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Federal Register / Vol. 86, No. 189 / Monday, October 4, 2021 / Notices
raised the monthly fees even higher to $22,000 per connection.23 Similarly, in 2013, NASDAQ adopted the pricing for its 10Gb Ultra connection of $1,500 per connection as a one-time installation fee and then a monthly fee of $15,000 per connection.24 The Exchanges current proposal does not contemplate any sort of installation fee or one-time fee and the monthly fee for the Exchanges highest connectivity tier $13,000 is $2,000 lower than the fees adopted 8
years ago by Amex, Arca and NASDAQ.
Separately, the Exchange is not aware of any reason why market participants could not simply drop their access or not initially access an exchange if an exchange were to establish prices for its non-transaction fees that, in the determination of such market participant, did not make business or economic sense for such market participant to access such exchange. No options market participant is required by rule, regulation, or competitive forces to be a Member of the Exchange. As evidence of the fact that market participants can and do drop their access to exchanges based on nontransaction fee pricing, R2G Services LLC R2G filed a comment letter after BOXs proposed rule changes to increase its connectivity fees SRBOX
201824, SRBOX201837, and SR
BOX201904. The R2G Letter stated, when BOX instituted a $10,000/
month price increase for connectivity;
we had no choice but to terminate connectivity into them as well as terminate our market data relationship.
The cost benefit analysis just didnt make any sense for us at those new levels. Similarly, the Exchanges affiliate, MIAX Emerald, noted in a recent filing that once MIAX Emerald issued a notice that it was instituting MEI Port fees, among other nontransaction fees, one MIAX Emerald Member dropped its access to MIAX
Emerald as a result of those fees.25
Accordingly, these examples show that if a market participant believes, based 23 See
Securities Exchange Act Release Nos.
79729 January 4, 2017, 82 FR 3061 January 10, 2017 SRNYSEARCA2016172; 79728 January 4, 2017, 82 FR 3035 January 10, 2017 SR
NYSEMKT2016126.
24 See Securities Exchange Act Release No. 70129
August 7, 2013, 78 FR 49308 August 13, 2013
SRNASDAQ2013099.
25 See Securities Exchange Act Release No. 91460
April 2, 2021, 86 FR 18349 April 8, 2021 SR
EMERALD202111 Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network Connectivity Fees, and Increase the Number of Additional Limited Service MIAX Emerald Express Interface Ports Available to Market Makers adopting tiered MEI Port fee structure ranging from $5,000 to $20,500 per month.

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on its business model, that an exchange charges too high of a fee for connectivity and/or other non-transaction fees for its relevant marketplace, market participants can choose to drop their access to such exchange.
In order to provide more detail and to quantify the Exchanges costs associated with providing access to the Exchange in general, the Exchange notes that there are material costs associated with providing the infrastructure and headcount to fully-support access to the Exchange. 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. While some of the expense is fixed, much of the expense is not fixed, and thus increases as the services associated with the Proposed Access Fees increase. For example, new Members to the Exchange may require the purchase of additional hardware to support those Members as well as enhanced monitoring and reporting of customer performance that the Exchange and its affiliates provide.
Further, as the total number 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 Access Fees are a reasonable attempt to offset a portion of the costs to the Exchange associated with providing access to its network infrastructure.
The Exchange only has four primary sources of revenue: Transaction fees, access fees which includes the Proposed Access Fees, regulatory fees, and market data fees. Accordingly, the Exchange must cover all of its expenses from these four primary sources of revenue.
The Exchange believes that the Proposed Access Fees are fair and reasonable because they will not result in excessive pricing or supracompetitive profit, when comparing the total annual expense that the Exchange and MIAX Pearl project to incur in connection with providing these access services versus the total annual revenue that the Exchange projects to collect in connection with services associated with the Proposed Access Fees. For 2021,26 the total annual expense for 26 The Exchange has not yet finalized its 2021
year end results.

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providing the access services associated with the Proposed Access Fees that is, the shared network connectivity of the Exchange and MIAX Pearl, but excluding MIAX Emerald is projected to be approximately $15.9 million. The approximately $15.9 million in projected total annual expense is comprised of the following, all of which are directly related to the access services associated with the Proposed Access Fees: 1 Third-party expense, relating to fees paid by the Exchange to thirdparties for certain products and services;
and 2 internal expense, relating to the internal costs of the Exchange and MIAX Pearl to provide the services associated with the Proposed Access Fees.27 As noted above, the Exchange believes it is more appropriate to analyze the Proposed Access Fees utilizing its 2021 revenue and costs, which utilize the same presentation methodology as set forth in the Exchanges previously-issued Audited Unconsolidated Financial Statements.28
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 other product or service offered by the Exchange. It does not include general costs of operating matching systems and other trading technology, and no expense amount was allocated twice.
As discussed, the Exchange conducted an extensive cost review in which the Exchange analyzed nearly every expense item in the Exchanges general expense ledger this includes over 150 separate and distinct expense items to determine whether each such expense relates to the access services associated with the Proposed Access Fees, and, if such expense did so relate, what portion or percentage of such expense actually supports those services, and thus bears a relationship that is, in nature and closeness, directly related to those services. The sum of all such portions of expenses 27 The percentage allocations used in this proposed rule change may differ from past filings from the Exchange or its affiliates due to, among other things, changes in expenses charged by thirdparties, adjustments to internal resource allocations, and different system architecture of the Exchange as compared to its affiliates.
28 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 Exchanges 2019 Form 1 Amendment containing its financial statements for 2018. See Securities Exchange Act Release No. 87875 December 31, 2019, 85 FR 770 January 7, 2020 SRMIAX
201951. Accordingly, the third-party expense described in this filing is attributed to the same line item for the Exchanges 2021 Form 1 Amendment, which will be filed in 2022.

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