I. Introduction

On September 24, 2021, Miami International Securities Exchange LLC, LLC (“MIAX”) and MIAX PEARL, LLC (“MIAX Pearl”) (collectively, the “Exchanges”) each filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”),^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change (File Numbers SR-MIAX-2021-41 and SR-PEARL-2021-45) to amend the MIAX Fee Schedule and MIAX Pearl Options Fee Schedule (collectively, the “Fee Schedules”) to adopt a tiered pricing structure for certain connectivity fees. The proposed rule changes were immediately effective upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Act.^[3] The proposed rule changes were published for comment in the Federal Register on October 4, 2021.^[4] Under Section 19(b)(3)(C) of the Act,^[5] the Commission is hereby: (i) Temporarily suspending File Numbers SR-MIAX-2021-41 and SR-PEARL-2021-45; and (ii) instituting proceedings to determine whether to approve or disapprove File Numbers SR-MIAX-2021-41 and SR-PEARL-2021-45.

II. Description of the Proposed Rule Changes

The Exchanges propose to modify their Fee Schedules to adopt a tiered-pricing structure for 10 gigabit (“Gb”) ultra-low latency (“ULL”) fiber connections to the Exchanges' primary and secondary facilities available to both Members ^[6] and non-Members. Specifically, the Exchanges propose to modify the pricing structure for 10Gb ULL connections from a flat monthly fee of $10,000 per 10Gb ULL connection to the following fees (collectively, the “Proposed Access Fees”): ^[7]

• $9,000 each for the 1st and 2nd connections;
• $11,000 each for the 3rd and 4th connections; and
• $13,000 for each additional connection after the 4th connection.

These fees are assessed in any month the Member or non-Member is credentialed to use any of the Exchanges' APIs or market data feeds in the Exchanges' production environment, pro-rated when a Member or non-Member makes a change to connectivity by adding or deleting connections, and assessed in any month during which the Member or non-Member has established connectivity with the Exchanges' disaster recovery facility.^[8]

The Exchanges state that the Exchanges' MIAX Express Network Interconnect (“MENI”) can be configured to provide Members and non-Members of the Exchanges network connectivity to the trading platforms, ( printed page 67759) market data systems, test systems, and disaster recovery facilities of both MIAX and MIAX Pearl, via a single, shared connection. The Exchanges state that Members and non-Members utilizing the MENI to connect to the trading platforms, market data systems, test systems, and disaster recovery facilities of MIAX and MIAX Pearl via a single, shared connection will 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.^[9]

III. Suspension of the Proposed Rule Changes

Pursuant to Section 19(b)(3)(C) of the Act,^[10] at any time within 60 days of the date of filing of an immediately effective proposed rule change pursuant to Section 19(b)(1) of the Act,^[11] the Commission summarily may temporarily suspend the change in the rules of a self-regulatory organization (“SRO”) if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. As discussed below, the Commission believes a temporary suspension of the proposed rule changes is necessary and appropriate to allow for additional analysis of the proposed rule changes' consistency with the Act and the rules thereunder.

The Exchanges state that the tiered-pricing structure is reasonable, equitably allocated, and not unfairly discriminatory because it will encourage Members and non-Members to be more efficient and economical when determining how to connect to the Exchanges, and also enable the Exchanges to better monitor and provide access to the Exchanges' network to ensure sufficient capacity and headroom in the System.^[12] The Exchanges also state that the majority of Members and non-Members that purchase 10Gb ULL connections will either save money or pay the same amount after the tiered-pricing structure is implemented.^[13] The Exchanges further state that firms that primarily route orders for best executions generally only need a limited number of connections to fulfill that obligation and connectivity costs will likely to be lower for these firms, while for firms that engaged in advanced trading strategies that typically require multiple connections will generate higher costs by utilizing more of the Exchanges' resources.^[14]

In further support of the proposed fee changes, the Exchanges argue principally that the fees for 10Gb ULL connections are constrained by competitive forces, and that this is supported by their revenue and cost analysis. The Exchanges state that they operate in a highly competitive market in which market participants can readily favor competing venues if they deem fee levels at a particular venue to be excessive and the Exchanges must continually adjust their fees for services and products, and in addition to order flow, to remain competitive with other exchanges.^[15] The Exchanges state that they are not aware of any evidence that a market share of approximately 5-6% provides the Exchanges with anti-competitive pricing power, and that market participants may look to connect to the Exchanges via cheaper alternatives or choose to disconnect from the Exchanges or reduce the number of connections to the Exchanges as a means to reduce costs.^[16] The Exchanges state that market participants can and do drop their access to exchanges based on non-transaction fee pricing.^[17] The Exchanges also state that there is no regulatory requirement that any market participant connect to any one options exchange, or connect at a particular connection speed or act in a particular capacity on the Exchanges, and that the Exchanges are unaware of any one options exchange whose membership includes all registered broker-dealers.^[18]

The Exchanges also state that the proposed fees are reasonable and appropriate to allow the Exchanges to offset expenses the Exchanges have and will incur in relation to providing the Proposed Access Fees and provide an analysis of their revenues, costs, and profitability associated with these fees.^[19] The Exchanges state that this analysis reflects an extensive cost review in which the Exchanges analyzed every expense item in the Exchanges' general expense ledgers to determine whether each such expense relates to the Proposed Access Fees, and, if such expense did so relate, what portion (or percentage) of such expense actually supports the access services.^[20] The Exchanges state that this analysis shows the fee increases will not result in excessive pricing or supra-competitive profits when compared to MIAX's and MIAX Pearl's annual expense associated with providing the 10Gb ULL connections versus the annual revenue for the 10Gb ULL connections.^[21]

The Exchanges state that, for 2021, the total annual expense for providing the access services associated with the Proposed Access Fees for MIAX and MIAX Pearl is projected to be approximately $15.9 million.^[22] The $15.9 million in projected total annual expense is comprised of the following, all of which the Exchanges state are directly related to the access services associated with the Proposed Access Fees: (1) Third-party expense, relating to fees paid by the Exchanges to third-parties for certain products and services; and (2) internal expense, relating to the internal costs of the Exchanges to provide the services associated with the Proposed Access Fees. The Exchanges state that the $15.9 million in projected total annual expense is directly related to the access services associated with the Proposed Access Fees, and not any ( printed page 67760) other product or service offered by the Exchanges.

The Exchanges state that the total third-party expense, relating to fees paid by MIAX and MIAX Pearl to third-parties for certain products and services for the Exchanges to be able to provide the access services associated with the Proposed Access Fees is projected to be $3.9 million for 2021.^[23] The Exchanges represent that they determined whether third-party expenses related to the access services associated with the Proposed Access Fees, and, if such expense did so relate, determined what portion (or percentage) of such expense represents the cost to the Exchanges to provide access services associated with the Proposed Access Fees. This includes allocating a portion of fees paid to: (1) Equinix, for data center services (approximately 62% of the Exchanges' total applicable Equinix expense); (2) Zayo Group Holdings, Inc. for network services (approximately 62%); (3) Secure Financial Transaction Infrastructure and various other services providers (approximately 75%); ^[24] and (4) various other hardware and software providers (approximately 51%).

In addition, the Exchanges state that the total internal expense, relating to the internal costs of the Exchanges to provide the access services associated with the Proposed Access Fees, is projected to be approximately $12 million for 2021.^[25] The Exchanges represent that: (1) The Exchanges' employee compensation and benefits expense relating to providing the access services associated with the Proposed Access Fees is projected to be approximately $6.1 million, which is a portion of the total projected expense of $12.6 million for MIAX and $9.2 million for MIAX Pearl for employee compensation and benefits; (2) the Exchanges' depreciation and amortization expense relating to providing the access services associated with the Proposed Access Fees is projected to be $5.3 million, which is a portion of the total projected expense of $4.8 million for MIAX and $2.9 million for MIAX Pearl for depreciation and amortization; and (3) the Exchanges' occupancy expense relating to providing the access services associated with the Proposed Access Fees is projected to be $0.6 million, which is a portion of the Exchanges' total projected expense of $0.6 million for MIAX and $0.5 million for MIAX Pearl for occupancy.

The Exchanges state that this cost and revenue analysis shows that the proposed rule changes will not result in excessive pricing or supra-competitive profit.^[26] The Exchanges project that, on a fully-annualized basis, the Proposed Access Fees will have an expense of approximately $15.9 million per annum and a projected revenue of $22 million per year, and including projected revenue for providing network connectivity for all connectivity alternatives to be approximately $22.8 million per annum, resulting in a projected profit margin of 30% inclusive of the Proposed Access Fees and all other connectivity alternatives ($22.8 million in total projected connectivity revenue minus $15.9 million in projected expense = $6.9 million profit per year). The Exchanges state that this profit margin does not take into account the cost of capital expenditures that MIAX and MIAX Pearl historically spent or are projected to spend each year going forward.

The Exchanges state that the proposed fees for 10Gb ULL connections is equitable and reasonable because the proposed highest tier is still less than fees charged for similar connectivity provided by other options exchanges.^[27] The Exchanges also state that their projected revenue from access fees is less than, or similar to, the access fee revenues generated by access fees charged by other U.S. options exchanges based on the 2020 audited financial statements within their Form 1 filings.^[28] The Exchanges also believe that their overall operating margin is in line with or less than the operating margins of competing options exchanges, including the revenue and expense associated with the Proposed Access Fees.^[29] The Exchanges state that this incremental increase in revenue generated from the 30% profit margin on connectivity will allow the Exchanges to further invest in their system architecture and matching engine functionality to the benefit of all market participants.^[30]

The Exchanges state that the proposed fees are equitably allocated, not unfairly discriminatory, and do not impose an unnecessary or inappropriate burden on competition because the Proposed Access Fees do not favor certain categories of market participants in a manner that would impose a burden on competition because the allocation reflects the network resources consumed by the various usage of market participants, with the lowest bandwidth consuming members paying the least, and highest bandwidth consuming members paying the most, particularly since higher bandwidth consumption translates to higher costs to the Exchanges; ^[31] options market participants are not forced to connect to all options exchanges; ^[32] and options market participants may choose alternative methods of connecting to the Exchanges, including routing through another participant or market center accessing the Exchanges indirectly.^[33]

The Commission received two comment letters from one commenter that opposes the proposed rule changes.^[34] This commenter states that the Exchanges have not sufficiently demonstrated their proposed fees' consistency with the Act or addressed previous concerns with the proposed fees raised by the same commenter.^[35] Specifically, this commenter argues that there are no reasonable substitutes for the Exchanges' 10Gb ULL connectivity lines, particularly for market makers whose business models require them to subscribe to direct connectivity to the Exchanges in the highest proposed pricing tier.^[36] The commenter further ( printed page 67761) argues that the fact that no member or non-member has altered its use of 10Gb ULL connectivity since the fee changes went into effect serves as further support of its claim that there are no reasonable alternatives to the service.^[37] This commenter also argues that the ability for a member to withdraw from an exchange should not support the reasonableness of any individual proposed fee, as a member would incur significant costs in withdrawing from an exchange in the form of lost infrastructure investments, the cost of withdrawal itself, and other opportunity costs.^[38] This commenter further objects that the Exchanges have not provided sufficient quantitative support for their revenues, costs, and profitability under the current and proposed fees to support an analysis that the proposed fees and the Exchanges' profitability are reasonable.^[39] Moreover, the commenter argues that the Exchanges' comparison of their projected access fee profit margins to the overall profit margins of competing exchanges is insufficient as it does not appropriately compare the individual components of these other exchange fees to those of the Exchanges.^[40] The commenter also suggests that any comparisons made by the Exchanges to the revenues and margins of other exchanges are inapt because they do not account for the circumstances under which other exchanges established their fees, including, for example, whether the services are equivalent or the costs to provide them are similar.^[41] Finally, this commenter claims that the proposed tiers in the new fee structure are unfairly discriminatory because the Exchanges have not provided any cost breakdown to support the claim that the use of multiple connections creates higher costs for the Exchanges.^[42] Instead, the commenter argues that market participants who purchase more units of 10Gb ULL connections use more exchange bandwidth simply due to the fact that they have purchased more units, and that this does not justify the proposal to charge a higher rate per unit, which the commenter claims is unfairly discriminatory towards market maker subscribers.^[43]

Another commenter opposing the proposed rule changes states that the Exchanges have not met their burden of demonstrating that the proposed fees are consistent with the standards under the Act.^[44] This commenter states that the Exchanges' argument that competition for order flow constrains pricing for products and services exclusively offered by the Exchanges does not demonstrate that the fees are reasonable.^[45] This commenter also disagrees with the Exchanges' statement that they must continually adjust the fees for these services as a result of competition from other markets, arguing that this does not reflect marketplace reality.^[46] This commenter also states that the Exchanges have failed to demonstrate that the proposed fees are equitably allocated and not unfairly discriminatory, claiming that the proposed fee changes directly impact market makers and the burden of the fee increases fall predominantly on market makers operating on the Exchanges because 10Gb ULL connections are an essential technology tool for market makers.^[47] The commenter states that the Exchanges offer no concrete support for their arguments that the tiered pricing structure would encourage firms to be more economical and efficient in the number of connections they purchase, allowing the Exchanges to better monitor and provide access to their networks to ensure that they have sufficient capacity and headroom in their systems.^[48] This commenter also states that the Exchanges provide no support for their position that the use of multiple 10Gb ULL connections generates higher costs for the Exchanges, positing that it is likely the Exchanges have fixed costs associated with providing connections and any additional connections purchased by users will result in greater Exchange profits.^[49] The commenter also states that the Exchanges have provided no public information on how they derived the cost amounts they determined to allocate to the products and services subject to the proposed fee changes nor any meaningful baseline information regarding the Exchanges' overall costs.^[50] This commenter believes that the Exchanges have withdrawn and refiled essentially identical proposals,^[51] subverting proper consideration of the proposed fee changes under the process set forth in the Act.^[52]

A different commenter, while not expressing support or opposition for the specific proposed fee changes, applauds the Exchanges for the enhanced disclosure they have provided with respect to their proposed fee changes as compared to the information in prior rule filings by other exchanges proposing similar types of market data or connectivity fees.^[53] This commenter states that the proposed fee changes would “materially lower costs for many users, while increasing the costs for some of [the Exchanges'] heaviest of users,” noting that when these fee filing proposals were withdrawn and refiled, they contained “significantly greater information about who is impacted and how than other filings that have been permitted to take effect without suspension.” ^[54]

When exchanges file their proposed rule changes with the Commission, including fee filings like the Exchanges' 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.^[55] The instructions to Form 19b-4, on which exchanges file their proposed rule changes, specify that such statement ( printed page 67762) “should be sufficiently detailed and specific to support a finding that the proposed rule change is consistent with [those] requirements.” ^[56]

Section 6 of the Act, including Sections 6(b)(4), (5), and (8), require 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; ^[57] (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; ^[58] and (3) not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.^[59]

In temporarily suspending the Exchanges' fee changes, the Commission intends to further consider whether the proposals to modify fees for certain connectivity options and implement a tiered pricing fee structure is consistent with the statutory requirements applicable to a national securities exchange under the Act. In particular, the Commission will consider whether the proposed rule changes satisfy the standards under the Act and the rules thereunder requiring, among other things, that an exchange's rules provide for the equitable allocation of reasonable fees among members, issuers, and other persons using its facilities; not permit unfair discrimination between customers, issuers, brokers or dealers; and do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.^[60]

Therefore, the Commission finds that it is appropriate in the public interest, for the protection of investors, and otherwise in furtherance of the purposes of the Act, to temporarily suspend the proposed rule changes.^[61]

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

In addition to temporarily suspending the proposals, the Commission also hereby institutes proceedings pursuant to Sections 19(b)(3)(C) ^[62] and 19(b)(2)(B) of the Act ^[63] to determine whether the proposed rule changes should be approved or disapproved. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to provide additional comment on the proposed rule changes to inform the Commission's analysis of whether to approve or disapprove the proposed rule changes.

Pursuant to Section 19(b)(2)(B) of the Act,^[64] the Commission is providing notice of the grounds for possible disapproval under consideration:

• Whether the Exchanges have demonstrated how the proposals are consistent with Section 6(b)(4) of the Act, which 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;” ^[65]

• Whether the Exchanges have demonstrated how the proposals are consistent with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be “designed to perfect the operation of a free and open market and a national market system” and “protect investors and the public interest,” and not be “designed to permit unfair discrimination between customers, issuers, brokers, or dealers;” ^[66] and

• Whether the Exchanges have demonstrated how the proposals are consistent with Section 6(b)(8) of the Act, which requires that the rules of a national securities exchange “not impose any burden on competition not necessary or appropriate in furtherance of the purposes of [the Act].” ^[67]

As discussed in Section III above, the Exchanges makes various arguments in support of the proposals, and the Commission received comment letters disputing the Exchanges' arguments and expressing concerns regarding the proposals.^[68] In particular, two commenters argue that the Exchanges did not provide sufficient information to establish that the proposed fees are consistent with the Act and the rules thereunder.^[69] The Commission believes that there are questions as to whether the Exchanges have provided sufficient information to demonstrate that the proposed 10Gb ULL connectivity fees are consistent with the Act and the rules thereunder.

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.” ^[70] 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,^[71] 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.^[72]

The Commission is instituting proceedings to allow for additional consideration and comment on the issues raised herein, including as to whether the proposals are consistent with the Act, specifically, with its requirements that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members, issuers, and other persons using its facilities; are designed to perfect the operation of a free and open market and a national market system, and to protect investors and the public interest; are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers; and do not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act; ^[73] as well as any other provision of the Act, or the rules and regulations thereunder.

V. Commission's Solicitation of Comments

The Commission requests written views, data, and arguments with respect ( printed page 67763) to the concerns identified above as well as any other relevant concerns. Such comments should be submitted by December 20, 2021. Rebuttal comments should be submitted by January 3, 2022. 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.^[74]

The Commission asks that commenters address the sufficiency and merit of the Exchanges' statements in support of the proposals, in addition to any other comments they may wish to submit about the proposed rule changes.

Interested persons are invited to submit written data, views, and arguments concerning the proposed rule changes, including whether the proposals are consistent with the Act. 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 torule-comments@sec.gov. Please include File Nos. SR-MIAX-2021-41 and SR-PEARL-2021-45 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.

VI. Conclusion

It is therefore ordered , pursuant to Section 19(b)(3)(C) of the Act,^[75] that File Numbers SR-MIAX-2021-41 and SR-PEARL-2021-45 be, and hereby are, temporarily suspended. In addition, the Commission is instituting proceedings to determine whether the proposed rule changes should be approved or disapproved.

All submissions should refer to File Numbers SR-MIAX-2021-41 and SR-PEARL-2021-45. These file numbers 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 changes that are filed with the Commission, and all written communications relating to the proposed rule changes between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filings also will be available for inspection and copying at the principal office of each Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Numbers SR-MIAX-2021-41 and SR-PEARL-2021-45 and should be submitted on or before December 20, 2021. Rebuttal comments should be submitted by January 3, 2022.