. . .'' (emphasis added). Id. at note 1. 
See also Securities Acts Amendments of 1975, available at https://www.govtrack.us/congress/bills/94/s249.
    \40\ This timeframe also includes challenges to over 400 rule 
filings by SIFMA and Bloomberg discussed above. Sec. Indus. & Fin. 
Mkts. Ass'n, Securities Exchange Act Release No. 84433, 2018 WL 
5023230 (Oct. 16, 2018). Those filings were left to stand, while at 
the same time, blocking newer exchanges from the ability to 
establish competitive access and market data fees. See The Nasdaq 
Stock Market, LLC v. SEC, Case No. 18-1292 (D.C. Cir. June 5, 2020). 
The expectation at the time of the litigation was that the 400 rule 
flings challenged by SIFMA and Bloomberg would need to be justified 
under revised review standards.
    \41\ See, e.g., Securities Exchange Act Release Nos. 74417 
(March 3, 2015), 80 FR 12534 (March 9, 2015) (SR-ISE-2015-06); 83016 
(April 9, 2018), 83 FR 16157 (April 13, 2018) (SR-PHLX-2018-26); 
70285 (August 29, 2013), 78 FR 54697 (September 5, 2013) (SR-
NYSEMKT-2013-71); 76373 (November 5, 2015), 80 FR 70024 (November 
12, 2015) (SR-NYSEMKT-2015-90); 79729 (January 4, 2017), 82 FR 3061 
(January 10, 2017) (SR-NYSEARCA-2016-172).
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    The net result is that the non-legacy exchanges are effectively now 
blocked by the Commission Staff from adopting or increasing fees to 
amounts comparable to the legacy exchanges (which were not subject to 
the Revised Review Process and Staff Guidance), despite providing 
enhanced disclosures and rationale to support their proposed fee 
changes that far exceed any such support provided by legacy exchanges. 
Simply put, legacy exchanges were able to increase their non-
transaction fees during an extended period in which the Commission 
applied a ``market-based'' test that only relied upon the assumed 
presence of significant competitive forces, while exchanges today are 
subject to a cost-based test requiring extensive cost and revenue 
disclosures, a process that is complex, inconsistently applied, and 
rarely results in a successful outcome, i.e., non-suspension. The 
Revised Review Process and Staff Guidance changed decades-long 
Commission Staff standards for review, resulting in unfair 
discrimination and placing an undue burden on inter-market competition 
between legacy exchanges and non-legacy exchanges.
    Commission Staff now require exchange filings, including from non-
legacy exchanges such as MIAX Pearl, to provide detailed cost-based 
analysis in place of competition-based arguments to support such 
changes. However, even with the added detailed cost and expense 
disclosures, the Commission

[[Page 86955]]

Staff continues to either suspend such filings and institute 
disapproval proceedings, or put the exchanges in the unenviable 
position of having to repeatedly withdraw and re-file with additional 
detail in order to continue to charge those fees.\42\ By impeding any 
path forward for non-legacy exchanges to establish commensurate non-
transaction fees, or by failing to provide any alternative means for 
smaller markets to establish ``fee parity'' with legacy exchanges, the 
Commission is stifling competition: non-legacy exchanges are, in 
effect, being deprived of the revenue necessary to compete on a level 
playing field with legacy exchanges. This is particularly harmful, 
given that the costs to maintain exchange systems and operations 
continue to increase. The Commission Staff's change in position impedes 
the ability of non-legacy exchanges to raise revenue to invest in their 
systems to compete with the legacy exchanges who already enjoy 
disproportionate non-transaction fee based revenue. For example, the 
Cboe Exchange, Inc. (``Cboe'') reported ``access and capacity fee'' 
revenue of $70,893,000 for 2020 \43\ and $80,383,000 for 2021.\44\ Cboe 
C2 Exchange, Inc. (``C2'') reported ``access and capacity fee'' revenue 
of $19,016,000 for 2020 \45\ and $22,843,000 for 2021.\46\ Cboe BZX 
Exchange, Inc. (``BZX'') reported ``access and capacity fee'' revenue 
of $38,387,000 for 2020 \47\ and $44,800,000 for 2021.\48\ Cboe EDGX 
Exchange, Inc. (``EDGX'') reported ``access and capacity fee'' revenue 
of $26,126,000 for 2020 \49\ and $30,687,000 for 2021.\50\ For 2021, 
the affiliated Cboe, C2, BZX, and EDGX (the four largest exchanges of 
the Cboe exchange group) reported $178,712,000 in ``access and capacity 
fees'' in 2021. NASDAQ Phlx, LLC (``NASDAQ Phlx'') reported ``Trade 
Management Services'' revenue of $20,817,000 for 2019.\51\ The Exchange 
notes it is unable to compare ``access fee'' revenues with NASDAQ Phlx 
(or other affiliated NASDAQ exchanges) because after 2019, the ``Trade 
Management Services'' line item was bundled into a much larger line 
item in PHLX's Form 1, simply titled ``Market services.'' \52\
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    \42\ The Exchange has filed, and subsequently withdrew, various 
forms of this proposed fee change numerous times since August 2021 
with each proposal containing hundreds of cost and revenue 
disclosures never previously disclosed by legacy exchanges in their 
access and market data fee filings prior to 2019.
    \43\ According to Cboe's 2021 Form 1 Amendment, access and 
capacity fees represent fees assessed for the opportunity to trade, 
including fees for trading-related functionality. See Cboe 2021 Form 
1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \44\ See Cboe 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001155.pdf.
    \45\ See C2 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000469.pdf.
    \46\ See C2 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001156.pdf.
    \47\ See BZX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000465.pdf.
    \48\ See BZX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001152.pdf.
    \49\ See EDGX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000467.pdf.
    \50\ See EDGX 2022 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2200/22001154.pdf.
    \51\ According to PHLX, ``Trade Management Services'' includes 
``a wide variety of alternatives for connectivity to and accessing 
[the PHLX] markets for a fee. These participants are charged monthly 
fees for connectivity and support in accordance with [PHLX's] 
published fee schedules.'' See PHLX 2020 Form 1 Amendment, available 
at https://www.sec.gov/Archives/edgar/vprr/2001/20012246.pdf.
    \52\ See PHLX 2021 Form 1 Amendment, available at https://www.sec.gov/Archives/edgar/vprr/2100/21000475.pdf. The Exchange 
notes that this type of Form 1 accounting appears to be designed to 
obfuscate the true financials of such exchanges and has the effect 
of perpetuating fee and revenue advantages of legacy exchanges.
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    The much higher non-transaction fees charged by the legacy 
exchanges provides them with two significant competitive advantages. 
First, legacy exchanges are able to use their additional non-
transaction revenue for investments in infrastructure, vast marketing 
and advertising on major media outlets,\53\ new products and other 
innovations. Second, higher non-transaction fees provide the legacy 
exchanges with greater flexibility to lower their transaction fees (or 
use the revenue from the higher non-transaction fees to subsidize 
transaction fee rates),\54\ which are more immediately impactful in 
competition for order flow and market share, given the variable nature 
of this cost on member firms. The prohibition of a reasonable path 
forward denies the Exchange (and other non-legacy exchanges) this 
flexibility, eliminates the ability to remain competitive on 
transaction fees, and hinders the ability to compete for order flow and 
market share with legacy exchanges. There is little doubt that 
subjecting one exchange to a materially different standard than that 
historically applied to legacy exchanges for non-transaction fees 
leaves that exchange at a disadvantage in its ability to compete with 
its pricing of transaction fees.
---------------------------------------------------------------------------

    \53\ See, e.g., CNBC Debuts New Set on NYSE Floor, available at 
https://www.cnbc.com/id/46517876.
    \54\ See, e.g., Cboe Fee Schedule, Page 4, Affiliate Volume 
Plan, available at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf (providing that if a market maker or its 
affiliate receives a credit under Cboe's Volume Incentive Program 
(``VIP''), the market maker will receive an access credit on their 
BOE Bulk Ports corresponding to the VIP tier reached and the market 
maker will receive a transaction fee credit on their sliding scale 
market maker transaction fees) and NYSE American Options Fee 
Schedule, Section III, E, Floor Broker Incentive and Rebate 
Programs, available at https://www.nyse.com/publicdocs/nyse/markets/american-options/NYSE_American_Options_Fee_Schedule.pdf (providing 
floor brokers the opportunity to prepay certain non-transaction fees 
for the following calendar year by achieving certain amounts of 
volume executed on NYSE American).
---------------------------------------------------------------------------

    While the Commission has clearly noted that the Staff Guidance is 
merely guidance and ``is not a rule, regulation or statement of the . . 
. Commission . . . the Commission has neither approved nor disapproved 
its content . . .'',\55\ this is not the reality experienced by 
exchanges such as MIAX Pearl. As such, non-legacy exchanges are forced 
to rely on an opaque cost-based justification standard. However, 
because the Staff Guidance is devoid of detail on what must be 
contained in cost-based justification, this standard is nearly 
impossible to meet despite repeated good-faith efforts by the Exchange 
to provide substantial amount of cost-related details. For example, the 
Exchange has attempted to increase fees using a cost-based 
justification numerous times, having submitted over six filings.\56\ 
However, despite providing 100+ page filings describing in extensive 
detail its costs associated with providing the services described in 
the filings, Commission Staff continues to suspend such filings, with 
the rationale that the Exchange has not provided sufficient detail of 
its costs and without ever being precise about what additional data 
points are required. The Commission Staff appears to be interpreting 
the reasonableness standard set forth in Section 6(b)(4) of the Act 
\57\ in a manner that is not possible to achieve. This essentially 
nullifies the cost-based approach for

[[Page 86956]]

exchanges as a legitimate alternative as laid out in the Staff 
Guidance. By refusing to accept a reasonable cost-based argument to 
justify non-transaction fees (in addition to refusing to accept a 
competition-based argument as described above), or by failing to 
provide the detail required to achieve that standard, the Commission 
Staff is effectively preventing non-legacy exchanges from making any 
non-transaction fee changes, which benefits the legacy exchanges and is 
anticompetitive to the non-legacy exchanges. This does not meet the 
fairness standard under the Act and is discriminatory.
---------------------------------------------------------------------------

    \55\ See supra note 29, at note 1.
    \56\ See Securities Exchange Act Release Nos. 92798 (August 27, 
2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-33); 92644 
(August 11, 2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36); 
93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR-PEARL-
2021-45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 2021) 
(SR-PEARL-2021-53); 93774 (December 14, 2021), 86 FR 71952 (December 
20, 2021) (SR-PEARL-2021-57); 93894 (January 4, 2022), 87 FR 1203 
(January 10, 2022) (SR-PEARL-2021-58); 94258 (February 15, 2022), 87 
FR 9659 (February 22, 2022) (SR-PEARL-2022-03); 94286 (February 18, 
2022), 87 FR 10860 (February 25, 2022) (SR-PEARL-2022-04); 94721 
(April 14, 2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11); 
94722 (April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-
12); 94888 (May 11, 2022), 87 FR 29892 (May 17, 2022) (SR-PEARL-
2022-18).
    \57\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    Because of the un-level playing field created by the Revised Review 
Process and Staff Guidance, the Exchange believes that the Commission 
Staff, at this point, should either (a) provide sufficient clarity on 
how its cost-based standard can be met, including a clear and 
exhaustive articulation of required data and its views on acceptable 
margins,\58\ to the extent that this is pertinent; (b) establish a 
framework to provide for commensurate non-transaction based fees among 
competing exchanges to ensure fee parity; \59\ or (c) accept that 
certain competition-based arguments are applicable given the linkage 
between non-transaction fees and transaction fees, especially where 
non-transaction fees among exchanges are based upon disparate standards 
of review, lack parity, and impede fair competition. Considering the 
absence of any such framework or clarity, the Exchange believes that 
the Commission does not have a reasonable basis to deny the Exchange 
this change in fees, where the proposed change would result in fees 
meaningfully lower than comparable fees at competing exchanges and 
where the associated non-transaction revenue is meaningfully lower than 
competing exchanges.
---------------------------------------------------------------------------

    \58\ To the extent that the cost-based standard includes 
Commission Staff making determinations as to the appropriateness of 
certain profit margins, the Exchange believes that Staff should be 
clear as to what they determine is an appropriate profit margin.
    \59\ In light of the arguments above regarding disparate 
standards of review for historical legacy non-transaction fees and 
current non-transaction fees for non-legacy exchanges, a fee parity 
alternative would be one possible way to avoid the current unfair 
and discriminatory effect of the Staff Guidance and Revised Review 
Process. See, e.g., CSA Staff Consultation Paper 21-401, Real-Time 
Market Data Fees, available at https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy2/21401_Market_Data_Fee_CSA_Staff_Consulation_Paper.pdf.
---------------------------------------------------------------------------

    In light of the above, disapproval of this would not meet the 
fairness standard under the Act, would be discriminatory and place a 
substantial burden on competition. The Exchange would be uniquely 
disadvantaged by not being able to increase its access fees to 
comparable levels (or lower levels than current market rates) to those 
of other options exchanges for connectivity. If the Commission Staff 
were to disapprove this proposal, that action, and not market forces, 
would substantially affect whether the Exchange can be successful in 
its competition with other options exchanges. Disapproval of this 
filing could also be viewed as an arbitrary and capricious decision 
should the Commission Staff continue to ignore its past treatment of 
non-transaction fee filings before implementation of the Revised Review 
Process and Staff Guidance and refuse to allow such filings to be 
approved despite significantly enhanced arguments and cost 
disclosures.\60\
---------------------------------------------------------------------------

    \60\ The Exchange's costs have clearly increased and continue to 
increase, particularly regarding capital expenditures, as well as 
employee benefits provided by third parties (e.g., healthcare and 
insurance). Yet, practically no fee change proposed by the Exchange 
to cover its ever increasing costs has been acceptable to the 
Commission Staff since 2021. The only other fair and reasonable 
alternative would be to require the numerous fee filings 
unquestioningly approved before the Staff Guidance and Revised 
Review Process to ``develop a record,'' and to ``explain their 
conclusions, based on that record, in a written decision that is 
sufficient to enable us to perform our review,'' and to ensure a 
comparable review process with the Exchange's filing.
---------------------------------------------------------------------------

* * * * *
10Gb ULL Connectivity Fee Change
    MIAX Pearl Options filed a proposal to no longer operate 10Gb 
connectivity to MIAX Pearl Options on a single shared network with its 
affiliate, MIAX. This change is an operational necessity due to ever-
increasing capacity constraints and to accommodate anticipated access 
needs for Members and other market participants.\61\ This proposal: (i) 
sets forth the applicable fees for the bifurcated 10Gb ULL network; 
(ii) removes provisions in the Fee Schedule that provide for a shared 
10Gb ULL network; and (iii) specifies that market participants may 
continue to connect to both MIAX Pearl Options and MIAX via the 1Gb 
network.
---------------------------------------------------------------------------

    \61\ See supra note 9.
---------------------------------------------------------------------------

    MIAX Pearl Options bifurcated the MIAX Pearl Options and MIAX 10Gb 
ULL networks in the first quarter of 2023, which change became 
effective on January 23, 2023. The Exchange issued an alert on August 
12, 2022 publicly announcing the planned network change and 
implementation plan and dates to provide market participants adequate 
time to prepare.\62\ Upon bifurcation of the 10Gb ULL network, 
subscribers need to purchase separate connections to MIAX Pearl Options 
and MIAX at the applicable rate. The Exchange's proposed amended rate 
for 10Gb ULL connectivity is described below. Prior to the bifurcation 
of the 10Gb ULL networks, subscribers to 10Gb ULL connectivity were 
able to connect to both MIAX Pearl Options and MIAX at the applicable 
rate set forth below.
---------------------------------------------------------------------------

    \62\ Id.
---------------------------------------------------------------------------

    The Exchange, therefore, proposes to amend the Fee Schedule to 
increase the fees for Members and non-Members to access the Exchange's 
system networks \63\ via a 10Gb ULL fiber connection and to specify 
that this fee is for a dedicated connection to MIAX Pearl Options and 
no longer provides access to MIAX. Specifically, MIAX Pearl Options 
proposes to amend Sections 5)a)-b) of the Fee Schedule to increase the 
10Gb ULL connectivity fee for Members and non-Members from $10,000 per 
month to $13,500 per month (``10Gb ULL Fee'').\64\ The Exchange also 
proposes to amend the Fee Schedule to reflect the bifurcation of the 
10Gb ULL network and specify that only the 1Gb network provides access 
to both MIAX Pearl Options and MIAX.
---------------------------------------------------------------------------

    \63\ The Exchange's system networks consist of the Exchange's 
extranet, internal network, and external network.
    \64\ Market participants that purchase additional 10Gb ULL 
connections as a result of this change will not be subject to the 
Exchange's Member Network Connectivity Testing and Certification Fee 
under Section 4)c) of the Exchange's Fee Schedule. See Section 4)c) 
of the Exchange's fee schedule available at https://www.miaxglobal.com/markets/us-options/pearl-options/fees (providing 
that ``Network Connectivity Testing and Certification Fees will not 
be assessed in situations where the Exchange initiates a mandatory 
change to the Exchange's system that requires testing and 
certification. Member Network Connectivity Testing and Certification 
Fees will not be assessed for testing and certification of 
connectivity to the Exchange's Disaster Recovery Facility.'').
---------------------------------------------------------------------------

    The Exchange proposes to make the following changes to reflect the 
bifurcated 10Gb ULL network for the Exchange and MIAX. First, in the 
Definitions section of the Fee Schedule, the Exchange proposes to amend 
the last sentence in the definition of ``MENI'' to specify that the 
MENI can be configured to provide network connectivity to the trading 
platforms, market data systems, test systems, and disaster recovery 
facilities of the Exchange's affiliate, MIAX, via a single, shared 1Gb 
connection. Next, the Exchange proposes to amend the explanatory 
paragraphs below the network connectivity fee tables in Sections 5)a)-
b) of the Fee Schedule to specify that, with the bifurcated 10Gb ULL 
network,

[[Page 86957]]

Members (and non-Members) utilizing the MENI to connect to the trading 
platforms, market data systems, test systems, and disaster recovery 
facilities of the Exchange and MIAX via a single, can only do so via a 
shared 1Gb connection.
    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the Exchange APIs or market data feeds in the production 
environment. The Exchange will continue to pro-rate the fees when a 
Member or non-Member makes a change to the connectivity (by adding or 
deleting connections) with such pro-rated fees based on the number of 
trading days that the Member or non-Member has been credentialed to 
utilize any of the Exchange APIs or market data feeds in the production 
environment through such connection, divided by the total number of 
trading days in such month multiplied by the applicable monthly rate.
Full Service MEO Ports--Bulk and Single
Background
    The Exchange also proposes to amend Section 5)d) of the Fee 
Schedule to amend the calculation and amount of fees for Full Service 
MEO Ports. The Exchange currently offers different types of MEO Ports 
depending on the services required by the Member, including a Full 
Service MEO Port-Bulk,\65\ a Full Service MEO Port-Single,\66\ and a 
Limited Service MEO Port.\67\ For one monthly price, a Member may be 
allocated two (2) Full-Service MEO Ports of either type per matching 
engine \68\ and may request Limited Service MEO Ports for which MIAX 
Pearl will assess Members Limited Service MEO Port fees based on a 
sliding scale for the number of Limited Service MEO Ports utilized each 
month. The two (2) Full-Service MEO Ports that may be allocated per 
matching engine to a Member may consist of: (a) two (2) Full Service 
MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--Single; or (c) one 
(1) Full Service MEO Port--Bulk and one (1) Full Service MEO Port--
Single.
---------------------------------------------------------------------------

    \65.\ ``Full Service MEO Port--Bulk'' means an MEO port that 
supports all MEO input message types and binary bulk order entry. 
See the Definitions Section of the Fee Schedule.
    \66\ ``Full Service MEO Port--Single'' means an MEO port that 
supports all MEO input message types and binary order entry on a 
single order-by-order basis, but not bulk orders. See the 
Definitions Section of the Fee Schedule.
    \67\ ``Limited Service MEO Port'' means an MEO port that 
supports all MEO input message types, but does not support bulk 
order entry and only supports limited order types, as specified by 
the Exchange via Regulatory Circular. See the Definitions Section of 
the Fee Schedule.
    \68\ A ``Matching Engine'' is a part of the Exchange's 
electronic system that processes options orders and trades on a 
symbol-by-symbol basis. See the Definitions Section of the Fee 
Schedule.
---------------------------------------------------------------------------

    Currently, the Exchange assesses Members Full Service MEO Port 
Fees, either for a Full Service MEO Port--Bulk and/or for a Full 
Service MEO Port--Single, based upon the monthly total volume executed 
by a Member and its Affiliates \69\ on the Exchange, across all origin 
types, not including Excluded Contracts,\70\ as compared to the Total 
Consolidated Volume (``TCV''),\71\ in all MIAX Pearl-listed options. 
The Exchange adopted a tier-based fee structure based upon the volume-
based tiers detailed in the definition of ``Non-Transaction Fees 
Volume-Based Tiers'' described in the Definitions section of the Fee 
Schedule. The Exchange assesses these and other monthly Port fees to 
Members in each month the market participant is credentialed to use a 
Port in the production environment.
---------------------------------------------------------------------------

    \69\ ``Affiliate'' means (i) an affiliate of a Member of at 
least 75% common ownership between the firms as reflected on each 
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an 
Appointed EEM (or, conversely, the Appointed EEM of an Appointed 
Market Maker). See the Definitions Section of the Fee Schedule.
    \70\ ``Excluded Contracts'' means any contracts routed to an 
away market for execution. See the Definitions Section of the Fee 
Schedule.
    \71\ ``TCV'' means total consolidated volume calculated as the 
total national volume in those classes listed on MIAX Pearl for the 
month for which the fees apply, excluding consolidated volume 
executed during the period of time in which the Exchange experiences 
an Exchange System Disruption (solely in the option classes of the 
affected Matching Engine). See the Definitions Section of the Fee 
Schedule.
---------------------------------------------------------------------------

Full Service MEO Port (Bulk) Fee Changes
    Current Full Service MEO Port (Bulk) Fees. The Exchange currently 
assesses all Members (Market Makers \72\ and Electronic Exchange 
Members \73\ (``EEMs'')) monthly Full Service MEO Port--Bulk fees as 
follows:
---------------------------------------------------------------------------

    \72\ The term ``Market Maker'' means a Member registered with 
the Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in Chapter VI of Exchange Rules. See the 
Definitions Section of the Fee Schedule and Exchange Rule 100.
    \73\ The term ``Electronic Exchange Member'' or ``EEM'' means 
the holder of a Trading Permit who is a Member representing as agent 
Public Customer Orders or Non-Customer Orders on the Exchange and 
those non-Market Maker Members conducting proprietary trading. 
Electronic Exchange Members are deemed ``members'' under the 
Exchange Act. See the Definitions Section of the Fee Schedule and 
Exchange Rule 100.
---------------------------------------------------------------------------

    (i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $4,500; and
    (iii) if its volume falls within the parameters of Tier 3 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
    Proposed Full Service MEO Port (Bulk) Fees. The Exchange proposes 
to amend the calculation and amount of Full Service MEO Port (Bulk) 
fees for EEMs and Market Makers. In particular, for EEMs, the Exchange 
proposes to move away from the above-described volume tier-based fee 
structure and instead charge all EEMs that utilize Full Service MEO 
Ports (Bulk) a flat monthly fee of $7,500. For this flat monthly fee, 
EEMs will continue to be entitled to two (2) Full Service MEO Ports 
(Bulk) for each Matching Engine for the single monthly fee of $7,500. 
The Exchange now proposes to amend the calculation and amount of Full 
Service MEO Port (Bulk) fees for Market Makers by moving away from the 
above-described volume tier-based fee structure to harmonize the Full 
Service MEO Port (Bulk) fee structure for Market Makers with that of 
the Exchange's affiliates, MIAX and MIAX Emerald.\74\ The Exchange 
proposes that the amount of the monthly Full Service MEO Port (Bulk) 
fees for Market Makers would be based on the lesser of either the per 
class traded or percentage of total national average daily volume 
(``ADV'') measurement based on classes traded by volume. The amount of 
monthly Market Maker Full Service MEO Port (Bulk) fee would be based 
upon the number of classes in which the Market Maker was registered to 
quote on any given day within the calendar month, or upon the class 
volume percentages. This change in how Full Service MEO Port (Bulk) 
fees are calculated is identical to how the Exchange assesses Market 
Makers Trading Permit fees, which is in line with how numerous 
exchanges charge similar membership fees.
---------------------------------------------------------------------------

    \74\ See MIAX Fee Schedule, Section 5)d)ii) and MIAX Emerald Fee 
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------

    Specifically, the Exchange proposes to adopt the following Full 
Service MEO Port (Bulk) fees for Market Makers: (i) $5,000 for Market 
Maker registrations in up to 10 option classes or up to 20% of option 
classes by national ADV; (ii) $7,500 for Market Maker registrations in 
up to 40 option classes or up to 35% of option classes by ADV; (iii) 
$10,000 for Market Maker registrations in up to 100 option classes or 
up to 50% of option

[[Page 86958]]

classes by ADV; and (iv) $12,000 for Market Maker registrations in over 
100 option classes or over 50% of option classes by ADV up to all 
option classes listed on MIAX Pearl. For example, if Market Maker 1 
elects to quote the top 40 option classes which consist of 58% of the 
total national average daily volume in the prior calendar quarter, the 
Exchange would assess $7,500 to Market Maker 1 for the month which is 
the lesser of `up to 40 classes' and `over 50% of classes by volume up 
to all classes listed on MIAX Pearl'. If Market Maker 2 elects to quote 
the bottom 1000 option classes which consist of 10% of the total 
national average daily volume in the prior quarter, the Exchange would 
assess $5,000 to Market Maker 2 for the month which is the lesser of 
`over 100 classes' and `up to 20% of classes by volume. The Exchange 
notes that the proposed tiers (ranging from $5,000 to $12,000) are 
lower than the tiers that the Exchange's affiliates charge for their 
comparable ports (ranging from $5,000 to $20,500) for similar per class 
tier thresholds.\75\
---------------------------------------------------------------------------

    \75\ See id.
---------------------------------------------------------------------------

    With the proposed changes, a Market Maker would be determined to be 
registered in a class if that Market Maker has been registered in one 
or more series in that class.\76\ The Exchange will assess MIAX Pearl 
Options Market Makers the monthly Market Maker Full Service MEO Port 
(Bulk) fee based on the greatest number of classes listed on MIAX Pearl 
Options that the MIAX Pearl Options Market Maker registered to quote in 
on any given day within a calendar month. Therefore, with the proposed 
changes to the calculation of Market Maker Full Service MEO Port (Bulk) 
fees, the Exchange's Market Makers would be encouraged to quote in more 
series in each class they are registered in because each additional 
series in that class would not count against their total classes for 
purposes of the Full Service MEO Port (Bulk) fee tiers. The class 
volume percentage is based on the total national ADV in classes listed 
on MIAX Pearl Options in the prior calendar quarter. Newly listed 
option classes are excluded from the calculation of the monthly Market 
Maker Full Service MEO Port (Bulk) fee until the calendar quarter 
following their listing, at which time the newly listed option classes 
will be included in both the per class count and the percentage of 
total national ADV.
---------------------------------------------------------------------------

    \76\ Pursuant to Exchange Rule 602(a), a Member that has 
qualified as a Market Maker may register to make markets in 
individual series of options.
---------------------------------------------------------------------------

    The Exchange also proposes to adopt an alternative lower Full 
Service MEO Port (Bulk) fee for Market Makers who fall within the 2nd, 
3rd and 4th levels of the proposed Market Maker Full Service MEO Port 
(Bulk) fee table: (i) Market Maker registrations in up to 40 option 
classes or up to 35% of option classes by volume; (ii) Market Maker 
registrations in up to 100 option classes or up to 50% of option 
classes by volume; and (iii) Market Maker registrations in over 100 
option classes or over 50% of option classes by volume up to all option 
classes listed on MIAX Pearl Options. In particular, the Exchange 
proposes to adopt footnote ``**'' following the Market Maker Full 
Service MEO Port (Bulk) fee table for these Monthly Full Service MEO 
Port (Bulk) tier levels. New proposed footnote ``**'' will provide that 
if the Market Maker's total monthly executed volume during the relevant 
month is less than 0.040% of the total monthly TCV for MIAX Pearl-
listed option classes for that month, then the fee will be $6,000 
instead of the fee otherwise applicable to such level.
    The purpose of the alternative lower fee designated in proposed 
footnote ``**'' is to provide a lower fixed fee to those Market Makers 
who are willing to quote the entire Exchange market (or substantial 
amount of the Exchange market), as objectively measured by either 
number of classes assigned or national ADV, but who do not otherwise 
execute a significant amount of volume on the Exchange. The Exchange 
believes that, by offering lower fixed fees to Market Makers that 
execute less volume, the Exchange will retain and attract smaller-scale 
Market Makers, which are an integral component of the option 
marketplace, but have been decreasing in number in recent years, due to 
industry consolidation. Since these smaller-scale Market Makers utilize 
less Exchange capacity due to lower overall volume executed, the 
Exchange believes it is reasonable and equitable to offer such Market 
Makers a lower fixed fee. The Exchange notes that the Exchange's 
affiliates, MIAX and MIAX Emerald, also provide lower MIAX Express 
Interface (``MEI'') Port fees (the comparable ports on those exchanges) 
for Market Makers who quote the entire MIAX and MIAX Emerald markets 
(or substantial amount of those markets), as objectively measured by 
either number of classes assigned or national ADV, but who do not 
otherwise execute a significant amount of volume on MIAX or MIAX 
Emerald.\77\ The proposed changes to the Full Service MEO Port (Bulk) 
fees for Market Makers who fall within the 2nd, 3rd and 4th levels of 
the fee table are based upon a business determination of current Market 
Maker assignments and trading volume.
---------------------------------------------------------------------------

    \77\ See MIAX Fee Schedule, Section 5)d)ii), note ``*'' and MIAX 
Emerald Fee Schedule, Section 5)d)ii), note ``[ssquf]'' [sic].
---------------------------------------------------------------------------

    Unlike other options exchanges that provide similar port 
functionality and charge fees on a per port basis,\78\ the Exchange 
offers Full Service MEO Ports as a package and provides Members with 
the option to receive up to two Full Service MEO Ports (described 
above) per matching engine to which that Member connects. The Exchange 
currently has twelve (12) matching engines, which means Market Makers 
may receive up to twenty-four (24) Full Service MEO Ports for a single 
monthly fee, that can vary based on the lesser of either the per class 
traded or percentage of total national ADV measurement based on classes 
traded by volume, as described above. For illustrative purposes, the 
Exchange currently assesses a fee of $5,000 per month for Market Makers 
that reach the highest Full Service MEO Port (Bulk) tier, regardless of 
the number of Full Service MEO Ports allocated to the Market Maker. For 
example, assuming a Market Maker connects to all twelve (12) matching 
engines during a month, with two Full Service MEO Ports (Bulk) per 
matching engine, this results in an effective fee of $208.33 per Full 
Service MEO Port ($5,000 divided by 24) for the

[[Page 86959]]

month, as compared to other exchanges that charge over $1,000 per port 
and require multiple ports to connect to all of their matching 
engines.\79\ This fee had been unchanged since the Exchange adopted 
Full Service MEO Port fees in 2018.\80\ The Exchange proposes to 
increase Full Service MEO Port fees, with the highest monthly fee of 
$12,000 for the Full Service MEO Ports (Bulk). Market Makers will 
continue to receive two (2) Full Service MEO Ports to each matching 
engine to which they connect for the single flat monthly fee. Assuming 
a Market Maker connects to all twelve (12) matching engines during the 
month, with two Full Service MEO Ports per matching engine, this would 
result in an effective fee of $500 per Full Service MEO Port ($12,000 
divided by 24).
---------------------------------------------------------------------------

    \78\ See NYSE American Options Fee Schedule, Section V.A., Port 
Fees (each port charged on a per matching engine basis, with NYSE 
American having 17 match engines). See NYSE Technology FAQ and Best 
Practices: Options, Section 5.1 (How many matching engines are used 
by each exchange?) (September 2020) (providing a link to an Excel 
file detailing the number of matching engines per options exchange); 
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a 
per matching engine basis, NYSE Arca having 19 match engines); and 
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How 
many matching engines are used by each exchange?) (September 2020) 
(providing a link to an Excel file detailing the number of matching 
engines per options exchange). See NASDAQ Fee Schedule, NASDAQ 
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports 
and Other Services (each port charged on a per matching engine 
basis, with Nasdaq having multiple matching engines). See NASDAQ 
Specialized Quote Interface (SQF) Specification, Version 6.5b 
(updated February 13, 2020), Section 2, Architecture, available at 
https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface Specification''). The 
NASDAQ SQF Interface Specification also provides that NASDAQ's 
affiliates, NASDAQ Phlx and NASDAQ BX, Inc. (``BX''), have trading 
infrastructures that may consist of multiple matching engines with 
each matching engine trading only a range of option classes. 
Further, the NASDAQ SQF Interface Specification provides that the 
SQF infrastructure is such that the firms connect to one or more 
servers residing directly on the matching engine infrastructure. 
Since there may be multiple matching engines, firms will need to 
connect to each engine's infrastructure in order to establish the 
ability to quote the symbols handled by that engine.
    \79\ Id. See also infra table on page 131 and accompanying text.
    \80\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).

                                            Full Service MEO Ports ()
                                                     [Bulk]
----------------------------------------------------------------------------------------------------------------
                                                                     Total number
                                                                     of ports for
                                                     Number of       market maker    Total fee    Effective per
                                                   match engines    to connect to    (monthly)       port fee
                                                                      all  match
                                                                       engines
----------------------------------------------------------------------------------------------------------------
Pricing Based on Market Maker Being Charged the                12               24       $5,000          $208.33
 Highest Tier (Current).........................
Pricing Based on Market Maker Being Charged the                12               24       12,000              500
 Highest Tier (as proposed).....................
----------------------------------------------------------------------------------------------------------------

Full Service MEO Port (Single) Fee Changes
    Current Full Service MEO Port (Single) Fees. The Exchange currently 
assesses all Members (Market Makers and EEMs) monthly Full Service MEO 
Port (Single) fees as follows:
    (i) if its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $3,375; and
    (iii) if its volume falls within the parameters of Tier 3 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
    Proposed Full Service MEO Port (Single) Fees. The Exchange proposes 
to amend the calculation and amount of Full Service MEO Port (Single) 
fees for EEMs and Market Makers. In particular, the Exchange proposes 
to move away from the above-described volume tier-based fee structure 
and instead charge all Members that utilize Full Service MEO Ports 
(Single) a flat monthly fee of $4,000. For this flat monthly fee, all 
Members will continue to be entitled to two (2) Full Service MEO Ports 
(Single) for each Matching Engine for the single monthly fee of $4,000.
    The Exchange offers various types of ports with differing prices 
because each port accomplishes different tasks, are suited to different 
types of Members, and consume varying capacity amounts of the network. 
For instance, MEO ports allow for a higher throughput and can handle 
much higher quote/order rates than FIX ports. Members that are Market 
Makers or high frequency trading firms utilize these ports (typically 
coupled with 10Gb ULL connectivity) because they transact in 
significantly higher amounts of messages being sent to and from the 
Exchange, versus FIX port users, who are traditionally customers 
sending only orders to the Exchange (typically coupled with 1Gb 
connectivity). The different types of ports cater to the different 
types of Exchange Memberships and different capabilities of the various 
Exchange Members. Certain Members need ports and connections that can 
handle using far more of the network's capacity for message throughput, 
risk protections, and the amount of information that the System has to 
assess. Those Members account for the vast majority of network capacity 
utilization and volume executed on the Exchange, as discussed 
throughout. For example, three (3) Members account for 64% of all 10Gb 
ULL connections and Full Service MEO Ports purchased.
    The Exchange proposes to increase its monthly Full Service MEO Port 
fees since it has not done so since the fees were adopted in 2018,\81\ 
which are designed to recover a portion of the costs associated with 
directly accessing the Exchange. As described above, the Exchange's 
affiliates, MIAX and MIAX Emerald, also charge fees for their high 
throughput, low latency ports in a similar fashion as the Exchange 
proposes to charge for its MEO Ports--generally, the more active user 
the Member (i.e., the greater number/greater national ADV of classes 
assigned to quote on MIAX and MIAX Emerald), the higher the MEI Port 
fee.\82\ This concept is, therefore, not new or novel.
---------------------------------------------------------------------------

    \81\ See id.
    \82\ See MIAX Fee Schedule, Section 5)d)ii); MIAX Emerald Fee 
Schedule, Section 5)d)ii).
---------------------------------------------------------------------------

Implementation
    The proposed fee changes are immediately effective.
2. Statutory Basis
    The Exchange believes that the proposed fees are consistent with 
Section 6(b) of the Act \83\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \84\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among Members and other persons using any facility or system which the 
Exchange operates or controls. The Exchange also believes the proposed 
fees further the objectives of Section 6(b)(5) of the Act \85\ in that 
they are designed to promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general protect investors 
and the public interest and are not designed to permit unfair 
discrimination between customers, issuers, brokers and dealers.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78f(b).
    \84\ 15 U.S.C. 78f(b)(4).
    \85\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the information provided to justify the 
proposed fees meets or exceeds the amount of detail required in respect 
of proposed fee changes under the Revised Review Process and as set 
forth in recent Staff Guidance. Based on both the BOX Order \86\ and 
the Staff Guidance \87\, the Exchange believes that the proposed fees 
are consistent with the Act because

[[Page 86960]]

they are: (i) reasonable, equitably allocated, not unfairly 
discriminatory, and not an undue burden on competition; (ii) comply 
with the BOX Order and the Staff Guidance; and (iii) supported by 
evidence (including comprehensive revenue and cost data and analysis) 
that they are fair and reasonable and will not result in excessive 
pricing or supra-competitive profit.
---------------------------------------------------------------------------

    \86\ See supra note 28.
    \87\ See supra note 29.
---------------------------------------------------------------------------

    The Exchange believes that exchanges, in setting fees of all types, 
should meet high standards of transparency to demonstrate why each new 
fee or fee amendment meets the requirements of the Act that fees be 
reasonable, equitably allocated, not unfairly discriminatory, and not 
create an undue burden on competition among market participants. The 
Exchange believes this high standard is especially important when an 
exchange imposes various fees for market participants to access an 
exchange's marketplace.
    In the Staff Guidance, the Commission Staff states that, ``[a]s an 
initial step in assessing the reasonableness of a fee, staff considers 
whether the fee is constrained by significant competitive forces.'' 
\88\ The Staff Guidance further states that, ``. . . even where an SRO 
cannot demonstrate, or does not assert, that significant competitive 
forces constrain the fee at issue, a cost-based discussion may be an 
alternative basis upon which to show consistency with the Exchange 
Act.'' \89\ In the Staff Guidance, the Commission Staff further states 
that, ``[i]f an SRO seeks to support its claims that a proposed fee is 
fair and reasonable because it will permit recovery of the SRO's costs, 
. . . , specific information, including quantitative information, 
should be provided to support that argument.'' \90\
---------------------------------------------------------------------------

    \88\ Id.
    \89\ Id.
    \90\ Id.
---------------------------------------------------------------------------

    The proposed fees are reasonable because they promote parity among 
exchange pricing for access, which promotes competition, including in 
the Exchanges' ability to competitively price transaction fees, invest 
in infrastructure, new products and other innovations, all while 
allowing the Exchange to recover its costs to provide dedicated access 
via 10Gb ULL connectivity (driven by the bifurcation of the 10Gb ULL 
network) and Full Service MEO Ports. As discussed above, the Revised 
Review Process and Staff Guidance have created an uneven playing field 
between legacy and non-legacy exchanges by severely restricting non-
legacy exchanges from being able to increase non-transaction related 
fees to provide them with additional necessary revenue to better 
compete with legacy exchanges, which largely set fees prior to the 
Revised Review Process. The much higher non-transaction fees charged by 
the legacy exchanges provides them with two significant competitive 
advantages: (i) additional non-transaction revenue that may be used to 
fund areas other than the non-transaction service related to the fee, 
such as investments in infrastructure, advertising, new products and 
other innovations; and (ii) greater flexibility to lower their 
transaction fees by using the revenue from the higher non-transaction 
fees to subsidize transaction fee rates. The latter is more immediately 
impactful in competition for order flow and market share, given the 
variable nature of this cost on Member firms. The absence of a 
reasonable path forward to increase non-transaction fees to comparable 
(or lower rates) limits the Exchange's flexibility to, among other 
things, make additional investments in infrastructure and advertising, 
diminishes the ability to remain competitive on transaction fees, and 
hinders the ability to compete for order flow and market share. Again, 
there is little doubt that subjecting one exchange to a materially 
different standard than that applied to other exchanges for non-
transaction fees leaves that exchange at a disadvantage in its ability 
to compete with its pricing of transaction fees.
The Proposed Fees Ensure Parity Among Exchange Access Fees, Which 
Promotes Competition
    The Exchange commenced operations in February 2017 \91\ and adopted 
its initial fee schedule, with 10Gb ULL connectivity fees set at $8,500 
(the Exchange originally had a non-ULL 10Gb connectivity option, which 
it has since removed) and a fee waiver for all Full Service MEO Port 
fees.\92\ As a new exchange entrant, the Exchange chose to offer Full 
Service MEO Ports free of charge to encourage market participants to 
trade on the Exchange and experience, among things, the quality of the 
Exchange's technology and trading functionality. This practice is not 
uncommon. New exchanges often do not charge fees or charge lower fees 
for certain services such as memberships/trading permits to attract 
order flow to an exchange, and later amend their fees to reflect the 
true value of those services, absorbing all costs to provide those 
services in the meantime. Allowing new exchange entrants time to build 
and sustain market share through various pricing incentives before 
increasing non-transaction fees encourages market entry and fee parity, 
which promotes competition among exchanges. It also enables new 
exchanges to mature their markets and allow market participants to 
trade on the new exchanges without fees serving as a potential barrier 
to attracting memberships and order flow.\93\
---------------------------------------------------------------------------

    \91\ See MIAX PEARL Successfully Launches Trading Operations, 
dated February 6, 2017, available at https://www.miaxglobal.com/sites/default/files/alert-files/MIAX_Press_Release_02062017.pdf.
    \92\ See Securities Exchange Act Release No. 80061 (February 17, 
2017), 82 FR 11676 (February 24, 2017) (SR-PEARL-2017-10).
    \93\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (stating, ``[t]he 
Exchange established this lower (when compared to other options 
exchanges in the industry) Participant Fee in order to encourage 
market participants to become Participants of BOX . . .''). See also 
Securities Exchange Act Release No. 90076 (October 2, 2020), 85 FR 
63620 (October 8, 2020) (SR-MEMX-2020-10) (proposing to adopt the 
initial fee schedule and stating that ``[u]nder the initial proposed 
Fee Schedule, the Exchange proposes to make clear that it does not 
charge any fees for membership, market data products, physical 
connectivity or application sessions.''). MEMX's market share has 
increased and recently proposed to adopt numerous non-transaction 
fees, including fees for membership, market data, and connectivity. 
See Securities Exchange Act Release Nos. 93927 (January 7, 2022), 87 
FR 2191 (January 13, 2022) (SR-MEMX-2021-19) (proposing to adopt 
membership fees); 96430 (December 1, 2022), 87 FR 75083 (December 7, 
2022) (SR-MEMX-2022-32) and 95936 (September 27, 2022), 87 FR 59845 
(October 3, 2022) (SR-MEMX-2022-26) (proposing to adopt fees for 
connectivity). See also, e.g., Securities Exchange Act Release No. 
88211 (February 14, 2020), 85 FR 9847 (February 20, 2020) (SR-
NYSENAT-2020-05), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-national/rule-filings/filings/2020/SR-NYSENat-2020-05.pdf (initiating market data fees for the NYSE National exchange 
after initially setting such fees at zero).
---------------------------------------------------------------------------

    Later in 2018, as the Exchange's market share increased,\94\ the 
Exchange adopted nominal fees for Full Service MEO Ports.\95\ The 
Exchange last increased the fees for its 10Gb ULL fiber connections 
from $9,300 to $10,000 per month on January 1, 2021.\96\ The Exchange 
balanced business and competitive concerns with the need to financially 
compete with the larger incumbent exchanges that charge higher fees for 
similar connectivity and use that revenue to invest in their technology 
and other service offerings.
---------------------------------------------------------------------------

    \94\ The Exchange experienced a monthly average trading volume 
of 3.94% for the month of March 2018. See the ``Market Share'' 
section of the Exchange's website, available at www.miaxglobal.com.
    \95\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
    \96\ See Securities Exchange Act Release No. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
---------------------------------------------------------------------------

    The proposed changes to the Fee Schedule are reasonable in several

[[Page 86961]]

respects. As a threshold matter, the Exchange is subject to significant 
competitive forces, which constrains its pricing determinations for 
transaction fees as well as non-transaction fees. The fact that the 
market for order flow is competitive has long been recognized by the 
courts. In NetCoalition v. Securities and Exchange Commission, the D.C. 
Circuit stated, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \97\
---------------------------------------------------------------------------

    \97\ See NetCoalition, 615 F.3d at 539 (D.C. Cir. 2010) (quoting 
Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 
74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention to determine 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues, and also recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \98\
---------------------------------------------------------------------------

    \98\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Congress directed the Commission to ``rely on `competition, 
whenever possible, in meeting its regulatory responsibilities for 
overseeing the SROs and the national market system.' '' \99\ As a 
result, and as evidenced above, the Commission has historically relied 
on competitive forces to determine whether a fee proposal is equitable, 
fair, reasonable, and not unreasonably or unfairly discriminatory. ``If 
competitive forces are operative, the self-interest of the exchanges 
themselves will work powerfully to constrain unreasonable or unfair 
behavior.'' \100\ Accordingly, ``the existence of significant 
competition provides a substantial basis for finding that the terms of 
an exchange's fee proposal are equitable, fair, reasonable, and not 
unreasonably or unfairly discriminatory.'' \101\ In the Revised Review 
Process and Staff Guidance, Commission Staff indicated that they would 
look at factors beyond the competitive environment, such as cost, only 
if a ``proposal lacks persuasive evidence that the proposed fee is 
constrained by significant competitive forces.'' \102\
---------------------------------------------------------------------------

    \99\ See NetCoalition, 615 F.3d at 534-35; see also H.R. Rep. 
No. 94-229 at 92 (1975) (``[I]t is the intent of the conferees that 
the national market system evolve through the interplay of 
competitive forces as unnecessary regulatory restrictions are 
removed.'').
    \100\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74,770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \101\ Id.
    \102\ See Staff Guidance, supra note 29.
---------------------------------------------------------------------------

    The Exchange believes the competing exchanges' 10Gb connectivity 
and port fees are useful examples of alternative approaches to 
providing and charging for access and demonstrating how such fees are 
competitively set and constrained. To that end, the Exchange believes 
the proposed fees are competitive and reasonable because the proposed 
fees are similar to or less than fees charged for similar connectivity 
and port access provided by other options exchanges with comparable 
market shares. As such, the Exchange believes that denying its ability 
to institute fees that allow the Exchange to recoup its costs with a 
reasonable margin in a manner that is closer to parity with legacy 
exchanges, in effect, impedes its ability to compete, including in its 
pricing of transaction fees and ability to invest in competitive 
infrastructure and other offerings.
    The following table shows how the Exchange's proposed fees remain 
similar to or less than fees charged for similar connectivity and port 
access provided by other options exchanges with similar market share. 
Each of the connectivity and port rates in place at competing options 
exchanges were filed with the Commission for immediate effectiveness 
and remain in place today.

------------------------------------------------------------------------
                                     Type of          Monthly fee (per
           Exchange               connection or      connection or per
                                       port                port)
------------------------------------------------------------------------
MIAX Pearl Options (as          10Gb ULL           $13,500
 proposed) (equity options       connection.       Lesser of either the
 market share of 6.36% for the  Full Service MEO    per class basis or
 month of August 2023) \a\.      Port (Bulk) for    percentage of total
                                 Market Makers.     national ADV by the
                                                    Market Maker, as
                                                    follows:
                                                   $5,000--up to 10
                                                    classes or up to 20%
                                                    of classes by
                                                    volume.
                                                   $7,500**--up to 40
                                                    classes or up to 35%
                                                    of classes by
                                                    volume.
                                                   $10,000**--up to 100
                                                    classes or up to 50%
                                                    of classes by
                                                    volume.
                                                   $12,000**--over 100
                                                    classes or over 50%
                                                    of all classes by
                                                    volume up to all
                                                    classes (or $500 per
                                                    port per matching
                                                    engine).
 
                                **A lower rate of
                                 $6,000 will
                                 apply to these
                                 tiers if the
                                 Market Maker's
                                 total monthly
                                 executed volume
                                 is less than
                                 0.040% of total
                                 monthly TCV for
                                 MIAX Pearl
                                 options..
                                Full Service MEO   $7,500 (or $312.50
                                 Port (Bulk) for    per port per
                                 EEMs.              matching engine).
                                Full Service MEO   $4,000 (or $166.66
                                 Port (Single)      per port per
                                 for Market         matching engine).
                                 Makers and EEMs.
NASDAQ \b\ (equity options      10Gb Ultra fiber   $15,000 per
 market share of 5.80% for the   connection.        connection.
 month of August 2023) \c\.     SQF Port \d\.....  1-5 ports: $1,500 per
                                                    port.
                                                   6-20 ports: $1,000
                                                    per port.
                                                   21 or more ports:
                                                    $500 per port.

[[Page 86962]]

 
NASDAQ ISE LLC (``ISE'') \e\    10Gb Ultra fiber   $15,000 per
 (equity options market share    connection.        connection.
 of 5.58% for the month of      SQF Port.........  $1,100 per port.
 August 2023) \f\.
NYSE American LLC (``NYSE       10Gb LX LCN        $22,000 per
 American'')\g\.                 connection.        connection.
(equity options market share    Order/Quote Entry  1-40 ports: $450 per
 of 7.34% for the month of       Port.              port
 August 2023)\h\.                                  41 or more ports:
                                                    $150 per port.
NASDAQ GEMX, LLC (``GEMX'')     10Gb Ultra         $15,000 per
 \i\ (equity options market      connection.        connection.
 share of 3.03% for the month   SQF Port.........  $1,250 per port.
 of August 2023) \j\.
------------------------------------------------------------------------
a See the ``Market Share'' section of the Exchange's website, available
  at https://www.miaxglobal.com/.
b See NASDAQ Pricing Schedule, Options 7, Section 3, Ports and Other
  Services and NASDAQ Rules, General 8: Connectivity, Section 1. Co-
  Location Services.
c See supra note a.
d Similar to the MIAX Pearl Options' MEO Ports, SQF ports are primarily
  utilized by Market Makers.
e See ISE Pricing Schedule, Options 7, Section 7, Connectivity Fees and
  ISE Rules, General 8: Connectivity.
f See supra note a.
g See NYSE American Options Fee Schedule, Section V.A. Port Fees and
  Section V.B. Co-Location Fees.
h See supra note a.
i See GEMX Pricing Schedule, Options 7, Section 6, Connectivity Fees and
  GEMX Rules, General 8: Connectivity.
j See supra note a.

    The Exchange acknowledges that, without additional contextual 
information, the above table may lead someone to believe that the 
Exchange's proposed fees for Full Service MEO Ports is higher than 
other exchanges when in fact, that is not true. The Exchange provides 
each Member or non-Member access to two (2) ports on all twelve (12) 
matching engines for a single fee and a vast majority choose to connect 
to all twelve (12) matching engines and utilize both ports for a total 
of 24 ports. Other exchanges charge on a per port basis and require 
firms to connect to multiple matching engines, thereby multiplying the 
cost to access their full market.\103\ On the Exchange, this is not the 
case. The Exchange provides each Member or non-Member access, but does 
not require they connect to, all twelve (12) matching engines.
---------------------------------------------------------------------------

    \103\ See Specialized Quote Interface Specification, Nasdaq 
PHLX, Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, 
Section 2, Architecture (revised August 16, 2019), available at 
http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is 
unclear whether the NASDAQ exchanges include connectivity to each 
matching engine for the single fee or charge per connection, per 
matching engine. See also NYSE Technology FAQ and Best Practices: 
Options, Section 5.1 (How many matching engines are used by each 
exchange?) (September 2020). The Exchange notes that NYSE provides a 
link to an Excel file detailing the number of matching engines per 
options exchange, with Arca and Amex having 19 and 17 matching 
engines, respectively.
---------------------------------------------------------------------------

    There is no requirement, regulatory or otherwise, that any broker-
dealer connect to and access any (or all of) the available options 
exchanges. Market participants may choose to become a member of one or 
more options exchanges based on the market participant's assessment of 
the business opportunity relative to the costs of the Exchange. With 
this, there is elasticity of demand for exchange membership. As an 
example, one Market Maker terminated their MIAX Pearl Options 
membership effective January 1, 2023 as a direct result of the proposed 
connectivity and port fee changes proposed by MIAX Pearl Options.
    It is not a requirement for market participants to become members 
of all options exchanges; in fact, certain market participants conduct 
an options business as a member of only one options market.\104\ A very 
small number of market participants choose to become a member of all 
sixteen options exchanges. Most firms that actively trade on options 
markets are not currently Members of the Exchange and do not purchase 
connectivity or port services at the Exchange. Connectivity and ports 
are only available to Members or service bureaus, and only a Member may 
utilize a port.\105\
---------------------------------------------------------------------------

    \104\ BOX recently adopted an electronic market maker trading 
permit fee. See Securities Exchange Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17). In that 
proposal, BOX stated that, ``. . . it is not aware of any reason why 
Market Makers could not simply drop their access to an exchange (or 
not initially access an exchange) if an exchange were to establish 
prices for its non-transaction fees that, in the determination of 
such Market Maker, did not make business or economic sense for such 
Market Maker to access such exchange. [BOX] again notes that no 
market makers are required by rule, regulation, or competitive 
forces to be a Market Maker on [BOX].'' Also in 2022, MEMX 
established a monthly membership fee. See Securities Exchange Act 
Release No. 93927 (January 7, 2022), 87 FR 2191 (January 13, 2022) 
(SR-MEMX-2021-19). In that proposal, MEMX reasoned that that there 
is value in becoming a member of the exchange and stated that it 
believed that the proposed membership fee ``is not unfairly 
discriminatory because no broker-dealer is required to become a 
member of the Exchange'' and that ``neither the trade-through 
requirements under Regulation NMS nor broker-dealers' best execution 
obligations require a broker-dealer to become a member of every 
exchange.''
    \105\ Service Bureaus may obtain ports on behalf of Members.
---------------------------------------------------------------------------

    One other exchange recently noted in a proposal to amend their own 
trading permit fees that of the 62 market making firms that are 
registered as Market Makers across Cboe, MIAX, and BOX, 42 firms access 
only one of the three exchanges.\106\ The Exchange and its affiliated 
options markets, MIAX and MIAX Emerald, have a total of 46 members. Of 
those 46 total members, 37 are members of all three affiliated options 
markets, two are members of only two affiliated options markets, and 
seven are members of only one affiliated options market. The Exchange 
also notes that no firm is a Member of the Exchange only. The above 
data evidences that a broker-dealer need not have direct connectivity 
to all options exchanges, let alone the Exchange and its two 
affiliates, and broker-dealers may elect to do so based on their own 
business decisions and need to directly access each exchange's 
liquidity pool.
---------------------------------------------------------------------------

    \106\ See Securities Exchange Act Release No. 94894 (May 11, 
2022), 87 FR 29987 (May 17, 2022) (SR-BOX-2022-17) (Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change to Amend the 
Fee Schedule on the BOX Options Market LLC Facility To Adopt 
Electronic Market Maker Trading Permit Fees). The Exchange believes 
that BOX's observation demonstrates that market making firms can, 
and do, select which exchanges they wish to access, and, 
accordingly, options exchanges must take competitive considerations 
into account when setting fees for such access.
---------------------------------------------------------------------------

    Not only is there not an actual regulatory requirement to connect 
to every options exchange, the Exchange believes there is also no ``de 
facto'' or practical requirement as well, as further evidenced by the 
broker-dealer membership analysis of the options exchanges discussed 
above. As noted above, this is evidenced by the fact that one MIAX 
Pearl Options Market Maker terminated their MIAX Pearl Options 
membership effective January 1, 2023 as a direct result of the proposed 
connectivity and port fee changes on MIAX Pearl Options. Indeed, 
broker-dealers choose if and how to access a

[[Page 86963]]

particular exchange and because it is a choice, the Exchange must set 
reasonable pricing, otherwise prospective members would not connect and 
existing members would disconnect from the Exchange. The decision to 
become a member of an exchange, particularly for registered market 
makers, is complex, and not solely based on the non-transactional costs 
assessed by an exchange. As noted herein, specific factors include, but 
are not limited to: (i) an exchange's available liquidity in options 
series; (ii) trading functionality offered on a particular market; 
(iii) product offerings; (iv) customer service on an exchange; and (v) 
transactional pricing. Becoming a member of the exchange does not 
``lock'' a potential member into a market or diminish the overall 
competition for exchange services.
    In lieu of becoming a member at each options exchange, a market 
participant may join one exchange and elect to have their orders routed 
in the event that a better price is available on an away market. 
Nothing in the Order Protection Rule requires a firm to become a Member 
at--or establish connectivity to--the Exchange.\107\ If the Exchange is 
not at the national best bid or offer (``NBBO''),\108\ the Exchange 
will route an order to any away market that is at the NBBO to ensure 
that the order was executed at a superior price and prevent a trade-
through.\109\
---------------------------------------------------------------------------

    \107\ See Options Order Protection and Locked/Crossed Market 
Plan (August 14, 2009), available at https://www.theocc.com/getmedia/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/options_order_protection_plan.pdf.
    \108\ See Exchange Rule 100.
    \109\ Members may elect to not route their orders by utilizing 
the Do Not Route order type. See Exchange Rule 516(g).
---------------------------------------------------------------------------

    With respect to the submission of orders, Members may also choose 
not to purchase any connection from the Exchange, and instead rely on 
the port of a third party to submit an order. For example, a third-
party broker-dealer Member of the Exchange may be utilized by a retail 
investor to submit orders into an exchange. An institutional investor 
may utilize a broker-dealer, a service bureau,\110\ or request 
sponsored access \111\ through a member of an exchange in order to 
submit a trade directly to an options exchange.\112\ A market 
participant may either pay the costs associated with becoming a member 
of an exchange or, in the alternative, a market participant may elect 
to pay commissions to a broker-dealer, pay fees to a service bureau to 
submit trades, or pay a member to sponsor the market participant in 
order to submit trades directly to an exchange.
---------------------------------------------------------------------------

    \110\ Service Bureaus provide access to market participants to 
submit and execute orders on an exchange. On the Exchange, a Service 
Bureau may be a Member. Some Members utilize a Service Bureau for 
connectivity and that Service Bureau may not be a Member. Some 
market participants utilize a Service Bureau who is a Member to 
submit orders.
    \111\ Sponsored Access is an arrangement whereby a Member 
permits its customers to enter orders into an exchange's system that 
bypass the Member's trading system and are routed directly to the 
Exchange, including routing through a service bureau or other third-
party technology provider.
    \112\ This may include utilizing a floor broker and submitting 
the trade to one of the five options trading floors.
---------------------------------------------------------------------------

    Non-Member third-parties, such as service bureaus and extranets, 
resell the Exchange's connectivity. This indirect connectivity is 
another viable alternative for market participants to trade on the 
Exchange without connecting directly to the Exchange (and thus not pay 
the Exchange's connectivity fees), which alternative is already being 
used by non-Members and further constrains the price that the Exchange 
is able to charge for connectivity and other access fees to its market. 
The Exchange notes that it could, but chooses not to, preclude market 
participants from reselling its connectivity. Unlike other exchanges, 
the Exchange also does not currently assess fees on third-party 
resellers on a per customer basis (i.e., fees based on the number of 
firms that connect to the Exchange indirectly via the third-
party).\113\ Indeed, the Exchange does not receive any connectivity 
revenue when connectivity is resold by a third-party, which often is 
resold to multiple customers, some of whom are agency broker-dealers 
that have numerous customers of their own.\114\ Particularly, in the 
event that a market participant views the Exchange's direct 
connectivity and access fees as more or less attractive than competing 
markets, that market participant can choose to connect to the Exchange 
indirectly or may choose not to connect to the Exchange and connect 
instead to one or more of the other 15 options markets. Accordingly, 
the Exchange believes that the proposed fees are fair and reasonable 
and constrained by competitive forces.
---------------------------------------------------------------------------

    \113\ See, e.g., Nasdaq Price List--U.S. Direct Connection and 
Extranet Fees, available at, US Direct-Extranet Connection 
(nasdaqtrader.com); and Securities Exchange Act Release Nos. 74077 
(January 16, 2022), 80 FR 3683 (January 23, 2022) (SR-NASDAQ-2015-
002); and 82037 (November 8, 2022), 82 FR 52953 (November 15, 2022) 
(SR-NASDAQ-2017-114).
    \114\ The Exchange notes that resellers, such as SFTI, are not 
required to publicize, let alone justify or file with the Commission 
their fees, and as such could charge the market participant any fees 
it deems appropriate (including connectivity fees higher than the 
Exchange's connectivity fees), even if such fees would otherwise be 
considered potentially unreasonable or uncompetitive fees.
---------------------------------------------------------------------------

    The Exchange is obligated to regulate its Members and secure access 
to its environment. In order to properly regulate its Members and 
secure the trading environment, the Exchange takes measures to ensure 
access is monitored and maintained with various controls. Connectivity 
and ports are methods utilized by the Exchange to grant Members secure 
access to communicate with the Exchange and exercise trading rights. 
When a market participant elects to be a Member, and is approved for 
membership by the Exchange, the Member is granted trading rights to 
enter orders and/or quotes into Exchange through secure connections.
    Again, there is no legal or regulatory requirement that a market 
participant become a Member of the Exchange. This is again evidenced by 
the fact that one MIAX Pearl Options Market Maker terminated their MIAX 
Pearl Options membership effective January 1, 2023 as a direct result 
of the proposed connectivity and port fee changes on MIAX Pearl 
Options. If a market participant chooses to become a Member, they may 
then choose to purchase connectivity beyond the one connection that is 
necessary to quote or submit orders on the Exchange. Members may freely 
choose to rely on one or many connections, depending on their business 
model.
Bifurcation of 10Gb ULL Connectivity and Related Fees
    The Exchange began to operate on a single shared network with MIAX 
when MIAX Pearl Options commenced operations as a national securities 
exchange on February 7, 2017.\115\ The Exchange and MIAX operated on a 
single shared network to provide Members with a single convenient set 
of access points for both exchanges. Both the Exchange and MIAX offer 
two methods of connectivity, 1Gb and 10Gb ULL connections. The 1Gb 
connection services are supported by a discrete set of switches 
providing 1Gb access ports to Members. The 10Gb ULL connection services 
are supported by a second and mutually exclusive set of switches 
providing 10Gb ULL access ports to Members. Previously, both the 1Gb 
and

[[Page 86964]]

10Gb ULL shared extranet ports allowed Members to use one connection to 
access both exchanges, namely their trading platforms, market data 
systems, test systems, and disaster recovery facilities.
---------------------------------------------------------------------------

    \115\ See Securities Exchange Act Release No. 80061 (February 
17, 2017), 82 FR 11676 (February 24, 2017) (establishing MIAX Pearl 
Options Fee Schedule and establishing that the MENI can also be 
configured to provide network connectivity to the trading platforms, 
market data systems, test systems, and disaster recovery facility of 
the MIAX Pearl Options' affiliate, MIAX, via a single, shared 
connection).
---------------------------------------------------------------------------

    The Exchange stresses that bifurcating the 10Gb ULL connectivity 
between the Exchange and MIAX was not designed with the objective to 
generate an overall increase in access fee revenue. Rather, the 
proposed change was necessitated by 10Gb ULL connectivity experiencing 
a significant decrease in port availability mostly driven by 
connectivity demands of latency sensitive Members that seek to maintain 
multiple 10Gb ULL connections on every switch in the network. Operating 
two separate national securities exchanges on a single shared network 
provided certain benefits, such as streamlined connectivity to multiple 
exchanges, and simplified exchange infrastructure. However, doing so 
was no longer sustainable due to ever-increasing capacity constraints 
and current system limitations. The network is not an unlimited 
resource. As described more fully in the proposal to bifurcate the 10Gb 
ULL network,\116\ the connectivity needs of Members and market 
participants has increased every year since the launch of MIAX Pearl 
Options and the operations of the Exchange and MIAX on a single shared 
10Gb ULL network is no longer feasible. This required constant System 
expansion to meet Member demand for additional ports and 10Gb ULL 
connections has resulted in limited available System headroom, which 
eventually became operationally problematic for both the Exchange and 
its customers.
---------------------------------------------------------------------------

    \116\ See Securities Exchange Act Release Nos. 96553 (December 
20, 2022), 87 FR 79379 (December 27, 2022) (SR-PEARL-2022-60); 96545 
(December 20, 2022) 87 FR 79393 (December 27, 2022) (SR-MIAX-2022-
48).
---------------------------------------------------------------------------

    As stated above, the shared network is not an unlimited resource 
and its expansion was constrained by MIAX's and MIAX Pearl Options' 
ability to provide fair and equitable access to all market participants 
of both markets. Due to the ever-increasing connectivity demands, the 
Exchange found it necessary to bifurcate 10Gb ULL connectivity to the 
Exchange's and MIAX's Systems and networks to be able to continue to 
meet ongoing and future 10Gb ULL connectivity and access demands.\117\
---------------------------------------------------------------------------

    \117\ Currently, the Exchange maintains sufficient headroom to 
meet ongoing and future requests for 1Gb connectivity. Therefore, 
the Exchange did not propose to alter 1Gb connectivity and continues 
to provide 1Gb connectivity over a shared network.
---------------------------------------------------------------------------

    Unlike the switches that provide 1Gb connectivity, the availability 
for additional 10Gb ULL connections on each switch had significantly 
decreased. This was mostly driven by the connectivity demands of 
latency sensitive Members (e.g., Market Makers and liquidity removers) 
that sought to maintain connectivity across multiple 10Gb ULL switches. 
Based on the Exchange's experience, such Members did not typically use 
a shared 10Gb ULL connection to reach both the Exchange and MIAX due to 
related latency concerns. Instead, those Members maintain dedicated 
separate 10Gb ULL connections for the Exchange and separate dedicated 
10Gb ULL connections for MIAX. This resulted in a much higher 10Gb ULL 
usage per switch by those Members on the shared 10Gb ULL network than 
would otherwise be needed if the Exchange and MIAX had their own 
dedicated 10Gb ULL networks. Separation of the Exchange and MIAX 10Gb 
ULL networks naturally lends itself to reduced 10Gb ULL port 
consumption on each switch and, therefore, increased 10Gb ULL port 
availability for current Members and new Members.
    Prior to bifurcating the 10Gb ULL network, the Exchange and MIAX 
continued to add switches to meet ongoing demand for 10Gb ULL 
connectivity. That was no longer sustainable because simply adding 
additional switches to expand the current shared 10Gb ULL network would 
not adequately alleviate the issue of limited available port 
connectivity. While it would have resulted in a gain in overall port 
availability, the existing switches on the shared 10Gb ULL network in 
use would have continued to suffer from lack of port headroom given 
many latency sensitive Members' needs for a presence on each switch to 
reach both the Exchange and MIAX. This was because those latency 
sensitive Members sought to have a presence on each switch to maximize 
the probability of experiencing the best network performance. Those 
Members routinely decide to rebalance orders and/or messages over their 
various connections to ensure each connection is operating with maximum 
efficiency. Simply adding switches to the extranet would not have 
resolved the port availability needs on the shared 10Gb ULL network 
since many of the latency sensitive Members were unwilling to relocate 
their connections to a new switch due to the potential detrimental 
performance impact. As such, the impact of adding new switches and 
rebalancing ports would not have been effective or responsive to 
customer needs. The Exchange has found that ongoing and continued 
rebalancing once additional switches are added has had, and would have 
continued to have had, a diminishing return on increasing available 
10Gb ULL connectivity.
    Based on its experience and expertise, the Exchange found the most 
practical way to increase connectivity availability on its switches was 
to bifurcate the existing 10Gb ULL networks for the Exchange and MIAX 
by migrating the exchanges' connections from the shared network onto 
their own set of switches. Such changes accordingly necessitated a 
review of the Exchange's previous 10Gb ULL connectivity fees and 
related costs. The proposed fees necessary to allow the Exchange to 
cover ongoing costs related to providing and maintaining such 
connectivity, described more fully below. The ever increasing 
connectivity demands that necessitated this change further support that 
the proposed fees are reasonable because this demand reflects that 
Members and non-Members believe they are getting value from the 10Gb 
ULL connections they purchase.
    The Exchange announced on August 12, 2022 the planned network 
change and January 23, 2023 implementation date to provide market 
participants adequate time to prepare.\118\ Since August 12, 2022, the 
Exchange has worked with current 10Gb ULL subscribers to address their 
connectivity needs ahead of the January 23, 2023 date. Based on those 
interactions and subscriber feedback, the Exchange experienced a 
minimal net increase of six (6) overall 10Gb ULL connectivity 
subscriptions across MIAX Pearl Options and MIAX. This immaterial 
increase in overall connections reflects a minimal fee impact for all 
types of subscribers and reflects that subscribers elected to 
reallocate existing 10Gb ULL connectivity directly to the Exchange or 
MIAX, or chose to decrease or cease connectivity as a result of the 
change.
---------------------------------------------------------------------------

    \118\ See supra note 9.
---------------------------------------------------------------------------

    Should the Commission Staff disapprove such fees, it would 
effectively dictate how an exchange manages its technology and would 
hamper the Exchange's ability to continue to invest in and fund access 
services in a manner that allows it to meet existing and anticipated 
access demands of market participants. Disapproval could also have the 
adverse effect of discouraging an exchange from optimizing its 
operations and deploying innovative technology to the benefit of market 
participants if it believes the Commission would later prevent that 
exchange from covering its costs and monetizing its operational 
enhancements, thus adversely

[[Page 86965]]

impacting competition. Also, as noted above, the economic consequences 
of not being able to better establish fee parity with other exchanges 
for non-transaction fees hampers the Exchange's ability to compete on 
transaction fees.
Cost Analysis
    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 and port services, the 
Exchange is especially diligent in assessing those fees in a 
transparent way against its own aggregate costs of providing the 
related service, and in 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,\119\ and Rule 19b-4 
thereunder,\120\ with respect to the types of information exchanges 
should provide when filing fee changes, and Section 6(b) of the 
Act,\121\ which requires, among other things, that exchange fees be 
reasonable and equitably allocated,\122\ not designed to permit unfair 
discrimination,\123\ and that they not impose a burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Act.\124\ 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.\125\ The Exchange 
reiterates that the legacy exchanges with whom the Exchange vigorously 
competes for order flow and market share, were not subject to any such 
diligence or transparency in setting their baseline non-transaction 
fees, most of which were put in place before the Revised Review Process 
and Staff Guidance.
---------------------------------------------------------------------------

    \119\ 15 U.S.C. 78s(b)(1).
    \120\ 17 CFR 240.19b-4.
    \121\ 15 U.S.C. 78f(b).
    \122\ 15 U.S.C. 78f(b)(4).
    \123\ 15 U.S.C. 78f(b)(5).
    \124\ 15 U.S.C. 78f(b)(8).
    \125\ See Staff Guidance, supra note 29.
---------------------------------------------------------------------------

    As detailed below, the Exchange recently calculated its aggregate 
annual costs for providing physical 10Gb ULL connectivity to the 
Exchange at $11,567,509 (or approximately $963,959 per month, rounded 
to the nearest dollar when dividing the annual cost by 12 months) and 
its aggregate annual costs for providing Full Service MEO Ports at 
$1,644,132 (or approximately $137,012 per month, rounded to the nearest 
dollar when dividing the annual cost by 12 months). In order to cover 
the aggregate costs of providing connectivity to its users (both 
Members and non-Members \126\) going forward and to make a modest 
profit, as described below, the Exchange proposes to modify its Fee 
Schedule to charge a fee of $13,500 per month for each physical 10Gb 
ULL connection and to remove language providing for a shared 10Gb ULL 
network between the Exchange and MIAX. The Exchange also proposes to 
modify its Fee Schedule to charge tiered rates for Full Service MEO 
Ports (Bulk) depending on the number of classes assigned or the 
percentage of national ADV, which is in line with how the Exchange's 
affiliates, MIAX and MIAX Emerald, assess fees for their comparable MEI 
Ports.
---------------------------------------------------------------------------

    \126\ 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, and thus, may access application sessions on behalf of one 
or more Members. Extranets offer physical connectivity services to 
Members and non-Members.
---------------------------------------------------------------------------

    In 2019, the Exchange completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis'').\127\ The 
Cost Analysis required a detailed analysis of the Exchange's aggregate 
baseline costs, including a determination and allocation of costs for 
core services provided by the Exchange--transaction execution, market 
data, membership services, physical connectivity, and port access 
(which provide order entry, cancellation and modification 
functionality, risk functionality, the ability to receive drop copies, 
and other functionality). The Exchange 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'').
---------------------------------------------------------------------------

    \127\ The Exchange frequently updates it Cost Analysis as 
strategic initiatives change, costs increase or decrease, and market 
participant needs and trading activity changes. The Exchange's most 
recent Cost Analysis was conducted ahead of this filing.
---------------------------------------------------------------------------

    As an initial step, the Exchange determined the total cost for the 
Exchange and the affiliated markets for each cost driver as part of its 
2023 budget review process. The 2023 budget review is a company-wide 
process that occurs over the course of many months, includes meetings 
among senior management, department heads, and the Finance Team. Each 
department head is required to send a ``bottom up'' budget to the 
Finance Team allocating costs at the profit and loss account and vendor 
levels for the Exchange and its affiliated markets based on a number of 
factors, including server counts, additional hardware and software 
utilization, current or anticipated functional or non-functional 
development projects, capacity needs, end-of-life or end-of-service 
intervals, number of members, market model (e.g., price time or pro-
rata, simple only or simple and complex markets, auction functionality, 
etc.), which may impact message traffic, individual system 
architectures that impact platform size,\128\ storage needs, dedicated 
infrastructure versus shared infrastructure allocated per platform 
based on the resources required to support each platform, number of 
available connections, and employees allocated time. All of these 
factors result in different allocation percentages among the Exchange 
and its affiliated markets, i.e., the different percentages of the 
overall cost driver allocated to the Exchange and its affiliated 
markets will cause the dollar amount of the overall cost allocated 
among the Exchange and its affiliated markets to also differ. Because 
the Exchange's parent company currently owns and operates four separate 
and distinct marketplaces, the Exchange must determine the costs 
associated with each actual market--as opposed to the Exchange's parent 
company simply concluding that all costs drivers are the same at each 
individual marketplace and dividing total cost by four (4) (evenly for 
each marketplace). Rather, the Exchange's parent company determines an 
accurate cost for each marketplace, which results in different 
allocations and amounts across exchanges for the same cost drivers, due 
to the unique factors of each marketplace as described above. This 
allocation methodology also

[[Page 86966]]

ensures that no cost would be allocated twice or double-counted between 
the Exchange and its affiliated markets. The Finance Team then 
consolidates the budget and sends it to senior management, including 
the Chief Financial Officer and Chief Executive Officer, for review and 
approval. Next, the budget is presented to the Board of Directors and 
the Finance and Audit Committees for each exchange for their approval. 
The above steps encompass the first step of the cost allocation 
process.
---------------------------------------------------------------------------

    \128\ For example, MIAX Pearl Options maintains 12 matching 
engines, MIAX Pearl Equities maintains 24 matching engines, MIAX 
maintains 24 matching engines and MIAX Emerald maintains 12 matching 
engines.
---------------------------------------------------------------------------

    The next step involves determining what portion of the cost 
allocated to the Exchange pursuant to the above methodology is to be 
allocated to each core service, e.g., connectivity and ports, market 
data, and transaction services. The Exchange and its affiliated markets 
adopted an allocation methodology with thoughtful and consistently 
applied principles to guide how much of a particular cost amount 
allocated to the Exchange should be allocated within the Exchange to 
each core service. This is the final step in the cost allocation 
process and is applied to each of the cost drivers set forth below. 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 (60.6% of total expense 
amount allocated to 10Gb ULL connectivity), with smaller allocations to 
Full Service MEO Ports (3.4%), and the remainder to the provision of 
other connectivity, other ports, transaction execution, membership 
services and market data services (36%). This next level of the 
allocation methodology at the individual exchange level also took into 
account factors similar to those set forth under the first step of the 
allocation methodology process described above, to determine the 
appropriate allocation to connectivity or market data versus 
allocations for other services. This allocation methodology was 
developed through an assessment of costs with senior management 
intimately familiar with each area of the Exchange's operations. After 
adopting this allocation methodology, the Exchange then applied an 
allocation of each cost driver to each core service, resulting in the 
cost allocations described below. Each of the below cost allocations is 
unique to the Exchange and represents a percentage of overall cost that 
was allocated to the Exchange pursuant to the initial allocation 
described above.
    By allocating segmented costs to each core service, the Exchange 
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 five primary sources of revenue that it can potentially 
use to fund its operations: transaction fees, fees for connectivity and 
port services, membership fees, regulatory fees, and market data fees. 
Accordingly, the Exchange must cover its expenses from these five 
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. While there is no standardized and generally accepted 
methodology for the allocation of an exchange's costs, the Exchange's 
methodology is the result of an extensive review and analysis and will 
be consistently applied going forward for any other potential fee 
proposals. In the absence of the Commission attempting to specify a 
methodology for the allocation of exchanges' interdependent costs, the 
Exchange will continue to be left with its best efforts to attempt to 
conduct such an allocation in a thoughtful and reasonable manner.
    Through the Exchange's extensive updated Cost Analysis, which was 
again recently further refined, 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 and port 
services, and, if such expense did so relate, what portion (or 
percentage) of such expense actually supports the provision of 
connectivity and port services, and thus bears a relationship that is, 
``in nature and closeness,'' directly related to network connectivity 
and port services. In turn, the Exchange allocated certain costs more 
to physical connectivity and others to ports, 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, the Exchange estimates that the aggregate monthly cost 
to provide 10Gb ULL connectivity and Full Service MEO Port services, is 
$1,106,971 (utilizing the rounded numbers when dividing the annual cost 
for 10Gb ULL connectivity and annual cost for Full Service MEO Ports by 
12 months, then adding both numbers together), as further detailed 
below.
    Lastly, the Exchange notes that, based on: (i) the total expense 
amounts contained in this filing (which are 2023 projected expenses), 
and (ii) the total expense amounts contained in the related MIAX Pearl 
Equities filing (also 2023 projected expenses), MIAX PEARL, LLC's total 
costs have increased at a greater rate over the last three years than 
the total costs of MIAX PEARL, LLC's affiliated exchanges, MIAX and 
MIAX Emerald. This is also reflected in the total costs reported in 
MIAX PEARL, LLC's Form 1 filings over the last three years, when 
comparing MIAX PEARL, LLC to MIAX PEARL, LLC's affiliated exchanges, 
MIAX and MIAX Emerald. This is primarily because that MIAX PEARL, LLC 
operates two markets, one for options and one for equities, while MIAX 
and MIAX Emerald each operate only one market. This is also due to 
higher current expense for MIAX PEARL, LLC for 2022 and 2023, due to a 
hardware refresh (i.e., replacing old hardware with new equipment) for 
MIAX Pearl Options, as well as higher costs associated with MIAX Pearl 
Equities due to greater development efforts to grow that newer 
marketplace.\129\ The Exchange confirms

[[Page 86967]]

that there is no double counting of expenses between the options and 
equities platform of MIAX Pearl; the greater expense amounts of the 
MIAX PEARL, LLC (relative to its affiliated exchanges, MIAX and MIAX 
Emerald) is solely attributed to the unique factors of MIAX Pearl 
discussed above.
---------------------------------------------------------------------------

    \129\ See, e.g., Securities Exchange Act Release Nos. 94301 
(February 23, 2022), 87 FR 11739 (March 2, 2022) (SR-PEARL-2022-06) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend Rule 2617(b) To Adopt Two New Routing Options, and 
To Make Related Changes and Clarifications to Rules 2614(a)(2)(B) 
and 2617(b)(2)); 94851 (May 4, 2022), 87 FR 28077 (May 10, 2022) 
(SR-PEARL-2022-15) (Notice of Filing and Immediate Effectiveness of 
a Proposed Rule Change To Adopt Exchange Rule 532, Order Price 
Protection Mechanisms and Risk Controls); 95298 (July 15, 2022), 87 
FR 43579 (July 21, 2022) (SR-PEARL-2022-29) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change by MIAX PEARL, LLC 
To Amend the Route to Primary Auction Routing Option Under Exchange 
Rule 2617(b)(5)(B)); 95679 (September 6, 2022), 87 FR 55866 
(September 12, 2022) (SR-PEARL-2022-34) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change To Amend Exchange 
Rule 2614, Orders and Order Instructions, To Adopt the Primary Peg 
Order Type); 96205 (November 1, 2022), 87 FR 67080 (November 7, 
2022) (SR-PEARL-2022-43) (Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders 
and Order Instructions and Rule 2618, Risk Settings and Trading Risk 
Metrics To Enhance Existing Risk Controls); 96905 (February 13, 
2023), 88 FR 10391 (February 17, 2023) (SR-PEARL-2023-03) (Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Exchange Rule 2618 To Add Optional Risk Control Settings); 
97236 (March 31, 2023), 88 FR 20597 (April 6, 2023) (SR-PEARL-2023-
15) (Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change To Amend Exchange Rules 2617 and 2626 Regarding Retail Orders 
Routed Pursuant to the Route to Primary Auction Routing Option).
---------------------------------------------------------------------------

Costs Related to Offering Physical 10Gb ULL Connectivity
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering physical dedicated 
10Gb ULL connectivity via an unshared network as well as the percentage 
of the Exchange's overall costs that such costs represent for each cost 
driver (e.g., as set forth below, the Exchange allocated approximately 
26.9% of its overall Human Resources cost to offering physical 
connectivity).

----------------------------------------------------------------------------------------------------------------
                                                                       Allocated         Allocated
                           Cost drivers                             annual cost \k\  monthly cost \l\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...................................................       $3,675,098          $306,258       26.3
Connectivity (external fees, cabling, switches, etc.).............           70,163             5,847       60.6
Internet Services and External Market Data........................          322,388            26,866       73.3
Data Center.......................................................          739,983            61,665       60.6
Hardware and Software Maintenance and Licenses....................          959,157            79,930       58.6
Depreciation......................................................        1,885,969           157,164       58.2
Allocated Shared Expenses.........................................        3,914,751           326,229       49.2
                                                                   ---------------------------------------------
    Total.........................................................       11,567,509           963,959       40.5
----------------------------------------------------------------------------------------------------------------
\k\ The Annual Cost includes figures rounded to the nearest dollar.
\l\ The Monthly Cost was determined by dividing the Annual Cost for each line item by twelve (12) months and
  rounding up or down to the nearest dollar.

    Below are additional details regarding each of the line-item costs 
considered by the Exchange to be related to offering physical 10Gb ULL 
connectivity. While some costs were attempted to be allocated as 
equally as possible among the Exchange and its affiliated markets, the 
Exchange notes that some of its cost allocation percentages for certain 
cost drivers differ when compared to the same cost drivers for the 
Exchange's affiliated markets in their similar proposed fee changes for 
connectivity and ports. This is because MIAX Pearl Options' cost 
allocation methodology utilizes the actual projected costs of MIAX 
Pearl Options (which are specific to MIAX Pearl Options, and are 
independent of the costs projected and utilized by MIAX Pearl Options' 
affiliated markets) to determine its actual costs, which may vary 
across the Exchange and its affiliated markets based on factors that 
are unique to each marketplace. MIAX Pearl Options provides additional 
explanation below (including the reason for the deviation) for the 
significant differences.
Human Resources
    The Exchange notes that it and its affiliated markets have 184 
employees (excluding employees at non-options/equities exchange 
subsidiaries of Miami International Holdings, Inc. (``MIH''), the 
holding company of the Exchange and its affiliated markets), and each 
department leader has direct knowledge of the time spent by each 
employee with respect to the various tasks necessary to operate the 
Exchange. Specifically, twice a year, and as needed with additional new 
hires and new project initiatives, in consultation with employees as 
needed, managers and department heads assign a percentage of time to 
every employee and then allocate that time amongst the Exchange and its 
affiliated markets to determine each market's individual Human 
Resources expense. Then, managers and department heads assign a 
percentage of each employee's time allocated to the Exchange into 
buckets including network connectivity, ports, market data, and other 
exchange services. This process ensures that every employee is 100% 
allocated, ensuring there is no double counting between the Exchange 
and its affiliated markets.
    For personnel costs (Human Resources), the Exchange calculated an 
allocation of employee time for employees whose functions include 
providing and maintaining physical connectivity and performance thereof 
(primarily the Exchange's network infrastructure team, which spends 
most of their time performing functions necessary to provide physical 
connectivity). As described more fully above, the Exchange's parent 
company allocates costs to the Exchange and its affiliated markets and 
then a portion of the Human Resources costs allocated to the Exchange 
is then allocated to connectivity. From that portion allocated to the 
Exchange that applied to connectivity, the Exchange then allocated a 
weighted average of 42.9% of each employee's time from the above group. 
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, sales, membership, and finance personnel). The 
Exchange allocated cost on an employee-by-employee basis (i.e., only 
including those personnel who support functions related to providing 
physical connectivity) and then applied a smaller allocation to such 
employees' time to 10Gb ULL connectivity (less than 17%). This other 
group of personnel with a smaller allocation of Human Resources costs 
also have a direct nexus to 10Gb ULL connectivity, whether it is a 
sales person selling a connection, finance personnel billing for 
connectivity or providing budget analysis, or information security 
ensuring that such connectivity is secure and adequately defended from 
an outside intrusion.
    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 time such employees devote to those 
tasks. This includes personnel from the Exchange departments that are 
predominately involved in providing 1Gb and 10Gb ULL connectivity: 
Business Systems Development, Trading Systems Development, Systems 
Operations and Network Monitoring,

[[Page 86968]]

Network and Data Center Operations, Listings, Trading Operations, and 
Project Management. Again, the Exchange allocated 42.9% of each of 
their employee's time assigned to the Exchange for 10Gb ULL 
connectivity, as stated above. Employees from these departments perform 
numerous functions to support 10Gb ULL connectivity, such as the 
installation, re-location, configuration, and maintenance of 10Gb ULL 
connections and the hardware they access. This hardware includes 
servers, routers, switches, firewalls, and monitoring devices. These 
employees also perform software upgrades, vulnerability assessments, 
remediation and patch installs, equipment configuration and hardening, 
as well as performance and capacity management. These employees also 
engage in research and development analysis for equipment and software 
supporting 10Gb ULL connectivity and design, and support the 
development and on-going maintenance of internally-developed 
applications as well as data capture and analysis, and Member and 
internal Exchange reports related to network and system performance. 
The above list of employee functions is not exhaustive of all the 
functions performed by Exchange employees to support 10Gb ULL 
connectivity, but illustrates the breath of functions those employees 
perform in support of the above cost and time allocations.
    Lastly, the Exchange notes that senior level executives' time was 
only allocated to the 10Gb ULL connectivity related Human Resources 
costs to the extent that 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.
Connectivity (External Fees, Cabling, Switches, etc.)
    The Connectivity cost driver includes external fees paid to connect 
to other exchanges and third parties, cabling and switches required to 
operate the Exchange. The Connectivity cost driver is more narrowly 
focused on technology used to complete connections to the Exchange and 
to connect to external markets. 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.
    The Exchange relies on various connectivity providers for 
connectivity to the entire U.S. options industry, and infrastructure 
services for critical components of the network that are necessary to 
provide and maintain its System Networks and access to its System 
Networks via 10Gb ULL connectivity. Specifically, the Exchange utilizes 
connectivity providers to connect to other national securities 
exchanges and the Options Price Reporting Authority (``OPRA''). The 
Exchange understands that these service providers provide services to 
most, if not all, of the other U.S. exchanges and other market 
participants. Connectivity provided by these service providers is 
critical to the Exchanges daily operations and performance of its 
System Networks to which market participants connect to via 10Gb ULL 
connectivity. Without these services providers, the Exchange would not 
be able to connect to other national securities exchanges, market data 
providers or OPRA and, therefore, would not be able to operate and 
support its System Networks. The Exchange does not employ a separate 
fee to cover its connectivity expense and recoups that expense, in 
part, by charging for 10Gb ULL connectivity.
Internet Services and External Market Data
    The next cost driver consists of internet Services and external 
market data. Internet services includes third-party service providers 
that provide the internet, fiber and bandwidth connections between the 
Exchange's networks, primary and secondary data centers, and office 
locations in Princeton and Miami.
    External market data includes fees paid to third parties, including 
other exchanges, to receive market data. The Exchange includes external 
market data fee costs towards the provision of 10Gb ULL connectivity 
because such market data is necessary for certain services related to 
connectivity, including pre-trade risk checks and checks for other 
conditions (e.g., re-pricing of orders to avoid locked or crossed 
markets and trading collars). Since external market data from other 
exchanges is consumed at the Exchange's matching engine level, (to 
which 10Gb ULL connectivity provides access) in order to validate 
orders before additional orders enter the matching engine or are 
executed, the Exchange believes it is reasonable to allocate an amount 
of such costs to 10Gb ULL connectivity.
    The Exchange relies on content service providers for data feeds for 
the entire U.S. options industry, as well as content for critical 
components of the network that are necessary to provide and maintain 
its System Networks and access to its System Networks via 10Gb ULL 
connectivity. Specifically, the Exchange utilizes content service 
providers to receive market data from OPRA, other exchanges and market 
data providers. The Exchange understands that these service providers 
provide services to most, if not all, of the other U.S. exchanges and 
other market participants. Market data provided these service providers 
is critical to the Exchanges daily operations and performance of its 
System Networks to which market participants connect to via 10Gb ULL 
connectivity. Without these services providers, the Exchange would not 
be able to receive market data and, therefore, would not be able to 
operate and support its System Networks. The Exchange does not employ a 
separate fee to cover its content service provider expense and recoups 
that expense, in part, by charging for 10Gb ULL connectivity.
    Lastly, the Exchange notes that the actual dollar amounts allocated 
as part of the second step of the 2023 budget process differ among the 
Exchange and its affiliated markets for the internet Services and 
External Market Data cost driver, even though, but for MIAX Emerald, 
the allocation percentages are generally consistent across markets 
(e.g., MIAX Emerald, MIAX, MIAX Pearl Options and MIAX Pearl Equities 
allocated 84.8%, 73.3%, 73.3% and 72.5%, respectively, to the same cost 
driver). This is because: (i) a different percentage of the overall 
internet Services and External Market Data cost driver was allocated to 
MIAX Emerald and its affiliated markets due to the factors set forth 
under the first step of the 2023 budget review process described above 
(unique technical architecture, market structure, and business 
requirements of each marketplace); and (ii) MIAX Emerald itself 
allocated a larger portion of this cost driver to 10Gb ULL connectivity 
because of recent initiatives to improve the latency and determinism of 
its systems. The Exchange notes while the percentage MIAX Emerald 
allocated to the internet Services and External Market Data cost driver 
is greater than the Exchange and its other affiliated markets, the 
overall dollar amount allocated to the Exchange under the initial step 
of the 2023 budget process is lower than its affiliated markets. 
However, the Exchange believes that this is not, in dollar amounts, a 
significant difference. This is because the total dollar amount of 
expense

[[Page 86969]]

covered by this cost driver is relatively small compared to other cost 
drivers and is due to nuances in exchange architecture that require 
different initial allocation amount under the first step of the 2023 
budget process described above. Thus, non-significant differences in 
percentage allocation amounts in a smaller cost driver create the 
appearance of a significant difference, even though the actual 
difference in dollar amounts is small.
Data Center
    Data Center costs includes an allocation of the costs the Exchange 
incurs to provide physical connectivity in the third-party data centers 
where it maintains its equipment (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 (60.6%) to 
physical 10Gb ULL 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 by 
market 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.
Hardware and Software Maintenance and Licenses
    Hardware and Software Licenses includes hardware and software 
licenses used to operate and monitor physical assets necessary to offer 
physical connectivity to the Exchange.\130\ The Exchange notes that 
this allocation is greater than MIAX and MIAX Emerald options exchanges 
by a significant amount as MIAX Pearl Options allocated 58.6% of its 
Hardware and Software Maintenance and License expense towards 10Gb ULL 
connectivity, while MIAX and MIAX Emerald allocated 49.8% and 50.9%, 
respectively, to the same category of expense. This is because MIAX 
Pearl Options is in the process of replacing and upgrading various 
hardware and software used to operate its options trading platform in 
order to maintain premium network performance. At the time of this 
filing, the Exchange is undergoing a major hardware refresh, replacing 
older hardware with new hardware. This hardware includes servers, 
network switches, cables, optics, protocol data units, and cabinets, to 
maintain a state-of-the-art technology platform. Because of the timing 
of the hardware refresh with the timing of this filing, the Exchange 
has materially higher expense than its affiliates. Also, MIAX Pearl 
Equities allocated a higher percentage of the same category of expense 
(58%) towards its Hardware and Software Maintenance and License expense 
for 10Gb ULL connectivity, which MIAX Pearl Equities explains in its 
own proposal to amend its 10Gb ULL connectivity fees.
---------------------------------------------------------------------------

    \130\ This expense may be greater than the Exchange's affiliated 
markets, specifically MIAX and MIAX Emerald, because, unlike the 
MIAX and MIAX Emerald, MIAX Pearl (the options and equities markets) 
maintains an additional gateway to accommodate its Members' and 
Equity Members' access and connectivity needs. This added gateway 
contributes to the difference in allocations between MIAX Pearl, 
MIAX and MIAX Emerald. This expense also differs in dollar amount 
among the MIAX Pearl (options and equities markets), MIAX, and MIAX 
Emerald because each market may maintain and utilize a different 
amount of hardware and software based on its market model and 
infrastructure needs. The Exchange allocated a percentage of the 
overall cost based on actual amounts of hardware and software 
utilized by that market, which resulted in different cost 
allocations and dollar amounts.
---------------------------------------------------------------------------

Depreciation
    All physical assets, software and hardware used to provide 10Gb ULL 
connectivity, which also includes assets used for testing and 
monitoring of Exchange infrastructure, were valued at cost, and 
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. The Exchange also included in the 
Depreciation cost driver certain budgeted improvements that the 
Exchange intends to capitalize and depreciate with respect to 10Gb ULL 
connectivity in the near-term. As with the other allocated costs in the 
Exchange's updated Cost Analysis, the Depreciation cost was therefore 
narrowly tailored to depreciation related to 10Gb ULL connectivity. As 
noted above, the Exchange allocated 58.2% of its allocated depreciation 
costs to providing physical 10Gb ULL connectivity.
    The Exchange also notes that this allocation differs from its 
affiliated markets due to a number of factors, such as the age of 
physical assets and software (e.g., older physical assets and software 
were previously depreciated and removed from the allocation), or 
certain system enhancements that required new physical assets and 
software, thus providing a higher contribution to the depreciated cost. 
For example, the percentages the Exchange and its affiliate, MIAX, 
allocated to the depreciation of hardware and software used to provide 
10Gb ULL connectivity are nearly identical. However, the Exchange's 
dollar amount is less than that of MIAX by approximately $35,000 per 
month due to two factors: first, MIAX has undergone a technology 
refresh since the time MIAX Pearl Options launched in 2017, leading to 
it having more hardware that software that is subject to depreciation. 
Second, MIAX maintains 24 matching engines while MIAX Pearl Options 
maintains only 12 matching engines. This also results in more of MIAX's 
hardware and software being subject to depreciation than MIAX Pearl 
Options' hardware and software due to the greater amount of equipment 
and software necessary to support the greater number of matching 
engines on MIAX.
Allocated Shared Expenses
    Finally, as with other exchange products and services, a portion of 
general shared expenses was allocated to overall physical connectivity 
costs. These general shared costs are integral to exchange operations, 
including its ability to provide physical connectivity. Costs included 
in general shared expenses include 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. Similarly, the cost of paying 
directors to serve on the Exchange's Board of Directors is also 
included in the Exchange's general shared expense cost driver.\131\ 
These general shared expenses are incurred by the Exchange's parent 
company, MIH, as a direct result of operating the Exchange and its 
affiliated markets.
---------------------------------------------------------------------------

    \131\ The Exchange notes that MEMX allocated a precise amount of 
10% of the overall cost for directors to providing physical 
connectivity. See Securities Exchange Act Release No. 95936 
(September 27, 2022), 87 FR 59845 (October 3, 2022) (SR-MEMX-2022-
26). The Exchange does not calculate is expenses at that granular a 
level. Instead, director costs are included as part of the overall 
general allocation.
---------------------------------------------------------------------------

    The Exchange employed a process to determine a reasonable 
percentage to allocate general shared expenses to 10Gb ULL connectivity 
pursuant to its multi-layered allocation process. First, general 
expenses were allocated among the Exchange and affiliated markets as

[[Page 86970]]

described above. Then, the general shared expense assigned to the 
Exchange was allocated across core services of the Exchange, including 
connectivity. Then, these costs were further allocated to sub-
categories within the final categories, i.e., 10Gb ULL connectivity as 
a sub-category of connectivity. In determining the percentage of 
general shared expenses allocated to connectivity that ultimately apply 
to 10Gb ULL connectivity, the Exchange looked at the percentage 
allocations of each of the cost drivers and determined a reasonable 
allocation percentage. The Exchange also held meetings with senior 
management, department heads, and the Finance Team to determine the 
proper amount of the shared general expense to allocate to 10Gb ULL 
connectivity. The Exchange, therefore, believes it is reasonable to 
assign an allocation, in the range of allocations for other cost 
drivers, while continuing to ensure that this expense is only allocated 
once. Again, the general shared expenses are incurred by the Exchange's 
parent company as a result of operating the Exchange and its affiliated 
markets and it is therefore reasonable to allocate a percentage of 
those expenses to the Exchange and ultimately to specific product 
offerings such as 10Gb ULL connectivity.
    Again, a portion of all shared expenses were allocated to the 
Exchange (and its affiliated markets) which, in turn, allocated a 
portion of that overall allocation to all physical connectivity on the 
Exchange. The Exchange then allocated 49.2% of the portion allocated to 
physical connectivity to 10Gb ULL connectivity. The Exchange believes 
this allocation percentage is reasonable because, while the overall 
dollar amount may be higher than other cost drivers, the 49.2% is based 
on and in line with the percentage allocations of each of the 
Exchange's other cost drivers. The percentage allocated to 10Gb ULL 
connectivity also reflects its importance to the Exchange's strategy 
and necessity towards the nature of the Exchange's overall operations, 
which is to provide a resilient, highly deterministic trading system 
that relies on faster 10Gb ULL connectivity than the Exchange's 
competitors to maintain premium performance. This allocation reflects 
the Exchange's focus on providing and maintaining high performance 
network connectivity, of which 10Gb ULL connectivity is a main 
contributor. The Exchange differentiates itself by offering a 
``premium-product'' network experience, as an operator of a high 
performance, ultra-low latency network with unparalleled system 
throughput, which system networks can support access to three distinct 
options markets and multiple competing market-makers having affirmative 
obligations to continuously quote over 1,100,000 distinct trading 
products (per exchange), and the capacity to handle approximately 38 
million quote messages per second. The ``premium-product'' network 
experience enables users of 10Gb ULL connections to receive the network 
monitoring and reporting services for those approximately 1,100,000 
distinct trading products. These value add services are part of the 
Exchange's strategy for offering a high performance trading system, 
which utilizes 10Gb ULL connectivity.
    The Exchange notes that the 49.2% allocation of general shared 
expenses for physical 10Gb ULL connectivity is higher than that 
allocated to general shared expenses for Full Service MEO Ports. This 
is based on its allocation methodology that weighted costs attributable 
to each core service. While physical connectivity has several areas 
where certain tangible costs are heavily weighted towards providing 
such service (e.g., Data Center, as described above), Full Service MEO 
Ports do not require as many broad or indirect resources as other core 
services.
* * * * *
Approximate Cost per 10Gb Connection per Month
    After determining the approximate allocated monthly cost related to 
10Gb connectivity, the total monthly cost for 10Gb ULL connectivity of 
$963,959 was divided by the number of physical 10Gb ULL connections the 
Exchange maintained at the time that proposed pricing was determined 
(108), to arrive at a cost of approximately $8,925 per month, per 
physical 10Gb ULL connection. Due to the nature of this particular 
cost, this allocation methodology results in an allocation among the 
Exchange and its affiliated markets based on set quantifiable criteria, 
i.e., actual number of 10Gb ULL connections.
* * * * *
Costs Related to Offering Full Service MEO Ports
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering Full Service MEO 
Ports 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 8.3% of its overall Human Resources cost to 
offering Full Service MEO Ports).

----------------------------------------------------------------------------------------------------------------
                                                                       Allocated         Allocated
                           Cost drivers                             annual cost \m\  monthly cost \n\   % of all
----------------------------------------------------------------------------------------------------------------
Human Resources...................................................       $1,159,831           $96,653        8.3
Connectivity (external fees, cabling, switches, etc.).............            1,589               132        1.4
Internet Services and External Market Data........................            6,033               503        1.4
Data Center.......................................................           41,881             3,490        3.4
Hardware and Software Maintenance and Licenses....................           22,438             1,870        1.4
Depreciation......................................................          127,986            10,666        3.9
Allocated Shared Expenses.........................................          284,374            23,698        3.6
                                                                   ---------------------------------------------
    Total.........................................................        1,644,132           137,012        5.8
----------------------------------------------------------------------------------------------------------------
m. See supra note k (describing rounding of Annual Costs).
n. See supra note l (describing rounding of Monthly Costs based on Annual Costs).

    Below are additional details regarding each of the line-item costs 
considered by the Exchange to be related to offering Full Service MEO 
Ports. While some costs were attempted to be allocated as equally as 
possible among the Exchange and its affiliated markets, the Exchange 
notes that some of its cost allocation percentages for certain cost 
drivers differ when compared to the same cost drivers for the 
Exchange's affiliated markets in their similar proposed fee changes for 
connectivity and ports. This is because the Exchange's cost allocation 
methodology utilizes the actual projected costs of the Exchange (which 
are specific to the Exchange, and are independent of the costs 
projected

[[Page 86971]]

and utilized by the Exchange's affiliated markets) to determine its 
actual costs, which may vary across the Exchange and its affiliated 
markets based on factors that are unique to each marketplace. The 
Exchange provides additional explanation below (including the reason 
for the deviation) for the significant differences.
Human Resources
    With respect to Full Service MEO Ports, the Exchange calculated 
Human Resources cost by taking an allocation of employee time for 
employees whose functions include providing Full Service MEO Ports 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). Just 
as described above for 10Gb ULL connectivity, the estimates of Human 
Resources cost were again determined by consulting with department 
leaders, determining which employees are involved in tasks related to 
providing Full Service MEO Ports 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 Full Service MEO Ports and maintaining 
performance thereof. This includes personnel from the following 
Exchange departments that are predominately involved in providing Full 
Service MEO Ports: Business Systems Development, Trading Systems 
Development, Systems Operations and Network Monitoring, Network and 
Data Center Operations, Listings, Trading Operations, and Project 
Management. The Exchange notes that senior level executives were 
allocated Human Resources costs to the extent they are involved in 
overseeing tasks specifically related to providing Full Service MEO 
Ports. Senior level executives were only allocated Human Resources 
costs to the extent that they are involved in managing personnel 
responsible for tasks integral to providing Full Service MEO Ports. 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.
Connectivity (External Fees, Cabling, Switches, etc.)
    The Connectivity cost includes external fees paid to connect to 
other exchanges and cabling and switches, as described above.
Internet Services and External Market Data
    The next cost driver consists of internet services and external 
market data. Internet services includes third-party service providers 
that provide the internet, fiber and bandwidth connections between the 
Exchange's networks, primary and secondary data centers, and office 
locations in Princeton and Miami. For purposes of Full Service MEO 
Ports, the Exchange also includes a portion of its costs related to 
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 includes external market data costs 
towards the provision of Full Service MEO Ports because such market 
data is necessary (in addition to physical connectivity) to offer 
certain services related to such ports, such as validating orders on 
entry against the NBBO and checking for other conditions (e.g., halted 
securities).\132\ Thus, since market data from other exchanges is 
consumed at the Exchange's Full Service MEO Port 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 Full Service MEO Ports.
---------------------------------------------------------------------------

    \132\ The Exchange notes that MEMX separately allocated 7.5% of 
its external market data costs to providing physical connectivity. 
See Securities Exchange Act Release No. 95936 (September 27, 2022), 
87 FR 59845 (October 3, 2022) (SR-MEMX-2022-26).
---------------------------------------------------------------------------

    The Exchange notes that the allocation for the internet Services 
and External Market Data cost driver is lower than that of its 
affiliate, MIAX, as MIAX allocated 7.2% of its internet Services and 
External Market Data expense towards Limited Service MEI Ports, while 
MIAX Pearl Options allocated 1.4% to its Full Service MEO Ports for the 
same cost driver. The allocation percentages set forth above differ 
because they directly correspond with the number of applicable ports 
utilized on each exchange. For August 2023, MIAX Market Makers utilized 
1,781 Limited Service MEI ports and MIAX Emerald Market Makers utilized 
1,030 Limited Service MEI Ports. When compared to Full Service Port 
(Bulk and Single) usage, for August 2023, MIAX Pearl Options Members 
utilized only 384 Full Service MEO Ports (Bulk and Single), far fewer 
than number of Limited Service MEI Ports utilized by Market Makers on 
MIAX and MIAX Emerald, thus resulting in a smaller cost allocation. 
There is increased cost associated with supporting a higher number of 
ports (requiring more hardware and other technical infrastructure and 
internet Service), thus the Exchange allocates a higher percentage of 
expense than MIAX Pearl Options, which has a lower port count.
Data Center
    Data Center costs includes an allocation of the costs the Exchange 
incurs to provide Full Service MEO Ports in the third-party data 
centers where it maintains its equipment as well as related costs for 
market data to then enter the Exchange's system via Full Service MEO 
Ports (the Exchange does not own the Primary Data Center or the 
Secondary Data Center, but instead, leases space in data centers 
operated by third parties).
Hardware and Software Maintenance and Licenses
    Hardware and Software Licenses includes hardware and software 
licenses used to monitor the health of the order entry services 
provided by the Exchange, as described above.
    The Exchange notes that this allocation is less than its affiliate, 
MIAX, as MIAX allocated 7.2% of its Hardware and Software Maintenance 
and License expense towards Limited Service MEI Ports, while MIAX Pearl 
Options allocated 1.4% to its Full Service MEO Ports (Bulk and Single) 
for the same category of expense. The allocation percentages set forth 
above differ because they correspond with the number of applicable 
ports utilized on each exchange. For August 2023, MIAX Market Makers 
utilized 1,781 Limited Service MEI ports and MIAX Emerald Market Makers 
utilized 1,030 Limited Service MEI Ports. When compared to Full Service 
Port (Bulk and Single) usage, for August 2023, MIAX Pearl Options 
Members utilized only 384 Full Service MEO Ports (Bulk and Single), far 
fewer than number of Limited Service MEI Ports utilized by Market 
Makers on MIAX and MIAX Emerald, thus resulting in a smaller cost 
allocation. There is increased cost associated with supporting a higher 
number of ports (requiring more hardware and other technical 
infrastructure), thus the Exchange allocates a higher percentage of 
expense than MIAX Pearl Options, which has a lower port count.

[[Page 86972]]

Depreciation
    The vast majority of the software the Exchange uses to provide Full 
Service MEO Ports has been developed in-house and the cost of such 
development, which takes place over an extended period of time and 
includes not just development work, but also quality assurance and 
testing to ensure the software works as intended, is depreciated over 
time once the software is activated in the production environment. 
Hardware used to provide Full Service MEO Ports includes equipment used 
for testing and monitoring of order entry infrastructure and other 
physical equipment the Exchange purchased and is also depreciated over 
time.
    All hardware 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 3.9% of 
all depreciation costs to providing Full Service MEO Ports. The 
Exchange allocated depreciation costs for depreciated software 
necessary to operate the Exchange to Full Service MEO Ports because 
such software is related to the provision of Full Service MEO Ports. As 
with the other allocated costs in the Exchange's updated Cost Analysis, 
the Depreciation cost driver was therefore narrowly tailored to 
depreciation related to Full Service MEO Ports.
    The Exchange notes that this allocation differs from its affiliated 
markets due to a number of factors, such as the age of physical assets 
and software (e.g., older physical assets and software were previously 
depreciated and removed from the allocation), or certain system 
enhancements that required new physical assets and software, thus 
providing a higher contribution to the depreciated cost.
    For example, the Exchange notes that the percentage it allocated to 
the depreciation cost driver for Full Service MEO Ports and the 
percentage its affiliate, MIAX, allocated to the depreciation cost 
driver for MIAX's Limited Service MEI Ports, differ by only 2.4%. 
However, MIAX's approximate dollar amount is greater than that of MIAX 
Pearl Options by approximately $9,000 per month. This is due to two 
primary factors. First, MIAX has under gone a technology refresh since 
the time MIAX Pearl Options launched in 2017, leading to it having more 
hardware that software that is subject to depreciation. Second, MIAX 
maintains 24 matching engines while MIAX Pearl Options maintains only 
12 matching engines. This also results in more of MIAX's hardware and 
software being subject to depreciation than MIAX Pearl Options' 
hardware and software due to the greater amount of equipment and 
software necessary to support the greater number of matching engines on 
MIAX.
Allocated Shared Expenses
    Finally, a portion of general shared expenses was allocated to 
overall Full Service MEO Ports 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 4.0% of the overall cost for 
directors was allocated to providing Full Service MEO Ports. The 
Exchange notes that the 3.6% allocation of general shared expenses for 
Full Service MEO Ports is lower than that allocated to general shared 
expenses for physical connectivity based on its allocation methodology 
that weighted costs attributable to each Core Service based on an 
understanding of each area. While Full Service MEO Ports have several 
areas where certain tangible costs are heavily weighted towards 
providing such service (e.g., Data Centers, as described above), 10Gb 
ULL connectivity requires a broader level of support from Exchange 
personnel in different areas, which in turn leads to a broader general 
level of cost to the Exchange.
    Lastly, the Exchange notes that this allocation is less than its 
affiliate, MIAX, as MIAX allocated 9.8% of its Allocated Shared Expense 
towards Limited Service MEI Ports, while MIAX Pearl Options allocated 
3.6% to its Full Service MEO Ports (Bulk and Single) for the same 
category of expense. The allocation percentages set forth above differ 
because they correspond with the number of applicable ports utilized on 
each exchange. For August 2023, MIAX Market Makers utilized 1,781 
Limited Service MEI Ports and MIAX Emerald Market Makers utilized 1,030 
Limited Service MEI ports. When compared to Full Service Port (Bulk and 
Single) usage, for August 2023, MIAX Pearl Options Members utilized 
only 384 Full Service MEO Ports (Bulk and Single), far fewer than 
number of Limited Service MEI Ports utilized by Market Makers on MIAX, 
thus resulting in a smaller cost allocation. There is increased cost 
associated with supporting a higher number of ports (requiring more 
hardware and other technical infrastructure), thus the Exchange 
allocates a higher percentage of expense than MIAX Pearl Options which 
has a lower port count.
* * * * *
Approximate Cost per Full Service MEO Port per Month
    Based on May 2023 data, the total monthly cost allocated to Full 
Service MEO Ports of $137,012 was divided by the number of chargeable 
Full Service MEO Ports the Exchange maintained at the time that 
proposed pricing was determined (25 total; 25 Full Service MEO Port, 
Bulk, and 0 Full Service MEO Port, Single), to arrive at a cost of 
approximately $5,480 per month, per charged Full Service MEO Port.
* * * * *
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 Full Service MEO Ports) 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 filings the 
Exchange submitted proposing fees for proprietary data feeds offered by 
the Exchange. For instance, in calculating the Human Resources expenses 
to be allocated to physical connections based upon the above described 
methodology, 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 cost of such personnel (42.9%) given their focus on functions 
necessary to provide physical connections. The salaries of those same 
personnel were allocated only 12.3% to Full Service MEO Ports and the 
remaining 44.8% was allocated to 1Gb

[[Page 86973]]

connectivity, other port services, transaction services, membership 
services and market data. The Exchange did not allocate any other Human 
Resources expense for providing physical connections to any other 
employee group, outside of a smaller allocation of 16.9% for 10Gb ULL 
connectivity or 17.3% for the entire network, of the cost associated 
with certain specified personnel who work closely with and support 
network infrastructure personnel. In contrast, the Exchange allocated 
much smaller percentages of costs (6.0% or less) across a wider range 
of personnel groups in order to allocate Human Resources costs to 
providing Full Service MEO Ports. This is because a much wider range of 
personnel are involved in functions necessary to offer, monitor and 
maintain Full Service MEO Ports but the tasks necessary to do so are 
not a primary or full-time function.
    In total, the Exchange allocated 26.9% of its personnel costs to 
providing 10Gb ULL and 1Gb ULL connectivity and 8.3% of its personnel 
costs to providing Full Service MEO Ports, for a total allocation of 
35.2% Human Resources expense to provide these specific connectivity 
and port services. In turn, the Exchange allocated the remaining 64.8% 
of its Human Resources expense to membership services, transaction 
services, other port services and market data. 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 Full Service MEO 
Ports, 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 62.1% of the Exchange's overall depreciation and 
amortization expense to connectivity services (58.2% attributed to 10Gb 
ULL physical connections and 3.9% to Full Service MEO Ports). The 
Exchange allocated the remaining depreciation and amortization expense 
(approximately 37.9%) toward the cost of providing transaction 
services, membership services, other port services and market data.
    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. 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 clients that wish to maintain physical 
connectivity and/or Full Service MEO Ports 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 is based on the 
Exchange's 2023 fiscal year of operations and projections. It is 
possible, however, that actual costs may be higher or lower. 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 may 
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, etc. 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, we believe 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.
Projected Revenue \133\
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    \133\ For purposes of calculating revenue for 10Gb ULL 
connectivity, the Exchange used revenues for February 2023, the 
first full month for which it provided dedicated 10Gb ULL 
connectivity to MIAX Pearl Options and ceased operating a shared 
10Gb ULL network with MIAX.
---------------------------------------------------------------------------

    The proposed fees 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 and port services. Much of the cost relates to monitoring 
and analysis of data and performance of the network via the 
subscriber's connection(s). The above cost, namely those associated 
with hardware, software, and human capital, enable the Exchange to 
measure network performance with nanosecond granularity. These same 
costs are also associated with time and money spent seeking to 
continuously improve the network performance, improving the 
subscriber's experience, based on monitoring and analysis activity. 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 amending fees for 
connectivity services. Subscribers, particularly those of 10Gb ULL 
connectivity, expect the Exchange to provide this level of support to 
connectivity so they continue to receive the performance they expect. 
This differentiates the Exchange from its competitors. As detailed 
above, the Exchange has five 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 five 
primary sources of revenue.

[[Page 86974]]

    The Exchange's Cost Analysis estimates the annual cost to provide 
10Gb ULL connectivity services will equal $11,567,509. Based on current 
10Gb ULL connectivity services usage, the Exchange would generate 
annual revenue of approximately $17,496,000. The Exchange believes this 
represents a modest profit of 34% when compared to the cost of 
providing 10Gb ULL connectivity services, which could decrease over 
time.\134\
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    \134\ Assuming the U.S. inflation rate continues at its current 
rate, the Exchange believes that the projected profit margins in 
this proposal will decrease; however, the Exchange cannot predict 
with any certainty whether the U.S. inflation rate will continue at 
its current rate or its impact on the Exchange's future profits or 
losses. See, e.g., https://www.usinflationcalculator.com/inflation/current-inflation-rates/ (last visited September 22, 2023).
---------------------------------------------------------------------------

    The Exchange's Cost Analysis estimates the annual cost to provide 
Full Service MEO Port services will equal $1,644,132. Based on current 
Full Service MEO Port services usage, the Exchange would generate 
annual revenue of approximately $1,644,000. The Exchange believes this 
would result in a small negative margin after calculating the cost of 
providing Full Service MEO Port services, which could decrease further 
over time.\135\
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    \135\ Id.
---------------------------------------------------------------------------

    Based on the above discussion, even if the Exchange earns the above 
revenue or incrementally more or less, the proposed fees are fair and 
reasonable because they will not result in excessive pricing that 
deviates from that of other exchanges or a supra-competitive profit, 
when comparing the total expense of the Exchange associated with 
providing 10Gb ULL connectivity and Full Service MEO Port services 
versus the total projected revenue of the Exchange associated with 
network 10Gb ULL connectivity and Full Service MEO Port services.
    The Exchange also notes that this the resultant profit margin 
differs slightly from the profit margins set forth in similar fee 
filings by its affiliated markets. This is not atypical among exchanges 
and is due to a number of factors that differ between these four 
markets, including: different market models, market structures, and 
product offerings (equities, options, price-time, pro-rata, simple, and 
complex); different pricing models; different number of market 
participants and connectivity subscribers; different maintenance and 
operations costs, as described in the cost allocation methodology 
above; different technical architecture (e.g., the number of matching 
engines per exchange, i.e., the Exchange maintains 12 matching engines 
while MIAX maintains 24 matching engines); and different maturity phase 
of the Exchange and its affiliated markets (i.e., start-up versus 
growth versus more mature). All of these factors contribute to a unique 
and differing level of profit margin per exchange.
    Further, the Exchange proposes to charge rates that are comparable 
to, or lower than, similar fees for similar products charged by 
competing exchanges. For example, for 10Gb ULL connectivity, the 
Exchange proposes a lower fee than the fee charged by Nasdaq for its 
comparable 10Gb Ultra fiber connection ($13,500 per month for the 
Exchange vs. $15,000 per month for Nasdaq).\136\ NYSE American charges 
even higher fees for its comparable 10GB LX LCN connection than the 
Exchange's proposed fees ($13,500 for the Exchange vs. $22,000 per 
month for NYSE American).\137\ Accordingly, the Exchange believes that 
comparable and competitive pricing are key factors in determining 
whether a proposed fee meets the requirements of the Act, regardless of 
whether that same fee across the Exchange's affiliated markets leads to 
slightly different profit margins due to factors outside of the 
Exchange's control (i.e., more subscribers to 10Gb ULL connectivity on 
the Exchange than its affiliated markets or vice versa).
---------------------------------------------------------------------------

    \136\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \137\ See NYSE American Options Fee Schedule, Section V.A. Port 
Fees and Section V.B. Co-Location Fees.
---------------------------------------------------------------------------

* * * * *
    The Exchange has operated at a cumulative net annual loss since it 
launched operations in 2017.\138\ This is due to a number of factors, 
one of which is choosing to forgo revenue by offering certain products, 
such as low latency connectivity, at lower rates than other options 
exchanges to attract order flow and encourage market participants to 
experience the high determinism, low latency, and resiliency of the 
Exchange's trading systems. The Exchange does not believe it should now 
be penalized for seeking to raise its fees as it now needs to upgrade 
its technology and absorb increased costs. Therefore, the Exchange 
believes the proposed fees are reasonable because they are based on 
both relative costs to the Exchange to provide dedicated 10Gb ULL 
connectivity and Full Service MEO Ports, the extent to which the 
product drives the Exchange's overall costs and the relative value of 
the product, as well as the Exchange's objective to make access to its 
Systems broadly available to market participants. The Exchange also 
believes the proposed fees are reasonable because they are designed to 
generate annual revenue to recoup the Exchange's costs of providing 
dedicated 10Gb ULL connectivity and Full Service MEO Ports.
---------------------------------------------------------------------------

    \138\ The Exchange has incurred a cumulative loss of $83 million 
since its inception in 2017 through full year 2022. See Exchange's 
Form 1/A, Application for Registration or Exemption from 
Registration as a National Securities Exchange, filed June 26, 2023, 
available at https://www.sec.gov/Archives/edgar/vprr/2300/23007743.pdf.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimate is based on 
projections and will only be realized to the extent customer activity 
produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving 
competition, the Exchange does not yet know whether such projections 
will be realized. For instance, in order to generate the revenue 
expected from 10Gb ULL connectivity and Full Service MEO Ports, the 
Exchange will have to be successful in retaining existing clients that 
wish to utilize 10Gb ULL connectivity and Full Service MEO Ports and/or 
obtaining new clients that will purchase such access. To the extent the 
Exchange is successful in encouraging new clients to utilize 10Gb ULL 
connectivity and Full Service MEO Ports, the Exchange does not believe 
it should be penalized for such success. To the extent the Exchange has 
mispriced and experiences a net loss in connectivity clients or in 
transaction activity, the Exchange could experience a net reduction in 
revenue. While the Exchange is supportive of transparency around costs 
and potential margins (applied across all exchanges), as well as 
periodic review of revenues and applicable costs (as discussed below), 
the Exchange does not believe that these estimates should form the sole 
basis of whether or not a proposed fee is reasonable or can be adopted. 
Instead, the Exchange believes that the information should be used 
solely to confirm that an Exchange is not earning--or seeking to earn--
supra-competitive profits. The Exchange believes the Cost Analysis and 
related projections in this filing demonstrate this fact.
    The Exchange is owned by a holding company that is the parent 
company of four exchange markets and, therefore, the Exchange and its 
affiliated markets must allocate shared costs across all of those 
markets accordingly, pursuant to the above-described allocation 
methodology. In contrast, the Investors Exchange LLC (``IEX'') and 
MEMX, which are currently each operating only one exchange, in their 
recent non-transaction fee filings allocate the entire

[[Page 86975]]

amount of that same cost to a single exchange. This can result in lower 
profit margins for the non-transaction fees proposed by IEX and MEMX 
because the single allocated cost does not experience the efficiencies 
and synergies that result from sharing costs across multiple platforms. 
The Exchange and its affiliated markets often share a single cost, 
which results in cost efficiencies that can cause a broader gap between 
the allocated cost amount and projected revenue, even though the fee 
levels being proposed are lower or competitive with competing markets 
(as described above). To the extent that the application of a cost-
based standard results in Commission Staff making determinations as to 
the appropriateness of certain profit margins, the Exchange believes 
that Commission Staff should also consider whether the proposed fee 
level is comparable to, or competitive with, the same fee charged by 
competing exchanges and how different cost allocation methodologies 
(such as across multiple markets) may result in different profit 
margins for comparable fee levels. Further, if Commission Staff is 
making determinations as to appropriate profit margins in their 
approval of exchange fees, the Exchange believes that the Commission 
should be clear to all market participants as to what they have 
determined is an appropriate profit margin and should apply such 
determinations consistently and, in the case of certain legacy 
exchanges, retroactively, if such standards are to avoid having a 
discriminatory effect.
    Further, as is reflected in the proposal, the Exchange continuously 
and aggressively works to control its costs as a matter of good 
business practice. A potential profit margin should not be evaluated 
solely on its size; that assessment should also consider cost 
management and whether the ultimate fee reflects the value of the 
services provided. For example, a profit margin on one exchange should 
not be deemed excessive where that exchange has been successful in 
controlling its costs, but not excessive on another exchange where that 
exchange is charging comparable fees but has a lower profit margin due 
to higher costs. Doing so could have the perverse effect of not 
incentivizing cost control where higher costs alone could be used to 
justify fees increases.
The Proposed Pricing Is Not Unfairly Discriminatory and Provides for 
the Equitable Allocation of Fees, Dues, and Other Charges
    The Exchange believes that the proposed fees are reasonable, fair, 
equitable, and not unfairly discriminatory because they are designed to 
align fees with services provided and will apply equally to all 
subscribers.
10Gb ULL Connectivity
    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity and port 
alternatives, as the users of 10Gb ULL connections consume 
substantially more bandwidth and network resources than users of 1Gb 
ULL connection. Specifically, the Exchange notes that 10Gb ULL 
connection users account for more than 99% of message traffic over the 
network, driving other costs that are linked to capacity utilization, 
as described above, while the users of the 1Gb ULL connections account 
for less than 1% of message traffic over the network. In the Exchange's 
experience, users of the 1Gb connections do not have the same business 
needs for the high-performance network as 10Gb ULL users.
    The Exchange's high-performance network and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput with the network ability to support access to several 
distinct options markets. To achieve a consistent, premium network 
performance, the Exchange must build out and maintain a network that 
has the capacity to handle the message rate requirements of its most 
heavy network consumers. These billions of messages per day consume the 
Exchange's resources and significantly contribute to the overall 
network connectivity expense for storage and network transport 
capabilities. The Exchange must also purchase additional storage 
capacity on an ongoing basis to ensure it has sufficient capacity to 
store these messages to satisfy its record keeping requirements under 
the Exchange Act.\139\ Thus, as the number of messages an entity 
increases, certain other costs incurred by the Exchange that are 
correlated to, though not directly affected by, connection costs (e.g., 
storage costs, surveillance costs, service expenses) also increase. 
Given this difference in network utilization rate, the Exchange 
believes that it is reasonable, equitable, and not unfairly 
discriminatory that the 10Gb ULL users pay for the vast majority of the 
shared network resources from which all market participants' benefit.
---------------------------------------------------------------------------

    \139\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

Full Service MEO Ports
    The tiered pricing structure for Full Service MEO Ports has been in 
effect since 2018.\140\ The Exchange now proposes a pricing structure 
that is used by the Exchange's affiliates, MIAX and MIAX Emerald, 
except with lower pricing for each tier for Full Service MEO Ports 
(Bulk) and a flat fee for Full Service MEO Ports (Single). Members that 
are frequently in the highest tier for Full Service MEO Ports consume 
the most bandwidth and resources of the network. Specifically, as noted 
above for 10Gb ULL connectivity, Market Makers who reach the highest 
tier for Full Service MEO Ports (Bulk) account for greater than 84% of 
ADV on the Exchange, while Market Makers that are typically in the 
lowest Tier for Full Service MEO Ports, account for less than 14% of 
ADV on the Exchange. The remaining 1% is accounted for by Market Makers 
who are frequently in the middle Tier for Full Service MEO Ports 
(Bulk).
---------------------------------------------------------------------------

    \140\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------

    To achieve a consistent, premium network performance, the Exchange 
must build out and maintain a network that has the capacity to handle 
the message rate requirements of its most heavy network consumers 
during anticipated peak market conditions. The need to support billions 
of messages per day consume the Exchange's resources and significantly 
contribute to the overall network connectivity expense for storage and 
network transport capabilities. The Exchange must also purchase 
additional storage capacity on an ongoing basis to ensure it has 
sufficient capacity to store these messages as part of it surveillance 
program and to satisfy its record keeping requirements under the 
Exchange Act.\141\ Thus, as the number of connections a Market Maker 
has increases, the related pull on Exchange resources also increases. 
The Exchange sought to design the proposed tiered-pricing structure to 
set the amount of the fees to relate to the number of connections a 
firm purchases. The more connections purchased by a Market Maker likely 
results in greater expenditure of Exchange resources and increased cost 
to the Exchange.
---------------------------------------------------------------------------

    \141\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    The Exchange further believes that the proposed fees are 
reasonable, equitably allocated and not unfairly discriminatory 
because, for the flat fee,

[[Page 86976]]

the Exchange provides each Member two (2) Full Service MEO Ports for 
each matching engine to which that Member is connected. Unlike other 
options exchanges that provide similar port functionality and charge 
fees on a per port basis,\142\ the Exchange offers Full Service MEO 
Ports as a package and provides Members with the option to receive up 
to two Full Service MEO Ports per matching engine to which it connects. 
The Exchange currently has twelve (12) matching engines, which means 
Members may receive up to twenty-four (24) Full Service MEO Ports for a 
single monthly fee, that can vary based on certain volume percentages. 
The Exchange currently assesses Members a fee of $5,000 per month in 
the highest Full Service MEO Port--Bulk Tier, regardless of the number 
of Full Service MEO Ports allocated to the Member. Assuming a Member 
connects to all twelve (12) matching engines during a month, with two 
Full Service MEO Ports per matching engine, this results in a cost of 
$208.33 per Full Service MEO Port--Bulk ($5,000 divided by 24) for the 
month. This fee has been unchanged since the Exchange adopted Full 
Service MEO Port fees in 2018.\143\ Members will continue to receive 
two (2) Full Service MEO Ports to each matching engine to which they 
are connected for the single flat monthly fee. Assuming a Member 
connects to all twelve (12) matching engines during the month, and 
achieves the highest Tier for that month, with two Full Service MEO 
Ports (Bulk) per matching engine, this would result in a cost of $500 
per Full Service MEO Port ($12,000 divided by 24).
---------------------------------------------------------------------------

    \142\ See supra table on page 122 and accompanying text.
    \143\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes the proposed fees will not result in any 
burden on intra-market competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the proposed fees 
will allow the Exchange to recoup some of its costs in providing 10Gb 
ULL connectivity and Full Service MEO Ports at below market rates to 
market participants since the Exchange launched operations. As 
described above, the Exchange has operated at a cumulative net annual 
loss since it launched operations in 2017 \144\ due to providing a low-
cost alternative to attract order flow and encourage market 
participants to experience the high determinism and resiliency of the 
Exchange's trading Systems. To do so, the Exchange chose to waive the 
fees for some non-transaction related services and Exchange products or 
provide them at a very lower fee, which was not profitable to the 
Exchange. This resulted in the Exchange forgoing revenue it could have 
generated from assessing any fees or higher fees. The Exchange could 
have sought to charge higher fees at the outset, but that could have 
served to discourage participation on the Exchange. Instead, the 
Exchange chose to provide a low-cost exchange alternative to the 
options industry, which resulted in lower initial revenues. Examples of 
this are 10Gb ULL connectivity and Full Service MEO Ports, for which 
the Exchange only now seeks to adopt fees at a level similar to or 
lower than those of other options exchanges.
---------------------------------------------------------------------------

    \144\ See supra note 138.
---------------------------------------------------------------------------

    Further, the Exchange does not believe that the proposed fee 
increase for the 10Gb ULL connection change would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants or affect the ability of such market 
participants to compete. As is the case with the current proposed flat 
fee, the proposed fee would apply uniformly to all market participants 
regardless of the number of connections they choose to purchase. The 
proposed fee does not favor certain categories of market participants 
in a manner that would impose an undue burden on competition.
    The Exchange does not believe that the proposed rule change would 
place certain market participants at the Exchange at a relative 
disadvantage compared to other market participants or affect the 
ability of such market participants to compete. In particular, Exchange 
personnel has been informally discussing potential fees for 
connectivity services with a diverse group of market participants that 
are connected to the Exchange (including large and small firms, firms 
with large connectivity service footprints and small connectivity 
service footprints, as well as extranets and service bureaus) for 
several months leading up to that time. The Exchange does not believe 
the proposed fees for connectivity services would negatively impact the 
ability of Members, non-Members (extranets or service bureaus), third-
parties that purchase the Exchange's connectivity and resell it, and 
customers of those resellers to compete with other market participants 
or that they are placed at a disadvantage.
    The Exchange does anticipate, however, that some market 
participants may reduce or discontinue use of connectivity services 
provided directly by the Exchange in response to the proposed fees. In 
fact, as mentioned above, one MIAX Pearl Options Market Maker 
terminated their membership on January 1, 2023 as a direct result of 
the proposed fee changes.\145\ The Exchange does not believe that the 
proposed fees for connectivity services place certain market 
participants at a relative disadvantage to other market participants 
because the proposed connectivity pricing is associated with relative 
usage of the Exchange by each market participant and does not impose a 
barrier to entry to smaller participants. The Exchange believes its 
proposed pricing is reasonable 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. 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.
---------------------------------------------------------------------------

    \145\ The Exchange acknowledges that IEX included in its 
proposal to adopt market data fees after offering market data for 
free an analysis of what its projected revenue would be if all of 
its existing customers continued to subscribe versus what its 
projected revenue would be if a limited number of customers 
subscribed due to the new fees. See Securities Exchange Act Release 
No. 94630 (April 7, 2022), 87 FR 21945 (April 13, 2022) (SR-IEX-
2022-02). MEMX did not include a similar analysis in either of its 
recent non-transaction fee proposals. See, e.g., supra note 135. The 
Exchange does not believe a similar analysis would be useful here 
because it is amending existing fees, not proposing to charge a new 
fee where existing subscribers may terminate connections because 
they are no longer enjoying the service at no cost.

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[[Page 86977]]

Inter-Market Competition
    The Exchange also does not believe that the proposed rule change 
and price increase will result in any burden on inter-market 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. As this is a fee increase, arguably if set too 
high, this fee would make it easier for other exchanges to compete with 
the Exchange. Only if this were a substantial fee decrease could this 
be considered a form of predatory pricing. In contrast, the Exchange 
believes that, without this fee increase, we are potentially at a 
competitive disadvantage to certain other exchanges that have in place 
higher fees for similar services. As we have noted, the Exchange 
believes that connectivity fees can be used to foster more competitive 
transaction pricing and additional infrastructure investment and there 
are other options markets of which market participants may connect to 
trade options at higher rates than the Exchange's. Accordingly, the 
Exchange does not believe its proposed fee changes impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
    The Exchange also believes that the proposed fees for 10Gb 
connectivity are appropriate and warranted and would not impose any 
burden on competition. This is a technology driven change designed to 
meet customer needs. The proposed fees would assist the Exchange in 
recovering costs related to providing dedicated 10Gb connectivity to 
the Exchange while enabling it to continue to meet current and 
anticipated demands for connectivity by its Members and other market 
participants. Separating its 10Gb network from MIAX enables the 
Exchange to better compete with other exchanges by ensuring it can 
continue to provide adequate connectivity to existing and new Members, 
which may increase in ability to compete for order flow and deepen its 
liquidity pool, improving the overall quality of its market. The 
proposed rates for 10Gb ULL connectivity are structured to enable the 
Exchange to bifurcate its 10Gb ULL network shared with MIAX so that it 
can continue to meet current and anticipated connectivity demands of 
all market participants.
    Similarly, and also in connection with a technology change, Cboe 
Exchange, Inc. (``Cboe'') amended its access and connectivity fees, 
including port fees.\146\ Specifically, Cboe adopted certain logical 
ports to allow for the delivery and/or receipt of trading messages--
i.e., orders, accepts, cancels, transactions, etc. Cboe established 
tiered pricing for BOE and FIX logical ports,\147\ tiered pricing for 
BOE Bulk ports, and flat prices for DROP, Purge Ports, GRP Ports and 
Multicast PITCH/Top Spin Server Ports. Cboe argued in its fee proposal 
that the proposed pricing more closely aligned its access fees to those 
of its affiliated exchanges as the affiliated exchanges offer 
substantially similar connectivity and functionality and are on the 
same platform that Cboe migrated to.\148\ Cboe justified its proposal 
by stating that, ``. . . the Exchange believes substitutable products 
and services are in fact available to market participants, including, 
among other things, other options exchanges a market participant may 
connect to in lieu of the Exchange, indirect connectivity to the 
Exchange via a third-party reseller of connectivity and/or trading of 
any options product, including proprietary products, in the Over- the-
Counter (OTC) markets.'' \149\ The Exchange concurs with the following 
statement by Cboe,
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    \146\ See Securities Exchange Act Release No. 90333 (November 4, 
2020), 85 FR 71666 (November 10, 2020) (SR-CBOE-2020-105). The 
Exchange notes that Cboe submitted this filing after the Staff 
Guidance and contained no cost based justification.
    \147\ See Cboe Fee Schedule, Page 12, Logical Connectivity Fees, 
available at https://cdn.cboe.com/resources/membership/Cboe_FeeSchedule.pdf (BOE/FIX logical monthly port fees of $750 per 
port for ports 1-5 and $800 per port for port 6 or more; and BOE 
Bulk logical monthly port fees of $1,500 per port for ports 1-5, 
$2,500 per port for ports 6-30, and $3,000 for port 31 or more).
    \148\ See supra note 146 at 71676.
    \149\ Id.

    The rule structure for options exchanges are also fundamentally 
different from those of equities exchanges. In particular, options 
market participants are not forced to connect to (and purchase 
market data from) all options exchanges. For example, there are many 
order types that are available in the equities markets that are not 
utilized in the options markets, which relate to mid-point pricing 
and pegged pricing which require connection to the SIPs and each of 
the equities exchanges in order to properly execute those orders in 
compliance with best execution obligations. Additionally, in the 
options markets, the linkage routing and trade through protection 
are handled by the exchanges, not by the individual members. Thus 
not connecting to an options exchange or disconnecting from an 
options exchange does not potentially subject a broker-dealer to 
violate order protection requirements. Gone are the days when the 
retail brokerage firms (such as Fidelity, Schwab, and eTrade) were 
members of the options exchanges--they are not members of the 
Exchange or its affiliates, they do not purchase connectivity to the 
Exchange, and they do not purchase market data from the Exchange. 
Accordingly, not only is there not an actual regulatory requirement 
to connect to every options exchange, the Exchange believes there is 
also no ``de facto'' or practical requirement as well, as further 
evidenced by the recent significant reduction in the number of 
broker-dealers that are members of all options exchanges.\150\
---------------------------------------------------------------------------

    \150\ Id. at 71676.

    The Cboe proposal also referenced the National Market System Plan 
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\151\ wherein 
the Commission discussed the existence of competition in the 
marketplace generally, and particularly for exchanges with unique 
business models. The Commission acknowledged that, even if an exchange 
were to exit the marketplace due to its proposed fee-related change, it 
would not significantly impact competition in the market for exchange 
trading services because these markets are served by multiple 
competitors.\152\ Further, the Commission explicitly stated that 
``[c]onsequently, demand for these services in the event of the exit of 
a competitor is likely to be swiftly met by existing competitors.'' 
\153\ Finally, the Commission recognized that while some exchanges may 
have a unique business model that is not currently offered by 
competitors, a competitor could create similar business models if 
demand were adequate, and if a competitor did not do so, the Commission 
believes it would be likely that new entrants would do so if the 
exchange with that unique business model was otherwise profitable.\154\
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    \151\ See Securities Exchange Act Release No. 86901 (September 
9, 2019), 84 FR 48458 (September 13, 2019) (File No. S7-13-19).
    \152\ Id.
    \153\ Id.
    \154\ Id.
---------------------------------------------------------------------------

    Cboe also filed to establish a monthly fee for Certification 
Logical Ports of $250 per Certification Logical Port.\155\ Cboe 
reasoned that purchasing additional Certification Logical Ports, beyond 
the one Certification Logical Port per logical port type offered in the 
production environment free of charge, is voluntary and not required in 
order to participate in the production

[[Page 86978]]

environment, including live production trading on the Exchange.\156\
---------------------------------------------------------------------------

    \155\ See Securities Exchange Act Release No. 94512 (March 24, 
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011). Cboe offers 
BOE and FIX Logical Ports, BOE Bulk Logical Ports, DROP Logical 
Ports, Purge Ports, GRP Ports and Multicast PITCH/Top Spin Server 
Ports. For each type of the aforementioned logical ports that are 
used in the production environment, the Exchange also offers 
corresponding ports which provide Trading Permit Holders and non-
TPHs access to the Exchange's certification environment to test 
proprietary systems and applications (i.e., ``Certification Logical 
Ports'').
    \156\ See Securities Exchange Act Release No. 94512 (March 24, 
2002), 87 FR 18425 (March 30, 2022) (SR-Cboe-2022-011).
---------------------------------------------------------------------------

    In its statutory basis, Cboe justified the new port fee by stating 
that it believed the Certification Logical Port fee were reasonable 
because while such ports were no longer completely free, TPHs and non-
TPHs would continue to be entitled to receive free of charge one 
Certification Logical Port for each type of logical port that is 
currently offered in the production environment.\157\ Cboe noted that 
other exchanges assess similar fees and cited to NASDAQ LLC and 
MIAX.\158\ Cboe also noted that the decision to purchase additional 
ports is optional and no market participant is required or under any 
regulatory obligation to purchase excess Certification Logical Ports in 
order to access the Exchange's certification environment.\159\ Finally, 
similar proposals to adopt a Certification Logical Port monthly fee 
were filed by Cboe BYX Exchange, Inc.,\160\ BZX,\161\ and Cboe EDGA 
Exchange, Inc.\162\
---------------------------------------------------------------------------

    \157\ Id. at 18426.
    \158\ Id.
    \159\ Id.
    \160\ See Securities Exchange Act Release No. 94507 (March 24, 
2002), 87 FR 18439 (March 30, 2022) (SR-CboeBYX-2022-004).
    \161\ See Securities Exchange Act Release No. 94511 (March 24, 
2002), 87 FR 18411 (March 30, 2022) (SR-CboeBZX-2022-021).
    \162\ See Securities Exchange Act Release No. 94517 (March 25, 
2002), 87 FR 18848 (March 31, 2022) (SR-CboeEDGA-2022-004).
---------------------------------------------------------------------------

    The Cboe fee proposals described herein were filed subsequent to 
the D.C. Circuit decision in Susquehanna Int'l Grp., LLC v. SEC, 866 
F.3d 442 (D.C. Cir. 2017), meaning that such fee filings were subject 
to the same (and current) standard for SEC review and approval as this 
proposal. In summary, the Exchange requests the Commission apply the 
same standard of review to this proposal which was applied to the 
various Cboe and Cboe affiliated markets' filings with respect to non-
transaction fees. If the Commission were to apply a different standard 
of review to this proposal than it applied to other exchange fee 
filings it would create a burden on competition such that it would 
impair the Exchange's ability to make necessary technology driven 
changes, such as bifurcating its 10Gb ULL network, because it would be 
unable to monetize or recoup costs related to that change and compete 
with larger, non-legacy exchanges.
* * * * *
    In conclusion, as discussed thoroughly above, the Exchange 
regrettably believes that the application of the Revised Review Process 
and Staff Guidance has adversely affected inter-market competition 
among legacy and non-legacy exchanges by impeding the ability of non-
legacy exchanges to adopt or increase fees for their market data and 
access services (including connectivity and port products and services) 
that are on parity or commensurate with fee levels previously 
established by legacy exchanges. Since the adoption of the Revised 
Review Process and Staff Guidance, and even more so recently, it has 
become extraordinarily difficult to adopt or increase fees to generate 
revenue necessary to invest in systems, provide innovative trading 
products and solutions, and improve competitive standing to the benefit 
of non-legacy exchanges' market participants. Although the Staff 
Guidance served an important policy goal of improving disclosures and 
requiring exchanges to justify that their market data and access fee 
proposals are fair and reasonable, it has also negatively impacted non-
legacy exchanges in particular in their efforts to adopt or increase 
fees that would enable them to more fairly compete with legacy 
exchanges, despite providing enhanced disclosures and rationale under 
both competitive and cost basis approaches provided for by the Revised 
Review Process and Staff Guidance to support their proposed fee 
changes.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange received one comment letter on the Initial Proposal, 
one comment letter on the Second Proposal, one comment letter on the 
Third Proposal, one comment letter on the Fourth Proposal, one comment 
letter on the Fifth Proposal, and one comment letter on the Sixth 
Proposal, all from the same commenter.\163\ In their letters, the sole 
commenter seeks to incorporate comments submitted on previous Exchange 
proposals to which the Exchange has previously responded. The Exchange 
also received one comment letter from a separate commenter on the Sixth 
Proposal.\164\ The Exchange believes issues raised by each commenters 
are not germane to this proposal in particular, but rather raise larger 
issues with the current environment surrounding exchange non-
transaction fee proposals that should be addressed by the Commission 
through rule making, or Congress, more holistically and not through an 
individual exchange fee filings. Among other things, the commenters are 
requesting additional data and information that is both opaque and a 
moving target and would constitute a level of disclosure materially 
over and above that provided by any competitor exchanges.
---------------------------------------------------------------------------

    \163\ See letter from Brian Sopinsky, General Counsel, 
Susquehanna International Group, LLP (``SIG''), to Vanessa 
Countryman, Secretary, Commission, dated February 7, 2023, and 
letters from Gerald D. O'Connell, SIG, to Vanessa Countryman, 
Secretary, Commission, dated March 21, 2023, May 24, 2023, July 24, 
2023 and September 18, 2023.
    \164\ See letter from Thomas M. Merritt, Deputy General Counsel, 
Virtu Financial, Inc. (``Virtu''), to Vanessa Countryman, Secretary, 
Commission, dated November 8, 2023.
---------------------------------------------------------------------------

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,\165\ and Rule 19b-4(f)(2) \166\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act. If the Commission takes such 
action, the Commission shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

    \165\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \166\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#8af8ffe6efa7e9e5e7e7efe4fef9caf9efe9a4ede5fc"><span class="__cf_email__" data-cfemail="dcaea9b0b9f1bfb3b1b1b9b2a8af9cafb9bff2bbb3aa">[email protected]</span></a>. Please include 
file number SR-PEARL-2023-64 on the subject line.

Paper Comments

    <bullet> 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-PEARL-2023-64. 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

[[Page 86979]]

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-PEARL-2023-64 and should be submitted on 
or before January 5, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\167\
---------------------------------------------------------------------------

    \167\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-27531 Filed 12-14-23; 8:45 am]
BILLING CODE 8011-01-P


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