I. Introduction
On July 1, 2021, MIAX PEARL, LLC (“MIAX Pearl” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act” or “Act”), and Rule 19b-4 thereunder, a proposed rule change (File Number SR-PEARL-2021-32) to amend the MIAX Pearl Options Fee Schedule (“Fee Schedule”) to remove certain credits and increase monthly Trading Permit fees for Exchange Members. The proposed rule change was immediately effective upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Act. The proposed rule change was published for comment in the Federal Register on July 15, 2021. The Commission has received no comment letters on the proposed rule change. Under Section 19(b)(3)(C) of the Act, the Commission is hereby: (i) Temporarily suspending File Number SR-PEARL-2021-32; and (ii) instituting proceedings to determine whether to approve or disapprove File Number SR-PEARL-2021-32.
17 CFR 240.19b-4.
The term “Trading Permit” means a permit issued by the Exchange that confers the ability to transact on the Exchange. See Notice, infra note 5, at 37379. The term “Member” means an individual or organization that is registered with the Exchange pursuant to Chapter II of Exchange 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 id.
15 U.S.C. 78s(b)(3)(A). A proposed rule change may take effect upon filing with the Commission if it is designated by the exchange as “establishing or changing a due, fee, or other charge imposed by the self-regulatory organization on any person, whether or not the person is a member of the self-regulatory organization.” 15 U.S.C. 78s(b)(3)(A)(ii).
See Securities Exchange Act Release No. 92366 (July 9, 2021), 86 FR 37379 (“Notice”).
II. Description of the Proposed Rule Change
The Exchange proposes to amend its Fee Schedule to: (1) Delete the definition of and remove the credits applicable to the Monthly Volume Credit for Members; (2) and; (3) amend Section (3)(b) of the Fee Schedule to increase the amount of monthly Trading Permit Fees.
Remove “Monthly Volume Credit”
The Exchange proposes to amend the Definitions section of its Fee Schedule to delete the definition of “Monthly Volume Credit” and remove the credits applicable to the Monthly Volume Credit for Members. The Exchange states that the Monthly Volume Credit was established in 2018 to encourage Members to send increased Priority Customer order flow to the Exchange. The Monthly Volume Credit is provided to Members whose executed Priority Customer volume along with that of its Affiliates, not including Excluded Contracts, is at least 0.30% of Exchange-listed Total Consolidated Volume (“TCV”) and is $250 for Members that connect via the FIX Interface and $1,000 for Members that connect via the MEO Interface (or both interfaces). The Monthly Volume Credit is a single once-per-month credit towards the aggregate monthly total of non-transaction fees assessable to a Member.
See Notice, supra note 5, at 37379-80.
“Priority Customer” means a person or entity that (i) is not a broker or dealer in securities, and (ii) does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial accounts(s). The number of orders shall be counted in accordance with Interpretation and Policy .01 of Exchange Rule 100. See Notice, supra note 5, at 37380 n.6.
“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). See Notice, supra note 5, at 37380 n.9.
“Excluded Contracts” means any contracts routed to an away market for execution. See Notice, supra note 5, at 37380 n.10.
“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 Notice, supra note 5, at 37380 n.11.
The “FIX Interface” and “MEO Interface” are different interfaces for certain order types as set forth in Exchange Rule 516. See Notice, supra note 5, at 37380 n.7-8.
Remove Trading Permit Fee Credit
The Exchange also proposes to amend Section (3)(b) of the Fee Schedule to remove a Trading Permit fee credit of $100 that is provided to Members who connect via both the MEO and FIX Interfaces and is a monthly credit towards the Trading Permit fees applicable to the MEO Interface use.
See Notice, supra note 5, at 37380.
Increase Monthly Trading Permit Fees
The Exchange also proposes to amend Section (3)(b) of the Fee Schedule to increase the amount of the monthly Trading Permit fees that are charged to Exchange Members that are Electronic Exchange Members or Market Makers. These fees are assessed in a tier-based fee structure based on the monthly total volume executed by a Member and its Affiliates on the Exchange across all origin types, not including Excluded Contracts, as compared to all Exchange-listed options and are also assessed based upon the type of interface used by the Member to connect to the Exchange, specifically the FIX Interface and/or the MEO Interface.
See Notice, supra note 5, at 37380-81.
See Notice, supra note 5, at 37380.
The Exchange proposes to increase fees for Trading Permits as follows:
For Members that connect via the FIX Interface, if the Member's relevant monthly volume falls within the parameters of:
- Tier 1 (up to 0.30% TCV): The monthly fee would increase from $250 to $500;
- Tier 2 (above 0.30%, up to 0.60% TCV): The monthly fee would increase from $350 to $1,000; and
- Tier 3 (above 0.60% TCV): The monthly fee would increase from $450 to $1,500.
For Members that connect via the MEO interface, if the Member's relevant monthly volume falls within the parameters of:
- Tier 1 (up to 0.30% TCV): The monthly fee would increase from $300 to $2,500;
- Tier 2 (above 0.30%, up to 0.60% TCV): The monthly fee would increase from $400 to $4,000; and
- Tier 3 (above 0.60% TCV): The monthly fee would increase from $500 to $6,000.
III. Suspension of the Proposed Rule Change
Pursuant to Section 19(b)(3)(C) of the Act, 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, 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.
15 U.S.C. 78s(b)(1).
In support of the proposed fee changes, the Exchange principally argues that these fees are constrained by competitive forces, and that this is supported by their revenue and cost analysis. In particular, the Exchange states that it operates 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. In further support of its argument that competitive forces constrain its proposed fee changes, Exchange further states that if it were to attempt to establish unreasonable pricing, then no market participant would join or connect, and existing market participants would disconnect. In addition, the Exchange states that it is not aware of any reason why market participants could not simply drop their access to an exchange (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, and claims that no options market participant is required by rule, regulation, or competitive forces to be a Member of the Exchange, which the Exchange believes is illustrated by the fact that it is unaware of any one options exchange whose membership includes every registered broker-dealer.
See Notice, supra note 5, at 37387; see also id. at 37382.
See Notice, supra note 5, at 37382.
See Notice, supra note 5, at 37387.
The Exchange also states that these fees are designed to recover a portion of the costs associated with directly accessing the Exchange. The Exchange believes that Trading Permits are a means to directly access the Exchange and thus offers meaningful value (and without a Trading Permit a Member cannot directly trade on the Exchange). The Exchange provides an analysis of its revenues, costs, and profitability associated with these fees, which it references as “Proposed Access Fees.” The Exchange states that this analysis reflects an extensive cost review in which the Exchange analyzed every expense item in the Exchange's general expense ledger 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. The Exchange states that this analysis shows that the Proposed Access Fees will not result in excessive pricing or supra-competitive profit when compared to the Exchange's annual expense associated with providing the services associated with the Proposed Access Fees versus the annual revenue the Exchange will collect for providing those services.
See Notice, supra note 5, at 37381-86.
See Notice, supra note 5, at 37382. In addition, the Exchange notes that the expenses discussed within their filing only cover the MIAX Pearl options market; expenses associated with the MIAX Pearl equities market are accounted for separately and are not included within the scope of this filing. See id. at 37384.
See Notice, supra note 5, at 37382, 37386.
The Exchange states that for 2021, the total annual expense for providing the access services associated with the Proposed Access Fees for the Exchange is projected to be approximately $844,741. The $844,741 in projected total annual expense is comprised of the following, all of which the Exchange states 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 third-parties for certain products and services; and (2) internal expense, relating to the internal costs of the Exchange to provide the services associated with the Proposed Access Fees. The Exchange states that the $844,741 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.
See Notice, supra note 5, at 37383-84.
The Exchange states that the total third-party expense, relating to fees paid by the Exchange to third-parties for certain products and services for the Exchange to be able to provide the access services associated with the Proposed Access Fees is projected to be $188,815 for 2021. The Exchange represents that it 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 Exchange 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 8% of the Exchange's total applicable Equinix expense); (2) Zayo Group Holdings, Inc. for network services (approximately 4%); (3) Secure Financial Transaction Infrastructure and various other services providers (approximately 3%); and (4) various other hardware and software providers (approximately 5%).
See Notice, supra note 5, at 37384-85.
In addition, the Exchange states that the total internal expense, relating to the internal costs of the Exchange to provide the access services associated with the Proposed Access Fees, is projected to be $655,925 for 2021. The Exchange represents that: (1) The Exchange's employee compensation and benefits expense relating to providing the access services associated with the Proposed Access Fees is projected to be $549,824, which is a portion of the Exchange's total projected expense of $9,163,894 for employee compensation and benefits (approximately 6%); (2) the Exchange's depreciation and amortization expense relating to providing the access services associated with the Proposed Access Fees is projected to be $66,316, which is a portion of the Exchange's total projected expense of $1,326,325 for depreciation and amortization (approximately 5%); and (3) the Exchange's occupancy expense relating to providing the access services associated with the Proposed Access Fees is projected to be $39,775, which is a portion of the Exchange's total projected expense of $497,180 for occupancy (approximately 8%).
See Notice, supra note 5, at 37385-86.
The Exchange states that this cost and revenue analysis shows that the proposed rule change will not result in excessive pricing or supra-competitive profit. The Exchange projects that, on a fully-annualized basis, the Proposed Access Fees will have an expense of $844,741 per year and a projected revenue of $1,170,000 per year, resulting in a projected profit margin of 28% ($1,170,000 in projected revenue minus $844,741 in projected expense = $325,259 profit per year). The Exchange states that this estimated profit margin is well below the operating profit margins of other competing exchanges based on financial statements provided by them in Form 1 filings. The Exchange also claims that the Trading Permit fees are reasonable and equitable because “they are in line with, or cheaper than, the trading permit fees or similar membership fees charged by other options exchanges.”
See Notice, supra note 5, at 37386.
See Notice, supra note 5, at 37386. The Exchange states that Nasdaq ISE, LLC's operating profit margin for 2019 was 83% and Nasdaq PHLX LLC's operating profit margin for 2019 was 67%.
See Notice, supra note 5, at 37387. The Exchange cites fees from NYSE Arca, NYSE American, and CBOE BZX Options Exchange in support of this statement. See id. at 37381 n.18. For a more detailed description of the Exchange's justifications for the proposed rule change, see Notice, supra note 5, at 37381-88.
The Exchange further states that its proposed fees are reasonable, equitably allocated and not unfairly discriminatory because the Exchange, and its affiliates, Miami International Securities Exchange, LLC and MIAX Emerald, LLC, are still recouping the initial expenditures from building out their systems while the “legacy” exchanges have already paid for and built their systems. The Exchange also believes that removal of the Monthly Volume Credit and Trading Permit fee credit is reasonable, equitable and not unfairly discriminatory because all market participants will no longer be offered the ability to receive the credit and access to the Exchange is offered on terms that are not unfairly discriminatory. In addition, the Exchange states that these credits were offered in order to attract order flow and membership after the Exchange first launched operations, and it is now appropriate to remove these credits in light of the current operating conditions of the Exchange.
See Notice, supra note 5, at 37386.
See Notice, supra note 5, at 37382-83.
See Notice, supra note 5, at 37382-83.
The Exchange states 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, the difference in Trading Permit fees for FIX versus MEO Interface users reflects the fact FIX Interface utilizes less capacity and resources of the Exchange while the MEO Interface offers lower latency and higher throughput, which utilizes greater capacity and resources of the Exchange; and options market participants are not forced to connect to (and purchase Trading Permits) all options exchanges.
See id. at 37387.
See Notice, supra note 5, at 37381.
For a more detailed description of the Exchange's justifications for the proposed rule change, see Notice, supra note 5, at 37381-88.
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. 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.”
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”).
Id.
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; (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; and (3) not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
15 U.S.C. 78f(b)(5).
In temporarily suspending the Exchange's fee change, the Commission intends to further consider whether the proposed rule change 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 change satisfies 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.
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.
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
In addition to temporarily suspending the proposal, the Commission also hereby institutes proceedings pursuant to Sections 19(b)(3)(C) and 19(b)(2)(B) of the Act to determine whether the proposed rule change 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 change to inform the Commission's analysis of whether to approve or disapprove the proposed rule change.
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.
Pursuant to Section 19(b)(2)(B) of the Act, the Commission is providing notice of the grounds for possible disapproval under consideration:
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.
- Whether the Exchange has demonstrated how the proposal is 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;”
- Whether the Exchange has demonstrated how the proposal is 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;” and
- Whether the Exchange has demonstrated how the proposal is 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].”
As discussed in Section III above, the Exchange makes various arguments in support of the proposal. The Commission believes that there are questions as to whether the Exchange has provided sufficient information to demonstrate that the proposal to remove certain credits and increase monthly Trading Permit fees is 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 [Act] and the rules and regulations issued thereunder . . . is on the [SRO] that proposed the rule change.” 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, 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.
See id.
See id.
The Commission is instituting proceedings to allow for additional consideration and comment on the issues raised herein, including as to whether the proposal is 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; as well as any other provision of the Act, or the rules and regulations thereunder.
See 15 U.S.C. 78f(b)(4), (5), and (8).
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. Such comments should be submitted by September 23, 2021. Rebuttal comments should be submitted by October 7, 2021. 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.
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).
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.
Interested persons are invited to submit written data, views, and arguments concerning the proposed rule change, including whether the proposal is 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 to rule-comments@sec.gov. Please include File No. SR-PEARL-2021-32 on the subject line.
Paper Comments
- Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PEARL-2021-32. 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 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 Number SR-PEARL-2021-32 and should be submitted on or before September 23, 2021. Rebuttal comments should be submitted by October 7, 2021.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the Act, that File Number SR-PEARL-2021-32 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.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
17 CFR 200.30-3(a)(57) and (58).
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-18948 Filed 9-1-21; 8:45 am]
BILLING CODE 8011-01-P