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[Federal Register Volume 89, Number 240 (Friday, December 13, 2024)]
[Notices]
[Pages 101057-101064]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-29336]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101851; File No. SR-LTSE-2024-09]

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

December 9, 2024
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 27, 2024, Long-Term Stock Exchange, Inc. (``LTSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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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[[Page 101058]]

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 Fees) in the Long-Term Stock Exchange Fee Schedule. Prior 
to the launch of the new trading system on September 23, 2024, the 
Exchange offered connectivity (both physical and logical) at no cost to 
all market participants. With the launch of the new trading system and 
the significant costs detailed below, the Exchange determined it was 
reasonable and appropriate to begin to charge market participants for 
their connectivity to the Exchange. The Exchange notes that the 
transition between trading systems required all market participants to 
set up new connectivity to the new trading system, and after the 
successful launch the Exchange decommissioned all the historical 
connections within the old trading system. The Exchange also notes that 
market participants were not charged simultaneously for both their old 
connections and new connections during the transition as the Exchange 
never charged for connectivity to the old trading system.
Cross-Connect Fees
    The Exchange proposes to offer to both Members \3\ and non-Members 
the option to utilize 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 ULL fiber cross-connection to the Test 
Environment. 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 either the Disaster Recovery facility or the 
Test Environment.
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    \3\ The term ``Member'' shall mean any registered broker or 
dealer that has been admitted to membership in the Exchange. See 
LTSE Rule 1.160.
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    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 the Primary facility, Disaster Recovery facility or Test 
Environment.\4\
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    \4\ 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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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 market participants--both generally and in relation to other 
market participants, 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 market participants and competition among 
market participants in general. The Exchange believes that this level 
of diligence and transparency is called for by the requirements of 
Section 19(b)(1) under the Act,\5\ and Rule 19b-4 thereunder,\6\ with 
respect to the types of information self-regulatory organizations 
(``SROs'') should provide when filing fee changes, and Section 6(b) of 
the Act,\7\ which requires, among other things, that exchange fees be 
reasonable and equitably allocated,\8\ not designed to permit unfair 
discrimination,\9\ and that they not impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.\10\ 
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.\11\
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    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ 15 U.S.C.78f(b).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ 15 U.S.C. 78(f)(b)(5).
    \10\ 15 U.S.C. 78f(b)(8).
    \11\ 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 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). Available at 
https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.gov.
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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.\12\ As such, a large portion 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.\13\ Because of this arrangement, the Exchange does not 
possess the same level of specificity for cost drivers related to 
connectivity as

[[Page 101059]]

other exchanges have detailed within their own similar filings. 
However, the Exchange recognizes that the fees it pays MEMX 
Technologies are for the services MEMX Technologies provides to the 
Exchange and their costs, these services and costs include maintaining 
a team of highly-skilled network engineers, fees charged to MEMX 
Technologies by the third-party data center operator for the servers 
and equipment LTSE utilizes, 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. While these cost drivers are known, 
because of the unique structure laid out above the Exchange is unable 
to separate out most of the specific expenses for connectivity 
services, as these are intricately combined in its DSLA with MEMX 
Technologies.
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    \12\ 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, supra note 3 [sic].
    \13\ The DSLA with MEMX Technologies entails both fixed and 
variable costs. To Exchange used both types of costs when 
determining aggregated monthly costs detailed below.
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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) does not 
reflect LTSE's actual current costs associated with the development and 
operation of connectivity on LTSE. Accordingly, the Exchange believes 
it is more appropriate to justify its fees 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 services to the Exchange at approximately $485,000 
beginning October 1, 2024.\14\ 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) \15\ the Exchange is 
proposing to modify its Fee Schedule and charge the fees for 
connectivity detailed herein.
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    \14\ The aggregate monthly costs were determined by taking the 
individual cost drivers detailed below and their yearly costs and 
dividing by twelve months.
    \15\ 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 connectivity, 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, 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 connectivity. 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 only cover a portion of the total annual 
expense that the Exchange projects to incur 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. Based on current connectivity services usage, 
the Exchange would generate monthly revenues for the rest of 2024 of 
approximately $192,000, which will result in a loss for the Exchange.
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 for a total of $538,400 per year of costs related 
to providing connectivity).

----------------------------------------------------------------------------------------------------------------
                                                         Allocated monthly   Allocated yearly
                      Cost drivers                             costs              costs             % of all
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Third-Party Expenses...................................           $427,279         $4,594,998                 32
Human Resources........................................             44,866            538,400                 10
Data Center............................................             13,170            158,040                 30
                                                        --------------------------------------------------------
    Total..............................................            485,315          5,291,438  .................
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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 trading system and related technology to a third-party 
technology provider MEMX Technologies. With this arrangement LTSE 
receives (1) access to technology used to complete connections to the 
Exchange and to connect to external markets, (2) physical connectivity 
in the data centers where MEMX Technologies maintains equipment for 
LTSE use--such as dedicated space, security services, cooling and 
power, (3) use of physical ports and logical ports, and (3) use of 
physical assets and software, which also includes assets used for 
testing and monitoring of infrastructure. Also included in this section 
are the costs from a second third-party vendor which assists LTSE with 
services related to member gateways.
    The Exchange took the annual costs for each of these third-party 
providers to determine what portion (or percentage) of these costs 
related to connectivity services and thus bears a relationship that is, 
``in nature and closeness,'' directly related to connectivity services. 
There are four major core services

[[Page 101060]]

associated with the Exchange (member gateways, the matching engine, the 
SIP and then downstream services). The services provided by these third 
party vendors touches each of these major core services, therefore the 
Exchange believed a conservative allocation of 32% of costs for 
connectivity services was appropriate.
Human Resources
    For personnel costs not related to its outsourced third-party 
providers, LTSE then 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 notes that network support services to Members and Non-Members 
provided by the Exchange and its staff, including network monitoring, 
reporting and support services, are all handled directly by LTSE and 
not MEMX Technologies.
    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
    In addition to the data center costs incurred by MEMX Technologies 
which are allocated in the Third-Party Expenses above, the Exchange 
also maintains its own footprint in a third-party data center.\16\ Data 
Center costs include an allocation of the costs the Exchange incurs to 
monitor its trading platform (both the Primary facility and Disaster 
Recovery facility) as well as the costs to maintain its equipment in 
the data center. The Exchange does not own the data center facilities, 
but instead, leases space in a data center operated by a third party).
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    \16\ LTSE has a data center presence in Secaucus NY4.
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    The Exchange took the annual data center costs to determine what 
portion (or percentage) of these costs related to connectivity services 
and thus bears a relationship that is, ``in nature and closeness,'' 
directly related to connectivity services. As stated above, there are 
four major core services associated with the Exchange (member gateways, 
the matching engine, the SIP and then downstream services). The 
services related to these costs include network packet capture for 
performance monitoring, security information and event management, 
network connectivity and security monitoring. The Exchange therefore 
believes a conservative allocation of 30% of costs for connectivity 
services was appropriate.
Physical Connectivity Fees
    With the launch of the new trading platform, LTSE required Members 
and Non-Members to establish all new connections (both physical and 
logical) to the Exchange in order to transmit orders to and receive 
information through the new trading platform. Members and Non-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 and Non-
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 market 
participant. The number of physical connections assigned to each firm 
as of September 30, 2024, ranges from one to three, depending on the 
scope and scale of the firm's trading activity on the Exchange as 
determined by the firm, including the firm'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 42% have either one or two physical 
connections to the Exchange in the Primary Data Center.
    As described above, to cover a portion the aggregate costs of 
providing physical connectivity to Members and Non-Members, as 
described below, the Exchange is proposing to charge a fee of $5,500 
per month for each physical connection in the Primary facility and a 
fee of $2,750 per month for each physical connection in the Disaster 
Recovery and Test Environment facilities. There is no requirement that 
any Member or Non-Member maintain a specific number of physical 
connections and a Member or Non-Member may choose to maintain as many 
or as few of such connections as each Member or Non-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 facility). 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 facility, 
in that these Members do not need one full 10Gb connection, and that 
four of the designated Members use a third-party provider instead of 
connecting directly to the Disaster Recovery facility through 
connectivity provided by the Exchange. Nonetheless, because some 
Members are required to connect to the Disaster Recovery facility 
pursuant to Rule 2.250 and to encourage Members and Non-Members to 
connect to the Disaster Recovery facility generally, the Exchange has 
proposed to charge one-half of the fee for a physical connection in the 
Primary facility. The Exchange believes that charging a higher fee for 
physical connections at the Disaster Recovery facility would be 
inconsistent with its objective of encouraging Members to connect at 
such a facility.

[[Page 101061]]

Further, other exchanges also provide discounted connectivity fees for 
connections to their respective disaster recovery facilities.\17\
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    \17\ See, e.g., the CBOE BZX equities fee schedule, available 
at: https://markets.cboe.com/us/equities/membership/fee_schedule/bzx/.
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    The Exchange notes that while Members are required to connect to 
the Test Environment in some way for initial protocol certification, 
they do not have to connect directly and can use an extranet provider 
to connect or access the LTSE Test Environment directly.
    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 Member of Non-Member requests, based upon 
factors deemed relevant by each firm (either a Member, service bureau 
or extranet). The Exchange believes these factors include the costs to 
maintain connectivity, business model and choices Members and Non-
Members make in how to participate on the Exchange, as further 
described below. The proposed connectivity fees are designed to permit 
the Exchange to cover a portion of costs allocated to providing 
connectivity services. 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 facility and Test Environment. The Exchange 
has proposed this discounted rate for Disaster Recovery and Test 
Environment connectivity in order to encourage Members and Non-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 facility given this 
requirement. The Exchange notes that this rate is well below the cost 
of providing such services and the Exchange will offer connectivity to 
the Disaster Recovery facility and Test Environment 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. Upon receipt of the completed instructions, LTSE assigns 
the Member or Non-Member the number of sessions requested. The number 
of sessions assigned to each Member 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 Members and Non-Members, 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 initiate order entry in all three 
environments (Production, Disaster Recovery and Test Environments). 
Further, 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.
    The proposed fee is also designed to encourage Members and Non-
Members 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 each 
logical connectivity session 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.
    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 Member of Non-Member requests, based upon 
factors deemed relevant by each firm (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.\18\
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    \18\ The Exchange understands that some Members (or service 
bureaus) may also request more sessions to enable the ability to 
send a greater number of simultaneous order messages to the Exchange 
by spreading orders over more Order Entry Ports, thereby increasing 
throughput (i.e., the potential for more orders to be processed in 
the same amount of time). The degree to which this usage of sessions 
provides any throughput advantage is based on how a particular 
Member sends order messages to LTSE, however the Exchange notes that 
the architecture reduces the impact or necessity of such a strategy. 
All sessions on LTSE provide the same throughput, and as noted 
above, the throughput is likely adequate even for a Member sending a 
significant amount of volume at a fast pace, and is not artificially 
throttled or limited in any way by the Exchange.
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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 
or Non-Members. As discussed in more detail in the Statutory Basis 
section, the Exchange believes that the likelihood of higher fees for 
certain Members or Non-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 and Non-Members. The Exchange's costs for connectivity services 
are directly proportional to the impact Members and Non-Members with 
higher message traffic and/or Members and Non-Members with more 
complicated connections established with the Exchange, as such Members 
and Non-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

[[Page 101062]]

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 and Non-
Members with higher message traffic and/or Members and Non-Members with 
more complicated connections to pay a higher share of the total 
connectivity services fees. While Members and Non-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 Non-Members and not on the business model or type of firm. The 
Exchange notes that the correlation between message traffic and usage 
of connectivity services is not completely aligned because Members and 
Non-Members individually determine how many physical connections and 
application sessions to request, and Members and Non-Members may make 
different decisions on the appropriate ways based on facts unique to 
their individual businesses. 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'').\19\ 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.\20\ 
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 Member or Non-Member 
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 and Test Environment 
facilities 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.\21\
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    \19\ 17 CFR 242.1000-1007.
    \20\ 17 CFR 242.1001(a).
    \21\ 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 rule change is consistent 
with the provisions of Section 6(b) \22\ of the Act in general and 
furthers the objectives of Section 6(b)(4) \23\ of the Act, in 
particular, in that it is designed to provide for the equitable 
allocation of reasonable dues, fees and other charges among its Members 
and other persons using its facilities. Additionally, the Exchange 
believes that the proposed fees are consistent with the objectives of 
Section 6(b)(5) \24\ of the Act in that they are designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to a free and open market and 
national market system, and, in general, to protect investors and the 
public interest, and, particularly, are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \22\ 15 U.S.C. 78f.
    \23\ 15 U.S.C. 78f(b)(4).
    \24\ 15 U.S.C. 78f(b)(5).
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    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 does not believe the proposed pricing for connectivity 
services imposes a barrier to entry to smaller market participants. As 
detailed above, the Exchange recognizes that there are various business 
models and varying sizes of market participants conducting business on 
the Exchange. The Exchange's costs for its connectivity services are 
directly proportional to the impact that Members and Non-Members with 
higher message traffic and/or Members and Non-Members with more 
complicated connections established with the Exchange, as such Members 
and Non-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 and Non-Members will pay the 
least, and highest resource consuming Members and Non-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

[[Page 101063]]

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 
$192,000 \25\ providing partial 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 also believes 
the proposed fee is a reasonable means of encouraging firms 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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    \25\ 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) 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.\26\ 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. As 
stated above, the proposed fee structure is merely designed to permit 
the Exchange to cover some of the costs allocated to providing 
connectivity services. Thus, the Exchange believes that its proposed 
pricing for Connectivity Fees is fair, reasonable, and equitable. 
Accordingly, the Exchange believes that its proposal is consistent with 
Section 6(b)(4) 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.
---------------------------------------------------------------------------

    \26\ See Fee Guidance, supra note 13 [sic].
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    The proposed fees for connectivity services will allow the Exchange 
to cover a portion of costs incurred by the Exchange for offering 
connectivity to Members and Non-Members. As detailed above, the 
Exchange has numerous internal and third-party expenses associated with 
providing connectivity. Including 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. 
Further, the Exchange routinely works with its MEMX Technologies 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 $485,000. Based 
on current connectivity services usage, the Exchange would generate 
monthly revenues for the rest of 2024 of approximately $192,000, which 
will result in a loss for the Exchange. 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 proposed 
connectivity fees are lower.\27\ The Exchange further notes that 
several of these exchanges charge for all logical connectivity 
sessions, and do not offer the three free sessions per month the 
Exchange is proposing to offer.\28\
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    \27\ See, e.g., the MEMX Connectivity fee schedule, available 
at: https://info.memxtrading.com/connectivity-fees/.
    \28\ See id.
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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 
\29\ 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.
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    \29\ 15 U.S.C. 78f(b)(4) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\30\ 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.
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    \30\ 15 U.S.C. 78f(b)(8).
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Intramarket Competition
    The Exchange does not believe that the proposed rule change to 
establish connectivity fees 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

[[Page 101064]]

firms. As described above, the connectivity services purchased by 
market participants typically increase based on their additional 
message traffic and/or the complexity of their operations. The market 
participants that utilize more connectivity services typically utilize 
the most bandwidth, and those are the participants that consume the 
most resources from the network. Accordingly, the proposed fees for 
connectivity services do not favor certain categories of market 
participants in a manner that would impose a burden on competition; 
rather, the allocation of the proposed fees for connectivity reflects 
the network resources consumed by the various size of market 
participants and the costs to the Exchange of providing such 
connectivity services.
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, another exchange has similar 
connectivity alternatives for their participants, but with higher rates 
to connect.\31\ The Exchange is also unaware of any assertion that the 
proposed fees for connectivity services would somehow unduly impair its 
competition with other exchanges. In sum, LTSE's proposed fees for 
connectivity for Members and Non-Members are comparable to and 
generally lower than fees charged by another exchange for the same or 
similar services.
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    \31\ See supra notes 28-29 [sic].
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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 \32\ and 
paragraph (f)(2) of Rule 19b-4 thereunder.\33\ Accordingly, the 
proposed rule change would take effect upon filing with the Commission.
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    \32\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \33\ 17 CFR 240.19b-4(f)(2).
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    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

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-LTSE-2024-09 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-LTSE-2024-09. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or
    withhold entirely from publication submitted material that is 
obscene or subject to copyright protection. All submissions should 
refer to file number SR-LTSE-2024-09 and should be submitted on or 
before January 3, 2025.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-29336 Filed 12-12-24; 8:45 am]
BILLING CODE 8011-01-P
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