[Federal Register Volume 89, Number 34 (Tuesday, February 20, 2024)]
[Notices]
[Pages 12882-12891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03342]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99527; File No. SR-PEARL-2024-07]


Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX 
Pearl Options Fee Schedule for Purge Ports

February 13, 2024.
    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 January 31, 2024, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'') 
filed with the 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 proposes to amend the MIAX Pearl Options Exchange Fee 
Schedule (the ``Fee Schedule'') to amend fees for MIAX Express Network 
(``MEO'') \3\ Purge Ports (``Purge Ports'').\4\
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    \3\ ``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.
    \4\ The proposed fee change is based on a recent proposal by 
Nasdaq Phlx LLC (``Phlx'') to adopt fees for purge ports. See 
Securities Exchange Act Release No. 97825 (June 30, 2023), 88 FR 
43405 (July 7, 2023) (SR-Phlx-2023-28).
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    The text of the proposed rule change is available on the Exchange's 
website at https://www.miaxglobal.com/markets/us-options/pearl-options/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 fees for Purge Ports, which is a 
function enabling the Exchange's two types of Members,\5\ Market Makers 
\6\ and Electronic Exchange Members \7\ (``EEMs''), to cancel all open 
orders or a subset of open orders through a single cancel message. The 
Exchange currently provides Members the option to purchase Purge Ports 
to assist in their quoting activity. Purge Ports provide Members with 
the ability to send purge messages to the Exchange System.\8\ Purge 
Ports are not capable of sending or receiving any other type of 
messages or information. The use of Purge Ports is completely optional 
and no rule or regulation requires that a Market Maker utilize them.
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    \5\ The term ``Member'' means an individual or organization that 
is registered with the Exchange pursuant to Chapter II of Exchange 
Rules for purposes of trading on the Exchange as an ``Electronic 
Exchange Member'' or ``Market Maker.'' Members are deemed 
``members'' under the Exchange Act. See the Definitions Section of 
the Fee Schedule and Exchange Rule 100.
    \6\ The term ``Market Maker'' or ``MM'' 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 the Exchange 
Rules. See the Definitions Section of the Fee Schedule and Exchange 
Rule 100.
    \7\ 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.
    \8\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
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    The Exchange initially filed the proposal on September 29, 2023 
(SR-PEARL-2023-52) (the ``Initial Proposal'').\9\ On November 22, 2023, 
the Exchange withdrew the Initial Proposal and replaced with a revised 
filing (SR-PEARL-2023-65) (the ``Second Proposal'').\10\ On January 31, 
2024, the

[[Page 12883]]

Exchange withdrew the Second Proposal and replaced it with this further 
revised filing (the ``Third Proposal'') (SR-PEARL-2024-07).
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    \9\ See Securities Exchange Act Release No. 98733 (October 12, 
2023), 88 FR 71907 (October 18, 2023) (SR-PEARL-2023-52).
    \10\ See Securities Exchange Act Release No. 99090 (December 5, 
2023), 88 FR 86193 (December 12, 2023) (SR-PEARL-2023-65).
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    The Exchange is including a cost analysis in this filing to justify 
the proposed fees. As described more fully below, the cost analysis 
includes, among other things, descriptions of how the Exchange 
allocated costs among it and its affiliated exchanges for similar 
proposed fee changes (separately between MIAX \11\ and MIAX 
Emerald,\12\ collectively referred to herein as the ``affiliated 
markets''), to ensure no cost was allocated more than once, as well as 
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 similar proposals submitted by the affiliated markets. 
The proposed fees are intended to cover the Exchange's cost of 
providing Purge Ports with a reasonable mark-up over those costs.
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    \11\ The term ``MIAX'' means Miami International Securities 
Exchange, LLC. See Exchange Rule 100.
    \12\ The term ``MIAX Emerald'' means MIAX Emerald, LLC. See 
Exchange Rule 100.
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* * * * *
Purge Port Fee Change
    Unlike other options exchanges that charge fees for Purge Ports on 
a per port basis,\13\ the Exchange assesses a flat fee of $750 per 
month, regardless of the number of Purge Ports utilized by a Market 
Maker. Currently, a Market Maker may request and be allocated two (2) 
Purge Ports per Matching Engine \14\ to which it connects and not all 
Members connect to all of the Exchange's Matching Engines.
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    \13\ See Cboe BXZ Exchange, Inc. (``BZX'') Options Fee Schedule, 
Options Logical Port Fees, Purge Ports ($750 per purge port per 
month); Cboe EDGX Exchange, Inc. (``EDGX'') Options Fee Schedule, 
Options Logical Port Fees, Purge Ports ($750 per purge port per 
month); Cboe Exchange, Inc. (``Cboe'') Fee Schedule ($850 per purge 
port per month). See also Nasdaq GEMX, Options 7, Pricing Schedule, 
Section 6.C.(3). Nasdaq GEMX, LLC (``Nasdaq GEMX'') assesses its 
members $1,250 per SQF Purge Port per month, subject to a monthly 
cap of $17,500 for SQF Purge Ports and SQF Ports, applicable to 
market makers. See also Securities Exchange Act Release No. 97825 
(June 30, 2023), 88 FR 43405 (July 7, 2023) (SR-Phlx-2023-28).
    \14\ A Matching Engine is a part of the Exchange's electronic 
system that processes options quotes and trades on a symbol-by- 
symbol basis. Some matching engines will process option classes with 
multiple root symbols, and other matching engines will be dedicated 
to one single option root symbol (for example, options on SPY will 
be processed by one single matching engine that is dedicated only to 
SPY). A particular root symbol may only be assigned to a single 
designated matching engine. A particular root symbol may not be 
assigned to multiple matching engines. See the Definitions Section 
of the Fee Schedule.
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    The Exchange now proposes to amend the fee for Purge Ports to align 
more closely with other exchanges who charge on a per port basis by 
providing two (2) Purge Ports per Matching Engine for a monthly flat 
fee of $600 per month per Matching Engine. The only difference with a 
per port structure is that Members receive two (2) Purge Ports per 
Matching Engine for the same proposed monthly fee, rather than being 
charged a separate fee for each Purge Port. The Exchange proposes to 
charge the proposed fee for Purge Ports per Matching Engine, instead on 
a per Purge Port basis, due to its System architecture which provides 
two (2) Purge Ports per Matching Engine for redundancy purposes. In 
addition, the proposed fee is lower than the comparable fee charged by 
competing exchanges that also charge on a per port basis, 
notwithstanding that the Exchange is providing up to two (2) Purge 
Ports for that same lower fee.\15\
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    \15\ See supra note 13.
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    Similar to a per port charge, Members are able to select the 
Matching Engines that they want to connect to,\16\ based on the 
business needs of each Market Maker, and pay the applicable fee based 
on the number of Matching Engines and ports utilized. The Exchange 
believes that the proposed fee provides Members with flexibility to 
control their Purge Port costs based on the number of Matching Engines 
each Marker Maker elects to connect to based on each Market Maker's 
business needs.
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    \16\ The Exchange notes that each Matching Engine corresponds to 
a specified group of symbols. Certain Market Makers choose to only 
quote in certain symbols while other Market Makers choose to quote 
the entire market.
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* * * * *
    A logical port represents a port established by the Exchange within 
the Exchange's System for trading and billing purposes. Each logical 
port grants a Member the ability to accomplish a specific function, 
such as order entry, order cancellation, access to execution reports, 
and other administrative information.
    Purge Ports are designed to assist Members \17\ in the management 
of, and risk control over, their orders, particularly if the firm is 
dealing with a large number of securities. For example, if a Market 
Maker detects market indications that may influence the execution 
potential of their orders, the Market Maker may use Purge Ports to 
reduce uncertainty and to manage risk by purging all orders in a number 
of securities. This allows Members to seamlessly avoid unintended 
executions, while continuing to evaluate the market, their positions, 
and their risk levels. Purge Ports are used by Members that conduct 
business activity that exposes them to a large amount of risk across a 
number of securities. Purge Ports enable Members to cancel all open 
orders, or a subset of open orders through a single cancel message. The 
Exchange notes that Purge Ports increase efficiency of already existing 
functionality enabling the cancellation of orders.
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    \17\ Members seeking to become registered as a Market Maker must 
comply with the applicable requirements of Chapter VI of the 
Exchange's Rules.
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    The Exchange operates highly performant systems with significant 
throughput and determinism which allows participants to enter, update 
and cancel orders at high rates. Members may currently cancel 
individual orders through the existing functionality, such as through 
the use of a mass cancel message by which a Market Maker may request 
that the Exchange remove all or a subset of its quotations and block 
all or a subset of its new inbound quotations.\18\ Other than Purge 
Ports being a dedicated line for cancelling quotations, Purge Ports 
operate in the same manner as a mass cancel message being sent over a 
different type of port. For example, like Purge Ports, mass 
cancellations sent over a logical port may be done at either the firm 
or MPID level. As a result, Members can currently cancel orders in 
rapid succession across their existing logical ports \19\ or through a 
single cancel message, all open orders or a subset of open orders.
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    \18\ See Exchange Rule 519C(a) and (b).
    \19\ Current Exchange port functionality supports cancelation 
rates that exceed one thousand messages per second and the 
Exchange's research indicates that certain market participants rely 
on such functionality and at times utilize such cancelation rates.
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    Similarly, Members may also use cancel-on-disconnect control when 
they experience a disruption in connection to the Exchange to 
automatically cancel all orders, as configured or instructed by the 
Member or Market Maker.\20\ In addition, the Exchange already provides 
similar ability to mass cancel orders through the Exchange's risk 
controls, which are offered at no charge and enables Members to 
establish pre-determined levels of risk exposure, and can be used to 
cancel all open orders.\21\ Accordingly, the Exchange believes that the 
Purge Ports provide an efficient option as an alternative to already 
available services and enhance the Member's ability to manage their 
risk.
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    \20\ See Exchange Rule 519C(c).
    \21\ See Exchange Rule 532.
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    The Exchange believes that market participants benefit from a 
dedicated purge mechanism for specific Members and to the market as a 
whole. Members will have the benefit of efficient risk

[[Page 12884]]

management and purge tools. The market will benefit from potential 
increased quoting and liquidity as Members may use Purge Ports to 
manage their risk more robustly. Only Members that request Purge Ports 
would be subject to the proposed fees, and other Members can continue 
to operate in exactly the same manner as they do today without 
dedicated Purge Ports, but with the additional purging capabilities 
described above.
Implementation Date
    The proposed fees are effective beginning February 1, 2024.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\22\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\23\ in particular, in that it 
is not designed to permit unfair discrimination among customers, 
brokers, or dealers. The Exchange also believes that its proposed fee 
is consistent with Section 6(b)(4) of the Act \24\ because it 
represents an equitable allocation of reasonable dues, fees and other 
charges among market participants.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78f(b)(4).
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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 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,\25\ and Rule 19b-4 thereunder,\26\ with respect to the 
types of information exchanges should provide when filing fee changes, 
and Section 6(b) of the Act,\27\ which requires, among other things, 
that exchange fees be reasonable and equitably allocated,\28\ not 
designed to permit unfair discrimination,\29\ and that they not impose 
a burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\30\ 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 Staff Guidance.\31\
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    \25\ 15 U.S.C. 78s(b)(1).
    \26\ 17 CFR 240.19b-4.
    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(4).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 15 U.S.C. 78f(b)(8).
    \31\ 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'').
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    As detailed below, the Exchange recently calculated its aggregate 
annual costs for providing Purge Ports to be $1,017,523 (or 
approximately $84,793 per month, rounded to the nearest dollar when 
dividing the annual cost by 12 months). In order to cover the aggregate 
costs of providing Purge Ports to its Market Makers going forward and 
to make a modest profit, as described below, the Exchange proposes to 
modify its Fee Schedule to charge a fee of $300 per Matching Engine for 
Purge Ports.
    In 2019, the Exchange completed a study of its aggregate costs to 
produce market data and connectivity (the ``Cost Analysis'').\32\ 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 and purge 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''). The Exchange recently update its Cost Analysis using its 
2024 estimated budget as described below.
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    \32\ 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.
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    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 
2024 budget review process. The 2024 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,\33\ 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 12885]]

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.
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    \33\ For example, MIAX maintains 24 matching engines, MIAX Pearl 
Options maintains 12 matching engines, MIAX Pearl Equities maintains 
24 matching engines, and MIAX Emerald maintains 12 matching engines.
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    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.
    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 Purge 
Port services, and thus bears a relationship that is, ``in nature and 
closeness,'' directly related to Purge 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 Purge 
Port services is $84,793, as further detailed below.
Costs Related to Offering Purge Ports
    The following chart details the individual line-item costs 
considered by the Exchange to be related to offering Purge Ports 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 3.5% of its overall Human Resources cost to 
offering Purge Ports).

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                                                                       Allocated         Allocated
                           Cost drivers                             annual cost \a\  monthly cost \b\   % of all
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Human Resources...................................................         $776,560           $64,713        3.5
Connectivity (external fees, cabling, switches, etc.).............              521                43        0.6
Internet Services and External Market Data........................            2,949               246        0.6
Data Center.......................................................           21,359             1,780        1.4
Hardware and Software Maintenance and Licenses....................           11,069               922        0.6
Depreciation......................................................           67,682             5,640        1.7
Allocated Shared Expenses.........................................          137,383            11,449        1.5
                                                                   ---------------------------------------------
    Total.........................................................        1,017,523            84,793        2.6
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\a\ The Annual Cost includes figures rounded to the nearest dollar.
\b\ 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 Purge 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 Purge Ports. This is because 
the Exchange's cost allocation methodology utilizes the actual

[[Page 12886]]

projected costs of the Exchange (which are specific to the Exchange and 
are independent of the costs projected 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
    The Exchange notes that it and its affiliated markets anticipate 
that by year-end 2024, there will be 289 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 Purge Ports and performance thereof 
(primarily the Exchange's network infrastructure team, which spends 
most of their time performing functions necessary to provide port and 
connectivity services). 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 port services. From that portion 
allocated to the Exchange that applied to ports, the Exchange then 
allocated a weighted average of 5.4% of each employee's time from the 
above group to Purge Ports.
    The Exchange also allocated Human Resources costs to provide Purge 
Ports to a limited subset of personnel with ancillary functions related 
to establishing and maintaining such ports (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 Purge Ports) 
and then applied a smaller allocation to such employees' time to Purge 
Ports (2.4%). This other group of personnel with a smaller allocation 
of Human Resources costs also have a direct nexus to Purge Ports, 
whether it is a sales person selling port services, finance personnel 
billing for port services or providing budget analysis, or information 
security ensuring that such ports are 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 Purge Ports, 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 Purge Ports: Business Systems Development, 
Trading Systems Development, Systems Operations and Network Monitoring, 
Network and Data Center Operations, Listings, Trading Operations, and 
Project Management. Again, the Exchange allocated 5.4% of each of their 
employee's time assigned to the Exchange for Purge Ports, as stated 
above. Employees from these departments perform numerous functions to 
support Purge Ports, such as the installation, re-location, 
configuration, and maintenance of Purge Ports 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 Purge Ports 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 Purge 
Ports, 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 Purge Ports related Human Resources costs to the 
extent that they are involved in overseeing tasks related to providing 
Purge Ports. 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 vendors 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 which includes Purge Ports. 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, including 
Purge Ports. In addition, the connectivity is necessary for the 
Exchange to notify OPRA and other market participants that an order has 
been cancelled, and that quotes may have been cancelled as a result of 
a Member purging quotes via their Purge Port. Also, like other types of 
ports

[[Page 12887]]

offered by the Exchange, Purge Ports leverage the Exchange's existing 
10Gb ULL connectivity, which also relies on connectivity to other 
national securities exchanges and OPRA. The Exchange does not employ a 
separate fee to cover its connectivity provider expense and recoups 
that expense, in part, by charging for Purge Ports.
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 Purge 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 OPRA, to receive and consume market data from other markets. 
The Exchange includes external market data costs towards Purge Ports 
because such market data is necessary to offer certain services related 
to such ports, such as checking for market conditions (e.g., halted 
securities). External market data is also consumed at the Matching 
Engine level for, among other things, as validating quotes on entry 
against the NBBO. Purge Ports are a component of the Matching Engine, 
and used by market participants to cancel multiple resting quotes 
within the Matching Engine. While resting, the Exchange uses external 
market data to manage those quotes, such as preventing trade-throughs, 
and those quotes are also reported to OPRA for inclusion in this 
consolidated data stream. The Exchange also must notify OPRA and other 
market participants that an order has been cancelled, and that quotes 
may have been cancelled as a result of a Member purging quotes via 
their Purge Port. Thus, since market data from other exchanges is 
consumed by the Matching Engine to validate quotes and check market 
conditions, the Exchange believes it is reasonable to allocate a small 
amount of such costs to Purge Ports.
    For the reasons set forth above, the Exchange believes it is 
reasonable to allocate a small amount of such costs to Purge Ports 
since market data from other exchanges is consumed at the Exchange's 
Purge Port level to validate purge messages and the necessity to cancel 
a resting quote via a purge message or via some other means.
Data Center
    Data Center costs includes an allocation of the costs the Exchange 
incurs to provide Purge 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 (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 operate and monitor physical assets necessary to offer 
Purge Ports for each Matching Engine of the Exchange.
Depreciation
    The vast majority of the software the Exchange uses to provide 
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 
Purge 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 1.9% of 
all depreciation costs to providing Purge Ports. The Exchange allocated 
depreciation costs for depreciated software necessary to operate the 
Exchange because such software is related to the provision of Purge 
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 Purge Ports.
Allocated Shared Expenses
    Finally, a portion of general shared expenses was allocated to 
overall Purge Port costs as without these general shared costs the 
Exchange would not be able to operate in the manner that it does and 
provide Purge Ports. 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 3% of 
the overall cost for directors was allocated to providing Purge Ports.
Approximate Cost per Purge Port per Month
    Based on projected 2024 data, the total monthly cost allocated to 
Purge Ports of $84,793 was divided by the total number of Matching 
Engines in which Market Makers used Purge Ports for the month of 
December 2023, which was 142, resulting in an approximate cost of $597 
per Matching Engine per month for Purge Port usage (when rounding to 
the nearest dollar). The Exchange notes that the flat fee of $600 per 
month per Matching Engine entitles each Market Maker to two Purge Ports 
per Matching Engine. The majority of Market Makers are connected to all 
twenty-four of the Exchange's Matching Engines and utilize Purge Ports 
on each Matching Engine, except one Market Maker, which only utilizes 
Purge Ports on three Matching Engines.
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 Purge 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. For 
instance, in calculating the Human Resources expenses to be allocated 
to Purge Ports 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 higher percentage of the cost of such personnel 
(19.3%) given their focus on functions necessary to provide Ports. The 
salaries of those same personnel were allocated only 5.4% to Purge 
Ports and the remaining 94.6% was allocated to connectivity, other port 
services, transaction services, membership

[[Page 12888]]

services and market data. The Exchange did not allocate any other Human 
Resources expense for providing Purge Ports to any other employee 
group, outside of a smaller allocation of 2.4% for Purge Ports, of the 
cost associated with certain specified personnel who work closely with 
and support network infrastructure personnel. This is because a much 
wider range of personnel are involved in functions necessary to offer, 
monitor and maintain Purge Ports but the tasks necessary to do so are 
not a primary or full-time function.
    In total, the Exchange allocated 3.5% of its personnel costs to 
providing Purge Ports. In turn, the Exchange allocated the remaining 
96.5% of its Human Resources expense to membership services, 
transaction services, connectivity 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 Purge 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 Purge Port services to its Market Makers. However, the Exchange 
did not allocate all of the depreciation and amortization expense 
toward the cost of providing Purge Port services, but instead allocated 
approximately 1.7% of the Exchange's overall depreciation and 
amortization expense to Purge Ports. The Exchange allocated the 
remaining depreciation and amortization expense (approximately 98.3%) 
toward the cost of providing transaction services, membership services, 
connectivity 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 Purge Ports, the Exchange will have to be 
successful in retaining existing Market Makers that wish to maintain 
Purge Ports or in obtaining new Market Makers 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 2024 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 port 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, the Exchange believes that it is appropriate for an 
exchange to refresh and update information about its relevant costs and 
revenues in seeking any future changes to fees, and the Exchange 
commits to do so.
Projected Revenue \34\
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    \34\ For purposes of calculating projected 2024 revenue for 
Purge Ports, the Exchange used revenues for the most recently 
completed full month.
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    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 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 Purge Port services. Subscribers, 
particularly those of Purge Ports, 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. 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 (connections and ports), membership and 
regulatory fees, and market data fees. Accordingly, the Exchange must 
cover its expenses from these five primary sources of revenue.
    The Exchange's Cost Analysis estimates the annual cost to provide 
Purge Port services will equal $1,017,523. Based on current Purge Port 
services usage, the Exchange would generate annual revenue of 
approximately $1,029,600. The Exchange believes this represents a 
modest profit of 1.2% when compared to the cost of providing Purge Port 
services, which could decrease over time.\35\
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    \35\ 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 January 18, 2024).
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    Based on the above discussion, the Exchange believes that even if 
the Exchange earns the above revenue or

[[Page 12889]]

incrementally more or less, the proposed fees are fair and reasonable 
because they will not result in pricing that deviates from that of 
other exchanges or a supra-competitive profit, when comparing the total 
expense of the Exchange associated with providing Purge Port services 
versus the total projected revenue of the Exchange associated with 
network Purge Port services.
Comparable Fee Filing Without Cost Justification
    The Exchange further supports the proposed fee change based on a 
recent 2023 proposal filed with the Commission by another national 
securities exchange, Phlx, to adopt fees for purge ports, which the 
Commission deemed acceptable by not suspending that filing during the 
applicable 60-day review period.\36\ In fact, the same justification 
Phlx utilized was also used in similar recent proposals to adopt fees 
for purge ports by two of Phlx's affiliated exchanges.\37\ Therefore, 
the Exchange utilizes the below justification based on this recent 
Commission precedent from approximately a few months ago.
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    \36\ See supra note 4.
    \37\ See Securities Exchange Act Release Nos. 98770 (October 18, 
2023), 88 FR 73065 (October 24, 2023) (SR-BX-2023-026); and 98768 
(October 18, 2023), 88 FR 73056 (October 24, 2023) (SR-NASDAQ-2023-
041). While the Exchange included a cost-based justification in this 
Third Proposal, the Exchange continues to believe that such 
justification puts the Exchange on an unlevel playing field with its 
competitors because Purge Ports are optional functionality and no 
cost-based justification was provided by Phlx or any of its 
affiliates in their same filings to adopt fees for purge ports. Nor 
does the Staff Guidance issued by the Commission Staff include such 
a requirement. See supra note 31.
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    The Exchange believes that the proposed rule change would promote 
just and equitable principles of trade and remove impediments to and 
perfect the mechanism of a free and open market because offering 
Members optional service and flexible fee structures which promotes 
choice, flexibility, efficiency, and competition. The Exchange believes 
Purge Ports enhance Members' ability to manage orders, which would, in 
turn, improve their risk controls to the benefit of all market 
participants. The Exchange believes that Purge Ports foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities because designating Purge Ports for purge messages may 
encourage better use of such ports. This may, concurrent with the ports 
that carry orders and other information necessary for market making 
activities, enable more efficient, as well as fair and reasonable, use 
of Members' resources. Similar connectivity and functionality is 
offered by options exchanges, including the Exchange's own affiliated 
options exchanges, and other equities exchanges.\38\ The Exchange 
believes that proper risk management, including the ability to 
efficiently cancel multiple orders quickly when necessary, is similarly 
valuable to firms that trade in the equities market, including Members 
that have heightened quoting obligations that are not applicable to 
other market participants.
---------------------------------------------------------------------------

    \38\ See supra notes 4 and 13. See also Securities Exchange Act 
Release No. 77613 (April 13, 2016), 81 FR 23023 (April 19, 2016). 
See also Securities Exchange Act Release Nos. 79956 (February 3, 
2017), 82 FR 10102 (February 9, 2017) (SR-BatsBZX-2017-05); 79957 
(February 3, 2017), 82 FR 10070 (February 9, 2017) (SR-BatsEDGX-
2017-07); 83201 (May 9, 2018), 83 FR 22546 (May 15, 2018) (SR-C2-
2018-006).
---------------------------------------------------------------------------

    Purge Ports do not relieve Members of their quoting obligations or 
firm quote obligations under Regulation NMS Rule 602.\39\ Specifically, 
any interest that is executable against a Member's or Market Maker's 
orders that is received by the Exchange prior to the time of the 
removal of orders request will automatically execute. Members that 
purge their orders will not be relieved of the obligation to provide 
continuous two-sided orders on a daily basis, nor will it prohibit the 
Exchange from taking disciplinary action against a Market Maker for 
failing to meet their continuous quoting obligation each trading 
day.\40\
---------------------------------------------------------------------------

    \39\ See Exchange Rule 604. See also generally Chapter VI of the 
Exchange's Rules.
    \40\ Id.
---------------------------------------------------------------------------

    The Exchange is not the only exchange to offer this functionality 
and to charge associated fees.\41\ The Exchange believes the proposed 
fee for Purge Ports is reasonable because it is lower than the fees 
currently charged by other exchanges for similar port functionality. 
For example, BZX and EDGX charge a fee of $750 per purge port per 
month, Cboe charges $850 per purge port per month, Nasdaq GEMX assesses 
its members $1,250 per SQF Purge Port per month, subject to a monthly 
cap of $17,500 for SQF Purge Ports and SQF Ports.\42\
---------------------------------------------------------------------------

    \41\ See supra notes 4 and 13.
    \42\ See supra note 13.
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to charge $600 per month for 
Purge Ports as proposed because such ports were specially developed to 
allow Members to send a single message to cancel multiple orders, 
thereby assisting firms in effectively managing risk. The Exchange also 
believes that a Member that chooses to utilize Purge Ports may, in the 
future, reduce their need for additional ports by consolidating cancel 
messages to their dedicated Purge Port and thus freeing up some 
capacity of the existing logical ports and, therefore, allowing for 
increased message traffic without paying for additional logical ports. 
Purge Ports provide the ability to cancel multiple orders with a single 
message over a dedicated port, and, therefore, may create efficiencies 
for firms and provide a more efficient solution for them based on their 
risk management needs. In addition, Purge Port requests may cancel 
orders submitted over numerous ports and contain added functionality to 
purge only a subset of these orders. Effective risk management is 
important both for individual market participants that choose to 
utilize risk features provided by the Exchange, as well as for the 
market in general. As a result, the Exchange believes that it is 
appropriate to charge fees for such functionality as doing so aids in 
the maintenance of a fair and orderly market.
    The Exchange also believes that its ability to set fees for Purge 
Ports is subject to significant substitution-based forces because 
Members are able to rely on currently available services both free and 
those they receive when using existing trading protocols. If the value 
of the efficiency introduced through the Purge Port functionality is 
not worth the proposed fees, Members will simply continue to rely on 
the existing functionality and not pay for Purge Ports. In that regard, 
Members may currently cancel individual orders through the existing 
functionality, such as through the use of a mass cancel message by 
which a Market Maker may request that the Exchange remove all or a 
subset of its quotations and block all or a subset of its new inbound 
quotations. Already Members can also cancel orders individually and by 
utilizing Exchange protocols that allow them to develop proprietary 
systems that can send cancel messages at a high rate.\43\ In addition, 
the Exchange already provides similar ability to mass cancel orders 
through the Exchange's risk controls, which are offered at no charge 
that enables Members to establish pre-determined levels of risk 
exposure, and can be used to cancel all open orders.\44\
---------------------------------------------------------------------------

    \43\ Current Exchange port functionality supports cancelation 
rates that exceed one thousand messages per second and the 
Exchange's research indicates that certain Participants rely on such 
functionality and at times utilize such cancelation rates.
    \44\ See Exchange Rule 532.
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    Further, like Purge Ports, Members may also cancel all or a subset 
of its orders in the System, by firm name or

[[Page 12890]]

by MPID, over their existing ports, or by requesting the Exchange staff 
to effect such cancellations.\45\
---------------------------------------------------------------------------

    \45\ See Exchange Rule 519C(a).
---------------------------------------------------------------------------

    Similarly, Members may use cancel-on-disconnect control when they 
experience a disruption in their connection to the Exchange and 
immediately cancel all pending quotes in the Exchange's System.\46\ 
Finally, this existing purging functionality will allow Members to 
achieve essentially the same outcome in canceling orders as they would 
by utilizing the Purge Ports. Accordingly, the Exchange believes that 
the proposed Purge Ports fee is reasonable because it is related to the 
efficiency of Purge Ports and to other means and services already 
available which are either free or already a part of a fee assessed to 
the Member's for existing connectivity. Accordingly, because Purge 
Ports provide additional optional functionality, excessive fees would 
simply serve to reduce or eliminate demand for this optional product.
---------------------------------------------------------------------------

    \46\ See Exchange Rule 519C(c).
---------------------------------------------------------------------------

    The Exchange also believes that offering Purge Ports at the 
Matching Engine level promotes risk management across the industry, and 
thereby facilitates investor protection. Some market participants, in 
particular the larger firms, could and do build similar risk 
functionality (as described above) in their trading systems that permit 
the flexible cancellation of orders entered on the Exchange at a high 
rate. Offering Matching Engine level protections ensures that such 
functionality is widely available to all firms, including smaller firms 
that may otherwise not be willing to incur the costs and development 
work necessary to support their own customized mass cancel 
functionality.
    As noted above, the Exchange is not the only exchange to offer 
dedicated Purge Ports, and the proposed rate is lower than that charged 
by other exchanges for similar functionality. The Exchange also 
believes that moving to a per Matching Engine fee is reasonable due to 
the Exchange's architecture that provides it the ability to provide two 
(2) Purge Ports per Matching Engine for a fee that would still be lower 
than competing exchanges that charge on a per port basis. Generally 
speaking, restricting the Exchange's ability to charge fees for these 
services discourages innovation and competition. Specifically in this 
case, the Exchange's inability to offer similar services to those 
offered by other exchanges, and charge reasonable and equitable fees 
for such services, would put the Exchange at a significant competitive 
disadvantage and, therefore, serve to restrict competition in the 
market--especially when other exchanges assess comparable fees higher 
than those proposed by the Exchange.
    The Exchange believes that the proposed Purge Port fees are 
equitable because the proposed Purge Ports are completely voluntary as 
they relate solely to optional risk management functionality.
    The Exchange also believes that the proposed amendments to its Fee 
Schedule are not unfairly discriminatory because they will apply 
uniformly to all Members that choose to use the optional Purge Ports. 
Purge Ports are completely voluntary and, as they relate solely to 
optional risk management functionality, no Market Maker is required or 
under any regulatory obligation to utilize them. All Members that 
voluntarily select this service option will be charged the same amount 
for the same services. All Members have the option to select any 
connectivity option, and there is no differentiation among Members with 
regard to the fees charged for the services offered by the Exchange.

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 not necessary or appropriate in 
furtherance of the purposes of the Act. Purge Ports are completely 
voluntary and are available to all Members on an equal basis at the 
same cost. While the Exchange believes that Purge Ports provide a 
valuable service, Members can choose to purchase, or not purchase, 
these ports based on their own determination of the value and their 
business needs. No Member is required or under any regulatory 
obligation to utilize Purge Ports. Accordingly, the Exchange believes 
that Purge Ports offer appropriate risk management functionality to 
firms that trade on the Exchange without imposing an unnecessary or 
inappropriate burden on competition.
    Furthermore, the Exchange operates in a highly competitive 
environment, and its ability to price the Purge Ports is constrained by 
competition among exchanges that offer similar functionality. As 
discussed, there are currently a number of similar offers available to 
market participants for higher fees at other exchanges. Proposing fees 
that are excessively higher than established fees for similar 
functionality would simply serve to reduce demand for the Purge Ports, 
which as discussed, market participants are under no obligation to 
utilize. It could also cause firms to shift trading to other exchanges 
that offer similar functionality at a lower cost, adversely impacting 
the overall trading on the Exchange and reducing market share. In this 
competitive environment, potential purchasers are free to choose which, 
if any, similar product to purchase to satisfy their need for risk 
management. As a result, the Exchange believes this proposed rule 
change permits fair competition among national securities exchanges.
    The Exchange also does not believe the proposal would cause any 
unnecessary or inappropriate burden on intermarket competition as other 
exchanges are free to introduce their own purge port functionality and 
lower their prices to better compete with the Exchange's offering. The 
Exchange does not believe the proposed rule change would cause any 
unnecessary or inappropriate burden on intramarket competition. 
Particularly, the proposal would apply uniformly to any market 
participant, in that it does not differentiate between Members. The 
proposal would allow any interested Members to purchase Purge Port 
functionality based on their business needs.

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 
and one comment letter on the Second Proposal, both from the same 
commenter.\47\ This comment letters were submitted not only on these 
proposals, but also the proposals by the Exchange and its affiliates to 
amend fees for 10Gb ULL connectivity and certain ports. The Exchange 
received one other comment letter on the Second Proposal.\48\ Overall, 
the Exchange believes that the issues raised by the first commenter are 
not germane to this proposal because they apply primarily to the other 
fee filings. Also, the commenters raised concerns 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

[[Page 12891]]

fee filings. However, the commenters do raise one issue that concerns 
this proposal whereby it asserts that the Exchange's comparison to fees 
charged by other exchanges for similar ports is irrelevant and 
unpersuasive. The core of the issue raised is regarding the cost to 
connect to one exchange compared to the cost to connect to others. A 
thorough response to this comment would require the Exchange to obtain 
competitively sensitive information about other exchange architecture 
and how their members connect. The Exchange is not privy to this 
information. Further, the commenter compares the Exchange's proposed 
rate to other exchanges that offer purge port functionality across all 
matching engines for a single fee, but fails to provide the same 
comparison to other exchanges that charge for purge functionality like 
proposed here. The Exchange does not have insight into the technical 
architecture of other exchanges so it is difficult to ascertain the 
number of purge ports a firm would need to connect to another exchanges 
entire market. Therefore, the Exchange is limited to comparing its 
proposed fee to other exchanges' purge port fees as listed in their fee 
schedules.
---------------------------------------------------------------------------

    \47\ See letters from Thomas M. Merritt, Deputy General Counsel, 
Virtu Financial, Inc. (``Virtu''), to Vanessa Countryman, Secretary, 
Commission, dated November 8, 2023 and January 2, 2024.
    \48\ See letter from John C. Pickford, Counsel, Susquehanna 
International Group, LLP (``SIG''), to Vanessa Countryman, 
Secretary, Commission, dated January 4, 2024.
---------------------------------------------------------------------------

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,\49\ and Rule 19b-4(f)(2) \50\ 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.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \50\ 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#2351564f460e404c4e4e464d5750635046400d444c55"><span class="__cf_email__" data-cfemail="641611080149070b0909010a1017241701074a030b12">[email protected]</span></a>. Please include 
file number SR-PEARL-2024-07 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-2024-07. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-PEARL-2024-07 and should be 
submitted on or before March 12, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-03342 Filed 2-16-24; 8:45 am]
BILLING CODE 8011-01-P


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