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Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices
annual revenue from the Proposed Access Fees.
The Exchange believes the proposed changes are reasonable, equitably allocated and not unfairly discriminatory, and do not result in a supra-competitive 18 profit. Of note, the Guidance defines supracompetitive profit as profits that exceed the profits that can be obtained in a competitive market.19 With the proposed changes, the Exchange and MIAX anticipate they will have a profit margin of approximately 30%, inclusive of the Proposed Access Fees and all other connectivity alternatives. Based on the 2020 Audited Financial Statements of competing options exchanges since the 2021 Audited Financial Statements will likely not become publicly available until early July 2022, after the Exchange has submitted this filing, the Exchanges profit margin is well below the operating profit margins of other competing exchanges. For example, Nasdaq ISE, LLCs ISE operating profit margin for all of 2020 was approximately 85%; Nasdaq PHLX
LLCs PHLX operating profit margin for all of 2020 was approximately 49%;
the Nasdaq Stock Market LLCs Nasdaq operating profit margin for all of 2020 was approximately 62%;
NYSE Arca, Inc.s Arca operating profit margin for all of 2020 was approximately 55%; NYSE American LLCs Amex operating profit margin for all of 2020 was approximately 59%;
Cboe Exchange, Inc.s Cboe operating profit margin for all of 2020
was approximately 74%; and Cboe BZX
Exchange, Inc.s BZX operating profit margin for all of 2020 was approximately 52%.
The Exchange believes that the Proposed Access 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 the Exchange. Under the proposed pricingstructure, the Exchange will assess each Member or non-Member $9,000 for the first 10Gb ULL connection. For that $9,000 monthly fee, each Member or non-Member has access to all twelve matching engines each month. This results in a per matching engine connectivity cost of only $750 $9,000
divided by 12. The Exchange believes its connectivity cost to be less than or 18 See 19 See
supra note 9.
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similar to connectivity fees charged by competing options exchanges.20
The Exchange further believes its proposed fees are reasonable, equitably allocated and not unfairly discriminatory because the Exchange believes that it benefits overall competition in the marketplace to allow relatively new entrants like the Exchange and its affiliates, MIAX and MIAX Emerald, to propose fees that may help these new entrants recoup their substantial investment in building out costly infrastructure. The Exchange and its affiliates have historically set their fees purposefully low in order to attract business and market share, and the proposed tiered-pricing structure will help make the rates consistent with other exchanges while not raising costs for a majority of the Exchanges Members and non-Members.
The Guidance provides that in determining whether a proposed fee is constrained by significant competitive forces, the Commission will consider whether there are reasonable substitutes for the product or service that is the subject of a proposed fee. As described below, the Exchange believes substitute products and services are available to market participants, including, among other things, other options exchanges that market participants may connect to in lieu of the Exchange, indirect connectivity to the Exchange via a thirdparty reseller and/or trading of any options products, including proprietary products, in the Over-the-Counter OTC markets.
There is also no regulatory requirement that any market participant connect to any one options exchange, that any market participant connect at a particular connection speed or act in a particular capacity on the Exchange, or trade any particular product offered on an exchange. Moreover, membership is not a requirement to participate on the Exchange. A market participant may 20 See The Nasdaq Stock Market LLC
NASDAQ Rules, General 8: Connectivity, Section 1. Co-Location Services charging a monthly fee of $10,000 per 10Gb fiber connection, $15,000
per 10Gb Ultra fiber connection, and $20,000 per 40Gb fiber connection, plus installation fees ranging from $1,000 to $1,500. The Exchange notes that the same connectivity fees described above for NASDAQ also apply to its affiliates, Nasdaq ISE, LLC and NASDAQ PHLX LLC. See Nasdaq ISE
Rules, General 8: Connectivity and NASDAQ PHLX
Rules, General 8: Connectivity both incorporating by reference the fees in NASDAQ Rules, General 8:
Connectivity. See also NYSE American LLC
Options Fee Schedule, Section IV charging the following connectivity fees: $6,000 per connection initial charge plus $5,000 monthly per 1Gb circuit connection; $15,000 per connection initial charge plus $22,000 monthly per 10Gb LX LCN circuit connection; and $15,000 per connection initial charge plus $22,000 monthly charge per 40Gb LCN
circuit connection.

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submit orders to the Exchange via a Sponsored User.21 Indeed, the Exchange is unaware of any one options exchange whose membership includes every registered broker-dealer. Based on a recent analysis conducted by the Cboe Exchange, Inc. Cboe, as of October 21, 2020, only three 3 of the brokerdealers, out of approximately 250
broker-dealers, were members of at least one exchange that lists options for trading and were members of all 16
options exchanges.22 Additionally, the Cboe Fee Filing found that several broker-dealers were members of only a single exchange that lists options for trading and that the number of members at each exchange that trades options varies greatly.23
The Exchange notes that non-Member third-parties, such as Service Bureaus and Extranets, resell the Exchanges connectivity. This indirect connectivity is another viable alternative for market participants to trade on the Exchange without connecting directly to the Exchange and thus not pay the Exchanges connectivity fees, which alternative is already being used by nonMembers and further constrains the price that the Exchange is able to charge for connectivity and other access fees to its market. The Exchange notes that it could, but chooses not to, preclude market participants from reselling its connectivity. The Exchange also chooses not to adopt fees that would be assessed to third-party resellers on a per customer basis i.e., fees based on the number of firms that connect to the Exchange indirectly via the third-party.
Indeed, the Exchange does not receive any connectivity revenue when connectivity is resold by a third-party, which often is resold to multiple customers, some of whom are agency broker-dealers that have numerous customers of their own.24 In sum, the 21 See Exchange Rule 210. The Sponsored User is subject to the fees, if any, of the Sponsoring Member. The Exchange notes that the Sponsoring Member is not required to publicize, let alone justify or file with the Commission its fees, and as such could charge the Sponsored User any fees it deems appropriate, even if such fees would otherwise be considered supra-competitive, or otherwise potentially unreasonable or uncompetitive.
22 See Securities Exchange Act Release No. 90333
November 4, 2020, 85 FR 71666 November 10, 2020 SRCBOE2020105 the Cboe Fee Filing. The Cboe Fee Filing cited to the October 2020 Active Broker Dealer Report, provided by the Commissions Office of Managing Executive, on October 8, 2020.
23 Id.
24 The Exchange notes that resellers are not required to publicize, let alone justify or file with the Commission their fees, and as such could charge the market participant any fees it deems appropriate including connectivity fees higher than the Exchanges connectivity fees, even if such fees
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