[Federal Register Volume 89, Number 174 (Monday, September 9, 2024)]
[Notices]
[Pages 73137-73145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-20172]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100901; File No. SR-SAPPHIRE-2024-26]


Self-Regulatory Organizations; MIAX Sapphire, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To 
Establish Fees for Purge Ports

September 3, 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 August 21, 2024, MIAX Sapphire, LLC (``MIAX Sapphire'' 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 is filing a proposal to amend the MIAX Sapphire Fee 
Schedule (the ``Fee Schedule'') to adopt certain non-transaction fees 
for Purge Ports as described below.
    The text of the proposed rule change is available on the Exchange's 
website at https://www.miaxglobal.com/markets/us-options/miax-sapphire/rule-filings, at the Exchange'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
    On July 15, 2024, the U.S. Securities and Exchange Commission 
(``Commission'') approved the Exchange's Form 1 application to register 
as a national securities exchange under Section 6 of the Exchange 
Act,\3\ and the Exchange began operations on August 12, 2024. The 
Exchange initially filed this proposal on August 9, 2024 (SR-SAPPHIRE-
2024-15) to establish fees for Purge Ports, which is functionality that 
enables Marker Makers \4\ to cancel all open orders or a subset of open 
orders through a single cancel message. The Exchange withdrew SR-
SAPPHIRE-2024-15 on August 21, 2024, and submitted this proposal.
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    \3\ See Securities Exchange Act Release No. 100539 (July 15, 
2024), 89 FR 58848 (July 19, 2024) (File No. 10-240) (order 
approving application of MIAX Sapphire, LLC for registration as a 
national securities exchange).
    \4\ 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.

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[[Page 73138]]

    Despite proposing to adopt fees herein, the Exchange also proposes 
to waive the proposed Purge Port fees for an Initial Waiver Period,\5\ 
which began on the date the Exchange began operations and which is the 
same date that the Fee Schedule became effective. However, even though 
the Exchange proposes to fully waive Purge Port fees for the Initial 
Waiver Period, the Exchange believes that it is appropriate to provide 
market participants with the overall structure of Purge Port fees by 
outlining the structure and amounts in the Fee Schedule, so that there 
is general awareness that the Exchange intends to assess such fees upon 
the expiration of the defined period of the Initial Waiver Period. 
Additionally, the Exchange notes that the proposed fees for Purge Ports 
on MIAX Sapphire are identical to Purge Port fees assessed by the 
Exchange's affiliated options exchange, MIAX PEARL, LLC (``MIAX Pearl 
Options'').\6\
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    \5\ The term ``Initial Waiver Period'' means, for each 
applicable fee, the period of time from the initial effective date 
of the MIAX Sapphire Fee Schedule plus an additional six (6) full 
calendar months after the completion of the partial month of the 
Exchange launch. See the Definitions Section of the Fee Schedule.
    \6\ See MIAX Pearl Options Fee Schedule, Section 5) d) Port Fees 
available at https://www.miaxglobal.com/markets/us-options/pearl-options/fees. See also Securities Exchange Act Release No. 100037 
(April 26, 2024), 89 FR 35899 (May 2, 2024) (SR-PEARL-2024-20).
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Purge Ports
    The Exchange proposes to amend Section 5) d) iii), which was 
reserved for use by an earlier proposal, to adopt Purge Port Fees to 
provide that a MIAX Sapphire Market Maker may request and be allocated 
two (2) Purge Ports per Matching Engine \7\ to which it connects and 
will be charged a monthly fee of $600 per Matching Engine. The Exchange 
believes that the proposed fee provides Market Makers 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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    \7\ ``Matching Engine'' is a part of the MIAX Sapphire 
electronic system that processes options orders and trades on a 
symbol-by-symbol basis. See the Definitions Section of the Fee 
Schedule.
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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 \8\ the ability to accomplish a specific function, 
such as order entry, order cancellation, access to execution reports, 
and other administrative information.
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    \8\ ``Member'' means an individual or organization that is 
registered with the Exchange pursuant to Chapter II of MIAX Sapphire 
Exchange Rules for purposes of trading on the Exchange as an 
``Electronic Exchange Member'' or ``Market Maker.'' See the 
Definitions Section of the Fee Schedule.
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    Purge Ports are designed to assist Market Makers 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 Market Makers to seamlessly avoid unintended 
executions, while continuing to evaluate the market, their positions, 
and their risk levels. Purge Ports are used by Market Makers that 
conduct business activity that exposes them to a large amount of risk 
across a number of securities. Purge Ports enable Market Makers 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.
    The Exchange will operate a highly performant system with 
significant throughput and determinism which should allow participants 
to enter, update and cancel orders at high rates. Market Makers will 
have the ability to 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.\9\ 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, Market Makers can 
currently cancel orders in rapid succession across their existing 
logical ports \10\ or through a single cancel message, all open orders 
or a subset of open orders.
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    \9\ See Exchange Rule 519C(a) and (b).
    \10\ 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.\11\ 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 Market Makers to 
establish pre-determined levels of risk exposure, and can be used to 
cancel all open orders.\12\ Accordingly, the Exchange believes that the 
Purge Ports provide an efficient option as an alternative to available 
services and enhance a Market Maker's ability to manage their risk.
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    \11\ See Exchange Rule 519C(c).
    \12\ See Exchange Rule 517.
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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. Market Makers will have the benefit of efficient risk management 
and purge tools. The market will benefit from potential increased 
quoting and liquidity as Market Makers may use Purge Ports to manage 
their risk more robustly. Only Market Makers that request Purge Ports 
would be subject to the proposed fees, and other Market Makers can 
operate without dedicated Purge Ports, but with the additional purging 
capabilities described above. Further, the Exchange notes that this 
functionality is similar to functionality on the Exchange's affiliate, 
MIAX Pearl Options.\13\
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    \13\ See supra note 6.
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Implementation
    The proposed fee change is immediately effective.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\14\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\15\ 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 \16\ because it 
represents an equitable allocation of reasonable dues, fees and other 
charges among market participants.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 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

[[Page 73139]]

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,\17\ and Rule 19b-4 thereunder,\18\ with respect to the 
types of information exchanges should provide when filing fee changes, 
and Section 6(b) of the Act,\19\ which requires, among other things, 
that exchange fees be reasonable and equitably allocated,\20\ not 
designed to permit unfair discrimination,\21\ and that they not impose 
a burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\22\ The Exchange reiterates that the legacy 
exchanges with whom the Exchange will vigorously compete 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.\23\
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    \17\ 15 U.S.C. 78s(b)(1).
    \18\ 17 CFR 240.19b-4.
    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78f(b)(8).
    \23\ 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 $426,238 (or approximately 
$35,518 per month, rounded to the nearest dollar when dividing the 
annual cost by 12 months). To recoup the costs of providing Purge Ports 
to its Market Makers going forward, as described below, the Exchange 
proposes to amend its Fee Schedule to charge a fee of $600 per Matching 
Engine for Purge Ports. The Exchange notes that the projected revenue 
will not be greater than the costs to the Exchange to provide Purge 
Ports, however the Exchange believes that it is necessary to accept 
this condition in order to successfully launch MIAX Sapphire.
    The Exchange's affiliates \24\ previously completed a study of 
their aggregate costs to produce market data and provide connectivity 
and port services, defined above as its Cost Analysis.\25\ Personnel 
began to plan for and develop the Exchange beginning in early 2023, and 
costs included in this Cost Analysis are related to the development and 
buildout of the Exchange since that time. During the Exchange's 
development and buildout that occurred throughout 2023 and continues to 
today, the Exchange routinely studied its aggregate costs to develop 
and implement the Exchange. 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'').
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    \24\ The affiliated markets include Miami International 
Securities Exchange, LLC (``MIAX''); separately, the options and 
equities markets of MIAX PEARL, LLC (``MIAX Pearl''); and MIAX 
Emerald, LLC (``MIAX Emerald'').
    \25\ See Securities Exchange Act Release Nos. 100036 (April 26, 
2024), 89 FR 35909 (May 2, 2024) (SR-MIAX-2024-22); 100037 (April 
26, 2024), 89 FR 35899 (May 2, 2024) (SR-PEARL-2024-20); 100039 
(April 26, 2024), 89 FR 35891 (May 2, 2024) (SR-EMERALD-2024-14). 
The Exchange frequently updates it Cost Analysis as strategic 
initiatives change, costs increase or decrease, and market 
participant needs and trading activity (once live trading begins) 
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 its affiliated markets for each cost driver as part of the 
Exchange's 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,\26\ 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 five 
(including MIAX Sapphire) 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 
cost drivers are the same at each individual marketplace and dividing 
total cost by five (5) (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 
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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    \26\ For example, MIAX Sapphire maintains 8 matching engines, 
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., market data, connectivity, ports, 
and transaction

[[Page 73140]]

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 it has five 
primary sources of revenue that it can potentially use to fund its 
operations: transaction fees, connectivity and port service fees, 
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; some 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 cost-justified 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 $35,518, 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    monthly cost      % of all
                                                                        \a\             \b\
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Human Resources.................................................        $363,954         $30,329             3.6
Connectivity (external fees, cabling, switches, etc.)...........             112               9             0.4
Internet Services and External Market Data......................             654              54             0.4
Data Center.....................................................           6,764             564             1.1
Hardware and Software Maintenance and Licenses..................           2,185             182             0.4
Depreciation....................................................          19,518           1,626             1.6
Allocated Shared Expenses.......................................          33,051           2,754             1.2
                                                                 -----------------------------------------------
     Total......................................................         426,238          35,518             2.7
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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 
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

[[Page 73141]]

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 4.8% 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 (2.2%). 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 4.8% 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 Market Maker purging quotes via their Purge Port. Also, like other 
types of ports 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

[[Page 73142]]

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 national best bid or offer (``NBBO'').\27\ Purge Ports are 
a component of the Matching Engine, and used by Market Makers 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 
Market Maker 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.
---------------------------------------------------------------------------

    \27\ The term ``NBBO'' means the national best bid or offer as 
calculated by the Exchange based on market information received by 
the Exchange from OPRA. See Exchange Rule 100.
---------------------------------------------------------------------------

    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. The Exchange has allocated a 
percentage of its Data Center cost (1.1%) to Purge Ports because the 
third-party data centers and the Exchange's physical equipment 
contained therein are necessary for providing Purge Ports. In other 
words, for the Exchange to operate in a dedicated physical space with 
direct connectivity by market participants to its trading platform, the 
data centers are a critical component to the provision of Purge Ports. 
If the Exchange did not maintain such a presence, then Purge Ports 
would be of little 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 
Purge Ports for each Matching Engine of the Exchange. This hardware 
includes servers, network switches, cables, optics, protocol data 
units, and cabinets, to maintain a state-of-the-art technology 
platform. Without hardware and software licenses, Purge Ports would not 
be able to be offered to market participants because hardware and 
software are necessary to operate the Exchange's Matching Engines, 
which are necessary to enable the purging of quotes. The Exchange also 
routinely works to improve the performance of the hardware and software 
used to operate the Exchange's network and System. 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 allocate a certain percentage 
of its hardware and software expense to help offset those costs of 
providing Purge Port connectivity to its Matching Engines.
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 0.8% 
[sic] 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 
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 2% of 
the overall cost for directors was allocated to providing Purge Ports.
Approximate Cost for Purge Port per Month
    Based on projected 2024 data, the total monthly cost allocated to 
Purge Ports is $35,518. This total is divided by the total number of 
Matching Engines (8) in which Market Makers may use Purge Ports for 
each month, divided by the anticipated number of Market Makers results 
in an approximate cost of $634 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 Exchange 
anticipates that the majority of Market Makers will connect to all 
eight of the Exchange's Matching Engines and utilize Purge Ports on 
each Matching Engine. The

[[Page 73143]]

Exchange recognizes that costs are greater than anticipated revenues 
but accepts this condition as a necessary cost to be incurred when 
launching a new exchange.
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 
(21.7%) given their focus on functions necessary to provide Ports. The 
salaries of those same personnel were allocated only 4.8% to Purge 
Ports and the remaining 95.2% was allocated to connectivity, other port 
services, transaction services, membership 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 2.2% 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 3.6% of its personnel costs to 
providing Purge Ports. In turn, the Exchange allocated the remaining 
96.4% 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 0.8% [sic] of the Exchange's overall depreciation and 
amortization expense to Purge Ports. The Exchange allocated the 
remaining depreciation and amortization expense (approximately 99.2% 
[sic]) 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 \28\
---------------------------------------------------------------------------

    \28\ For purposes of calculating projected 2024 revenue for 
Purge Ports, the Exchange is using estimated projections.
---------------------------------------------------------------------------

    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

[[Page 73144]]

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 $426,238. Based on projected Purge Port 
services usage, the Exchange would generate annual revenue of 
approximately $403,200. The Exchange estimates it will incur a 5.7% 
loss when comparing revenues to the cost of providing Purge Port 
services.
    Based on the above discussion, the Exchange believes that 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 
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.
The Proposed Fees Are Also Equitable, Reasonable, and Not Unfairly 
Discriminatory
    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 Market 
Makers optional Purge Port services with a flexible fee structure 
promotes choice, flexibility, and efficiency. The Exchange believes 
Purge Ports enhance Market Makers' 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 Market Makers' resources. The Exchange believes that 
proper risk management, including the ability to efficiently cancel 
multiple orders quickly when necessary is valuable to all firms, 
including Market Makers that have heightened quoting obligations that 
are not applicable to other market participants.
    Purge Ports do not relieve Market Makers of their quoting 
obligations or firm quote obligations under Regulation NMS Rule 
602.\29\ 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. Market Makers 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.\30\
---------------------------------------------------------------------------

    \29\ See Exchange Rule 604. See also generally Chapter VI of the 
Exchange's Rules.
    \30\ Id.
---------------------------------------------------------------------------

    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 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.
    The Exchange also believes that moving to a per Matching Engine fee 
for Purge Ports is reasonable due to the Exchange's architecture that 
provides the Exchange the ability to provide two (2) Purge Ports per 
Matching Engine.
    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 Market Makers 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 Market Makers 
that voluntarily select this service option will be charged the same 
amount for the same services. Market Makers have the option to select 
any port or connectivity option, and there is no differentiation among 
Market Makers 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 Market Makers on an equal basis at 
the same cost. While the Exchange believes that Purge Ports provide a 
valuable service, Market Makers can choose to purchase, or not 
purchase, these ports based on their own determination of the value and 
their business needs. No Market Maker 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.
    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 Market Makers. 
The proposal would allow any interested Market Maker 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

    Written comments were neither solicited nor received.

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,\31\ and Rule 19b-4(f)(2) \32\ 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

[[Page 73145]]

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.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \32\ 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#4133342d246c222e2c2c242f3532013224226f262e37"><span class="__cf_email__" data-cfemail="ff8d8a939ad29c9092929a918b8cbf8c9a9cd1989089">[email protected]</span></a>. Please include 
file number SR-SAPPHIRE-2024-26 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-SAPPHIRE-2024-26. 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-SAPPHIRE-2024-26 and should 
be submitted on or before September 30, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-20172 Filed 9-6-24; 8:45 am]
BILLING CODE 8011-01-P


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