Document ID: SEC-2022-0295-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MEMX, LLC
Posted Date: 2022-03-04T05:00Z

[Federal Register Volume 87, Number 43 (Friday, March 4, 2022)]
[Notices]
[Pages 12513-12518]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04568]

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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.
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    \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).
    \4\ See Securities Exchange Act Release No. 93937 (January 10, 
2022), 87 FR 2466 (``Notice'').
    \5\ See 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 broker-dealers 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).
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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\
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    \7\ See 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.
    \8\ See id. at 2467.
    \9\ See 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.
    \10\ See 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.
    \11\ See id. at 2469.
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    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\
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    \12\ See id. at 2472.
    \13\ See id. at 2466.
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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.
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    \14\ 15 U.S.C. 78s(b)(3)(C).
    \15\ 15 U.S.C. 78s(b)(1).
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    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

[[Page 12514]]

share.'' \17\ For example, the Exchange cites the example of extranets 
and service bureaus that compete with MEMX to provide Members and non-
Members 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\
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    \16\ Notice, supra note 4 at 2471.
    \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.
    \18\ See id. at 2472.
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    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 line-items 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\
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    \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 non-Members 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.
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    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\
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    \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.
    \26\ The 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.
    \27\ The Exchange also notes that those users require high-touch 
network support services, including network monitoring, reporting, 
and support services. Id. at 2473.
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    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\
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    \28\ See 17 CFR 240.19b-4 (Item 3 entitled ``Self-Regulatory 
Organization's Statement of the Purpose of, and Statutory Basis for, 
the Proposed Rule Change'').
    \29\ Id.
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    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\
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    \30\ 15 U.S.C. 78f(b)(4).
    \31\ 15 U.S.C. 78f(b)(5).
    \32\ 15 U.S.C. 78f(b)(8).
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    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\
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    \33\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    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\
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    \34\ For 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).
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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

[[Page 12515]]

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

[[Page 12516]]

73% of applicable depreciation and amortization expenses the Exchange 
does not allocate to connectivity services)?
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    \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.
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    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)?
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    \51\ Id.
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    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?
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    \52\ Id. at 2469.
    \53\ Id.
    \54\ Id. at 2467.
    \55\ Id.
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    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?
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    \56\ Id. at 2473.
    \57\ Id. at 2474.
    \58\ Id.
    \59\ Id. at 2469.
    \60\ Id. at 2468.
    \61\ Id.
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    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?
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    \62\ Id. at 2469.
    \63\ Id. MEMX is not proposing fees for application sessions in 
the Secondary Data Center.
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    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

[[Page 12517]]

connectivity fee is implemented? 60 days? 90 days? Some other period?
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    \64\ Id.
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    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?
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    \65\ Id. at 2471.
    \66\ Id.
    \67\ Id.
    \68\ Id.
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    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 Non-Members 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?
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    \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.
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    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\
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    \72\ 17 CFR 201.700(b)(3).
    \73\ See id.
    \74\ See id.
    \75\ See 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).
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    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\
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    \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).
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    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:

[[Page 12518]]

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 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.
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    \77\ 15 U.S.C. 78s(b)(3)(C).
    \78\ 17 CFR 200.30-3(a)(57) and (58).

    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