Federal Register / Vol. 87, No. 43 / Friday, March 4, 2022 / Notices 12513 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A). A proposed rule change 

may take effect upon filing with the Commission if 

it is designated by the exchange as ‘‘establishing or 

changing a due, fee, or other charge imposed by the 

self-regulatory organization on any person, whether 

or not the person is a member of the self-regulatory 

organization.’’ 15 U.S.C. 78s(b)(3)(A)(ii). 

4See Securities Exchange Act Release No. 93937 

(January 10, 2022), 87 FR 2466 (‘‘Notice’’). 

5See Letter from Tyler Gellasch, Executive 

Director, Healthy Markets Association, dated 

January 26, 2022. The commenter asserts that the 

Exchange did not address the Exchange’s 

ownership structure (where a number of brokerdealers own interests in the holding company that 

controls the Exchange), which the commenter states 

can result in Member-owners recouping the costs of 

the new fees, as well as the additional revenues 

collected from non-owners, which the commenter 

characterized as a ‘‘disparate impact.’’ 

6 15 U.S.C. 78s(b)(3)(C). 

7See Notice at 2466. The Exchange explained that 

‘‘[t]he objective of this approach was to eliminate 

any fee-based barriers to connectivity for Members 

when MEMX launched as a national securities 

exchange in 2020, and it was successful in 

achieving this objective in that a significant number 

of Members are directly or indirectly connected to 

the Exchange.’’ Id. at 2467. 

8See id. at 2467. 

9See id. The Exchange is not proposing to charge 

for: (1) Order Entry Ports or Drop Copy Ports in the 

Secondary Data Center, or (2) Test Facility Ports or 

MEMOIR Gap Fill Ports. Id. at 2470. A ‘‘drop copy’’ 

refers to information on trades executed on the 

Exchange. 10See id. at n.12. If a product is cancelled by a 

Member’s submission of a written request or via the 

MEMX User Portal prior to such fee being assessed 

then the Member will not be obligated to pay the 

applicable product fee. See id. 

11See id. at 2469. 

12See id. at 2472. 

13See id. at 2466. 

14 15 U.S.C. 78s(b)(3)(C). 

15 15 U.S.C. 78s(b)(1). 

16Notice, supra note 4 at 2471. 

Persons submitting comments are 

cautioned that we do not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make available publicly. 

MATTER TO BE CONSIDERED: The agenda 

for the meeting includes: Welcome and 

opening remarks; departure remarks 

from J.W. Verret and Paul Mahoney; 

approval of previous meeting minutes; a 

panel discussion regarding ethical 

artificial intelligence and ‘‘roboadviser’’ 

fiduciary responsibilities; a panel 

discussion regarding cybersecurity; 

subcommittee reports; and a non-public 

administrative session. 

CONTACT PERSON FOR MORE INFORMATION: 

For further information and to ascertain 

what, if any, matters have been added, 

deleted or postponed; please contact 

Vanessa A. Countryman from the Office 

of the Secretary at (202) 551–5400. 

Authority: 5 U.S.C. 552b. 

Dated: March 1, 2022. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2022–04695 Filed 3–2–22; 11:15 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94332; File No. SR–MEMX– 

2021–22] 

Self-Regulatory Organizations; MEMX 

LLC; Suspension of and Order 

Instituting Proceedings To Determine 

Whether To Approve or Disapprove 

Proposed Rule Change To Amend the 

Exchange’s Fee Schedule To Adopt 

Connectivity Fees 

February 28, 2022. 

I. Introduction 

On December 30, 2021, MEMX LLC 

(‘‘MEMX’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Exchange Act’’ or ‘‘Act’’),1 and 

Rule 19b–4 thereunder,2 a proposed rule 

change (File Number SR–MEMX–2021– 

22) to amend the Exchange’s Fee 

Schedule (‘‘Fee Schedule’’) to adopt 

certain connectivity fees. The proposed 

rule change was immediately effective 

upon filing with the Commission 

pursuant to Section 19(b)(3)(A) of the 

Act.3 The proposed rule change was 

published for comment in the Federal 

Register on January 14, 2022.4 The 

Commission received one comment 

letter on the proposed rule change.5

Under Section 19(b)(3)(C) of the Act,6

the Commission is hereby: (i) 

Temporarily suspending File Number 

SR–MEMX–2021–22; and (ii) instituting 

proceedings to determine whether to 

approve or disapprove File Number SR– 

MEMX–2021–22. 

II. Description of the Proposed Rule 

Change 

MEMX provides Members and certain 

non-Members (i.e., service bureaus and 

extranets) with physical connectivity 

and application sessions (also known as 

‘‘logical ports’’) to access and participate 

on its market (collectively, 

‘‘connectivity services’’). Prior to 

implementation of the proposed rule 

change, the Exchange did not impose a 

fee for such connectivity services.7 The 

Exchange now proposes to amend its 

Fee Schedule to adopt fees for 

connectivity services. Specifically, the 

Exchange proposes to charge $6,000 per 

month for each physical connection in 

the data center where the Exchange 

primarily operates under normal market 

conditions (‘‘Primary Data Center’’) and 

$3,000 per month for each physical 

connection in the Exchange’s backup 

data center (‘‘Secondary Data Center’’).8

In addition, the Exchange proposes to 

charge a fee of $450 per month for each 

application session used for order entry 

(‘‘Order Entry Port’’) and $450 per 

month for each application session used 

for receipt of drop copies (‘‘Drop Copy 

Port’’) in the Exchange’s Primary Data 

Center.9 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.10 The 

Exchange represents that it will 

periodically review the costs applicable 

to providing connectivity services and 

propose changes to its fees as 

appropriate.11

While the Exchange states its belief 

that there is ‘‘competition for 

connectivity to the Exchange’’ that acts 

to constrain its ability to set pricing for 

connectivity services,12 it also believes 

that ‘‘each exchange should take extra 

care to be able to demonstrate that [fees 

for connectivity services] are based on 

its costs and reasonable business 

needs.’’ 13

III. Suspension of the Proposed Rule 

Changes 

Pursuant to Section 19(b)(3)(C) of the 

Act,14 at any time within 60 days of the 

date of filing of an immediately effective 

proposed rule change pursuant to 

Section 19(b)(1) of the Act,15 the 

Commission summarily may 

temporarily suspend the change in the 

rules of a self-regulatory organization 

(‘‘SRO’’) if it appears to the Commission 

that such action is necessary or 

appropriate in the public interest, for 

the protection of investors, or otherwise 

in furtherance of the purposes of the 

Act. As discussed below, the 

Commission believes a temporary 

suspension of the proposed rule changes 

is necessary and appropriate to allow for 

additional analysis of the proposed rule 

changes’ consistency with the Act and 

the rules thereunder. 

The Exchange states that the proposal 

‘‘reflects a simple, competitive, 

reasonable, and equitable pricing 

structure designed to permit the 

Exchange to cover certain fixed costs 

that it incurs for providing connectivity 

services, which are discounted when 

compared to products and services 

offered by competitors.’’ 16 With respect 

to competition, the Exchange states that 

it ‘‘believes that competitive forces are 

in effect and that if the proposed fees for 

connectivity services were unreasonable 

that the Exchange would lose current or 

prospective Members and market 


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17 Id. at 2473. The Exchange represents that 

because it has not previously charged fees for 

connectivity and logical ports, it does not have 

comprehensive exchange-specific data to determine 

the impact of the proposed fees and will not have 

such data until the fees are actually imposed. 

However, the Exchange states that it understands 

that certain Members may be considering modifying 

the way that they connect to the Exchange in 

response to the proposed fees. See id. 

18See id. at 2472. 

19 Id. at 2473. 

20 Id. at 2469. 

21 Id. at 2467–68. MEMX notes that since its 

inception it has borne 100% of the connectivity 

costs because it currently offers connectivity 

services for free. Id. 

22 Id. at 2473–74. The Exchange asserts that it has 

four primary sources of revenue from which it can 

potentially fund operations: transaction fees, 

connectivity services fees, membership and 

regulatory fees, and market data fees. The Exchange 

further states it must cover its expenses from one 

of these four sources. Id. 

23 Id. at 2473–74. The Exchange notes that it 

‘‘anticipates (and encourages) Members and nonMembers to more closely evaluate their 

connectivity services usage’’ once MEMX begins 

charging for the services. Id. As a result, the 

Exchange notes, actual Exchange revenue resulting 

from the proposed fees may be less than the 

Exchange’s estimate. See id. 

24 Id. The Exchange asserts that its proposed fees 

do not yet constitute a true ‘‘markup’’ because the 

Exchange has not recovered the initial costs of 

building the network and infrastructure necessary 

to offer connectivity services, as it did not 

previously charge any fees for connectivity services 

since it began operations. See id. at 2469. 

25 Id. at 2470. 

26The Exchange states that although it offers 

physical connections of different bandwidths 

(10Gb, 25Gb, 40Gb, and 100Gb), it does not propose 

to charge different prices for such connections and 

it does not believe its costs increase incrementally 

based on the size of the physical connection. It 

instead believes that ‘‘individual connections and 

the number of separate and disparate connections 

are the primary drivers’’ of the Exchange’s costs. Id. 

at 2474 n. 29. 

27The Exchange also notes that those users 

require high-touch network support services, 

including network monitoring, reporting, and 

support services. Id. at 2473. 

28See 17 CFR 240.19b–4 (Item 3 entitled ‘‘SelfRegulatory Organization’s Statement of the Purpose 

of, and Statutory Basis for, the Proposed Rule 

Change’’). 

29 Id. 

30 15 U.S.C. 78f(b)(4). 

31 15 U.S.C. 78f(b)(5). 

32 15 U.S.C. 78f(b)(8). 

33See 15 U.S.C. 78f(b)(4), (5), and (8), 

respectively. 

34For purposes of temporarily suspending the 

proposed rule changes, the Commission has 

considered the proposed rules’ impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

35 15 U.S.C. 78s(b)(3)(C). Once the Commission 

temporarily suspends a proposed rule change, 

Section 19(b)(3)(C) of the Act requires that the 

Commission institute proceedings under Section 

19(b)(2)(B) to determine whether a proposed rule 

change should be approved or disapproved. 

share.’’ 17 For example, the Exchange 

cites the example of extranets and 

service bureaus that compete with 

MEMX to provide Members and nonMembers with physical connectivity to 

the Exchange. MEMX notes that ‘‘nearly 

half of the Exchange’s Members do not 

have a physical connection provided by 

the Exchange and instead must use a 

third party provider,’’ though MEMX 

acknowledges that application sessions 

are necessary to submit orders to MEMX 

such that indirectly connected users 

still will need to pay the application 

session fee to the Exchange or through 

the vendor.18

In further support of the proposal, the 

Exchange presents information on its 

costs and expected revenues from 

connectivity services, which the 

Exchange uses to support its position 

that the proposed fees for connectivity 

services are consistent with Section 

6(b)(4) of the Act because they would 

permit the Exchange to recover the costs 

of providing connectivity services to 

Members and non-Members.19 In its 

filing, MEMX provides a breakdown and 

summary of the costs of providing 

physical connectivity and application 

sessions and describes the various lineitems that it classifies into several ‘‘cost 

drivers.’’ MEMX represents that it 

allocated such expenses ‘‘without 

double-counting any expenses.’’ 20

Specifically, MEMX details its direct 

and allocated costs categorized 

according to those seven cost drivers, 

which result in a combined aggregate 

monthly cost of $1,143,715 ($795,789 

for physical connectivity and $347,926 

for application sessions).21 The 

Exchange states that the proposed fees 

would ‘‘not result in excessive pricing 

or supracompetitive profit,’’ as it 

projects a ‘‘modest profit’’ with revenue 

of $1,233,750 based on current 

connectivity services usage,22

representing a markup of approximately 

8%.23

MEMX states that its proposed fees 

are designed ‘‘to cover the aggregate 

costs of providing connectivity services 

[to Members and non-Members] and to 

recoup some of the costs already born 

by the Exchange to create and offer its 

services. . . .’’ 24 The Exchange further 

states that the proposed fees, 

specifically charging per connection, 

constitute an equitable allocation of 

reasonable fees 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.’’ 25 Additionally, the 

Exchange explains that these Members 

consume the most bandwidth 26 of the 

network and transact the ‘‘vast 

majority’’ of Exchange volume.27

When exchanges file their proposed 

rule changes with the Commission, 

including fee filings like the Exchange’s 

present proposal, they are required to 

provide a statement supporting the 

proposal’s basis under the Act and the 

rules and regulations thereunder 

applicable to the exchange.28 The 

instructions to Form 19b–4, on which 

exchanges file their proposed rule 

changes, specify that such statement 

‘‘should be sufficiently detailed and 

specific to support a finding that the 

proposed rule change is consistent with 

[those] requirements.’’ 29

Section 6 of the Act, including 

Sections 6(b)(4), (5), and (8), require the 

rules of an exchange to, among other 

things, (1) provide for the equitable 

allocation of reasonable fees among 

members, issuers, and other persons 

using the exchange’s facilities; 30 (2) 

perfect the mechanism of a free and 

open market and a national market 

system, protect investors and the public 

interest, and not be designed to permit 

unfair discrimination between 

customers, issuers, brokers, or 

dealers; 31 and (3) not impose any 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Act.32

In temporarily suspending the 

Exchange’s fee changes, the Commission 

intends to further consider whether the 

proposal to establish fees for 

connectivity to the Exchange is 

consistent with the statutory 

requirements applicable to a national 

securities exchange under the Act. In 

particular, the Commission will 

consider whether the proposed rule 

changes satisfy the standards under the 

Act and the rules thereunder requiring, 

among other things, that an exchange’s 

rules provide for the equitable 

allocation of reasonable fees among 

members, issuers, and other persons 

using its facilities; not permit unfair 

discrimination between customers, 

issuers, brokers or dealers; and do not 

impose any burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Act.33

Therefore, the Commission finds that 

it is appropriate in the public interest, 

for the protection of investors, and 

otherwise in furtherance of the purposes 

of the Act, to temporarily suspend the 

proposed rule changes.34

IV. Proceedings To Determine Whether 

To Approve or Disapprove the 

Proposed Rule Change and Grounds for 

Disapproval Under Consideration 

In addition to temporarily suspending 

the proposal, the Commission also 

hereby institutes proceedings pursuant 

to Sections 19(b)(3)(C) 35 and 


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36 15 U.S.C. 78s(b)(2)(B). 

37 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the 

Act also provides that proceedings to determine 

whether to disapprove a proposed rule change must 

be concluded within 180 days of the date of 

publication of notice of the filing of the proposed 

rule change. See id. The time for conclusion of the 

proceedings may be extended for up to 60 days if 

the Commission finds good cause for such 

extension and publishes its reasons for so finding, 

or if the exchange consents to the longer period. See 

id. 

38 15 U.S.C. 78f(b)(4). 

39 15 U.S.C. 78f(b)(5). 

40 15 U.S.C. 78f(b)(8). 

41 Id. at 2466. 

42 Id. 

43 Id. 

44 Id. 

45 Id. at 2468–69. 

46 Id. at 2467–68. The Exchange allocates the 

following amounts to each cost driver for providing 

physical connectivity: $262,129 for Human 

Resources, $162,000 for Infrastructure and 

Connectivity Technology, $219,000 for Data Center 

Costs, $4,507 for Hardware and Software Licenses, 

$99,328 for Monthly Depreciation, and $48,826 for 

Allocated Shared Expenses. For application 

sessions, the Exchange allocated $147,029 for 

Human Resources, $33,358 for Infrastructure and 

Connectivity Technology, $108,138 for Hardware 

and Software Licenses, and $59,400 for Allocated 

Shared Expenses. 

47 Id. 

48 Id. For example, the Exchange stated that 

Infrastructure and Connectivity Technology cost 

includes servers, switches and related hardware 

required to provide physical access to 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. 

49 Id. at 2468. The Exchange explained that it in 

calculating the Human Resource cost to be allocated 

to physical connections, the Exchange allocated 

‘‘network infrastructure personnel with a high 

percentage of the cost of such personnel (75%) 

given their focus on functions necessary to provide 

physical connections’’ and a smaller percentage 

(19%) of the cost associated with certain personnel 

who ‘‘work closely with and support network 

infrastructure personnel.’’ The Exchange also stated 

that for application sessions, it allocated ‘‘much 

smaller percentages (11% or less)’’ of Human 

Resources costs across a wider range of personnel 

groups because a ‘‘much wider range of personnel’’ 

are involved in providing application sessions but 

it is not a primary or full-time function for them. 

50 Id. 

19(b)(2)(B) 36 of the Act to determine 

whether the proposed rule change 

should be approved or disapproved. 

Institution of such proceedings is 

appropriate at this time in view of the 

legal and policy issues raised by the 

proposed rule change. Institution of 

proceedings does not indicate that the 

Commission has reached any 

conclusions with respect to any of the 

issues involved. Rather, as described 

below, the Commission seeks and 

encourages interested persons to 

provide comments on the proposed rule 

change to inform the Commission’s 

analysis of whether to approve or 

disapprove the proposed rule change. 

Pursuant to Section 19(b)(2)(B) of the 

Act,37 the Commission is providing 

notice of the grounds for possible 

disapproval under consideration. The 

Commission is instituting proceedings 

to allow for additional analysis of 

whether the Exchange has sufficiently 

demonstrated how the proposed rule 

change is consistent with Sections 

6(b)(4),38 6(b)(5),39 and 6(b)(8) 40 of the 

Act. Section 6(b)(4) of the Act requires 

that the rules of a national securities 

exchange provide for the equitable 

allocation of reasonable dues, fees, and 

other charges among its members and 

issuers and other persons using its 

facilities. Section 6(b)(5) of the Act 

requires that the rules of a national 

securities exchange be designed, among 

other things, 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, and not be designed to 

permit unfair discrimination between 

customers, issuers, brokers, or dealers. 

Section 6(b)(8) of the Act requires that 

the rules of a national securities 

exchange not impose any burden on 

competition that is not necessary or 

appropriate in furtherance of the 

purposes of the Act. 

The Commission asks that 

commenters address the sufficiency of 

the Exchange’s statements in support of 

the proposal, which are set forth in the 

Notice, in addition to any other 

comments they may wish to submit 

about the proposed rule change. In 

particular, the Commission seeks 

comment on the following aspects of the 

proposals and asks commenters to 

submit data where appropriate to 

support their views: 

1. Cost Estimates and Allocation. 

MEMX argues that competition acts to 

constrain its proposed fees but also 

presents a cost-based analysis of its 

proposed fees because MEMX says it 

believes that exchanges should meet 

‘‘very high standards of transparency’’ 

when demonstrating why a new fee or 

fee increase is consistent with the 

Exchange Act.41 The Exchange states 

specifically that an exchange should 

take ‘‘extra care’’ to ‘‘demonstrate that 

these fees are based on its costs and 

reasonable business needs.’’ 42 MEMX 

believes that it has attempted to be 

‘‘especially diligent in assessing those 

fees in a transparent way against its own 

aggregate costs of providing the related 

service. . . .’’ 43 According to the 

Exchange, it employed a methodology 

that ‘‘narrowly limits the aggregate cost 

elements considered to those closely 

and directly related to the particular 

product offering.’’ 44 MEMX classified 

its connectivity services expenses 

according to the following cost drivers: 

Human resources (i.e., personnel), 

infrastructure and connectivity 

technology (servers, switches, etc.), data 

center costs, hardware and software 

licenses, monthly depreciation, 

allocated shared expenses.45 It then 

applied an estimated allocation of each 

cost driver to each connectivity service, 

determining that the total monthly cost 

was $795,789 46 to offer physical 

connectivity and $347,926 to offer 

application services.47 The Exchange 

lists the individual line-item costs in its 

filing, and describes some of the criteria 

included in each cost driver.48 Do 

commenters believe that the cost drivers 

the Exchange has considered are 

sufficiently clear and complete? Do 

commenters believe that the Exchange 

should consider additional cost drivers 

or clarify the cost drivers it identified? 

If so, which ones? Do commenters 

believe that the Exchange has provided 

sufficient detail about how it allocated 

costs to connectivity services? Across all 

costs, what are commenters’ views on 

whether the Exchange has provided 

sufficient detail on the elements that go 

into its connectivity costs, including 

how it allocated shared costs to 

connectivity, to permit an independent 

review of its costs and meaningfully 

assess the reasonableness of the 

proposed fees and the corresponding 

profit margin? 

In allocating cost drivers, the 

Exchange states that it allocated a total 

of 21.5% of Human Resources expense 

to provide connectivity services, 

consisting of 13.8% of its personnel 

costs to provide physical connections 

and 7.7% to application sessions.49 The 

Exchange provides similar information 

for depreciation and amortization 

expense, noting that it allocated 

approximately 27% of the Exchange’s 

overall depreciation and amortization 

expense to connectivity services (19% 

to physical connections and 8% to 

application sessions).50 Do commenters 

believe that the Exchange sufficiently 

explained the principles that it applied 

in making these determinations, or is 

further explanation necessary? For 

personnel costs, for instance, the 

Exchange did not provide the job titles 

and salaries of persons whose time was 

accounted for, nor did it explain the 

methodology used to determine how 

much of an employee’s time is devoted 

to that specific activity. Should the 

Exchange identify to which services the 

remaining percentage of un-allocated 

expenses are attributable (e.g., what 

services or fees are associated with the 


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51 Id. 

52 Id. at 2469. 

53 Id. 

54 Id. at 2467. 

55 Id. 

56 Id. at 2473. 

57 Id. at 2474. 

58 Id. 

59 Id. at 2469. 

60 Id. at 2468. 

61 Id. 

62 Id. at 2469. 

63 Id. MEMX is not proposing fees for application 

sessions in the Secondary Data Center. 

64 Id. 

73% of applicable depreciation and 

amortization expenses the Exchange 

does not allocate to connectivity 

services)? 

MEMX states it calculated the Human 

Resources cost using a ‘‘blended rate of 

compensation reflecting salary, equity 

and bonus compensation, benefits, 

payroll taxes, and 401(k) matching 

contributions.’’ 51 Do commenters 

believe that those are the appropriate 

criteria? In particular, is it appropriate 

to include stock compensation and 

annual cash bonuses in a blended 

compensation rate for the purpose of 

assessing connectivity costs if those 

items are based on an exchange’s overall 

profitability or performance and not the 

individual employee’s performance in 

providing connectivity services (and 

thus not directly attributable to 

connectivity)? 

The Exchange notes that its cost 

analysis was based on its first year of 

operations and projections for next year 

and states that it believes that its costs 

will remain similar in future years.52

The Exchange recognizes, however, the 

possibility that costs may increase or 

decrease.53 Do commenters expect costs 

incurred based on MEMX’s first year of 

operations to be generally representative 

of an exchange’s expected costs going 

forward, or should an exchange present 

an estimated range of costs with an 

explanation of how profit margins could 

vary along with the cost estimates? The 

Exchange also states that it seeks to 

‘‘recoup some of the costs already borne 

by the Exchange to create and offer its 

services’’ 54 but does not distinguish 

between current-year costs and the 

‘‘already borne’’ costs it seeks to recover 

or provide detail on those prior costs.55

Do commenters think MEMX should 

elaborate on how and to what extent the 

proposed fees recoup past expenses? 

2. Profit Margin. The Exchange states 

its proposed fees would not result in 

supracompetitive profits,56 and projects 

an 8% profit margin resulting from costs 

to provide connectivity services of 

$1,143,715 and projected revenue of 

approximately $1,233,750.57 The 

Exchange believes that this is a ‘‘modest 

profit’’ 58 that represents a ‘‘reasonable 

markup’’ over cost given factors that 

include the ‘‘lack of other costs to 

participate on the Exchange’’ and the 

Exchange maintaining a high 

performing and stable platform.59 In 

arriving at its revenue estimate (and 8% 

profit margin), the Exchange has 

assumed that the current number of 

physical connections (143) 60 and 

application sessions (835) 61 will remain 

constant once the proposed fees are in 

place. Also, it assumes that all 143 

physical connections will be to the 

Primary Data Center, for the proposed 

fee of $6,000 per connection. The profit 

margin is dependent on the accuracy of 

the cost projections which, if inflated 

(intentionally or unintentionally), may 

render the projected profit margin 

meaningless. Further, the margin may 

fluctuate due to changes in the number 

of connections purchased and increases 

or decreases in costs. Do commenters 

find the Exchange’s estimated revenue 

and profit margin and the assumptions 

on which they are based to be 

appropriate? Do commenters agree that 

the Exchange’s estimated profit margin 

would constitute a reasonable rate of 

return over costs? What are commenters’ 

views regarding what factors should be 

considered in determining what 

constitutes a reasonable rate of return 

for connectivity fees? Do commenters 

believe that it is relevant to an 

assessment of reasonableness that the 

Exchanges’ proposed fees are lower than 

those of other exchanges to which the 

Exchange has compared its fees? Should 

an assessment of reasonable rate of 

return include consideration of factors 

other than costs; and if so, what factors 

should be considered and why? Should 

the Exchange provide more information 

on the number of physical connections 

and application sessions it expects to 

maintain when it begins charging for 

connectivity that was previously 

provided for free, and an estimate of the 

potential change in each when MEMX 

begins charging for them broken down 

by the type of user? 

MEMX also has proposed to charge a 

fee of $3,000 per connection to the 

Secondary Data Center, which is 50% 

less than the fee for a connection to the 

Primary Data Center. The Exchange’s 

explanation for the difference in fees is 

that certain Members are required to 

participate in mandatory testing of the 

Exchange’s backup systems, which 

would require them to connect to the 

Secondary Data Center.62 The Exchange 

did not provide a separate estimate of 

the number of firms it expects to be 

subject to the Secondary Data Center fee 

or how much revenue it expects to earn 

from the fee, nor did the Exchange 

allocate its connectivity costs between 

the Primary and Secondary Data 

Centers. The Exchange notes that its 

proposed physical connectivity fee for 

the Secondary Data Center is ‘‘well 

below the cost of providing such 

services’’ and the Exchange will not 

recoup the full amount of its costs.63 Do 

commenters believe that the Exchange 

should provide information on its 

connectivity costs specifically for the 

Secondary Data Center as well as 

additional information to support its 

assertion that it will not recover its costs 

of providing connectivity services to its 

backup data center? In addition, should 

the Exchange clarify how charging a 

lower fee for the Secondary Data Center 

would affect its projected revenue? Do 

commenters believe that competitive 

forces exist for physical connectivity to 

the Secondary Data Center, particularly 

for those firms that MEMX requires to 

connect? 

3. Periodic Reevaluation. The 

Exchange represents that it will 

‘‘periodically review the costs 

applicable to providing connectivity 

services and to propose changes to it 

fees as appropriate.’’ 64 However, the 

Exchange has not addressed whether it 

believes a material deviation from the 

anticipated profit margin would warrant 

the need to make a rule filing pursuant 

to Section 19(b) of the Act to increase 

or decrease the fees accordingly. In light 

of the impact that the number of users 

paying for connectivity services has on 

connectivity profit margins, and the 

potential for costs to decrease (or 

increase) over time, what are 

commenters’ views on the need for 

exchanges to commit to reevaluate, on 

an ongoing and periodic basis, their 

cost-based connectivity fees to ensure 

that they stay in line with their stated 

profitability target and do not become 

unreasonable over time, for example, by 

failing to adjust for efficiency gains, cost 

increases or decreases, and changes in 

other fees or services? How formal 

should that process be, how often 

should that reevaluation occur, and 

what metrics and thresholds should be 

considered? How soon after a new 

connectivity fee change is implemented 

should an exchange assess whether its 

costs, subscriber, and revenue estimates 

were accurate and at what threshold 

should an exchange commit to file a fee 

change if its estimates were inaccurate? 

Should an initial review take place 

within the first 30 days after a 


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Federal Register / Vol. 87, No. 43 / Friday, March 4, 2022 / Notices 12517 

65 Id. at 2471. 

66 Id. 

67 Id. 

68 Id. 

69 Id. at 2469. The Exchange further explained 

that 44% of its Members maintain one to two 

physical ports to connect to the Exchange’s Primary 

Data Center, while only 12% maintain three or 

more such ports. Id. 

70 Id. at 2471–2. 

71 Id. at 2472. 

72 17 CFR 201.700(b)(3). 

73See id. 

74See id. 

75See Susquehanna Int’l Group, LLP v. Securities 

and Exchange Commission, 866 F.3d 442, 446–47 

(D.C. Cir. 2017) (rejecting the Commission’s reliance 

on an SRO’s own determinations without sufficient 

evidence of the basis for such determinations). 

76 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act 

grants the Commission flexibility to determine what 

type of proceeding—either oral or notice and 

opportunity for written comments—is appropriate 

for consideration of a particular proposal by an 

SRO. See Securities Acts Amendments of 1975, 

Report of the Senate Committee on Banking, 

Housing and Urban Affairs to Accompany S. 249, 

S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). 

connectivity fee is implemented? 60 

days? 90 days? Some other period? 

4. Competition. The Exchange asserts 

that the its proposed connectivity fees 

are subject to competition. In support of 

its claim, the Exchange states that 

connectivity to the Exchange is optional 

and says ‘‘there is no regulatory 

requirement that any market participant 

connect to the Exchange, that any 

participant connect in a particular 

manner, or that any participant 

maintain a certain number of 

connections to the Exchange,’’ 65

therefore, if the proposed fees are too 

high, Members may cease to connect to 

the Exchange. However, the Exchange 

acknowledges that ‘‘certain Members 

operate as routing brokers for other 

market participants . . . [and a]s an 

equity exchange with 4% volume, these 

routing brokers likely need to maintain 

a connection to the Exchange on behalf 

of their clients.’’ 66 Further, the 

Exchange represents that as of 

November 2021, it had 4.16% of market 

share and argues that it ‘‘is not aware of 

any evidence that a market share of 

approximately 4% provides the 

Exchange with anti-competitive price 

power because . . . market participants 

that choose to connect to the Exchange 

have various choices in determining 

how to do so, including third party 

alternatives [e.g., service bureaus, 

extranet].’’ 67 The Exchange concludes 

that ‘‘[t]his, in addition to the fact that 

not all broker-dealers are required to 

connect of the Exchange, supports the 

Exchange’s conclusion that its pricing is 

constrained by competition.’’ 68 Do 

commenters agree that the lack of a 

regulatory requirement to connect to an 

exchange means that there are sufficient 

competitive forces to constrain 

connectivity fees? Are such competitive 

forces present for service bureaus and 

extranets, who are in the business of 

providing connectivity services to 

trading centers, as well as large market 

makers? Are competitive forces present 

when MEMX imposes a regulatory 

requirement in its rules for certain 

members to participate in mandatory 

testing of the Exchange’s backup 

systems, thus effectively requiring those 

members to purchase connectivity to the 

Secondary Data Center? Are there 

reasons, not presented by the Exchange, 

why a market participant would need 

direct connectivity to the Exchange’s 

Primary Data Center? Do commenters 

agree that an exchange with only 4% 

market share lacks pricing power 

sufficient to charge supracompetitive 

fees? At what percentage of market 

share would an exchange have such 

pricing power? Should exchanges 

reevaluate their fees as their market 

share increases? 

The Exchange also argues that its 

connectivity fees are constrained by 

competitive forces because 44% of its 

Members do not maintain direct 

connectivity to the Exchange,69 but 

rather connect to the Exchange through 

a service bureau or extranet.70 The 

Exchange argues that these NonMembers provide competition for 

connectivity to the Exchange as resellers 

of MEMX connectivity. The Exchange 

states that it will not receive any 

compensation for re-sold physical 

connectivity, ‘‘thus constraining the 

ability of MEMX to set its connectivity 

pricing as indirect connectivity is a 

substitute for direct connectivity.’’ 71 Do 

commenters believe that resellers of 

connectivity to the Exchange provide a 

competitive restraint on the fees MEMX 

charges for direct connectivity? Do 

commenters believe that resellers offer 

connectivity services to market 

participants effectively at a lower price 

than what the Exchange is proposing or 

do commenters believe that resellers 

pass-through the fee charged to them by 

the Exchange to their customers? 

While there may be alternatives for 

physical connectivity (e.g., using a third 

party service provider), application 

sessions are not optional for those that 

do connect to the Exchange. Do 

commenters believe competition acts as 

a constraint on application session fees? 

If so, how? 

Under the Commission’s Rules of 

Practice, the ‘‘burden to demonstrate 

that a proposed rule change is 

consistent with the Exchange Act and 

the rules and regulations issued 

thereunder . . . is on the [SRO] that 

proposed the rule change.’’ 72 The 

description of a proposed rule change, 

its purpose and operation, its effect, and 

a legal analysis of its consistency with 

applicable requirements must all be 

sufficiently detailed and specific to 

support an affirmative Commission 

finding,73 and any failure of an SRO to 

provide this information may result in 

the Commission not having a sufficient 

basis to make an affirmative finding that 

a proposed rule change is consistent 

with the Act and the applicable rules 

and regulations.74 Moreover, 

‘‘unquestioning reliance’’ on an SRO’s 

representations in a proposed rule 

change would not be sufficient to justify 

Commission approval of a proposed rule 

change.75

The Commission believes it is 

appropriate to institute proceedings to 

allow for additional consideration and 

comment on the issues raised herein, 

including as to whether the proposals 

are consistent with the Act, any 

potential comments or supplemental 

information provided by the Exchange, 

and any additional independent 

analysis by the Commission. 

V. Request for Written Comments 

The Commission requests written 

views, data, and arguments with respect 

to the concerns identified above as well 

as any other relevant concerns. In 

particular, the Commission invites the 

written views of interested persons 

concerning whether the proposal is 

consistent with Sections 6(b)(4), 6(b)(5), 

and 6(b)(8), or any other provision of the 

Act, or the rules and regulations 

thereunder. The Commission asks that 

commenters address the sufficiency and 

merit of the Exchange’s statements in 

support of the proposal, in addition to 

any other comments they may wish to 

submit about the proposed rule change. 

Although there do not appear to be any 

issues relevant to approval or 

disapproval that would be facilitated by 

an oral presentation of views, data, and 

arguments, the Commission will 

consider, pursuant to Rule 19b–4, any 

request for an opportunity to make an 

oral presentation.76

Interested persons are invited to 

submit written data, views, and 

arguments regarding whether the 

proposal should be approved or 

disapproved by March 25, 2022. Any 

person who wishes to file a rebuttal to 

any other person’s submission must file 

that rebuttal by April 8, 2022. 

Comments may be submitted by any 

of the following methods: 


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12518 Federal Register / Vol. 87, No. 43 / Friday, March 4, 2022 / Notices 

77 15 U.S.C. 78s(b)(3)(C). 

78 17 CFR 200.30–3(a)(57) and (58). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A)(iii). 

4 17 CFR 240.19b–4(f)(6). 

5The Term ‘‘User’’ shall mean any Trading 

Privilege Holder (TPH) or Sponsored User who is 

authorized to obtain access to the System pursuant 

to Rule 5.5. 

6A ‘‘Stop (Stop-Loss)’’ order is an order to buy 

(sell) that becomes a market order when the 

consolidated last sale price (excluding prices from 

complex order trades if outside of the NBBO) or 

NBB (NBO) for a particular option contract is equal 

to or above (below) the stop price specified by the 

User. Users may not designate a Stop Order as All 

Sessions. Users may not designate bulk messages as 

Stop Orders. A User may not designate a Stop order 

as Direct to PAR. See Rule 5.6(c) (definition of 

‘‘Stop (Stop-Loss)’’ order). 

7A ‘‘Stop-Limit’’ order is an order to buy (sell) 

that becomes a limit order when the consolidated 

last sale price (excluding prices from complex order 

trades if outside the NBBO) or NBB (NBO) for a 

particular option contract is equal to or above 

(below) the stop price specified by the User. A User 

may not designate a Stop-Limit Order as All 

Sessions. Users may not designate bulk messages as 

Stop-Limit Orders. A User may not designate a 

Stop-Limit order as Direct to PAR. See Rule 5.6(c) 

(definition of ‘‘Stop-Limit’’ order). 

8See Rule 5.34(a)(4)(A). 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File No. SR– 

MEMX–2021–22 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–MEMX–2021–22. 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 

changes that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule changes 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 

10:00 a.m. and 3:00 p.m. Copies of the 

filings also will be available for 

inspection and copying at the principal 

office of each Exchange. All comments 

received will be posted without change. 

Persons submitting comments are 

cautioned that we do not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make available publicly. All 

submissions should refer to File 

Number SR–MEMX–2021–22 and 

should be submitted on or before March 

25, 2022. Rebuttal comments should be 

submitted by April 8, 2022. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(3)(C) of the Act,77 that File 

Number SR–MEMX–2021–22 be, and 

hereby is, temporarily suspended. In 

addition, the Commission is instituting 

proceedings to determine whether the 

proposed rule change should be 

approved or disapproved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.78

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2022–04568 Filed 3–3–22; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–94327; File No. SR–CBOE– 

2022–006] 

Self-Regulatory Organizations; Cboe 

Exchange, Inc.; Notice of Filing and 

Immediate Effectiveness of a Proposed 

Rule Change To Modify How DrillThrough Price Protection Applies to 

Users’ Orders When Multiple Stop 

(Stop-Loss) and Stop-Limit Orders Are 

Triggered by the Same Price 

February 28, 2022. 

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 February 

17, 2022, Cboe Exchange, Inc. (the 

‘‘Exchange’’ or ‘‘Cboe Options’’) filed 

with the Securities and Exchange 

Commission (the ‘‘Commission’’) the 

proposed rule change as described in 

Items I and II below, which Items have 

been prepared by the Exchange. The 

Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change 

pursuant to Section 19(b)(3)(A)(iii) of 

the Act 3 and Rule 19b–4(f)(6) 

thereunder.4 The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

Cboe Exchange, Inc. (‘‘C1’’ or the 

‘‘Exchange’’) is filing with the Securities 

and Exchange Commission (the 

‘‘Commission’’) a proposal to modify 

how drill-through price protection 

applies to Users’ 5 orders when multiple 

Stop (Stop-Loss) and Stop-Limit orders 

are triggered by the same price. The text 

of the proposed rule change is provided 

in Exhibit 5. 

The text of the proposed rule change 

is also available on the Exchange’s 

website (http://www.cboe.com/ 

AboutCBOE/CBOELegal

RegulatoryHome.aspx), at the 

Exchange’s Office of the Secretary, and 

at the Commission’s Public Reference 

Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The purpose of this rule filing is to 

amend current Rule 5.34(a)(4), Order 

and Quote Price Protection Mechanisms 

and Risk Controls, to add new Rule 

5.34(a)(4)(E), which modifies what the 

drill-through price will be for Stop 

(Stop-Loss) 6 and Stop-Limit 7 orders 

when multiple Stop and Stop-Limit 

orders are triggered by the same stop 

price specified by Users. 

Drill-through price protection is 

currently described in Exchange Rule 

5.34(a)(4)(A). Rule 5.34(a)(4)(A) equates 

the drill-through reference price for a 

buy (sell) order to a price up to a buffer 

amount (the Exchange determines the 

buffer amount on a class and premium 

basis) above (below) the offer (bid) limit 

of the Opening Collar or the NBO (NBB) 

that existed at the time of order entry, 

respectively (the, ‘‘drill-through 

price’’).8


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