Document ID: SEC-2022-0677-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: MIAX PEARL, LLC
Posted Date: 2022-05-17T04:00Z

[Federal Register Volume 87, Number 95 (Tuesday, May 17, 2022)]
[Notices]
[Pages 29892-29911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-10514]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94888; File No. SR-PEARL-2022-18]

Self-Regulatory Organizations; MIAX PEARL LLC; Notice of Filing 
of a Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule 
To Increase Certain Connectivity Fees and To Increase the Monthly Fees 
for MIAX Express Network Full Service Port; Suspension of and Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove 
the Proposed Rule Change

May 11, 2022.
    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 May 2, 2022, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and is, pursuant to Section 19(b)(3)(C) of the Act, hereby: (i) 
Temporarily suspending the proposed rule change; and (ii) instituting 
proceedings to determine whether to approve or disapprove the proposed 
rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the MIAX Pearl Options 
Fee Schedule (the ``Fee Schedule'') to amend certain connectivity fees.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX 
Pearl's principal office, and at the Commission's Public Reference 
Room.

[[Page 29893]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV [sic] below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the Fee Schedule to increase the 
fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') fiber 
connection and the fees for the Exchange's MIAX Express Network Full 
Service (``MEO'') \3\ Ports. The Exchange last increased the fees for 
its 10Gb ULL fiber connections in a filing that became effective 
beginning January 1, 2021 (subsequently withdrawn and refiled one 
time).\4\ The Exchange increased the fee for 10Gb ULL fiber connections 
from $9,300 to $10,000 per month. Also, in connection with that fee 
change, the Exchange's affiliate, Miami International Securities 
Exchange, LLC (``MIAX''), increased its 10Gb ULL connectivity fee to 
$10,000 per month.\5\ The Exchange and MIAX shared a combined cost 
analysis in those filings. In those filings, the Exchange and MIAX 
allocated a combined total of $17.9 million in expenses to providing 
10Gb ULL fiber connectivity.
---------------------------------------------------------------------------

    \3\ The term ``MEO Interface'' or ``MEO'' means a binary order 
interface for certain order types as set forth in Rule 516 into the 
MIAX Pearl System. See the Definitions Section of the Fee Schedule 
and Exchange Rule 100.
    \4\ See Securities Exchange Act Release No. 90981 (January 25, 
2021), 86 FR 7582 (January 29, 2021) (SR-PEARL-2021-01).
    \5\ See Securities Exchange Act Release No. 90980 (January 25, 
2021), 86 FR 7602 (January 29, 2021) (SR-MIAX-2021-02).
---------------------------------------------------------------------------

    Since the time of that filing, the Exchange and MIAX have 
experienced an increase in expenses, particularly regarding internal 
expenses. For example, from January 2021 to March 2022 expenses related 
to employee compensation for 10Gb ULL connectivity increased from a 
combined $6,892,689 to $7,063,801 and occupancy increased from $560,408 
to $701,437. In addition, from January 2021 to March 2022, the 
Exchange's third party related expense increased as well. In January 
2021, the Exchange and MIAX allocated a combined $4,079,910 of their 
shared third party expenses to providing the 10Gb ULL fiber 
connectivity. As described more fully below, the Exchange and MIAX are 
now allocating $4,382,307 of their shared third party expense to 10Gb 
ULL fiber connectivity, which represents only a portion of the total 
combined third party expense of $7,575,888.\6\
---------------------------------------------------------------------------

    \6\ The Exchange notes that it last filed to amend the fees for 
Full Service MEO Ports (Bulk and Single) in 2018, prior to which the 
Exchange provided Full Service MEO Ports (Bulk and Single) free of 
charge since the Exchange launched operations in 2017 and had 
absorbed all costs since that time. See Securities Exchange Act 
Release No. 82867 (March 13, 2018), 83 FR 12044 (March 19, 2018) 
(SR-PEARL-2018-07). This prior filing did not include a cost 
analysis.
---------------------------------------------------------------------------

    As discussed more fully below, the Exchange and MIAX recently 
calculated the combined annual aggregate costs for providing 10Gb ULL 
connectivity, plus the cost of providing Full Service MEO Ports (on 
MIAX Pearl Options only) to be $22,589,805, or $1,882,484 per month. 
The Exchange now proposes to amend the Fee Schedule to amend the fees 
for 10Gb ULL connectivity and Full Service MEO Ports (Bulk and Single) 
in order to recoup these ongoing costs and as a result of the increase 
in expenses described above.\7\
---------------------------------------------------------------------------

    \7\ The Exchange notes that MIAX will make a similar filing to 
increase its 10Gb ULL connectivity fees (plus the fees for MIAX's 
Limited Service MEI Ports).
---------------------------------------------------------------------------

    First, the Exchange proposes to amend the Fee Schedule to increase 
the fees for Members \8\ and non-Members to access the Exchange's 
System Networks \9\ via a 10Gb ULL fiber connection. Specifically, the 
Exchange proposes to amend Sections 5(a)-(b) of the Fee Schedule to 
increase the 10Gb ULL connectivity fee for Members and non-Members from 
$10,000 per month to $12,000 per month (``10Gb ULL Fee''). Prior to the 
proposed fee change, the Exchange assessed Members and non-Members a 
flat monthly fee of $10,000 per 10Gb ULL connection for access to the 
Exchange's primary and secondary facilities.\10\
---------------------------------------------------------------------------

    \8\ The term ``Member'' means an individual or organization that 
is registered with the Exchange pursuant to Chapter II of these 
Rules for purposes of trading on the Exchange as an ``Electronic 
Exchange Member'' or ``Market Maker.'' Members are deemed 
``members'' under the Exchange Act. See Exchange Rule 100.
    \9\ The Exchange's System Networks consist of the Exchange's 
extranet, internal network, and external network.
    \10\ The Exchange notes that it employed a tiered pricing 
structure for 10Gb ULL connectivity from August 2021 through March 
2022. See infra notes 25-27.
---------------------------------------------------------------------------

    The Exchange will continue to assess monthly Member and non-Member 
network connectivity fees for connectivity to the primary and secondary 
facilities in any month the Member or non-Member is credentialed to use 
any of the Exchange APIs or market data feeds in the production 
environment. The Exchange proposes to pro-rate the fees when a Member 
or non-Member makes a change to the connectivity (by adding or deleting 
connections) with such pro-rated fees based on the number of trading 
days that the Member or non-Member has been credentialed to utilize any 
of the Exchange APIs or market data feeds in the production environment 
through such connection, divided by the total number of trading days in 
such month multiplied by the applicable monthly rate. The Exchange will 
continue to assess monthly Member and non-Member network connectivity 
fees for connectivity to the disaster recovery facility in each month 
during which the Member or non-Member has established connectivity with 
the disaster recovery facility.
    The Exchange's MIAX Express Network Interconnect (``MENI'') can be 
configured to provide Members and non-Members of the Exchange network 
connectivity to the trading platforms, market data systems, test 
systems, and disaster recovery facilities of both the Exchange and its 
affiliate, MIAX, via a single, shared connection. Members and non-
Members utilizing the MENI to connect to the trading platforms, market 
data systems, test systems, and disaster recovery facilities of the 
Exchange and MIAX via a single, shared connection will continue to only 
be assessed one monthly connectivity fee per connection, regardless of 
the trading platforms, market data systems, test systems, and disaster 
recovery facilities accessed via such connection.
    Second, the Exchange proposes to amend Section (5)(d) of the Fee 
Schedule to amend the fees for Full Service MEO Ports. The Exchange 
currently offers different types of MEO Ports depending on the services 
required by the Member, including a Full Service MEO Port-Bulk,\11\ a 
Full Service MEO Port-Single,\12\ and a

[[Page 29894]]

Limited Service MEO Port.\13\ For one monthly price, a Member may be 
allocated two (2) Full-Service MEO Ports of either type per matching 
engine \14\ and may request Limited Service MEO Ports for which MIAX 
Pearl will assess Members Limited Service MEO Port fees per matching 
engine based on a sliding scale for the number of Limited Service MEO 
Ports utilized each month. The two (2) Full-Service MEO Ports that may 
be allocated per matching engine to a Member may consist of: (a) Two 
(2) Full Service MEO Ports--Bulk; (b) two (2) Full Service MEO Ports--
Single; or (c) one (1) Full Service MEO Port--Bulk and one (1) Full 
Service MEO Port--Single.
---------------------------------------------------------------------------

    \11\ ``Full Service MEO Port--Bulk'' means an MEO port that 
supports all MEO input message types and binary bulk order entry. 
See the Definitions Section of the Fee Schedule.
    \12\ ``Full Service MEO Port--Single'' means an MEO port that 
supports all MEO input message types and binary order entry on a 
single order-by-order basis, but not bulk orders. See the 
Definitions Section of the Fee Schedule.
    \13\ ``Limited Service MEO Port'' means an MEO port that 
supports all MEO input message types, but does not support bulk 
order entry and only supports limited order types, as specified by 
the Exchange via Regulatory Circular. See the Definitions Section of 
the Fee Schedule.
    \14\ A ``Matching Engine'' is a part of the MIAX Pearl 
electronic system that processes options orders and trades on a 
symbol-by-symbol basis. Some Matching Engines will process option 
classes with multiple root symbols, and other Matching Engines may 
be dedicated to one single option root symbol. A particular root 
symbol may only be assigned to a single designated Matching Engine. 
A particular root symbol may not be assigned to multiple Matching 
Engines. See the Definitions Section of the Fee Schedule.
---------------------------------------------------------------------------

    Unlike other options exchanges that provide similar port 
functionality and charge fees on a per port basis,\15\ the Exchange 
offers Full Service MEO Ports as a package and provides Members with 
the option to receive up to two Full Service MEO Ports (described 
above) per matching engine to which that Member connects. The Exchange 
currently has twelve (12) matching engines, which means Members may 
receive up to twenty-four (24) Full Service MEO Ports for a single 
monthly fee, that can vary based on certain volume percentages, as 
described below. For illustrative purposes and as described in more 
detail below, the Exchange currently assesses a fee of $5,000 per month 
for Members that reach the highest Full Service MEO Port--Bulk Tier, 
regardless of the number of Full Service MEO Ports allocated to the 
Member. For example, assuming a Member connects to all twelve (12) 
matching engines during a month, with two Full Service MEO Ports per 
matching engine, this results in a cost of $208.33 per Full Service MEO 
Port ($5,000 divided by 24) for the month. This fee had been unchanged 
since the Exchange adopted Full Service MEO Port fees in 2018.\16\ The 
Exchange proposes to increase Full Service MEO Port fees as further 
described below, with the highest monthly fee of $10,000 for the Full 
Service MEO Port--Bulk. Members will continue to receive two (2) Full 
Service MEO Ports to each matching engine to which they connect for the 
single flat monthly fee. Assuming a Member connects to all twelve (12) 
matching engines during the month, with two Full Service MEO Ports per 
matching engine, this would result in a cost of $416.67 per Full 
Service MEO Port ($10,000 divided by 24).
---------------------------------------------------------------------------

    \15\ See NYSE American Options Fee Schedule, Section V.A., Port 
Fees (each port charged on a per matching engine basis, with NYSE 
American having 17 match engines). See NYSE Technology FAQ and Best 
Practices: Options, Section 5.1 (How many matching engines are used 
by each exchange?) (September 2020) (providing a link to an Excel 
file detailing the number of matching engines per options exchange); 
NYSE Arca Options Fee Schedule, Port Fees (each port charged on a 
per matching engine basis, NYSE Arca having 19 match engines); and 
NYSE Technology FAQ and Best Practices: Options, Section 5.1 (How 
many matching engines are used by each exchange?) (September 2020) 
(providing a link to an Excel file detailing the number of matching 
engines per options exchange). See NASDAQ Fee Schedule, Nasdaq 
Options 7 Pricing Schedule, Section 3, Nasdaq Options Market--Ports 
and Other Services (each port charged on a per matching engine 
basis, with Nasdaq having multiple matching engines). See Nasdaq 
Specialized Quote Interface (SQF) Specification, Version 6.5b 
(updated February 13, 2020), Section 2, Architecture, available at 
https://www.nasdaq.com/docs/2020/02/18/Specialized-Quote-Interface-SQI-6.5b.pdf (the ``NASDAQ SQF Interface Specification''). The 
NASDAQ SQF Interface Specification also provides that NASDAQ's 
affiliates, Nasdaq PHLX LLC (``Nasdaq Phlx'') and Nasdaq BX, Inc. 
(``Nasdaq BX''), have trading infrastructures that may consist of 
multiple matching engines with each matching engine trading only a 
range of option underlyings. Further, the NASDAQ SQF Interface 
Specification provides that the SQF infrastructure is such that the 
firms connect to one or more servers residing directly on the 
matching engine infrastructure. Since there may be multiple matching 
engines, firms will need to connect to each engine's infrastructure 
in order to establish the ability to quote the symbols handled by 
that engine.
    \16\ See Securities Exchange Act Release No. 82867 (March 13, 
2018), 83 FR 12044 (March 19, 2018) (SR-PEARL-2018-07).
---------------------------------------------------------------------------

    The Exchange assesses Members Full Service MEO Port Fees, either 
for a Full Service MEO Port--Bulk and/or for a Full Service MEO Port--
Single, based upon the monthly total volume executed by a Member and 
its Affiliates \17\ on the Exchange across all origin types, not 
including Excluded Contracts,\18\ as compared to the Total Consolidated 
Volume (``TCV''),\19\ in all MIAX Pearl-listed options. The Exchange 
adopted a tier-based fee structure based upon the volume-based tiers 
detailed in the definition of ``Non-Transaction Fees Volume-Based 
Tiers'' described in the Definitions section of the Fee Schedule. The 
Exchange assesses these and other monthly Port fees to Members in each 
month the market participant is credentialed to use a Port in the 
production environment.
---------------------------------------------------------------------------

    \17\ ``Affiliate'' means (i) an affiliate of a Member of at 
least 75% common ownership between the firms as reflected on each 
firm's Form BD, Schedule A, or (ii) the Appointed Market Maker of an 
Appointed EEM (or, conversely, the Appointed EEM of an Appointed 
Market Maker). An ``Appointed Market Maker'' is a MIAX Pearl Market 
Maker (who does not otherwise have a corporate affiliation based 
upon common ownership with an EEM) that has been appointed by an EEM 
and an ``Appointed EEM'' is an EEM (who does not otherwise have a 
corporate affiliation based upon common ownership with a MIAX Pearl 
Market Maker) that has been appointed by a MIAX Pearl Market Maker, 
pursuant to the following process. A MIAX Pearl Market Maker 
appoints an EEM and an EEM appoints a MIAX Pearl Market Maker, for 
the purposes of the Fee Schedule, by each completing and sending an 
executed Volume Aggregation Request Form by email to 
[email protected] no later than 2 business days prior to 
the first business day of the month in which the designation is to 
become effective. Transmittal of a validly completed and executed 
form to the Exchange along with the Exchange's acknowledgement of 
the effective designation to each of the Market Maker and EEM will 
be viewed as acceptance of the appointment. The Exchange will only 
recognize one designation per Member. A Member may make a 
designation not more than once every 12 months (from the date of its 
most recent designation), which designation shall remain in effect 
unless or until the Exchange receives written notice submitted 2 
business days prior to the first business day of the month from 
either Member indicating that the appointment has been terminated. 
Designations will become operative on the first business day of the 
effective month and may not be terminated prior to the end of the 
month. Execution data and reports will be provided to both parties. 
See the Definitions Section of the Fee Schedule.
    \18\ ``Excluded Contracts'' means any contracts routed to an 
away market for execution. See the Definitions Section of the Fee 
Schedule.
    \19\ ``TCV'' means total consolidated volume calculated as the 
total national volume in those classes listed on MIAX Pearl for the 
month for which the fees apply, excluding consolidated volume 
executed during the period of time in which the Exchange experiences 
an Exchange System Disruption (solely in the option classes of the 
affected Matching Engine). See the Definitions Section of the Fee 
Schedule.
---------------------------------------------------------------------------

    Current Full Service MEO Port--Bulk Fees. The Exchange currently 
assesses Members monthly Full Service MEO Port--Bulk fees as follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $3,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $4,500; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $5,000.
    Proposed Full Service MEO Port--Bulk Fees. The Exchange proposes to 
assess Members monthly Full Service MEO Port--Bulk fees as follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-

[[Page 29895]]

Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $5,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $7,500; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $10,000.
    Current Full Service MEO Port--Single Fees. The Exchange currently 
assesses Members monthly Full Service MEO Port--Single fees as follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,000;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $3,375; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $3,750.
    Proposed Full Service MEO Port--Single Fees. The Exchange proposes 
to assess Members monthly Full Service MEO Port--Single fees as 
follows:
    (i) If its volume falls within the parameters of Tier 1 of the Non-
Transaction Fees Volume-Based Tiers, or volume up to 0.30%, $2,500;
    (ii) if its volume falls within the parameters of Tier 2 of the 
Non-Transaction Fees Volume-Based Tiers, or volume above 0.30% up to 
0.60%, $3,500; and
    (iii) if its volume falls with the parameters of Tier 3 of the Non-
Transaction Fees Volume-Based Tiers, or volume above 0.60%, $4,500.
    The Exchange offers various types of ports with differing prices 
because each port accomplishes different tasks, are suited to different 
types of Members, and consume varying capacity amounts of the network. 
For instance, MEO ports allow for a higher throughput and can handle 
much higher quote/order rates than FIX ports. Members that are Market 
Makers \20\ or high frequency trading firms utilize these ports 
(typically coupled with 10Gb ULL connectivity) because they transact in 
significantly higher amounts of messages being sent to and from the 
Exchange, versus FIX port users, who are traditionally customers 
sending only orders to the Exchange (typically coupled with 1Gb 
connectivity). The different types of ports cater to the different 
types of Exchange Memberships and different capabilities of the various 
Exchange Members. Certain Members need ports and connections that can 
handle using far more of the network's capacity for message throughput, 
risk protections, and the amount of information that the System has to 
assess. Those Members may account for the vast majority of network 
capacity utilization and volume executed on the Exchange, as discussed 
throughout.
---------------------------------------------------------------------------

    \20\ The term ``Market Maker'' means a Member registered with 
the Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in Chapter VI of Exchange Rules. See the 
Definitions Section of the Fee Schedule and Exchange Rule 100.
---------------------------------------------------------------------------

    The Exchange proposes to increase its monthly Full Service MEO Port 
fees since it has not done so since the fees were adopted in 2018,\21\ 
which are designed to recover a portion of the costs associated with 
directly accessing the Exchange. The Exchange notes that its 
affiliates, Miami International Securities Exchange, LLC (``MIAX'') and 
MIAX Emerald, LLC (``MIAX Emerald''), charge fees for their high 
throughput, low latency MIAX Express Interface (``MEI'') Ports in a 
similar fashion as the Exchange charges for its MEO Ports--generally, 
the more active user the Member (i.e., the greater number/greater 
national ADV of classes assigned to quote on MIAX and MIAX Emerald), 
the higher the MEI Port fee.\22\ This concept is not new or novel.
---------------------------------------------------------------------------

    \21\ See supra note 6.
    \22\ See MIAX Fee Schedule, Section (5)(d)(ii); MIAX Emerald Fee 
Schedule, Section (5)(d)(ii).
---------------------------------------------------------------------------

    The Exchange believes that other exchanges' connectivity and port 
fees are useful examples and provides the following table for 
comparison purposes only to show how the Exchange's proposed fees 
compare to fees currently charged by other options exchanges for 
similar connectivity and port access. As shown by the below table, the 
Exchange's proposed fees are similar to or less than fees charged for 
similar access to other options exchanges.
---------------------------------------------------------------------------

    \23\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited April 29, 2022).
    \24\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports 
and Other Services and NASDAQ Rules, General 8: Connectivity, 
Section 1. Co-Location Services.
    \25\ See supra note 23.
    \26\ See ISE Pricing Schedule, Options 7, Section 7, 
Connectivity Fees and ISE Rules, General 8: Connectivity.
    \27\ See supra note 23.
    \28\ See NYSE American Options Fee Schedule, Section V.A. Port 
Fees and Section V.B. Co-Location Fees.
    \29\ See supra note 23.
    \30\ See GEMX Pricing Schedule, Options 7, Section 6, 
Connectivity Fees and GEMX Rules, General 8: Connectivity.
    \31\ See supra note 23.

------------------------------------------------------------------------
                                       Type of        Monthly fee (per
             Exchange               connection or     connection or per
                                         port               port)
------------------------------------------------------------------------
MIAX Pearl (as proposed) (equity   10Gb ULL         $12,000.
 options market share of 4.61% as   connection.     Tier 1: $5,000 (or
 of April 29, 2022 for the month   Full Service      $208.33 per
 of April).\23\                     MEO Port         Matching Engine).
                                    (Bulk).         Tier 2: $7,500 (or
                                                     $312.50 per
                                                     Matching Engine).
                                                    Tier 3: $10,000 (or
                                                     $416.66 per
                                                     Matching Engine).
                                   Full Service     Tier 1: $2,500 (or
                                    MEO Port         $104.16 per
                                    (Single).        Matching Engine).
                                                    Tier 2: $3,500 (or
                                                     $145.83 per
                                                     Matching Engine).
                                                    Tier 3: $4,500 (or
                                                     $187.50 per
                                                     Matching Engine).
The NASDAQ Stock Market LLC        10Gb Ultra       $15,000.
 (``NASDAQ'') \24\ (equity          fiber           1-5 ports. $1,500.
 options market share of 8.47% as   connection.     6-20 ports. $1,000.
 of April 29, 2022 for the month   SQF Port.......  21 or more ports.
 of April).\25\                                      $500.
Nasdaq ISE LLC (``ISE'') \26\      10Gb Ultra       $15,000.
 (equity options market share of    fiber           $1,100.
 5.48% as of April 29, 2022 for     connection.
 the month of April).\27\          SQF Port.......
NYSE American LLC (``NYSE          10Gb LX LCN      $22,000.
 American'') \28\ (equity options   connection.     Ports 1-40. $450
 market share of 8.13% as of       Order/Quote      Ports 41 and
 April 29, 2022 for the month of    Entry Port.      greater. $150.
 April).\29\

[[Page 29896]]

 
Nasdaq GEMX, LLC (``GEMX'') \30\   10Gb Ultra       $15,000.
 (equity options market share of    connection.     $1,250.
 2.36% as of April 29, 2022 for    SQF Port.......
 the month of April).\31\
------------------------------------------------------------------------

Implementation and Procedural History
    The proposed rule change will be effective May 2, 2022. The 
Exchange initially filed proposals to adopt tiered-pricing structures 
for the 10Gb ULL connections and amend the fees for Full Service MEO 
Ports, with the proposed fees being effective beginning August 1, 2021. 
Between August 2021 and February 2022, the Exchange withdrew and 
refiled the proposed rule changes, each time to meaningfully attempt to 
provide additional justification for the proposed fee changes, provide 
enhanced details regarding the Exchange's cost methodology, and address 
questions contained in the Commission's suspension orders. The Exchange 
received six comment letters from three separate commenters on the 
filings.\32\ This revised proposal provided additional details 
regarding the Exchange's cost methodology, revenue projections, and 
responded to various questions and requests for information contained 
in the Commission's suspension orders.\33\ On April 1, 2022, the 
Exchange submitted revised proposals to provide additional clarity 
regarding the Exchange's cost justification and those proposals were 
subsequently suspended by the Commission.\34\ The Exchange withdrew 
those revised proposals and submitted this filing on May 2, 2022. This 
newest revised filing builds upon the additional details regarding the 
Exchange's cost methodology and revenue projections, as well as the 
Exchange's responses to various questions and requests for information 
contained in the Commission's suspension orders.
---------------------------------------------------------------------------

    \32\ See letters from Richard J. McDonald, Susquehanna 
International Group, LLC (``SIG''), to Vanessa Countryman, 
Secretary, Commission, dated September 7, 2021, October 1, 2021, 
October 26, 2021, and March 15, 2022 (``SIG Letters''). See also 
letter from Tyler Gellasch, Executive Director, Healthy Markets 
Association (``HMA''), to Hon. Gary Gensler, Chair, Commission, 
dated October 29, 2021 (``HMA Letter''); and letter from Ellen 
Green, Managing Director, Equity and Options Market Structure, 
Securities Industry and Financial Markets Association (``SIFMA''), 
to Vanessa Countryman, Secretary, Commission, dated November 26, 
2021 (``SIFMA Letter'').
    \33\ See Securities Exchange Act Release Nos. 92644 (August 11, 
2021), 86 FR 46055 (August 17, 2021) (SR-PEARL-2021-36); 92798 
(August 27, 2021), 86 FR 49360 (September 2, 2021) (SR-PEARL-2021-
33); 93162 (September 28, 2021), 86 FR 54739 (October 4, 2021) (SR-
PEARL-2021-45); 93556 (November 10, 2021), 86 FR 64235 (November 17, 
2021) (SR-PEARL-2021-53); 93639 (November 22, 2021), 86 FR 67758 
(November 29, 2021) (SR-PEARL-2021-45); 93774 (December 14, 2021), 
86 FR 71952 (December 20, 2021) (SR-PEARL-2021-57); 94088 (January 
27, 2022), 87 FR 5901 (February 2, 2022) (SR-PEARL-2021-57); 94258 
(February 15, 2022), 87 FR 9659 (February 22, 2022) (SR-PEARL-2022-
03).
    \34\ See Securities Exchange Act Release Nos. 94721 (April 14, 
2022), 87 FR 23573 (April 20, 2022) (SR-PEARL-2022-11) and 94722 
(April 14, 2022), 87 FR 23660 (April 20, 2022) (SR-PEARL-2022-12).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed fees are consistent with 
Section 6(b) of the Act \35\ in general, and furthers the objectives of 
Section 6(b)(4) of the Act \36\ in particular, in that it provides for 
the equitable allocation of reasonable dues, fees and other charges 
among Members and other persons using any facility or system which the 
Exchange operates or controls. The Exchange also believes the proposed 
fees further the objectives of Section 6(b)(5) of the Act \37\ in that 
they are designed to promote just and equitable principles of trade, 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general protect investors 
and the public interest and are not designed to permit unfair 
discrimination between customers, issuers, brokers and dealers.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78f(b).
    \36\ 15 U.S.C. 78f(b)(4).
    \37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the information provided to justify the 
proposed fees meets or exceeds the amount of detail required in respect 
of proposed fee changes as set forth in recent Commission and 
Commission Staff guidance. On March 29, 2019, the Commission issued an 
Order disapproving a proposed fee change by the BOX Market LLC Options 
Facility to establish connectivity fees for its BOX Network (the ``BOX 
Order'').\38\ On May 21, 2019, the Commission Staff issued guidance 
``to assist the national securities exchanges and FINRA . . . in 
preparing Fee Filings that meet their burden to demonstrate that 
proposed fees are consistent with the requirements of the Securities 
Exchange Act.'' \39\ Based on both the BOX Order and the Guidance, the 
Exchange believes that the proposed fees are consistent with the Act 
because they are: (i) Reasonable, equitably allocated, not unfairly 
discriminatory, and not an undue burden on competition; (ii) comply 
with the BOX Order and the Guidance; and (iii) supported by evidence 
(including comprehensive revenue and cost data and analysis) that they 
are fair and reasonable and will not result in excessive pricing or 
supra-competitive profit.
---------------------------------------------------------------------------

    \38\ See Securities Exchange Act Release No. 85459 (March 29, 
2019), 84 FR 13363 (April 4, 2019) (SR-BOX-2018-24, SR-BOX-2018-37, 
and SR-BOX-2019-04) (Order Disapproving Proposed Rule Changes to 
Amend the Fee Schedule on the BOX Market LLC Options Facility to 
Establish BOX Connectivity Fees for Participants and Non-
Participants Who Connect to the BOX Network).
    \39\ See Staff Guidance on SRO Rule Filings Relating to Fees 
(May 21, 2019), at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (the ``Guidance'').
---------------------------------------------------------------------------

The Proposed Fees Will Not Result in a Supra-Competitive Profit
    The Exchange believes that exchanges, in setting fees of all types, 
should meet very high standards of transparency to demonstrate why each 
new fee or fee amendment meets the requirements of the Act that fees be 
reasonable, equitably allocated, not unfairly discriminatory, and not 
create an undue burden on competition among market participants. The 
Exchange believes this high standard is especially important when an 
exchange imposes various fees for market participants to access an 
exchange's marketplace.
    In the Guidance, the Commission Staff states that, ``[a]s an 
initial step in assessing the reasonableness of a fee, staff considers 
whether the fee is constrained by significant competitive forces.'' 
\40\ The Guidance further states that, ``. . . even where an SRO cannot 
demonstrate, or does not assert, that significant competitive forces 
constrain the fee at issue, a cost-based discussion may be an 
alternative basis upon which to show consistency with the Exchange 
Act.'' \41\ In the Guidance, the Commission Staff further states that, 
``[i]f an SRO seeks to support its claims that a proposed fee is fair 
and reasonable because it will permit recovery of the SRO's costs, or 
will not result in excessive pricing or supra-competitive profit, 
specific information, including quantitative information, should be 
provided to support that

[[Page 29897]]

argument.'' \42\ The Exchange does not assert that the proposed fees 
are constrained by competitive forces. Rather, the Exchange asserts 
that the proposed fees are reasonable because they will permit recovery 
of the Exchange's costs in providing access services to supply 10Gb ULL 
connectivity and Full Service MEO Ports and will not result in the 
Exchange generating a supra-competitive profit.
---------------------------------------------------------------------------

    \40\ See id.
    \41\ Id.
    \42\ Id.
---------------------------------------------------------------------------

    The Guidance defines ``supra-competitive profit'' as ``profits that 
exceed the profits that can be obtained in a competitive market.'' \43\ 
The Commission Staff further states in the Guidance that ``the SRO 
should provide an analysis of the SRO's baseline revenues, costs, and 
profitability (before the proposed fee change) and the SRO's expected 
revenues, costs, and profitability (following the proposed fee change) 
for the product or service in question.'' \44\ The Exchange provides 
this analysis below.
---------------------------------------------------------------------------

    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

    The proposed fees are based on a cost-plus model. The Exchange 
believes that it is important to demonstrate that the proposed fees are 
based on its costs and reasonable business needs and believes the 
proposed fees will allow the Exchange to begin to offset expenses. 
However, as discussed more fully below, such fees may also result in 
the Exchange recouping less than, or more than, all of its costs of 
providing 10Gb ULL connectivity and Full Service MEO Ports because of 
the uncertainty of forecasting subscriber decision making with respect 
to firms' access needs. The Exchange believes that the proposed fees 
will not result in excessive pricing or supra-competitive profit based 
on the total expenses the Exchange incurs versus the total revenue the 
Exchange projects to collect, and therefore meets the standards in the 
Act as interpreted by the Commission and the Commission Staff in the 
BOX Order and the Guidance.
    The suspension orders sought additional information and comments on 
various aspects of the prior proposed fee changes. In many respects, 
the Commission's questions about the prior proposed fee changes raise 
broader questions around the factors the Commission should consider and 
the type of data and analysis an exchange should provide in considering 
whether market data, port fees, or connectivity fees are fair and 
reasonable under a cost-based methodology. The suspension orders also 
sought more specific information regarding the allocation of third-
party expenses, such as the overall estimated cost for each category of 
external expenses or at minimum the total applicable third-party 
expenses and percentage allocation or statements regarding the 
Exchange's overall estimated costs for the internal expense categories 
and general shared expenses figure. The Exchange added this additional 
information below.
    In this filing, the Exchange offers a conceptual framework for 
further considering the Commission's questions that draws on the 
Exchange's own experience over several years of analyzing its own 
costs. The elements of that framework are as follows:
    First, the Exchange proposes a flat, simple 10Gb ULL Fee that 
imposes a single monthly fee for Members and non-Members. The Exchange 
believes this relatively simple, flat fee structure is transparent and 
easy for users to apply, and also helps show that it meets the 
objectives of the Act. The Exchange also proposes to amend the fees for 
Full Service MEO Ports, which tiered-pricing structure has been in 
place since 2018. Accordingly, the pricing structure for Full Service 
MEO Ports is already transparent and easy for users to apply, and is a 
common pricing method used by the other options exchanges when charging 
for port connectivity.\45\
---------------------------------------------------------------------------

    \45\ See MIAX Fee Schedule, Section (5)(d)(ii); MIAX Emerald Fee 
Schedule, Section (5)(d)(ii); see also supra notes 24, 26, 28, and 
30.
---------------------------------------------------------------------------

    The Exchange then conducted an extensive cost review in which the 
Exchange analyzed nearly every expense item in the Exchange's general 
expense ledger to determine whether each such expense relates to 
providing 10Gb ULL connectivity and Full Service MEO Ports. That 
methodology does not allow for ``double-counting'' of the same costs 
for different classes of exchange products--for example transaction 
services, market data, physical connectivity, ``logical'' port 
connections or regulatory resources. As a result of this review, the 
Exchange determined that it experienced an increase in costs since 
January 2021 as set forth above and determined to propose to increase 
select connectivity fees as described herein to attempt to recoup this 
increased expense.
    The Exchange then sought to narrowly allocate specific costs to 
10Gb ULL connectivity and Full Service MEO Ports to which the proposed 
fees would apply. In this filing, the Exchange provided more detail 
about how that allocation was determined and included information about 
tangential cost items that were not included. In determining what 
portion (or percentage) to allocate to access services, each Exchange 
department head, in coordination with other Exchange personnel, 
determined the expenses that support access services and System 
Networks associated with 10Gb ULL connectivity and Full Service MEO 
Ports. This included numerous meetings between the Exchange's Chief 
Information Officer, Chief Financial Officer, Head of Strategic 
Planning and Operations, Chief Technology Officer, various members of 
the Legal Department, and other group leaders. The analysis also 
included each department head meeting with the divisions of teams 
within each department to determine the amount of time and resources 
allocated by employees within each division towards the access services 
and System Networks associated with 10Gb ULL connectivity and Full 
Service MEO Ports. The Exchange reviewed each individual expense to 
determine if such expense was related to 10Gb ULL connectivity and Full 
Service MEO Ports. Once the expenses were identified, the Exchange 
department heads, with the assistance of the Exchange's internal 
finance department, reviewed such expenses holistically on an Exchange-
wide level to determine what portion of that expense supports providing 
access services and the System Networks. The sum of all such portions 
of expenses represents the total cost to the Exchange to provide access 
services associated with 10Gb ULL connectivity and Full Service MEO 
Ports. For the avoidance of doubt, no expense amount is allocated 
twice. Specifically, no expense amount is allocated to more than one 
expense category within this filing and no expense amount that is 
allocated as a cost to provide and maintain access to the 10Gb ULL 
connectivity and Full Service MEO Ports in this filing have been or 
will be allocated as a cost to provide any other exchange product or 
service in any other fee filing. In the suspension orders, the 
Commission questioned whether further explanation of the Exchange's 
cost analysis was necessary. The Exchange provides further details 
concerning its cost analysis in response to this question.
    The Exchange believes exchanges, like all businesses, should be 
provided flexibility when developing and applying a methodology to 
allocate costs and resources they deem necessary to operate their 
business, including providing market data and access services. The 
Exchange notes that costs and resource allocations may vary from 
business to business and, likewise, costs

[[Page 29898]]

and resource allocations may differ from exchange to exchange when it 
comes to providing market data and access services. It is a business 
decision that must be evaluated by each exchange as to how to allocate 
internal resources and what costs to incur internally or via third 
parties that it may deem necessary to support its business and its 
provision of market data and access services to market participants.
    Finally, the Exchange acknowledges that it is difficult to predict 
how much revenue the Exchange will receive from the proposed fees with 
precision. The analysis conducted by the Exchange is designed to make a 
fair and reasonable assessment of costs and resources allocated to 
support the provision of access services associated with the proposed 
fees. The Exchange further acknowledges that this assessment can only 
capture a moment in time and that costs and resource allocations may 
change. That is why the Exchange historically, and on an ongoing basis, 
reviews its costs and resource allocations to ensure it appropriately 
allocates resources to properly provide services to the Exchange's 
constituents. As part of this proposed rule change, and as described 
further below, the Exchange is committing to conduct an annual cost 
review with respect to fees that are cost justified in this proposed 
rule change beginning one year from the date of this proposal, and 
annually thereafter. The Exchange expects that it may propose to adjust 
fees at that time, either to increase fees in the event that revenues 
fail to reasonably cover costs at the estimated margin set forth below, 
or to decrease fees in the event that revenue materially exceeds the 
Exchange's current projections. In the event that the Exchange 
determines to propose a fee change, updated cost estimates will be 
included in a rule filing proposing the fee change.
    The Exchange believes applying this framework to the proposed fees 
shows that they are consistent with the requirements of the Act, 
leaving aside that the proposed fees are relatively similar to fees 
charged by other exchanges for connectivity and port access.
Exchange Costs and Cost Methodology
    The Exchange notes that there are material costs associated with 
providing the infrastructure and headcount to fully support access to 
the Exchange via connectivity and ports. As described below, the 
Exchange incurs technology expense related to establishing and 
maintaining Information Security services, enhanced network monitoring 
and customer reporting, as well as Regulation SCI-mandated processes 
associated with its network technology. Both fixed and variable 
expenses have significant impact on the Exchange's overall costs to 
provide 10Gb ULL connectivity and Full Service MEO Ports. For example, 
to accommodate new Members, the Exchange may need to purchase 
additional hardware to support those Members and provide access through 
10Gb ULL connectivity and Full Service MEO Ports.\46\ Further, as the 
total number of Members increases, the Exchange and its affiliates may 
need to increase their data center footprint and consume more power, 
resulting in increased costs charged by their third-party data center 
provider. Accordingly, the cost to the Exchange and its affiliates to 
provide access to its Members is not fixed. The Exchange believes the 
proposed fees are a reasonable attempt to offset those costs associated 
with providing access to and maintaining its System Networks' 
infrastructure.
---------------------------------------------------------------------------

    \46\ The Exchange is not considering future costs associated 
with accommodating new 10Gb ULL connectivity and Full Service MEO 
Ports subscriptions.
---------------------------------------------------------------------------

    The Exchange estimated its total annual expense to provide 10Gb ULL 
connectivity and Full Service MEO Ports based on the following general 
expense categories: (1) External expenses, which include fees paid to 
third parties for certain products and services; (2) internal expenses 
relating to the internal costs to provide the services associated with 
10Gb ULL connectivity and Full Service MEO Ports; and (3) general 
shared expenses.\47\ The below table details each of these individual 
external and internal annual costs considered by the Exchange to be 
directly related to offering 10Gb ULL connectivity and Full Service MEO 
Ports, and not any other product or service offered by the Exchange. 
The below table also details the general shared expense allocated to 
this proposal. Each of these expenses are discussed in more detail 
further below.
---------------------------------------------------------------------------

    \47\ The percentage allocations used in this proposed rule 
change may differ from past filings from the Exchange or its 
affiliates due to adjustments to internal resource allocations, and 
different system architecture of the Exchange as compared to its 
affiliates.
---------------------------------------------------------------------------

    For 2022, the total annual expense for providing the access 
services associated with providing 10Gb ULL connectivity for MIAX and 
MIAX Pearl Options combined, and Full Service MEO Ports for MIAX Pearl 
Options only, is estimated to be $22,589,805, or $1,882,484 per month. 
The Exchange utilized its estimated 2022 revenue and costs, which 
utilize the same methodology set forth in the Exchange's previously-
issued Audited Unconsolidated Financial Statements.\48\
---------------------------------------------------------------------------

    \48\ For example, the Exchange previously noted that all third-
party expense described in its prior fee filing was contained in the 
information technology and communication costs line item under the 
section titled ``Operating Expenses Incurred Directly or Allocated 
From Parent,'' in the Exchange's 2019 Form 1 Amendment containing 
its financial statements for 2018. See Securities Exchange Act 
Release No. 87876 (December 31, 2019), 85 FR 757 (January 7, 2020) 
(SR-PEARL-2019-36). Accordingly, the third-party expense described 
in this filing is attributed to the same line item for the 
Exchange's 2022 Form 1 Amendment, which will be filed in 2023. In 
its suspension orders, the Commission also asked should the Exchange 
use cost projections or actual costs estimated for 2021 in a filing 
made in 2022, or make cost projections for 2022. The Exchange 
utilized expenses from its most recent audited financial statement 
as those numbers are more reliable than more recent unaudited 
numbers, which may be subject to change.

----------------------------------------------------------------------------------------------------------------
                                                External expenses
-----------------------------------------------------------------------------------------------------------------
                                                      Percentage of total expense amount allocated
                                      --------------------------------------------------------------------------
               Category                                                                   Full service MEO ports
                                        10Gb ULL connectivity    10Gb ULL connectivity     (MIAX pearl options
                                                (MIAX)            (MIAX pearl options)            only)
----------------------------------------------------------------------------------------------------------------
Data Center Provider.................  61%....................  61%....................  10.8%.
Fiber Connectivity Provider..........  61%....................  61%....................  5.4%.
Security Financial Transaction         73.6%..................  73.6%..................  4.4%.
 Infrastructure (``SFTI''), and Other
 Connectivity and Content Service
 Providers.
Hardware and Software Providers......  50%....................  50%....................  6.4%.
                                      --------------------------------------------------------------------------
    Total of External Expenses.......  $4,677,491. \49\
----------------------------------------------------------------------------------------------------------------

[[Page 29899]]

 
                                                Internal expenses
-----------------------------------------------------------------------------------------------------------------
                                                                Expense amount allocated
                                      --------------------------------------------------------------------------
               Category                                                                   Full service MEO ports
                                        10Gb ULL connectivity    10Gb ULL connectivity     (MIAX pearl options
                                                (MIAX)            (MIAX pearl options)            only)
----------------------------------------------------------------------------------------------------------------
Employee Compensation................  $4,108,382               $2,955,419               $2,066,488
                                        (representing 27.5% of   (representing 27.5% of   (representing 19.2% of
                                        total $14,957,861        total $10,760,135        total $10,760,135
                                        expense).                expense).                expense).
Depreciation and Amortization........  $2,724,062               $1,460,789               $161,579 (representing
                                        (representing 66% of     (representing 61.3% of   6.8% of total
                                        total $4,135,294         total $2,382,314         $2,382,314 expense).
                                        expense).                expense).
Occupancy............................  $399,859 (representing   $301,578 (representing   $62,531 (representing
                                        52% of total $769,108    52% of total $580,068    10.8% of total
                                        expense).                expense).                $580,068 expense).
                                      --------------------------------------------------------------------------
    Total of Internal Expenses.......  $14,240,687.
                                      --------------------------------------------------------------------------
Allocated Shared Expenses............  $1,982,793               $1,351,081               $337,753 (representing
                                        (representing 49% of     (representing 44% of     11% of total
                                        total $4,042,629         total $3,060,734         $3,060,734 expense).
                                        expense).                expense).
                                      --------------------------------------------------------------------------
    Total of Allocated Shared          $3,671,627.
     Expenses.
                                      --------------------------------------------------------------------------
        Total External + Internal +    $22,589,805.
         Allocated Shared Expenses.
----------------------------------------------------------------------------------------------------------------

    In its suspension orders, the Commission solicited commenters' 
views on whether the Exchange has provided sufficient detail on the 
identity and nature of services provided by third parties. The 
Commission further solicited commenters' views on whether the Exchange 
has provided sufficient detail on the elements that go into 
connectivity and port costs, including how shared costs are allocated 
and attributed to connectivity and port expenses, to permit an 
independent review and assessment of the reasonableness of purported 
cost-based fees and the corresponding profit margin thereon. In 
response, the Exchange provides additional detail regarding the 
identity and nature of services provided by third parties, the elements 
that go into connectivity and port costs, and how expenses are 
allocated. The Exchange believes this additional detail is sufficient 
to support a finding that the proposed fees are consistent with the 
Exchange Act.
---------------------------------------------------------------------------

    \49\ The Exchange does not believe it is appropriate to disclose 
the actual amount it pays to each individual third party provider as 
those fee arrangements are competitive or the Exchange is 
contractually prohibited from disclosing that number.
---------------------------------------------------------------------------

    For clarity, the Exchange took a conservative approach in 
determining the expense and the percentage of that expense to be 
allocated to providing 10Gb ULL connectivity and Full Service MEO 
Ports. The Exchange describes below the analysis conducted for each 
expense and the resources or determinations that were considered when 
determining the amount necessary to allocate to each expense. The 
Exchange notes that, without the specific external and internal expense 
items, the Exchange would not be able to provide access to its System 
Networks through 10Gb ULL connectivity and Full Service MEO Ports. Each 
of these expense items, including physical hardware, software, employee 
compensation and benefits, occupancy costs, and the depreciation and 
amortization of equipment, were identified through a line-by-line cost 
analysis and determined to be integral to providing access to its 
System Networks through 10Gb ULL connectivity and Full Service MEO 
Ports for the reasons discussed below. Only a portion of all fees paid 
to such third parties are included in the third party expenses 
described herein, and, again, no expense amount is allocated twice. For 
example, the Exchange does not allocate its entire information 
technology and communication costs to providing access to its System 
Networks through 10Gb ULL connectivity and Full Service MEO Ports 
because it determined that a portion of those costs are attributable to 
other areas of the Exchange's operations, such as transaction services, 
market data, and other forms of connectivity offered by the Exchange. 
This may result in the Exchange under allocating an expense to provide 
access to its System Networks through 10Gb ULL connectivity and Full 
Service MEO Ports, and such expenses may actually be higher than what 
the Exchange allocated as part of this proposal.\50\
---------------------------------------------------------------------------

    \50\ The Exchange notes that expenses associated with its 
affiliates, MIAX Emerald and MIAX Pearl (the equities market), are 
accounted for separately and are not included within the scope of 
this filing.
---------------------------------------------------------------------------

    Further, as part its ongoing assessment of costs and expenses, the 
Exchange recently conducted a periodic thorough review of its expenses 
and resource allocations, which resulted in revised percentage 
allocations in this filing as compared to prior versions of this 
proposed fee change that were previously withdrawn by the Exchange. The 
revised percentages are, among other things, the result of the shifting 
of internal resources in response to business objectives. Therefore, 
the percentage allocations used in this proposed rule change may differ 
from past filings from the Exchange or its affiliates due to 
adjustments to internal resource allocations, and different system 
architecture of the Exchange as compared to its affiliates.\51\
---------------------------------------------------------------------------

    \51\ See supra notes 4 and 5.
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to consider the expense and 
revenue for 10Gb ULL connectivity and Full Service MEO Ports together 
because ports and connectivity are inextricably linked components of 
the network infrastructure, and that both are necessary for a market 
participant to access the Exchange. The various types of connectivity 
and port alternatives that the Exchange offers provide a wide array of 
access alternatives necessary for a market participant to conduct its 
business using the Exchange, which is a business decision to be made by 
each

[[Page 29900]]

particular type of market participant. The different types of 
connectivity and port alternatives allows Members to conduct their 
different business strategies--some Members put an emphasis on speed, 
while others emphasize other strategies, such as redundancy and 
certainty of execution. The Exchange does not require a Member to have 
a certain framework for accessing the Exchange, but provides various 
connectivity and port alternatives for each Member's distinct business 
lines.
External Expense Allocations
    For 2022, annual expenses relating to fees paid by the Exchange to 
third parties for products and services necessary to provide 10Gb ULL 
connectivity and Full Service MEO Ports are estimated to be $4,677,491. 
This includes a portion of the fees paid to: (1) A third party data 
center provider, including for the primary, secondary, and disaster 
recovery locations of the Exchange's trading system infrastructure; (2) 
a fiber connectivity provider for network services (fiber and bandwidth 
products and services) linking the Exchange's and its affiliates' 
office locations in Princeton, New Jersey and Miami, Florida, to all 
data center locations; (3) SFTI, which supports connectivity feeds for 
the entire U.S. options industry, and various other content and 
connectivity service providers, which provide content, connectivity 
services, and infrastructure services for critical components of 
options connectivity and network services; and (4) hardware and 
software providers, which support the production environment in which 
Members and non-Members connect to the network to trade and receive 
market data.
Data Center Space and Operations Provider
    The Exchange does not own the primary data center or the secondary 
data center, but instead leases space in data centers operated by third 
parties where the Exchange houses servers, switches and related 
equipment. Data center costs include an allocation of the costs the 
Exchange incurs to provide physical connectivity in the third-party 
data centers where it maintains its equipment as well as related costs. 
The data center provider operates the data centers (primary, secondary, 
and disaster recovery) that host the Exchange's network infrastructure. 
Without the retention of a third party data center, the Exchange would 
not be able to operate its systems, provide a trading platform for 
market participants, and produce and distribute market data. The 
Exchange does not employ a separate fee to cover its data center 
expense and recoups that expense, in part, by charging for 10Gb ULL 
connectivity and Full Service MEO Ports.
    The Exchange reviewed its data center footprint and space utilized, 
including its total rack space, cage usage, number of servers, 
switches, cabling within the data center, heating and cooling of 
physical space, storage space, and monitoring and divided its data 
center expenses among providing transaction services, market data, 
connectivity (10Gb ULL and 1Gb ULL separately), and ports based on 
space utilized by each area.\52\ Based on this review, the Exchange and 
MIAX determined that 61% of the total applicable data center provider 
expense for each is applicable to providing 10Gb ULL connectivity and 
10.8% for Full Service MEO Ports for MIAX Pearl Options. The Exchange 
reviewed space utilized to house rack space, cage usage, servers, 
switches, cabling, storage space, heating and cooling of physical 
space, and monitoring, and identified that a small portion of that 
footprint is dedicated to equipment used to support 10Gb ULL 
connectivity and Full Service MEO Ports.
---------------------------------------------------------------------------

    \52\ The Investors Exchange, Inc. (``IEX'') also allocated data 
center costs to produce market data based on space utilized. See 
Securities Exchange Act Release No. 94630 (April 7, 2022), 87 FR 
21945, at page 21949 (April 13, 2022) (SR-IEX-2022-02) (``IEX Market 
Data Fee Proposal'') (noting that ``[d]ata Center costs consist of 
the fees charged by the third-party data centers used by IEX and 
represent less than 10% the Exchange's total data center costs based 
on space utilized'' (emphasis added)).
---------------------------------------------------------------------------

    The Exchange believes this allocation is reasonable because it 
represents the costs associated with housing the Exchange's equipment 
dedicated to supporting 10Gb ULL connectivity and Full Service MEO 
Ports. 10Gb ULL connectivity and Full Service MEO Ports are core means 
of access to the Exchange's network, providing several methods for 
market participants to send and receive order and trade messages, as 
well as receive market data. A large portion of the Exchange's data 
center expense is due to space utilized to provide and maintain 
connectivity and port access to the Exchange's System Networks, 
including providing cabling within the data center between market 
participants and the Exchange. The Exchange excluded from this 
allocation servers and space that are dedicated to market data. The 
Exchange also did not allocate the remainder of the data center expense 
because it pertains to space utilized by other areas of the Exchange's 
operations, such as 1Gb ULL connectivity, other types of ports, market 
data, and transaction services.
Fiber Connectivity Provider
    The Exchange engages a third-party service provider that provides 
the internet, fiber and bandwidth connections between the Exchange's 
networks, primary and secondary data center, and office locations in 
Princeton and Miami. Fiber connectivity is necessary for the Exchange 
to switch to its secondary data center in the case of an outage in its 
primary data center. Fiber connectivity also allows the Exchange's 
National Operations & Control Center (``NOCC'') and Security Operations 
Center (``SOC'') in Princeton to communicate with the Exchange's 
primary and secondary data centers. As such, all trade data, including 
the billions of messages each day, flow through this third party 
provider's infrastructure over the Exchange's network. Fiber 
connectivity is also necessary for personnel responsible for overseeing 
and providing customer service related to supporting 10Gb ULL 
connectivity and Full Service MEO Ports, receiving relevant data and 
being able to communicate between the Exchange's various locations and 
data centers. Without these services, the Exchange would not be able to 
operate and support the network and provide and maintain access 
services and System Networks associated with the 10Gb ULL connectivity 
and Full Service MEO Ports to its Members and their customers. Without 
the retention of a third party fiber connectivity provider, the 
Exchange would not be able to communicate between its data centers and 
office locations in a manner necessary to maintain and support 10Gb ULL 
connectivity and Full Service MEO Ports. Fiber connectivity is a 
necessary integral means to disseminate information, including data 
related to supporting 10Gb ULL connectivity and Full Service MEO Ports, 
from the Exchange's primary data center to other Exchange locations. It 
is necessary for Exchange employees located in various locations to be 
able to communicate and receive the necessary data to maintain and 
provide customer support related to 10Gb ULL connectivity and Full 
Service MEO Ports. The Exchange would not be able to operate and 
support the network and provide and maintain access services and System 
Networks associated with 10Gb ULL connectivity and Full Service MEO 
Ports without third party fiber connectivity. The Exchange does not 
employ a separate fee to cover its fiber connectivity expense and 
recoups that expense, in

[[Page 29901]]

part, by charging for 10Gb ULL connectivity and Full Service MEO Ports.
    The Exchange reviewed it costs to retain fiber connectivity from a 
third party, including the ongoing costs to support fiber connectivity, 
ensuring adequate bandwidth and infrastructure maintenance to support 
exchange operations, and ongoing network monitoring and maintenance. 
Based on this review, the Exchange and MIAX determined that 61% of the 
total fiber connectivity expense for each was applicable to providing 
and maintaining access services and System Networks associated with 
10Gb ULL connectivity and 5.4% for Full Service MEO Ports for MIAX 
Pearl Options. The Exchange reviewed its total fiber connectivity 
expense and allocated it among transaction services, connectivity, 
ports, market data, and administrative operations, based on usage. The 
Exchange then further divided up its fiber connectivity costs related 
to connectivity and ports and identified the portion that is 
attributable to supporting 10Gb ULL connectivity and Full Service MEO 
Ports, also based on usage. This allocation is, therefore, based on the 
amount of bandwidth and fiber connectivity the Exchange calculated is 
utilized to support exchange operations, and ongoing network monitoring 
and maintenance that are necessary to provide 10Gb ULL connectivity and 
Full Service MEO Ports. The Exchange believes this allocation is 
reasonable because 10Gb ULL connectivity and Full Service MEO Ports are 
core means of access to the Exchange's network, providing several 
methods for market participants to send and receive order and trade 
messages, as well as receive market data. A large portion of the 
Exchange's fiber connectivity expense is due to providing and 
maintaining connectivity between the Exchange's System Networks, data 
centers, and office locations and is core to the daily operation of the 
Exchange. The Exchange also excluded from this allocation fiber 
connectivity usage related to other business lines, such as transaction 
services, market data, and other forms of connectivity offered by the 
Exchange, or unrelated administrative services. The Exchange also did 
not allocate the remainder of this expense because it pertains to other 
areas of the Exchange's operations and does not directly relate to 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Full Service MEO Ports. The 
Exchange believes this allocation is reasonable because it represents 
the Exchange's cost to providing and maintaining access services and 
System Networks associated with 10Gb ULL connectivity and Full Service 
MEO Ports.
Connectivity and Content Services Provided by SFTI and Other Providers
    The Exchange relies on SFTI and various other connectivity and 
content service providers for connectivity and data feeds for the 
entire U.S. options industry, as well as content, connectivity, and 
infrastructure services for critical components of the network that are 
necessary to provide and maintain its System Networks and access to its 
System Networks via 10Gb ULL connectivity and Full Service MEO Ports. 
Specifically, the Exchange utilizes SFTI and other content service 
provider to connect to other national securities exchanges, the Options 
Price Reporting Authority (``OPRA''), and to receive market data from 
other exchanges and market data providers. SFTI is operated by the 
Intercontinental Exchange, the parent company of five registered 
exchanges, and has become integral to the U.S. markets. The Exchange 
understands SFTI provides services to most, if not all, of the other 
U.S. exchanges and other market participants. Connectivity and market 
data provided by SFTI and other service is critical to the Exchanges 
daily operations and performance of its System Networks to which market 
participants connect to via 10Gb ULL connectivity and Full Service MEO 
Ports. Without services from SFTI and various other service providers, 
the Exchange would not be able to connect to other national securities 
exchanges, market data providers, or OPRA and, therefore, would not be 
able to operate and support its System Networks. The Exchange does not 
employ a separate fee to cover its SFTI and content service provider 
expense and recoups that expense, in part, by charging for 10Gb ULL 
connectivity and Full Service MEO Ports.
    The Exchange reviewed it costs to retain SFTI and other content 
service providers, including network monitoring and maintenance, 
remediation of connectivity related issues, and ongoing administrative 
activities related to connectivity management. Based on this review, 
the Exchange and MIAX determined that 73.6% of the total applicable 
SFTI and other service provider expense for each is allocated to 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and 4.4% for Full Service MEO 
Ports for MIAX Pearl Options. The Exchange reviewed its total SFTI and 
other service provider expense and allocated it among transaction 
services, connectivity, ports, other market data products, and 
administrative operations, based on usage. The Exchange then further 
divided up its SFTI and other service provider costs related to 
connectivity and ports and identified the portion that is attributable 
to supporting 10Gb ULL connectivity and Full Service MEO Ports, also 
based on usage. This allocation is, therefore, based on the amount of 
SFTI and other service provider resources utilized to support exchange 
operations, and ongoing network monitoring and maintenance that are 
necessary to provide 10Gb ULL connectivity and Full Service MEO Ports. 
SFTI and other content service providers are key vendors and necessary 
components in providing access to the Exchange. The primary service 
SFTI provides for the Exchange is connectivity to other national 
securities exchanges and their disaster recovery facilities and, 
therefore, a vast portion of this expense is allocated to providing 
access to the System Networks via 10Gb ULL connectivity and Full 
Service MEO Ports. Connectivity via SFTI is necessary for purposes of 
order routing and accessing disaster recovery facilities in the case of 
a system outage. Engaging SFTI and other like vendors provides 
purchasers of 10Gb ULL connectivity to other national securities 
exchanges for purposes of order routing and disaster recovery. The 
Exchange did not allocate a portion of this expense that relates to the 
receipt of market data from other national securities exchanges and 
OPRA. The Exchange also did not allocate the remainder of this expense 
because it pertains to other areas of the Exchange's operations and 
does not directly relate to providing and maintaining the System 
Networks or access to its System Networks via 10Gb ULL connectivity or 
Full Service MEO Ports, such as transaction services, market data, 
other forms of connectivity offered by the Exchange, or unrelated 
administrative services. The Exchange believes this allocation is 
reasonable because it represents the Exchange's cost to provide and 
maintain its System Networks and access to its System Networks via 10Gb 
ULL connectivity and Full Service MEO Ports, and not any other service, 
as supported by its cost review.
Hardware and Software Providers
    The Exchange relies on dozens of third-party hardware and software 
providers for equipment necessary to

[[Page 29902]]

operate its System Networks. This includes either the purchase or 
licensing of physical equipment, such as servers, switches, cabling, 
and devices needed by Exchange personnel to monitor servers and the 
health 10Gb ULL connectivity and Full Service MEO Ports. This consists 
of real-time monitoring of system performance, integrity, and latency 
of 10Gb ULL connectivity and Full Service MEO Ports. It also includes 
the Exchange purchasing or licensing software necessary for security 
monitoring, data analysis and Exchange operations. Hardware and 
software providers are necessary to maintain its System Networks and 
provide access to its System Networks via a 10Gb ULL connectivity and 
Full Service MEO Ports. Hardware and software equipment and licenses 
for that equipment are also necessary to operate and monitor physical 
assets necessary to offer physical connectivity to the Exchange. 
Hardware and software equipment and licenses are key to the operation 
of the Exchange and, without them, the Exchange would not be able to 
operate and support its System Networks and provide access to its 
Members and their customers. The Exchange does not employ a separate 
fee to cover its hardware and software expense and recoups that 
expense, in part, by charging for 10Gb ULL connectivity and Full 
Service MEO Ports.
    The Exchange reviewed its hardware and software related costs, 
including software patch management, vulnerability management, 
administrative activities related to equipment and software management, 
professional services for selection, installation and configuration of 
equipment and software supporting exchange operations. The Exchange 
then divided those costs among transaction services, ports, 
connectivity, market data, and other Exchange operations based on 
whether all of that hardware or software is based on usage. The 
Exchange then reviewed the amount allocated to connectivity and ports 
generally and what portion of that hardware and software equipment or 
license is used to support 10Gb ULL connectivity and Full Service MEO 
Ports specifically. Based on this review, the Exchange and MIAX 
determined that 50% of the total applicable hardware and software 
expense for each is allocated to providing and maintaining access 
services and System Networks associated with 10Gb ULL connectivity and 
6.4% for Full Service MEO Ports for MIAX Pearl Options. These 
percentages reflect the amount of hardware and software equipment and 
licenses dedicated to support 10Gb ULL connectivity and Full Service 
MEO Ports.\53\ Hardware and software equipment and licenses are key to 
the operation of the Exchange and its System Networks. Without them, 
the Exchange would not be able to provide and maintain access services 
and System Networks associated with 10Gb ULL connectivity and Full 
Service MEO Ports. The Exchange only allocated the portion of this 
expense to the hardware and software that is related to 10Gb ULL 
connectivity and Full Service MEO Ports, such as operating servers and 
equipment necessary to provide and maintain access services and System 
Networks associated with 10Gb ULL connectivity and Full Service MEO 
Ports. The Exchange, therefore, did not allocate portions of its 
hardware and software expense that related to other areas of the 
Exchange's business, such as hardware and software used for market data 
or unrelated administrative services. The Exchange also did not 
allocate the remainder of this expense because it pertains to other 
areas of the Exchange's operations, such as transaction services, 
market data, and other forms of connectivity offered by the Exchange, 
and is not directly relate to providing 10Gb ULL connectivity or Full 
Service MEO Ports. The Exchange believes this allocation is reasonable 
because it represents the Exchange's cost to provide and maintain 
access services and System Networks associated with 10Gb ULL 
connectivity and Full Service MEO Ports, and not any other service, as 
supported by its cost review.
---------------------------------------------------------------------------

    \53\ The Exchange notes that IEX used a similar methodology to 
allocate hardware costs to market data. See IEX Market Data Fee 
Proposal, supra note 52 at page 21950 (noting that ``IEX only 
included hardware specifically dedicated to the market data feeds in 
calculating the costs of providing market data'').
---------------------------------------------------------------------------

Internal Expense Allocations
    For 2022, total combined internal annual expense relating to the 
Exchange and MIAX to provide and maintain their System Networks and 
access to their System Networks for 10Gb ULL connectivity, and for 
access via Full Service MEO Ports for MIAX Pearl Options, is estimated 
to be $14,240,687. This includes costs associated with: (1) Employee 
compensation and benefits for full-time employees that support the 
System Networks and access to System Networks via 10Gb ULL connectivity 
and Full Service MEO Ports, including staff in network operations, 
trading operations, development, system operations, business, as well 
as staff in general corporate departments (such as legal, regulatory, 
and finance) that support those employees and functions as well as 
important system upgrades; (2) depreciation and amortization of 
hardware and software used to provide and maintain access services and 
System Networks associated with the 10Gb ULL connectivity and Full 
Service MEO Ports, including equipment, servers, cabling, purchased 
software and internally developed software used in the production 
environment to support the network for trading; and (3) occupancy costs 
for leased office space for staff that provide and maintain the System 
Networks and access to System Networks via 10Gb ULL connectivity and 
Full Service MEO Ports.
Employee Compensation and Benefits
    Human personnel are key to exchange operations and supporting the 
Exchange's ongoing provision of 10Gb ULL connectivity and Full Service 
MEO Ports. The Exchange reviewed its employee compensation and benefits 
expense and the portion of that expense allocated to providing 10Gb ULL 
connectivity and Full Service MEO Ports. As part of this review, the 
Exchange considered employees whose functions include providing and 
maintaining access services and System Networks associated with 10Gb 
ULL connectivity and Full Service MEO Ports and used a blended rate of 
compensation reflecting salary, stock and bonus compensation, bonuses, 
benefits, payroll taxes, and 401K matching contributions.\54\
---------------------------------------------------------------------------

    \54\ For purposes of this allocation, the Exchange did not 
consider expenses related to office space, supplies, or equipment 
use by employees who support 10Gb ULL connectivity and Full Service 
MEO Ports.
---------------------------------------------------------------------------

    In its suspension orders, the Commission asked the Exchange provide 
more detail about the methodology the Exchange used to determine how 
much of an employee's time is devoted to connectivity and port related 
activities. In considering the cost of personnel, the Exchange 
generally considered the time spent on various access service projects 
and initiatives through project management tracking tools and analysis 
of employee resource allocations, among its Technology Team in the 
following areas: Technical Operations, Software Engineering, Quality 
Assurance, and Infrastructure. The Exchange did not consider non-
Technology Teams such as Market Operations, Project Management,

[[Page 29903]]

Regulatory, Legal, and Accounting/Finance.\55\
---------------------------------------------------------------------------

    \55\ The Exchange notes that IEX used a similar methodology to 
allocate employee compensation related costs to market data. See IEX 
Market Data Fee Proposal, supra note 52 at page 29150 (noting that 
``[f]or personnel costs, IEX calculated an allocation of employee 
time for employees whose functions include providing and maintaining 
IEX Data and/or the proprietary market data feeds used to transmit 
IEX Data, and used a blended rate of compensation reflecting salary, 
stock and bonus compensation, benefits, payroll taxes, and 401(k) 
matching contributions'').
---------------------------------------------------------------------------

    Based on this review, the Exchange and MIAX determined to allocate 
a combined $9,130,289 in combined employee compensation and benefits 
expense to provide and maintain access services and System Networks 
associated with 10Gb ULL connectivity and Full Service MEO Ports. This 
is only a portion of the $25,717,996 total projected combined expense 
for employee compensation and benefits for MIAX and MIAX Pearl Options. 
Of that total, the Exchange and MIAX allocated approximately 27.5% of 
the total applicable employee compensation and benefits expense for 
each to providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and 19.2% for Full Service MEO 
Ports for MIAX Pearl Options. The Exchange and MIAX determined the cost 
allocations for employees who perform work in support of providing and 
maintaining access services and System Networks associated with 10Gb 
ULL connectivity and Full Service MEO Ports to arrive at full time 
equivalents (``FTE'') of 12.0 FTEs for MIAX and 8.9 FTEs for MIAX Pearl 
Options across all the identified personnel related to 10Gb ULL 
connectivity, and 6.3 FTEs across all the identified personnel related 
to Full Service MEO Ports for MIAX Pearl Options. The Exchange then 
multiplied the FTE times a blended compensation rate for all relevant 
Exchange personnel to determine the personnel costs associated with 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Full Service MEO Ports. 
Senior staff also reviewed these time allocations with department heads 
and team leaders to determine whether those allocations were 
appropriate. These employees are critical to the Exchange to providing 
and maintaining access services and System Networks associated with 
10Gb ULL connectivity and Full Service MEO Ports. The Exchange 
determined the above allocation based on the personnel whose work 
focused on functions necessary to providing and maintaining access 
services and System Networks associated with 10Gb ULL connectivity and 
Full Service MEO Ports. The Exchange does not charge a separate fee 
regarding employees who support 10Gb ULL connectivity and Full Service 
MEO Ports and the Exchange seeks to recoup those expenses, in part, by 
charging for 10Gb ULL connectivity and Full Service MEO Ports.
    The Exchange believes it is appropriate to include incentive 
compensation in the blended personnel compensation rate on the same 
basis as other personnel costs for in-scope employees because incentive 
compensation is a part of the total personnel costs associated with the 
Exchange's provision of 10Gb ULL connectivity and Full Service MEO 
Ports. Moreover, the Exchange notes that it has taken a conservative 
approach in determining which employees to include in its cost 
analysis, in terms of function and percent allocation, so that the 
included personnel costs are directly and closely tied to the costs of 
providing 10Gb ULL connectivity and Full Service MEO Ports. The FTE 
allocations represent just 36% of the Exchange's and MIAX's overall 
personnel costs. Consistent with the Exchange's conservative 
methodology to limit costs allocated to 10Gb ULL connectivity and Full 
Service MEO Ports, this approach includes only a de minimis personnel 
cost allocation for senior level executives and no allocation for 
members of the Exchange's board of directors. Accordingly, the Exchange 
believes that the allocated personnel expenses included are 
appropriately attributable to 10Gb ULL connectivity and Full Service 
MEO Ports.
Depreciation and Amortization
    A key expense incurred by the Exchange relates to the depreciation 
and amortization of equipment that the Exchange procured to provide and 
maintain access services and System Networks associated with 10Gb ULL 
connectivity and Full Service MEO Ports. The Exchange reviewed all of 
its physical assets and software, owned and leased, and determined 
whether each asset is related to providing and maintaining the 10Gb ULL 
connectivity and Full Service MEO Ports, and added up the depreciation 
of those assets. All physical assets and software, which includes 
assets used for testing and monitoring of Exchange infrastructure, were 
valued at cost and depreciated or leased over periods ranging from 
three to five years. Based on the Exchange's experience, this 
depreciation period equals the typical life expectancy of those assets. 
In determining the amount of depreciation and amortization to apply to 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Full Service MEO Ports, the 
Exchange considered the depreciation of hardware and software that are 
key to the operation of the Exchange and its provision of 10Gb ULL 
connectivity and Full Service MEO Ports. This includes servers, 
computers, laptops, monitors, information security appliances and 
storage, and network switching infrastructure equipment, including 
switches and taps that were previously purchased to provide and 
maintain access services and System Networks associated with 10Gb ULL 
connectivity and Full Service MEO Ports. Without them, market 
participants would not be able to access the Exchange. The Exchange 
seeks to recoup a portion of its depreciation expense by charging for 
10Gb ULL connectivity and Full Service MEO Ports.
    Based on this review, the Exchange and MIAX determined to allocate 
a combined $4,346,430 in combined depreciation and amortization expense 
to provide and maintain access services and System Networks associated 
with 10Gb ULL connectivity and Full Service MEO Ports. This is only a 
portion of the $6,517,608 total projected combined expense for 
depreciation and amortization for MIAX and MIAX Pearl Options. This 
allocation represents approximately 66% for MIAX and 61.3% for MIAX 
Pearl Options of the total applicable depreciation expenses to 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and 6.8% for Full Service MEO 
Ports for MIAX Pearl Options. For purposes of the allocation of these 
costs to 10Gb ULL connectivity and Full Service MEO Ports, the Exchange 
allocates the annual depreciation (i.e., one-third or one-fifth of the 
initial asset value based on the typical life expectancy of those 
assets). One-third or one-fifth of the cost of each asset is included 
in the annual costs allocated to 10Gb ULL connectivity and Full Service 
MEO Ports. The Exchange only included assets specifically dedicated to 
10Gb ULL connectivity and Full Service MEO Ports in calculating the 
costs of providing 10Gb ULL connectivity and Full Service MEO Ports. 
This means that physical assets used for such as transaction services, 
market data, other forms of connectivity offered by the Exchange, or 
other Exchange operations were excluded

[[Page 29904]]

from the calculation.\56\ The Exchange, therefore, did not allocate 
portions of depreciation expense that relates to other areas of the 
Exchange's business, such as the depreciation of hardware and software 
used for market data, unrelated administrative services, or other 
connectivity or ports offered by the Exchange. All of the expenses 
outlined in this proposed fee change refer to the operating expenses of 
the Exchange. In the suspension orders, the Commission asked for 
additional detail or explanation to ensure that no expense amount is 
allocated twice. The Exchange did not included any future capital 
expenditures within these costs ensuring that no cost is counted twice. 
Depreciation and amortization represent the expense of previously 
purchased hardware and internally developed software spread over the 
useful life of the assets. Due to the fact that the Exchange has only 
included operating expense and historical purchases, there is no double 
counting of expenses in the Exchange's cost estimates.
---------------------------------------------------------------------------

    \56\ The Exchange notes that IEX used a similar methodology to 
allocate hardware costs to market data. See IEX Market Data Fee 
Proposal at note 54, supra note 52 at page 21950 (noting that 
``[h]ardware is depreciated on a straight-line three-year period, 
which in IEX's experience, is equal to the typical life expectancy 
of those assets. As noted above, one-third of the cost of each 
hardware asset is included in the annual costs allocated to market 
data. IEX only included hardware specifically dedicated to the 
market data feeds in calculating the costs of providing market data. 
This means that physical assets used for both order entry and market 
data were excluded from the calculation'').
---------------------------------------------------------------------------

Occupancy
    The Exchange rents and maintains multiple physical locations to 
house staff and equipment necessary to support access to System 
Networks via 10Gb ULL connectivity and Full Service MEO Ports. The 
Exchange's occupancy expense is not limited to the housing of personnel 
and includes locations used to store equipment necessary for Exchange 
operations. In determining the amount of its occupancy related expense, 
the Exchange considered actual physical space used to house employees 
whose functions include providing and maintaining access services and 
System Networks associated with 10Gb ULL connectivity and Full Service 
MEO Ports. Similarly, the Exchange also considered the actual physical 
space used to house hardware and other equipment necessary to provide 
and maintain the 10Gb ULL connectivity and Full Service MEO Ports. The 
Exchange maintains staff that support 10Gb ULL connectivity and Full 
Service MEO Ports in various locations and needs to provide workplaces 
for that staff as well as space to house hardware and equipment 
necessary for those employees to perform those functions.\57\ This 
equipment includes computers, servers, and accessories necessary to 
support the access to the System Networks via 10Gb ULL connectivity and 
Full Service MEO Ports. Based on this review, the Exchange and MIAX 
determined to allocate a combined $763,968 in occupancy expense to 
providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Full Service MEO Ports for 
MIAX Pearl Options. According to the Exchange's calculations, MIAX and 
MIAX Pearl Options each allocated approximately 52% of their total 
applicable occupancy expense to providing and maintaining access 
services and System Networks associated with 10Gb ULL connectivity and 
10.8% for Full Service MEO Ports for MIAX Pearl Options. This is only a 
portion of the $1,349,176 total projected combined expense for 
occupancy for MIAX and MIAX Pearl Options. The Exchange believes this 
allocation is reasonable because it represents the Exchange's cost to 
rent and maintain a physical location for the Exchange's staff who 
operate and support 10Gb ULL connectivity and Full Service MEO Ports. 
The Exchange considered the rent paid for the Exchange's Princeton and 
Miami offices, as well as various related costs, such as physical 
security, property management fees, property taxes, and utilities at 
each of those locations. The Exchange did not include occupancy 
expenses related to housing employees and equipment related to other 
Exchange operations, such as transaction and administrative services.
---------------------------------------------------------------------------

    \57\ For the avoidance of doubt, the Exchange did not include 
within this cost any portion of its costs related to third party 
fiber connectivity used by Exchange staff in different office 
locations to communicate as part of their role in supporting 10Gb 
ULL connectivity and Full Service MEO Ports.
---------------------------------------------------------------------------

Allocated Shared Expense
    Finally, a limited portion of general shared expenses was allocated 
to providing and maintaining access services and System Networks 
associated with 10Gb ULL connectivity and Full Service MEO Ports as 
without these general shared costs, the Exchange would not be able to 
operate in the manner that it does. The costs included in general 
shared expenses include recruiting and training, marketing and 
advertising costs, professional fees for legal, tax and accounting 
services, and telecommunications costs. For 2022, the Exchange's and 
MIAX Pearl Option's combined general shared expense allocated to 10Gb 
ULL connectivity and Full Service MEO Ports for MIAX Pearl Options is 
estimated to be $3,671,627. This represents approximately 49% for MIAX 
and 44% for MIAX Pearl Options for 10Gb ULL connectivity, and 11% for 
MIAX Pearl Options for Full Service MEO Ports, of the $7,103,363 total 
projected combined general shared expense for MIAX and MIAX Pearl 
Options. The Exchange used the weighted average of the above 
allocations to determine the amount of general shared expenses to 
allocate to the Exchange. Next, based on additional management and 
expense analysis, these fees are allocated to the proposal.
Revenue and Estimated Profit Margin
    The Exchange only has four primary sources of revenue and cost 
recovery mechanisms to fund all of its operations: Transaction fees, 
access fees, regulatory fees, and market data fees. Accordingly, the 
Exchange must cover all of its expenses from these four primary sources 
of revenue and cost recovery mechanisms.
    To determine the Exchange's and MIAX's estimated revenue associated 
with 10Gb ULL connectivity and Full Service MEO Ports for MIAX Pearl 
Options, the Exchange and MIAX analyzed the number of subscribers 
currently utilizing 10Gb ULL connectivity (for both on the shared 
network) and Full Service MEO Ports (for MIAX Pearl Options) and used a 
recent monthly billing cycle representative of current monthly revenue. 
The Exchange also provided its baseline by analyzing March 2022, the 
monthly billing cycle prior to the proposed fees, and compared this to 
its expenses for that month. As discussed below, the Exchange does not 
believe it is appropriate to factor into its analysis future revenue 
growth or decline into its estimates for purposes of these 
calculations, given the uncertainty of such estimates due to the 
continually changing access needs of market participants and potential 
changes in internal and external expenses, as well as because the 
Exchange is committing to review this cost analysis for these fees on 
an annual basis going forward.
    For March 2022, prior to the proposed fees, the Exchange and MIAX 
had a combined 173 10Gb ULL connections and MIAX Pearl Options had 15 
Full Service MEO Ports (Bulk) and 4 Full Service MEO Ports (Single) 
purchased, for which the Exchange and MIAX charged a total of 
$1,787,712 (including charges for connections that were dropped or 
added mid-month, resulting in pro-rated charges). This resulted in a 
loss of $94,772 for that month (a margin

[[Page 29905]]

of -5.3%). For April 2022, the Exchange and MIAX anticipate that a 
combined 174 10Gb ULL connections and, for MIAX Pearl Options, 15 Full 
Service MEO Ports (Bulk) and 4 Full Service MEO Ports (Single) will be 
charged for (as of the date of this filing).\58\ Assuming the Exchange 
and MIAX charge the proposed monthly rate of $12,000 per 10Gb ULL 
connection and the proposed rates for Full Service MEO Ports for MIAX 
Pearl Options, the Exchange and MIAX would generate revenue of 
$2,213,500 for April 2022 (not including potential pro-rated connection 
charges for mid-month connections) for 10Gb ULL connectivity for both 
exchanges and Full Service MEO Ports for MIAX Pearl Options combined. 
This would result in a profit of $331,016 ($2,213,500 minus $1,882,484) 
for that month (a 15% profit margin). As discussed above, the Exchange 
believes it is reasonable to consider the expense and revenue for 10Gb 
ULL connectivity and Full Service MEO Ports together because ports and 
connectivity are inextricably linked components of the network 
infrastructure, and that both are necessary for a market participant to 
access the Exchange.
---------------------------------------------------------------------------

    \58\ The Exchange notes that the number of subscribers of 10Gb 
ULL connections and Full Service MEO Ports may change over time. For 
example, from June 2021 to April 2022, MIAX and MIAX Pearl Options 
had the following number of combined subscribers of 10Gb ULL 
connectivity per month: June (152); July (156); August (154); 
September (154); October (154); November (152); December (159); 
January (174); February (171); March (173); April (174). From June 
2021 to April 2022, MIAX had the following number of Full Service 
MEO Ports utilized per month (Bulk and Single combined): June (20); 
July (20); August (19); September (19); October (19); November (19); 
December (19); January (19); February (19); March (19); April (19).
---------------------------------------------------------------------------

    The Exchange believes that conducting the above analysis on a per 
month basis is reasonable as the revenue generated from access services 
subject to the proposed fee generally remains static from month to 
month. The Exchange also conducted the above analysis on a per month 
basis to comply with the Commission Staff's Guidance, which requires a 
baseline analysis to assist in determining whether the proposal 
generates a supra-competitive profit. The Exchange cautions that this 
profit margin may also fluctuate from month to month based on the 
uncertainty of predicting how many connections and ports may be 
purchased from month to month as Members and non-Members are free to 
add and drop connections and ports at any time based on their own 
business decisions.
    The Exchange believes the proposed profit margin is reasonable and 
will not result in a ``supra-competitive'' profit. The Guidance defines 
``supra-competitive profit'' as ``profits that exceed the profits that 
can be obtained in a competitive market.'' \59\ Until recently, the 
Exchange has operated at a cumulative net annual loss since it launched 
operations in 2017.\60\ The Exchange has operated at a net loss due to 
a number of factors, one of which is choosing to forgo revenue by 
offering certain products, such as connectivity, at lower rates than 
other options exchanges to attract order flow and encourage market 
participants to experience the high determinism, low latency, and 
resiliency of the Exchange's trading systems. The Exchange should not 
now be penalized for seeking to raise it fees to near market rates 
after offering such products as discounted prices. Therefore, the 
Exchange believes the proposed fees are reasonable because they are 
based on both relative costs to the Exchange to provide 10Gb ULL 
connectivity and Full Service MEO Ports, the extent to which the 
product drives the Exchange's overall costs and the relative value of 
the product, as well as the Exchange's objective to make access to its 
Systems broadly available to market participants. The Exchange also 
believes the proposed fees are reasonable because they are designed to 
generate annual revenue to recoup the Exchange's costs of providing 
10Gb ULL connectivity and Full Service MEO Ports.
---------------------------------------------------------------------------

    \59\ See supra note 39.
    \60\ The Exchange has incurred a cumulative loss of $86 million 
since its inception in 2017 to 2020. See Exchange's Form 1/A, 
Application for Registration or Exemption from Registration as a 
National Securities Exchange, filed July 28, 2021, available at 
https://www.sec.gov/Archives/edgar/vprr/2100/21000461.pdf.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimate is based on 
projections and will only be realized to the extent such revenue 
actually produces the revenue estimated. As a competitor in the hyper-
competitive exchange environment, and an exchange focused on driving 
competition, the Exchange does not yet know whether such expectations 
will be realized. For instance, in order to generate the revenue 
expected from 10Gb ULL connectivity and Full Service MEO Ports, the 
Exchange will have to be successful in retaining existing clients that 
wish to utilize 10Gb ULL connectivity and Full Service MEO Ports or 
obtaining new clients that will purchase such access. To the extent the 
Exchange is successful in encouraging new clients to utilize 10Gb ULL 
connectivity and Full Service MEO Ports, the Exchange does not believe 
it should be penalized for such success. The Exchange, like other 
exchanges, is, after all, a for-profit business. While the Exchange 
believes in transparency around costs and potential margins, the 
Exchange does not believe that these estimates should form the sole 
basis of whether or not a proposed fee is reasonable or can be adopted. 
Instead, the Exchange believes that the information should be used 
solely to confirm that an Exchange is not earning supra-competitive 
profits, and the Exchange believes this proposal demonstrates this 
fact.
    Further, the proposed profit margin reflects the Exchange's efforts 
to control its costs. A profit margin should not be judged alone based 
on its size, but whether the ultimate fee reflects the value of the 
services provided and is in line with other exchanges. A profit margin 
on one exchange should not be deemed excessive where that exchange has 
been successful in controlling costs, but not excessive where an 
exchange is charging the same fee but has a lower profit margin due to 
higher costs.
    The expected profit margin is reasonable because the Exchange 
offers a premium System Network, System Networks connectivity, and a 
highly deterministic trading environment. The Exchange is recognized as 
a leader in network monitoring, determinism, risk protections, and 
network stability. For example, the Exchange experiences approximately 
a 95% determinism rate, system throughput of approximately 10.8 million 
quotes per second and average round trip latency rate of approximately 
30.76 microseconds for a single quote. The Exchange provides extreme 
performance and radical scalability designed to match the unique needs 
of trading differing asset class/market model combinations. Exchange 
systems offer two customer interfaces, FIX gateway for orders, and 
ultra-low latency interfaces and data feeds with best-in-class wire 
order determinism. The Exchange also offers automated continuous 
testing to ensure high reliability, advanced monitoring and systems 
security, and employs a software architecture that results in 
minimizing the demands on power, space, and cooling while allowing for 
rapid scalability, resiliency and fault isolation. The Exchange also 
provides latency equalized cross-connects in the primary data center 
ensures fair and cost efficient access to the Exchange's Systems. The 
Exchange, therefore, believes the anticipated profit margin is 
reasonable because it reflects the Exchange's cost controls and the 
quality of the Exchanges systems.

[[Page 29906]]

    Finally, the Exchange believes that the proposed fees are 
reasonable because they will not impose onerous audit requirements on 
subscribers, because there will be no need to substantiate the number 
of users of 10Gb ULL connectivity and Full Service MEO Ports or the 
manner in which it is being used.
Annual Review of Fees
    In its suspension orders, the Commission asks whether exchanges 
should periodically reevaluate fees on an ongoing and periodic basis in 
order to assure that actual revenue aligns with a reasonable cost-plus 
model. As described above and as part of this proposed rule change, the 
Exchange is committing to conduct a one year review of the fees that 
are cost justified as part of this proposed rule change after the date 
of this proposal, and annually thereafter. The Exchange expects that it 
may propose to adjust fees at that time, either to increase fees in the 
event that revenues fail to reasonably cover costs at the estimated 
margin set forth below [sic], or to decrease fees in the event that 
revenue materially exceeds the Exchange's current projections. In the 
event that the Exchange determines to propose a fee change, updated 
cost estimates will be included in a rule filing proposing the fee 
change. The Exchange believes this approach will further increase 
transparency around market data costs and help to ensure that Exchange 
fees continue to be reasonably related to costs.
The Proposed Fees Are Reasonable When Compared to the Fees of Other 
Options Exchanges With Similar Market Share
    The Exchange does not have visibility into other options exchanges' 
costs to provide connectivity and port access or their fee markup over 
those costs, and therefore cannot use other exchange's connectivity and 
port fees as benchmarks to determine a reasonable markup over the costs 
of providing such access. Nevertheless, the Exchange believes the other 
exchanges' 10Gb connectivity and port fees are useful examples of 
alternative approaches to providing and charging for access 
notwithstanding that the competing exchanges may have different system 
architectures that may result in different cost structures for the 
provision of connectivity and ports. To that end, the Exchange believes 
the proposed fees are reasonable because the proposed fees are similar 
to or less than fees charged for similar connectivity and port access 
provided by other options exchanges with comparable market shares.
    As described in the table below, the Exchange's proposed fees 
remain similar to or less than fees charged for similar connectivity 
and port access provided by other options exchanges with similar market 
share. In the each of the below cases, the Exchange's proposed fees are 
still significantly lower than that of competing options exchanges with 
similar market share. Each of the market data rates in place at 
competing options exchanges were filed with the Commission for 
immediate effectiveness and remain in place today.

------------------------------------------------------------------------
                                       Type of        Monthly fee (per
             Exchange               connection or     connection or per
                                         port               port)
------------------------------------------------------------------------
MIAX Pearl (as proposed) (equity   10Gb ULL         $12,000.
 options market share of 5.67% as   connection.     Tier 1: $5,000 (or
 of April 29, 2022 for the month   Full Service      $208.33 per
 of April) \61\.                    MEO Port         Matching Engine).
                                    (Bulk).         Tier 2: $7,500 (or
                                   ...............   $312.50 per
                                   ...............   Matching Engine).
                                   Full Service     Tier 3: $10,000 (or
                                    MEO Port         $416.66 per
                                    (Single).        Matching Engine).
                                                    Tier 1: $2,500 (or
                                                     $104.16 per
                                                     Matching Engine).
                                                    Tier 2: $3,500 (or
                                                     $145.83 per
                                                     Matching Engine).
                                                    Tier 3: $4,500 (or
                                                     $187.50 per
                                                     Matching Engine).
NASDAQ \62\ (equity options        10Gb Ultra       $15,000.
 market share of 8.47% as of        fiber           1-5 ports. $1,500.
 April 29, 2022 for the month of    connection.     6-20 ports. $1,000.
 April) \63\.                      SQF Port.......  21 or more ports.
                                                     $500.
ISE \64\ (equity options market    10Gb Ultra       $15,000.
 share of 5.48% as of April 29,     fiber           $1,100.
 2022 for the month of April)       connection.
 \65\.                             SQF Port.......
NYSE American \66\ (equity         10Gb LX LCN      $22,000.
 options market share of 8.13% as   connection.     Ports 1-40. $450.
 of April 29, 2022 for the month   Order/Quote      Ports 41 and
 of April) \67\.                    Entry Port.      greater. $150.
GEMX \68\ (equity options market   10Gb Ultra       $15,000.
 share of 2.36% as of April 29,     connection.     $1,250
 2022 for the month of April)      SQF Port.......
 \69\.
------------------------------------------------------------------------

The Proposed Pricing Is Not Unfairly Discriminatory and Provides for 
the Equitable Allocation of Fees, Dues, and Other Charges
---------------------------------------------------------------------------

    \61\ See supra note 23.
    \62\ See supra note 24.
    \63\ See supra note 23.
    \64\ See supra note 26.
    \65\ See supra note 23.
    \66\ See supra note 28.
    \67\ See supra note 23.
    \68\ See supra note 30.
    \69\ See supra note 23.
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees are reasonable, fair, 
equitable, and not unfairly discriminatory because they are designed to 
align fees with services provided and will apply equally to all 
subscribers.
10Gb ULL Connectivity
    The Exchange believes that the proposed fees are reasonable, 
equitably allocated and not unfairly discriminatory because, for one 
10Gb ULL connection, the Exchange provides each Member or non-Member 
access to all twelve (12) matching engines on MIAX Pearl and a vast 
majority choose to connect to all twelve (12) matching engines. The 
Exchange believes that

[[Page 29907]]

other exchanges require firms to connect to multiple matching 
engines.\70\
---------------------------------------------------------------------------

    \70\ See Specialized Quote Interface Specification, Nasdaq PHLX, 
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2, 
Architecture (revised August 16, 2019), available at http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is 
unclear whether the NASDAQ exchanges include connectivity to each 
matching engine for the single fee or charge per connection, per 
matching engine. See also NYSE Technology FAQ and Best Practices: 
Options, Section 5.1 (How many matching engines are used by each 
exchange?) (September 2020). The Exchange notes that NYSE provides a 
link to an Excel file detailing the number of matching engines per 
options exchange, with Arca and Amex having 19 and 17 matching 
engines, respectively.
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity and port 
alternatives, as the users of 10Gb ULL connections consume the more 
bandwidth and network resources than users of 1Gb ULL connection. 
Specifically, the Exchange notes that 10Gb ULL connection users account 
for approximately more than 99% of message traffic over the network, 
while the users of the 1Gb ULL connections account for approximately 
less than 1% of message traffic over the network. In the Exchange's 
experience, users of the 1Gb connections do not have a business need 
for the high performance network solutions required by 10Gb ULL users. 
The Exchange's high performance network solutions and supporting 
infrastructure (including employee support), provides unparalleled 
system throughput with the network ability to support access to several 
distinct options markets and the capacity to handle approximately 38 
million quote messages per second. On an average day, the Exchange and 
MIAX handle over approximately 8,304,500,000 billion total messages. Of 
that total, users of the 10Gb ULL connections generate approximately 
8.3 billion messages, and users of the 1Gb connections generate 
approximately 4.5 million messages. To achieve a consistent, premium 
network performance, the Exchange must build out and maintain a network 
that has the capacity to handle the message rate requirements of its 
most heavy network consumers. These billions of messages per day 
consume the Exchange's resources and significantly contribute to the 
overall network connectivity expense for storage and network transport 
capabilities. The Exchange must also purchase additional storage 
capacity on an ongoing basis to ensure it has sufficient capacity to 
store these messages as part of it surveillance program and to satisfy 
its record keeping requirements under the Exchange Act.\71\ Thus, as 
the number of messages an entity increases, certain other costs 
incurred by the Exchange that are correlated to, though not directly 
affected by, connection costs (e.g., storage costs, surveillance costs, 
service expenses) also increase. Given this difference in network 
utilization rate, the Exchange believes that it is reasonable, 
equitable, and not unfairly discriminatory that the 10Gb ULL users pay 
for the vast majority of the shared network resources from which all 
market participants' benefit.
---------------------------------------------------------------------------

    \71\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    The Exchange also believes that the connectivity fees are equitably 
allocated amongst users of the network connectivity alternatives, when 
these fees are viewed in the context of the overall trading volume on 
the Exchange. To illustrate, the purchasers of the 10Gb ULL 
connectivity account for approximately 91.95% of the volume on the 
Exchange. This overall volume percentage (91.95% of total Exchange 
volume) is in line with the amount of network connectivity revenue 
collected from 10Gb ULL purchasers (98% of total Exchange connectivity 
revenue). For example, utilizing a recent billing cycle, Exchange 
Members and non-Members that purchased 10Gb ULL connections accounted 
for approximately 98% of the total network connectivity revenue 
collected by the Exchange from all connectivity alternatives; and 
Members and non-Members that purchased 1Gb and 10Gb connections 
accounted for approximately 2% of the revenue collected by the Exchange 
from all connectivity alternatives.
Full Service MEO Ports
    The Exchange believes that the proposed fees are equitably 
allocated among users of the network connectivity alternatives, as the 
Members that are frequently in the highest Tier for Full Service MEO 
Ports consume the most bandwidth and resources of the network. 
Specifically, like above for the 10Gb ULL connectivity, the Exchange 
notes that the Market Makers who reach the highest tier for Full 
Service MEO Ports (Bulk) account for approximately greater than 84% of 
average daily volume (``ADV'') on the Exchange, while Market Makers 
that are typically in the lowest Tier for Full Service MEO Ports, 
account for approximately less than 14% of ADV on the Exchange. The 
remaining 1% if accounted for by Market Makers who are frequently in 
the middle Tier for Full Service MEO Ports (Bulk), which is usually one 
firm. To achieve a consistent, premium network performance, the 
Exchange must build out and maintain a network that has the capacity to 
handle the message rate requirements of its most heavy network 
consumers. These billions of messages per day consume the Exchange's 
resources and significantly contribute to the overall network 
connectivity expense for storage and network transport capabilities. 
The Exchange must also purchase additional storage capacity on an 
ongoing basis to ensure it has sufficient capacity to store these 
messages as part of it surveillance program and to satisfy its record 
keeping requirements under the Exchange Act.\72\ Thus, as the number of 
connections a Market Maker has increases, certain other costs incurred 
by the Exchange that are correlated to, though not directly affected 
by, connection costs (e.g., storage costs, surveillance costs, service 
expenses) also increase. The Exchange sought to design the proposed 
tiered-pricing structure to set the amount of the fees to relate to the 
number of connections a firm purchases. The more connections purchased 
by a Market Maker likely results in greater expenditure of Exchange 
resources and increased cost to the Exchange. The Exchange further 
believes that the proposed fees are reasonable, equitably allocated and 
not unfairly discriminatory because, for the flat fee, the Exchange 
provides each Member two (2) Full Service MEO Ports for each matching 
engine to which that Member is connected. Unlike other options 
exchanges that provide similar port functionality and charge fees on a 
per port basis,\73\ the Exchange offers Full Service MEO Ports as a 
package and provides Members with the option to receive up to two Full 
Service MEO Ports per matching engine to which it connects. The 
Exchange currently has twelve (12) matching engines, which means 
Members may receive up to twenty-four (24) Full Service MEO Ports for a 
single monthly fee, that can vary based on certain volume percentages. 
The Exchange currently assesses Members a fee of $5,000 per month in 
the highest Full Service MEO Port--Bulk Tier, regardless of the number 
of Full Service MEO Ports allocated to the Member. Assuming a Member 
connects to all twelve (12) matching engines during a month, with two 
Full Service

[[Page 29908]]

MEO Ports per matching engine, this results in a cost of $208.33 per 
Full Service MEO Port--Bulk ($5,000 divided by 24) for the month. This 
fee has been unchanged since the Exchange adopted Full Service MEO Port 
fees in 2018.\74\ The Exchange now proposes to increase the Full 
Service MEO Port fees, with the highest Tier fee for a Full Service MEO 
Port--Bulk of $10,000 per month. Members will continue to receive two 
(2) Full Service MEO Ports to each matching engine to which they are 
connected for the single flat monthly fee. Assuming a Member connects 
to all twelve (12) matching engines during the month, and achieves the 
highest Tier for that month, with two Full Service MEO Ports--Bulk per 
matching engine, this would result in a cost of $416.67 per Full 
Service MEO Port ($10,000 divided by 24).
---------------------------------------------------------------------------

    \72\ 17 CFR 240.17a-1 (recordkeeping rule for national 
securities exchanges, national securities associations, registered 
clearing agencies and the Municipal Securities Rulemaking Board).
    \73\ See supra notes 24, 26, 28, and 30.
    \74\ See supra note 6.
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes the proposed fees will not result in any 
burden on intra-market competition that is not necessary or appropriate 
in furtherance of the purposes of the Act because the proposed fees 
will allow the Exchange to recoup some of its costs in providing 10Gb 
ULL connectivity and Full Service MEO Ports at below market rates to 
market participants since the Exchange launched operations. As 
described above, the Exchange has operated at a cumulative net annual 
loss since it launched operations in 2017 \75\ due to providing a low 
cost alternative to attract order flow and encourage market 
participants to experience the high determinism and resiliency of the 
Exchange's trading Systems. To do so, the Exchange chose to waive the 
fees for some non-transaction related services and Exchange products or 
provide them at a very marginal cost, which was not profitable to the 
Exchange. This resulted in the Exchange forgoing revenue it could have 
generated from assessing any fees or higher fees. The Exchange could 
have sought to charge higher fees at the outset, but that could have 
served to discourage participation on the Exchange. Instead, the 
Exchange chose to provide a low cost exchange alternative to the 
options industry, which resulted in lower initial revenues. Examples of 
this are 10Gb ULL connectivity and Full Service MEO Ports, for which 
the Exchange only now seeks to adopt fees at a level similar to or 
lower than those of other options exchanges.
---------------------------------------------------------------------------

    \75\ See supra note 60.
---------------------------------------------------------------------------

    Further, the Exchange does not believe that the proposed fee 
increase for the 10Gb ULL connection change would place certain market 
participants at the Exchange at a relative disadvantage compared to 
other market participants or affect the ability of such market 
participants to compete. As is the case with the current proposed flat 
fee, the proposed fee would apply uniformly to all market participants 
regardless of the number of connections they choose to purchase. The 
proposed fee does not favor certain categories of market participants 
in a manner that would impose an undue burden on competition.
Inter-Market Competition
    The Exchange also does not believe that the proposed rule change 
will result in any burden on inter-market competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. As 
discussed above, options market participants are not forced to connect 
to all options exchanges. There is no reason to believe that our 
proposed price increase will harm another exchange's ability to 
compete. There are other options markets of which market participants 
may connect to trade options. There is also a possible range of 
alternative strategies, including routing to the exchange through 
another participant or market center or accessing the Exchange 
indirectly. Market participants are free to choose which exchange or 
reseller to use to satisfy their business needs. Accordingly, the 
Exchange does not believe its proposed fee changes impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.

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

    The Exchange responded to the comment letters submitted on prior 
versions of these proposed fee changes.\76\
---------------------------------------------------------------------------

    \76\ See, e.g., SR-PEARL-2022-03, SR-PEARL-2022-04, SR-PEARL-
2022-11.
---------------------------------------------------------------------------

III. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\77\ at any time within 
60 days of the date of filing of a proposed rule change pursuant to 
Section 19(b)(1) of the Act,\78\ 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 change is necessary and appropriate to allow for 
additional analysis of the proposed rule change's consistency with the 
Act and the rules thereunder.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78s(b)(3)(C).
    \78\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    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.\79\ 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.'' \80\
---------------------------------------------------------------------------

    \79\ 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'').
    \80\ See Id.
---------------------------------------------------------------------------

    Among other things, exchange proposed rule changes are subject to 
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which 
requires the rules of an exchange to: (1) Provide for the equitable 
allocation of reasonable fees among members, issuers, and other persons 
using the exchange's facilities; \81\ (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; \82\ 
and (3) not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\83\
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78f(b)(4).
    \82\ 15 U.S.C. 78f(b)(5).
    \83\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    In temporarily suspending the Exchange's fee change, the Commission 
intends to further consider whether the proposed fees are consistent 
with the statutory requirements applicable to a national securities 
exchange under the Act. In particular, the Commission will consider 
whether the proposed rule change satisfies the standards under the Act 
and the rules thereunder requiring,

[[Page 29909]]

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 be designed to 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.\84\
---------------------------------------------------------------------------

    \84\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
---------------------------------------------------------------------------

    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 change.\85\
---------------------------------------------------------------------------

    \85\ For purposes of temporarily suspending the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change

    The Commission is instituting proceedings pursuant to Sections 
19(b)(3)(C) \86\ and 19(b)(2)(B) \87\ of the Act to determine whether 
the Exchange's 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.
---------------------------------------------------------------------------

    \86\ 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.
    \87\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\88\ 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),\89\ 6(b)(5),\90\ and 6(b)(8) \91\ 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.
---------------------------------------------------------------------------

    \88\ 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.
    \89\ 15 U.S.C. 78f(b)(4).
    \90\ 15 U.S.C. 78f(b)(5).
    \91\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The Commission asks that commenters address the sufficiency 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. 
In particular, the Commission seeks comment on the following aspects of 
the proposal and asks commenters to submit data where appropriate to 
support their views:
    1. Cost Estimates and Allocation. The Exchange states that it is 
not asserting that the proposed fees are constrained by competitive 
forces.\92\ Rather, the Exchange states that its proposed fees are 
based on a ``cost-plus model,'' employing a ``conservative approach,'' 
and that the expenses are ``directly related'' to 10Gb ULL connectivity 
and Full Service MEO Ports, and not any other product or service 
offered by the Exchange.\93\ In explaining its costs, should the 
Exchange identify more specifically which, if any, of its costs are 
incurred solely to provide 10Gb ULL connectivity and solely to provide 
Full Service MEO Ports? Regarding the allocations provided by the 
Exchange as described in greater detail above, do commenters believe 
that the Exchange provided sufficient detail about how it determined 
these allocations and why they are reasonable? \94\ Why or why not? Do 
commenters believe that the Exchange provided sufficient context to 
permit an independent review and assessment of the reasonableness of 
the allocations? Do commenters believe that the Exchange provided 
sufficient detail or explanation to support its claim that ``no expense 
amount is allocated twice,'' \95\ whether among the sub-categories of 
expenses in this filing, across the Exchange's fee filings for other 
products or services, or over time?
---------------------------------------------------------------------------

    \92\ See supra Section II.A.2.
    \93\ See id.
    \94\ See id.
    \95\ See id.
---------------------------------------------------------------------------

    2. Revenue Estimates and Profit Margin Range. The Exchange uses a 
single monthly revenue figure (April 2022) as the basis for calculating 
its projected combined profit margin of 15%.\96\ The Exchange argues 
that projecting revenues on a per month basis is reasonable ``as the 
revenue generated from access services subject to the proposed fee 
generally remains static from month to month.'' \97\ Yet the Exchange 
also acknowledges that ``profit margin may also fluctuate from month to 
month based on the uncertainty of predicting how many connections and 
ports may be purchased from month to month as Members and non-Members 
are free to add and drop connections and ports at any time based on 
their own business decisions.'' \98\ Do commenters believe a single 
month provides a reasonable basis for a revenue projection? If not, why 
not? Should the Exchange provide a range of profit margins that it 
believes are reasonably possible, and the reasons therefor? The 
Exchange also provided its baseline by analyzing March 2022.\99\ Do 
commenters believe that March 2022 is an appropriate month for a 
baseline? What are commenters' views on the Exchange providing a 
combined profit margin for both 10Gb ULL connectivity and Full Service 
MEO Ports, rather than separate margins for each?
---------------------------------------------------------------------------

    \96\ See id.
    \97\ See id.
    \98\ See id.
    \99\ See id.
---------------------------------------------------------------------------

    3. Reasonableness. The Exchange states that its proposed fees are 
``reasonable because they will permit recovery of the Exchange's costs 
in providing access services to supply 10Gb ULL connectivity and Full 
Service MEO Ports and will not result in the Exchange generating a 
supra-competitive profit.'' \100\ The Exchange offers several 
justifications for why its estimated profit margin (which is blended 
and not discussed separately for each service) is not a supra-
competitive profit, including: (a) When it launched operations in 2017, 
it chose

[[Page 29910]]

to forgo revenue by offering certain products at lower rates than other 
options exchanges to attract order flow; (b) the Exchange has been 
successful in controlling its costs; (c) a profit margin should not be 
judged alone based on its size, but on whether the ultimate fee 
reflects the value of the services provided, and (d) the Exchange's 
proposed fees remain similar to or less than fees charged for access 
provided by other options exchanges with similar market share. Do 
commenters agree that these factors are relevant to assessment of 
whether the fees are reasonable for each service? Should such an 
assessment include consideration of any factors other than costs; and 
if so, what factors should be considered, and why?
---------------------------------------------------------------------------

    \100\ See id.
---------------------------------------------------------------------------

    4. Periodic Reevaluation. The Exchange has stated that it will 
conduct a review of the cost-based fees subject to this proposal one 
year after the date of the proposal, and annually thereafter.\101\ In 
light of the impact that the number of connections and ports purchased 
has on 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 fees to ensure that the fees stay in line with their 
stated profitability projections and do not become unreasonable over 
time, for example, by failing to adjust for efficiency gains, cost 
increases or decreases, and changes in amounts purchased? 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 
fee change is implemented should an exchange assess whether its revenue 
and/or cost estimates were accurate and at what threshold should an 
exchange commit to file a fee change if its estimates were inaccurate?
---------------------------------------------------------------------------

    \101\ See id.
---------------------------------------------------------------------------

    5. Tiered Structure for Full Service MEO Ports Fees. The Exchange 
states that proposed tiered-pricing structure is reasonable, equitably 
allocated, and not unfairly discriminatory because for a flat fee the 
Exchange provides each Member two Full Service MEO Ports for each 
matching engine to which the Member is connected, and further, it is 
the model adopted by the Exchange when it launched operations for its 
Full Service MEO Port fees.\102\ What are commenters' views on the 
adequacy of the information the Exchange provides regarding the 
proposed differentials in fees? Do commenters believe that the proposed 
price differences are supported by the Exchange's assertions that it 
set the level of each proposed new fee in a manner that it equitable 
and not unfairly discriminatory?
---------------------------------------------------------------------------

    \102\ See id.
---------------------------------------------------------------------------

    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.'' \103\ 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,\104\ 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.\105\ 
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.\106\
---------------------------------------------------------------------------

    \103\ 17 CFR 201.700(b)(3).
    \104\ See id.
    \105\ See id.
    \106\ 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).
---------------------------------------------------------------------------

    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 proposal is consistent with the 
Act, any potential comments or supplemental information provided by the 
Exchange, and any additional independent analysis by the Commission.

V. Commission's Solicitation of 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.\107\
---------------------------------------------------------------------------

    \107\ 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).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 7, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 21, 
2022.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-PEARL-2022-18 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 No. SR-PEARL-2022-18. 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 (http://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

[[Page 29911]]

10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the 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 No. SR-PEARL-2022-18 and should be 
submitted on or before June 7, 2022. Rebuttal comments should be 
submitted by June 21, 2022.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\108\ that File No. SR-PEARL-2022-18 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.
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78s(b)(3)(C).
    \109\ 17 CFR 200.30-3(a)(12), (57) and (58).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\109\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-10514 Filed 5-16-22; 8:45 am]
BILLING CODE 8011-01-P