[Federal Register Volume 89, Number 201 (Thursday, October 17, 2024)]
[Notices]
[Pages 83731-83738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23981]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101320; File No. SR-LTSE-2024-07]


Self-Regulatory Organizations; Long-Term Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend the Fee Schedule To Adopt Certain Connectivity Fees

October 11, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 1, 2024, Long-Term Stock Exchange, Inc. (``LTSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(the ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the self-
regulatory organization. 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 with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend the LTSE Fee Schedule 
(the ``Fee Schedule'') to adopt certain connectivity fees effective 
October 1, 2024. The text of the proposed rule change is available at 
the Exchange's website at https://longtermstockexchange.com/, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement on 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 self-regulatory organization 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 is proposing to establish a new section (C. 
Connectivity) in the Long-Term Stock Exchange Fee Schedule and adopt 
fees for Cross-Connect (Primary), Cross-Connect (Disaster Recovery), 
Cross-Connect (Test Environment) and Logical Connectivity (all 
Environments) that will apply to all market participants connecting to 
the Exchange.\3\
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    \3\ As proposed, fees for connectivity services would be 
assessed based on each active connectivity service product at the 
close of business on the first day of each month. If a product is 
canceled prior to such fee being assessed, then the Member will not 
be obligated to pay the applicable product fee.
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Cross-Connect Fees
    The Exchange proposes to offer to both Members and non-Members the 
choice of a 10 Gigabit (``Gb'') ultra-low latency (``ULL'') fiber 
cross-connection to the Exchange's Primary and Disaster Recovery 
facilities, as well as a 10Gb cross-connection to the Test Environment 
facility. The Exchange proposes to establish a Cross-Connect fee of 
$5,500 per 10Gb physical interface per month that will be assessed to 
Members and non-Members for connecting to the Primary facility. The 
Exchange proposes to establish a Cross-Connect fee of $2,750 per 10Gb 
physical interface per month that will be assessed to Members and non-
Members for connecting to both the Disaster Recovery facility or the 
Test Environment.
    Monthly network connectivity fees for Members and non-Members for 
connectivity will be assessed in any month the Member or non-Member is 
credentialed to use any of the LTSE Application Programming Interfaces 
(``APIs'') in either the Primary, Disaster Recovery or test 
environments.
Port Fees
    The Exchange proposes to establish a $450 fee for all Logical 
Connectivity sessions. These application sessions, commonly known as 
ports, are utilized to perform a particular function on the Exchange, 
such as order entry or order cancellation, receipt of drop copies, 
proprietary market data dissemination, or requesting data to be 
backfilled (i.e., ``gap ports''). All market participants (members and 
non-members) will be charged per session per month. The Exchange will 
waive the fees for three sessions per month per market participant.
    In proposing to charge fees for connectivity to LTSE, the Exchange 
has sought to be especially diligent in assessing those fees in a 
transparent way against its own aggregate costs of providing the 
related services, and also carefully and transparently assessing the 
impact on Members--both generally and in relation to other Members, 
i.e., to assure the fee will not create a financial burden on any 
participant and will not have an undue impact in particular on smaller 
Members and competition among Members in general. The Exchange believes 
that this level diligence and transparency is called for by the 
requirements of Section 19(b)(1)

[[Page 83732]]

under the Act,\4\ and Rule 19b-4 thereunder,\5\ with respect to the 
types of information self-regulatory organizations (``SROs'') should 
provide when filing fee changes, and Section 6(b) of the Act,\6\ which 
requires, among other things, that exchange fees be reasonable and 
equitably allocated,\7\ not designed to permit unfair 
discrimination,\8\ and that they not impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.\9\ 
This rule change proposal addresses those requirements, and the 
analysis and data in each of the sections that follow are designed to 
clearly and comprehensively show how they are met.\10\
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    \4\ 15 U.S.C. 78s(b)(1).
    \5\ 17 CFR 240.19b-4.
    \6\ 15 U.S.C.78f(b).
    \7\ 15 U.S.C. 78f(b)(4).
    \8\ 15 U.S.C. 78(b)(5).
    \9\ 15 U.S.C. 78f(b)(8).
    \10\ In 2019, Commission staff published guidance suggesting the 
types of information that SROs may use to demonstrate that their fee 
filings comply with the standards of the Exchange Act (``Fee 
Guidance''). While LTSE understands that the Fee Guidance does not 
create new legal obligations on SROs, the Fee Guidance is consistent 
with LTSE's view about the type and level of transparency that 
exchanges should meet to demonstrate compliance with their existing 
obligations when they seek to charge new fees. See Staff Guidance on 
SRO Rule Filings Relating to Fees (May 21, 2019).
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Cost Analysis
    The Exchange notes it operates a unique model where the LTSE 
trading system and services are provided on an outsourced basis by MEMX 
Technologies LLC.\11\ As such, most of the Exchange's technology costs, 
including those related to Connectivity, are incorporated into the 
overall fees that the Exchange pays MEMX Technologies as part of its 
multi-year arrangement to provide a trading system and associated 
services. Because of this arrangement, the Exchange does not possess 
the same level of specificity for cost drivers related to Connectivity 
as other exchanges have detailed within their own similar filings. 
However, the Exchange recognizes that the costs associated with 
building out and maintaining a state-of-the-art network infrastructure 
for LTSE were extensive and in line with the costs that MEMX LLC, an 
exchange that also uses the trading system and associated services of 
MEMX Technologies, outlined in its own filing establishing connectivity 
fees for Members and Non-Members.\12\ These include costs associated 
with maintaining and expanding a team of highly-skilled network 
engineers, fees charged by the third-party data center operator, costs 
associated with projects and initiatives designed to improve overall 
network performance and stability, and costs associated with fully-
supporting advances in infrastructure and expansion of network level 
services, including customer monitoring, alerting and reporting. There 
are also significant technology expenses related to establishing and 
maintaining Information Security services, enhanced network monitoring 
and customer reporting, as well as Regulation SCI mandated processes, 
associated with the MEMX Technologies network technology. Because of 
this structure, the Exchange is unable to separate out its expense by 
connectivity alternative, as all connectivity alternatives are 
intricately combined in its DSLA with MEMX Technologies.
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    \11\ The Exchange and MEMX Technologies executed a Development, 
License and Services Agreement on January 23, 2024, with 
accompanying Schedules (collectively, the ``DLSA''). MEMX 
Technologies, an affiliate of the MEMX Exchange, is in the business 
of developing technology systems for use in the financial industry. 
See SR-LTSE-2024-03.
    \12\ See SR-MEMX-2022-26.
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    Further, while the Exchange has been operating since September 
2020, it only entered the DLSA with MEMX Technologies LLC in January of 
this year and launched the new trading system in September 2024. 
Therefore, the Exchange's most recent publicly available financial 
statement (2023 Audited Unconsolidated Financial Statement) is not an 
accurate reflection of the total annual costs associated with the 
development and operation of Connectivity on LTSE. Accordingly, the 
Exchange believes it is more appropriate to justify its fees using cost 
figures that are isolated specifically for LTSE on an annualized basis, 
and utilizing a recent monthly billing cycle and extrapolated 
annualized costs on a going-forward basis.
    LTSE recently calculated its aggregate monthly costs for providing 
Connectivity to the Exchange at $193,637 beginning October 1, 2024. 
Because LTSE offered all connectivity free of charge from its launch in 
September 2020 until October of this year, LTSE has borne 100% of all 
connectivity costs. Now, in order to cover some of the aggregate costs 
of providing connectivity to market participants (both Members and non-
Members) \13\ the Exchange is proposing to modify its Fee Schedule and 
charge the Connectivity fees detailed above.
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    \13\ Types of market participants that obtain connectivity 
services from the Exchange but are not Members include service 
bureaus and extranets. Service bureaus offer technology-based 
services to other companies for a fee, including order entry 
services to Members, and thus, may access application sessions on 
behalf of one or more Members. Extranets offer physical connectivity 
services to Members and non-Members.
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    In order to determine the Exchange's costs for providing the 
services associated with the Connectivity Fees, the Exchange conducted 
an extensive review in which the Exchange analyzed every expense item 
in the Exchange's general expense ledger to determine whether each such 
expense relates to the services associated with the Connectivity Fees, 
and, if such expense did so relate, what portion (or percentage) of 
such expense actually supports those services. The sum of all such 
portions of expenses represents the total cost of the Exchange to 
provide the services associated with the Connectivity Fees. For the 
avoidance of doubt, no expense amount was allocated twice. The Exchange 
is also providing detailed information regarding the Exchange's cost 
allocation methodology--namely, information that explains the 
Exchange's rationale for determining that it was reasonable to allocate 
certain expenses described in this filing towards the total cost to the 
Exchange to provide Connectivity.
    The Exchange believes that the Connectivity Fees are fair and 
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total annual expense that the 
Exchange projects to incur in connection with providing the services 
associated with the proposed Connectivity Fees versus the total annual 
revenue of the Exchange projects to collect in connection with 
providing those services. For 2024, the total annual expense for 
providing the services associated with the Connectivity Fees is 
projected to be approximately $4.5 million. The $4.5 million in expense 
includes expenses associated with providing all ports and all 
connectivity alternatives.
Costs Related to Offering Connectivity
    The following chart details the individual line-item costs 
considered by LTSE to be related to offering connectivity as well as 
the percentage of the Exchange's overall costs per year such costs 
represent for such area (e.g., as set forth below, the Exchange 
allocated approximately 10% of its overall Human Resources cost to 
offering connectivity).

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                                                         Yearly     % of
                    Cost drivers                         costs      all
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Third-Party Expenses................................   $3,228,630     32
Human Resources.....................................    1,120,500     10

[[Page 83733]]

 
Data Center.........................................      158,040     30
                                                     -------------------
    Total...........................................    4,507,170  .....
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    Below are additional details regarding each of the line-item costs 
considered by LTSE to be related to offering connectivity.
Third-Party Expenses
    As discussed above, LTSE has undertaken a unique model where it has 
outsourced its technology to a third-party technology provider. As such 
the costs associated with connectivity for this provider include (1) 
costs for the technology used to complete connections to the Exchange 
and to connect to external markets, (2) costs the third-party provider 
incurs to provide physical connectivity in the data centers where it 
maintains its equipment--such as dedicated space, security services, 
cooling and power, (3) charges from the third-party provider for use of 
physical ports and logical ports, and (3) depreciation of physical 
assets and software, which also includes assets used for testing and 
monitoring of infrastructure.
Human Resources
    For personnel costs (Human Resources), LTSE calculated an 
allocation of LTSE employee time for employees whose functions include 
providing and maintaining connectivity and performance thereof 
(technical operations personnel, market operations personnel, and 
software engineering personnel). The Exchange also allocated Human 
Resources costs to provide connectivity to a limited subset of 
personnel with ancillary functions related to establishing and 
maintaining such connectivity (such as information security and finance 
personnel), for which the Exchange allocated cost on an employee-by-
employee basis (i.e., only including those personnel who do support 
functions related to providing connectivity) and then applied a smaller 
allocation to such employees. The Exchange notes that it has fewer than 
fifty (50) employees 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. 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 connectivity, and confirming that the proposed allocations 
were reasonable based on an understanding of the percentage of their 
time such employees devote to tasks related to providing connectivity. 
The Exchange notes that senior level executives were only allocated 
Human Resources costs to the extent the Exchange believed they are 
involved in overseeing tasks related to providing connectivity. The 
Human Resources cost was calculated using a blended rate of 
compensation reflecting salary, equity and bonus compensation, 
benefits, payroll taxes, and 401(k) matching contributions.
Data Center
    Data Center costs include an allocation of the costs the Exchange 
incurs to monitor its trading platform in third-party data centers 
where it maintains its equipment as well as related costs (the Exchange 
does not own the Primary Data Center or the Secondary Data Center, but 
instead, leases space in data centers operated by third parties).
Physical Connectivity Fees
    LTSE offers its Members the ability to connect to the Exchange in 
order to transmit orders to and receive information from the Exchange. 
Members can also choose to connect to LTSE indirectly through physical 
connectivity maintained by a third-party extranet. Extranet physical 
connections may provide access to one or multiple Members on a single 
connection. Users of LTSE physical connectivity services (both Members 
and non-Members) seeking to establish one or more connections with the 
Exchange submit a request directly to Exchange personnel. Upon receipt 
of the completed instructions, LTSE establishes the physical 
connections requested by the User. The number of physical connections 
assigned to each User as of September 30, 2024, ranges from one to 
three, depending on the scope and scale of the Member's trading 
activity on the Exchange as determined by the Member, including the 
Member's determination of the need for redundant connectivity. The 
Exchange notes that 58% of its Members do not maintain a physical 
connection directly with the Exchange in the Primary Data Center 
(though many such Members have connectivity through a third-party 
provider) and another 41% have either one or two physical connections 
to the Exchange in the Primary Data Center.
    As described above, to cover the aggregate costs of providing 
physical connectivity to Users and make a modest profit, as described 
below, the Exchange is proposing to charge a fee of $5,500 per month 
for each physical connection in the Primary Data Center and a fee of 
$2,750 per month for each physical connection in the Disaster Recovery 
Data Center and Test Environment. There is no requirement that any 
Member maintain a specific number of physical connections and a Member 
may choose to maintain as many or as few of such connections as each 
Member deems appropriate. The Exchange notes, however, that pursuant to 
Rule 2.250 (Mandatory Participation in Testing of Backup Systems), the 
Exchange does require a small number of Members to connect and 
participate in functional and performance testing as announced by the 
Exchange, which occurs at least once every 12 months. Specifically, 
Members that have been determined by the Exchange to contribute a 
meaningful percentage of the Exchange's overall volume must participate 
in mandatory testing of the Exchange's backup systems (i.e., such 
Members must connect to the Disaster Recovery Data Center). The 
Exchange notes that Members that have been designated are still able to 
use third-party providers of connectivity to access the Exchange at its 
Disaster Recovery Data Center, and that four of the designated Members 
use a third-party provider instead of connecting directly to the 
Disaster Recovery Data Center through connectivity provided by the 
Exchange. Nonetheless, because some Members are required to connect to 
the Disaster Recovery Data Center pursuant to Rule 2.250 and to 
encourage Exchange Members to connect to the Disaster Recovery Data 
Center generally, the Exchange has proposed to charge one-half of the 
fee for a physical connection in the Primary Data Center. The Exchange 
believes that charging a higher fee for physical connections at the 
Disaster Recovery Data Center would be inconsistent with its objective 
of encouraging Members to connect at such data center and is 
inconsistent with the fees charged by other exchanges, which also 
provide connectivity for disaster recovery purposes at a discounted 
rate.
    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
physical connections a User requests, based upon factors deemed 
relevant by each User (either a Member, service bureau or extranet). 
The Exchange believes these factors include the costs to maintain 
connectivity, business model and choices. The proposed fee of $5,500 
per month for physical connections at the Primary Data Center is 
designed to permit the Exchange to cover a portion

[[Page 83734]]

of costs allocated to providing connectivity services, which would also 
help fund future expenditures (increased costs, improvements, etc.). 
The Exchange believes it is appropriate to charge fees that represent a 
reasonable markup over cost given the other factors discussed above and 
the need for the Exchange to maintain a highly performant and stable 
platform to allow Members to transact with determinism. The Exchange 
also reiterates that the Exchange did not charge any fees for 
connectivity services prior to October 2024, and its allocation of 
costs to physical connections was part of a holistic allocation that 
also allocated costs to other core services without double-counting any 
expenses. As noted above, the Exchange proposes a discounted rate of 
$2,750 per month for physical connections at its Disaster Recovery 
Center and Test Environment. The Exchange has proposed this discounted 
rate for Disaster Recovery Center and Test Environment connectivity in 
order to encourage Members to establish and maintain such connections. 
Also, as noted above, a small number of Members are required pursuant 
to Rule 2.4 to connect and participate in testing of the Exchange's 
backup systems, and the Exchange believes it is appropriate to provide 
a discounted rate for physical connections at the Disaster Recovery 
Center given this requirement. The Exchange notes that this rate is 
well below the cost of providing such services and the Exchange will 
operate its network and systems at the Disaster Recovery Center without 
recouping the full amount of such cost through connectivity services.
Logical Connectivity Fees
    Similar to other exchanges, LTSE offers its Members application 
sessions, also known as logical ports, for order entry and receipt of 
trade execution reports and order messages. Members can also choose to 
connect to LTSE indirectly through a session maintained by a third-
party service bureau. Service bureau sessions may provide access to one 
or multiple Members on a single session. Users of LTSE connectivity 
services (both Members and non-Members) seeking to establish one or 
more application sessions with the Exchange shall submit a request to 
the Exchange via the LTSE User Portal or directly to Exchange 
personnel. Upon receipt of the completed instructions, LTSE assigns the 
User the number of sessions requested by the User. The number of 
sessions assigned to each User as of September 30, 2024, ranges from 
one (1) to more than 58 depending on the scope and scale of the 
Member's trading activity on the Exchange (either through a direct 
connection or through a service bureau) as determined by the Member. 
For example, by using multiple sessions, Members can segregate order 
flow from different internal desks, business lines, or customers. The 
Exchange does not impose any minimum or maximum requirements for how 
many application sessions a Member or service bureau can maintain, and 
it is not proposing to impose any minimum or maximum session 
requirements for its Members or their service bureaus.
    As described above, to cover the aggregate costs of providing 
application sessions to Users and to make a modest profit, as described 
below, the Exchange is proposing to charge a fee of $450 per session 
per month. The Exchange notes that it is proposing to waive the fees 
for Members and Non-Members their first three sessions, so that market 
participants can have no cost to connect to the Disaster Recovery 
Center or a Test Environment port. The Exchange believes that providing 
three free sessions will encourage Members to connect to the Exchange's 
backup trading systems and to conduct appropriate testing of their use 
of the Exchange.
    The proposed fee of $450 per month for each Logical Connectivity 
session is designed to permit the Exchange to cover some of the costs 
allocated to providing application sessions, which would also help fund 
future expenditures (increased costs, improvements, etc.).
    The proposed fee is also designed to encourage Users to be 
efficient with their application session usage, thereby resulting in a 
corresponding increase in the efficiency that the Exchange would be 
able to realize in managing its aggregate costs for providing 
connectivity services. There is no requirement that any Member maintain 
a specific number of application sessions and a Member may choose to 
maintain as many or as few of such ports as each Member deems 
appropriate. The platform has been designed such that Order Entry Ports 
can handle a significant amount of message traffic (i.e., over 50,000 
orders per second), and has no application flow control or order 
throttling. In contrast, other exchanges maintain certain thresholds 
that limit the amount of message traffic that a single logical port can 
handle.\14\ As such, while several Members maintain a relatively high 
number of ports because that is consistent with their usage on other 
exchanges and is preferable for their own reasons, the Exchange 
believes that it has designed a system capable of allowing such Members 
to significantly reduce the number of application sessions maintained.
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    \14\ See, e.g., Cboe US Options BOE Specification, available at: 
https://cdn.cboe.com/resources/membership/US_Options_BOE_Specification.pdf (describing a 5,000 message per 
second Port Order Rate Threshold on Cboe BOE ports).
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    The proposed fee will not apply differently based upon the size or 
type of the market participant, but rather based upon the number of 
application sessions a User requests, based upon factors deemed 
relevant by each User (either a Member or service bureau on behalf of a 
Member). The Exchange believes these factors include the costs to 
maintain connectivity and choices Members make in how to segment or 
allocate their order flow.
Proposed Fees--Additional Discussion
    As discussed above, the proposed fees for connectivity services do 
not by design apply differently to different types or sizes of Members. 
As discussed in more detail in the Statutory Basis section, the 
Exchange believes that the likelihood of higher fees for certain 
Members subscribing to connectivity services usage than others is not 
unfairly discriminatory because it is based on objective differences in 
usage of connectivity services among different Members. The Exchange's 
incremental aggregate costs for all connectivity services are 
disproportionately related to Members with higher message traffic and/
or Members with more complicated connections established with the 
Exchange, as such Members: (1) consume the most bandwidth and resources 
of the network; (2) transact the vast majority of the volume on the 
Exchange; and (3) require the high-touch network support services 
provided by the Exchange and its technology service provider, including 
network monitoring, reporting and support services, resulting in a much 
higher cost to the Exchange to provide such connectivity services. For 
these reasons, LTSE believes it is not unfairly discriminatory for the 
Members with higher message traffic and/or Members with more 
complicated connections to pay a higher share of the total connectivity 
services fees. While Members with a business model that results in 
higher relative inbound message activity or more complicated 
connections are projected to pay higher fees, the level of such fees is 
based solely on the number of physical connections and/or application 
sessions deemed necessary by the Member and not on the Member's 
business model or type of Member. The Exchange notes

[[Page 83735]]

that the correlation between message traffic and usage of connectivity 
services is not completely aligned because Members individually 
determine how many physical connections and application sessions to 
request, and Members may make different decisions on the appropriate 
ways based on facts unique to their individual businesses. Based on the 
Exchange's architecture, as described above, the Exchange believes that 
a Member even with high message traffic would be able to conduct 
business on the Exchange with a relatively small connectivity services 
footprint.
    Finally, the fees for connectivity services will help to encourage 
connectivity services usage in a way that aligns with the Exchange's 
regulatory obligations. As a national securities exchange, the Exchange 
is subject to Regulation Systems Compliance and Integrity (``Reg 
SCI'').\15\ Reg SCI Rule 1001(a) requires that the Exchange establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure (among other things) that its Reg SCI systems have 
levels of capacity adequate to maintain the Exchange's operational 
capability and promote the maintenance of fair and orderly markets.\16\ 
By encouraging Users to be efficient with their usage of connectivity 
services, the proposed fee will support the Exchange's Reg SCI 
obligations in this regard by ensuring that unused application sessions 
are available to be allocated based on individual User needs and as the 
Exchange's overall order and trade volumes increase. Additionally, 
because the Exchange will charge a lower rate for a physical connection 
to the Disaster Recovery Center and Test Environment and will waive the 
first three logical connectivity sessions each month, the proposed fee 
structure will further support the Exchange's Reg SCI compliance by 
reducing the potential impact of a disruption should the Exchange be 
required to switch to its Disaster Recovery Facility and encouraging 
Members to engage in any necessary system testing with low or no cost 
imposed by the Exchange.\17\
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    \15\ 17 CFR 242.1000-1007.
    \16\ 17 CFR 242.1001(a).
    \17\ While some Members might directly connect to the Disaster 
Recovery Center and incur the proposed $2,750 per month fee, there 
are other ways to connect to the Exchange, such as through a service 
bureau or extranet, and because the Exchange is waiving fees for the 
first three logical connectivity sessions, a Member connecting 
through another method would not incur any fees charged directly by 
the Exchange. However, the Exchange notes that a third-party service 
provider providing connectivity to the Exchange likely would charge 
a fee for providing such connectivity; such fees are not set by or 
shared in by the Exchange.
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2. Statutory Basis
    The Exchange believes that the proposed fees for connectivity 
services to LTSE are reasonable, equitable and not unfairly 
discriminatory because, as described above, the proposed pricing for 
connectivity services is directly related to the relative costs to the 
Exchange to provide those respective services and does not impose a 
barrier to entry to smaller participants.
    The Exchange recognizes that there are various business models and 
varying sizes of market participants conducting business on the 
Exchange. The Exchange's incremental aggregate costs for all 
connectivity services are disproportionately related to Members with 
higher message traffic and/or Members with more complicated connections 
established with the Exchange, as such Members: (1) consume the most 
bandwidth and resources of the network; (2) transact the vast majority 
of the volume on the Exchange; and (3) require the high-touch network 
support services provided by the Exchange and its staff, including 
network monitoring, reporting and support services, resulting in a much 
higher cost to the Exchange to provide such connectivity services. 
Accordingly, the Exchange believes the allocation of the proposed fees 
that increase based on the number of physical connections or 
application sessions is reasonable based on the resources consumed by 
the respective type of market participant (i.e., lowest resource 
consuming Members will pay the least, and highest resource consuming 
Members will pay the most), particularly since higher resource 
consumption translates directly to higher costs to the Exchange.
    With regard to reasonableness, the Exchange understands that when 
appropriate given the context of a proposal the Commission has taken a 
market-based approach to examine whether the SRO making the proposal 
was subject to significant competitive forces in setting the terms of 
the proposal. In looking at this question, the Commission considers 
whether the SRO has demonstrated in its filing that: (i) there are 
reasonable substitutes for the product or service; (ii) ``platform'' 
competition constrains the ability to set the fee; and/or (iii) revenue 
and cost analysis shows the fee would not result in the SRO taking 
supra-competitive profits. If the SRO demonstrates that the fee is 
subject to significant competitive forces, the Commission will next 
consider whether there is any substantial countervailing basis to 
suggest the fee's terms fail to meet one or more standards under the 
Exchange Act. If the filing fails to demonstrate that the fee is 
constrained by competitive forces, the SRO must provide a substantial 
basis, other than competition, to show that it is consistent with the 
Exchange Act, which may include production of relevant revenue and cost 
data pertaining to the product or service.
    LTSE believes the proposed fees for connectivity services are fair 
and reasonable as a form of cost recovery for the Exchange's aggregate 
costs of offering connectivity services to Members and non-Members. The 
proposed fees are expected to generate monthly revenue of approximately 
$120,000 \18\ providing cost recovery to the Exchange for the aggregate 
costs of offering connectivity services, based on a methodology that 
narrowly limits the cost drivers that are allocated to those closely 
and directly related to the particular service. In addition, this 
revenue will allow the Exchange to continue to offer, to enhance, and 
to continually refresh its infrastructure as necessary to offer a 
state-of-the-art trading platform. The Exchange believes that, 
consistent with the Act, it is appropriate to charge fees that 
represent a reasonable markup over cost given the other factors 
discussed above. The Exchange also believes the proposed fee is a 
reasonable means of encouraging Users to be efficient in the 
connectivity services they reserve for use, with the benefits to 
overall system efficiency to the extent Members and non-Members 
consolidate their usage of connectivity services or discontinue 
subscriptions to unused physical connectivity.
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    \18\ As stated above, the Exchange launched its new trading 
platform on September 23, 2024. This expected revenue is based on a 
model for Q4 2024.
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    The Exchange further believes that the proposed fees, as they 
pertain to purchasers of each type of connectivity alternative, 
constitute an equitable allocation of reasonable fees charged to the 
Exchange's Members and non-Members and are allocated fairly amongst the 
types of market participants using the facilities of the Exchange.
    As described above, the Exchange believes the proposed fees are 
equitably allocated because the Exchange's incremental aggregate costs 
for all connectivity services are disproportionately related to Members 
with higher message traffic and/or Members with more complicated 
connections established with the Exchange, as such Members: (1)

[[Page 83736]]

consume the most bandwidth and resources of the network; (2) transact 
the vast majority of the volume on the Exchange; and (3) require the 
high-touch network support services provided by the Exchange and its 
staff, including network monitoring, reporting and support services, 
resulting in a much higher cost to the Exchange to provide such 
connectivity services.
    Commission staff previously noted that the generation of supra-
competitive profits is one of several potential factors in considering 
whether an exchange's proposed fees are consistent with the Act.\19\ As 
described in the Fee Guidance, the term ``supra-competitive profits'' 
refers to profits that exceed the profits that can be obtained in a 
competitive market. The proposed fee structure would not result in 
excessive pricing or supra-competitive profits for the Exchange. The 
proposed fee structure is merely designed to permit the Exchange to 
cover some of the costs allocated to providing connectivity services, 
which would also help fund future expenditures (increased costs, 
improvements, etc.). While the Fee Guidance did not establish a 
guideline as to what constitutes supra-competitive pricing through 
analyzing margin (nor does the Exchange believe it should have), the 
Exchange does not believe that it would be reasonable to consider the 
aforementioned margins to constitute supra-competitive pricing. Of 
course, should the Exchange find opportunities to dramatically reduce 
costs or increase revenues such that it believes the cost it is 
charging for physical connections or applications sessions is 
inconsistent with the cost of providing such connectivity or resulting 
in unreasonable margin, the Exchange will seek to lower its fees in 
order to pass savings on to its constituents. Thus, the Exchange 
believes that its proposed pricing for Connectivity Fees is fair, 
reasonable, and equitable. Further, the Exchange notes that certain of 
its competitors have connectivity fees that were approved without the 
presentation of a cost-based analysis, but it is reasonable to assume 
that certain of those competitors with significantly higher fees also 
operate with significantly higher profit margins. Accordingly, the 
Exchange believes that its proposal is consistent with Section 
6(b)(4)40 of the Act because the proposed fees will permit recovery of 
the Exchange's costs and will not result in excessive pricing or supra-
competitive profit.
---------------------------------------------------------------------------

    \19\ See Fee Guidance, supra note 13.
---------------------------------------------------------------------------

    The proposed fees for connectivity services will allow the Exchange 
to cover certain costs incurred by the Exchange's technology provider 
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 offer the connectivity services. The 
Exchange routinely works with its technology provider 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 portion of the overall expense of the 
technology provider's services, and thus the Exchange believes that it 
is reasonable and appropriate to help offset those costs by adopting 
fees for connectivity services. The Exchange's Cost Analysis estimates 
the monthly costs to provide connectivity services at $375,597. Based 
on current connectivity services usage, the Exchange would generate 
monthly revenues for the rest of 2024 of approximately $120,000. Even 
if the Exchange earns that amount or incrementally more, the Exchange 
believes the proposed fees for connectivity services are fair and 
reasonable because they will not result in excessive pricing or supra-
competitive profit, when comparing the total expense of LTSE associated 
with providing connectivity services versus the total projected revenue 
of the Exchange associated with network connectivity services.
    The Exchange notes that other exchanges offer similar connectivity 
options to market participants and that the Exchange's fees are a 
discount as compared to the majority of such fees.\20\ With respect to 
physical connections, MIAX Options (``MIAX''), MIAX Pearl, LLC (``MIAX 
Pearl''), MIAX Emerald, LLC (``MIAX Emerald''), each of the Nasdaq 
Stock Market LLC (``Nasdaq'') options exchanges,\21\ NYSE American 
Options (``NYSE American''), NYSE Arca Options (``NYSE Arca''), Cboe 
Exchange, Inc. (``Cboe Options''), Cboe BZX Options (``BZX Options''), 
and Cboe EDGX Options (``EDGX Options'') charge between $7,000-$22,750 
per month for physical connectivity at their primary data centers that 
is comparable to that offered by the Exchange.\22\ Nasdaq, NYSE 
American and NYSE Arca also charge installation fees, which are not 
proposed to be charged by the Exchange. With respect to application 
sessions, BX,PHLX, GEMX, MRX, BOX Options (``BOX''), Cboe Options, BZX 
Options and EDGX charge between $500-$800 per month for order entry and 
drop ports.\23\ The Exchange further notes that several of these 
exchanges each charge for other logical ports that the Exchange will 
continue to provide for free, such as application sessions for testing 
and disaster recovery purposes.\24\ While the Exchange's proposed 
Options Connectivity Fees are lower than certain of the fees charged by 
the Nasdaq options exchanges, MIAX Options, MIAX Pearl, MIAX Emerald, 
NYSE American, NYSE Arca, BOX, Cboe, BZX and EDGX, MEMX believes that 
it offers significant value to Members over these other exchanges in 
terms of bandwidth available over such connectivity services, which the 
Exchange believes is a competitive advantage, and differentiates its 
connectivity versus connectivity to other exchanges.\25\ Additionally, 
the

[[Page 83737]]

Exchange's proposed Connectivity Fees to its disaster recovery facility 
are within the range of the fees charged by other exchanges for similar 
connectivity alternatives.\26\
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    \20\ One significant differentiation between the Exchanges is 
that while it offers different types of physical connections, 
including 10Gb, 25Gb, 40Gb, and 100Gb connections, the Exchange does 
not propose to charge different prices for such connections. In 
contrast, most of the Exchange's competitors provide scaled pricing 
that increases depending on the size of the physical connection. The 
Exchange does not believe that its costs increase incrementally 
based on the size of a physical connection but instead, that 
individual connections and the number of such separate and disparate 
connections are the primary drivers of cost for the Exchange.
    \21\ Including Nasdaq PHLX (``PHLX''), Nasdaq Options Market 
(``NOM''), Nasdaq BX Options (``BX''), Nasdaq ISE (``ISE''), Nasdaq 
GEMX (``GEMX''), and Nasdaq MRX (``MRX'').
    \22\ See the MIAX fee schedule, available at:http://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Options_Fee_Schedule_09122023.pdf; the MIAX 
Emerald fee schedule, available at: https://www.miaxglobal.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Options_Options_Fee_Schedule_10122023_3.pdf; the Nasdaq 
Options markets fee schedule, at http://www.nasdaqtrader.com/trader.aspx?id=pricelisttrading2; the NYSE Connectivity fee 
schedule, at: https://www.nyse.com/publicdocs/wireless_Connectivity_Fees_and_Charges.pdf; the Cboe fee schedule, 
available at: https://cboe.com/us/options/membership/fee_schedule/bzx/; the EDGX Options fee schedule, at: https://cboe.com/us/options/membership/fee_schedule/edgx/, and the BOX Options fee 
schedule, available at: https://boxoptions.com/fee-schedule/. This 
range is based on a review of the fees charged for 10-40Gb 
connections at each of these exchanges and relates solely to the 
physical port fee or connection charge, excluding co-location fees 
and other fees assessed by these exchanges. The Exchange notes that 
it does not offer physical connections with lower bandwidth than 
10Gb and that Members and non-members with lower bandwidth than 10Gb 
and that Members and non-members with lower bandwidth requirements 
typically access the Exchange through third-party extranets or 
service bureaus.
    \23\ See id.
    \24\ See id.
    \25\ As noted above, all physical connections offered by LTSE 
are at least 10Gb capable and physical connections provided with 
larger bandwidth capabilities will be provided at the same rate as 
such connections. The Exchange also reiterates that LTSE application 
sessions are capable of handling significant amount of message 
traffic (i.e., over 50,000 orders per second), and have no 
application flow control or order throttling, in contrast to 
competitors that have imposed message rate thresholds.
    \26\ See supra note 22.
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    In conclusion, the Exchange submits that its proposed fee structure 
satisfies the requirements of Sections 6(b)(4) and 6(b)(5) of the Act 
\27\ for the reasons discussed above in that it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
its Members and other persons using its facilities, does not permit 
unfair discrimination between customers, issuers, brokers, or dealers, 
and is designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and in general to protect investors 
and the public interest, particularly as the proposal neither targets 
nor will it have a disparate impact on any particular category of 
market participant.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

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

    In accordance with Section 6(b)(8) of the Act,\28\ the Exchange 
does not believe that the proposed rule change would impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

Intramarket Competition
    The Exchange does not believe that the proposed rule change to 
apply Connectivity Fees to Users would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants because the proposed connectivity pricing is 
associated with relative usage of the Exchange by each market 
participant and does not impose a barrier to entry to smaller 
participants. The Exchange believes its proposed pricing is reasonable 
and lower than what other exchanges charge and, when coupled with the 
availability of third-party providers that also offer connectivity 
solutions, that participation on the Exchange is affordable for all 
market participants, including smaller trading firms. Therefore, the 
fees may stimulate intramarket competition by attracting additional 
firms to become Members of LTSE. As described above, the connectivity 
services purchased by market participants typically increase based on 
their additional message traffic and/or the complexity of their 
operations. The market participants that utilize more connectivity 
services typically utilize the most bandwidth, and those are the 
participants that consume the most resources from the network. 
Accordingly, the proposed fees for connectivity services do not favor 
certain categories of market participants in a manner that would impose 
a burden on competition; rather, the allocation of the proposed 
Connectivity Fees reflects the network resources consumed by the 
various size of market participants and the costs to the Exchange of 
providing such connectivity services.
    As it relates to the reorganization of the fee schedule, as 
discussed above, the Exchange does not believe that the proposed change 
would impose any burden on competition because such change serves to 
create an easier to read fee schedule to avoid any Member confusion.
Intermarket Competition
    The Exchange does not believe the proposed fees for Connectivity to 
LTSE places an undue burden on competition on other SROs that is not 
necessary or appropriate. Additionally, other exchanges have similar 
connectivity alternatives for their participants, but with higher rates 
to connect.\29\ The Exchange is also unaware of any assertion that the 
proposed fees for connectivity services would somehow unduly impair its 
competition with other exchanges. As a participant in an already highly 
competitive environment for equity trading, LTSE does not have the 
market power necessary to set prices for services that are unreasonable 
or unfairly discriminatory in violation of the Exchange Act. In sum, 
LTSE's proposed Connectivity Fees for Members are comparable to and 
generally lower than fees charged by other exchanges for the same or 
similar services.
---------------------------------------------------------------------------

    \29\ See supra notes 21-24 and accompanying text.
---------------------------------------------------------------------------

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

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    This proposed rule change establishes dues, fees or other charges 
among its members and, as such, may take effect upon filing with the 
Commission pursuant to Section 19(b)(3)(A)(ii) of the Act \30\ and 
paragraph (f)(2) of Rule 19b-4 thereunder.\31\ Accordingly, the 
proposed rule change would take effect upon filing with the Commission.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \31\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further 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.

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#8dfff8e1e8a0eee2e0e0e8e3f9fecdfee8eea3eae2fb"><span class="__cf_email__" data-cfemail="d6a4a3bab3fbb5b9bbbbb3b8a2a596a5b3b5f8b1b9a0">[email protected]</span></a>. Please include 
file number SR-LTSE-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-LTSE-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

[[Page 83738]]

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-LTSE-2024-07 and should be submitted on or before November 7, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-23981 Filed 10-16-24; 8:45 am]
BILLING CODE 8011-01-P


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