[Federal Register Volume 86, Number 18 (Friday, January 29, 2021)]
[Notices]
[Pages 7582-7590]
[FR Doc No: 2021-01940]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90981; File No. SR-PEARL-2021-01]

Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
PEARL Options Fee Schedule for Member and Non-Member Monthly Network
Connectivity Fees

January 25, 2021.
    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 January 13, 2021, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 Fee
Schedule (the ``Fee Schedule'') for the Exchange's options market.\3\
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    \3\ The Commission notes that the Exchange initially filed the
proposed Fee Schedule amendment on December 31, 2020 (SR-PEARL-2020-
39). On January 13, 2021, the Exchange withdrew that filing and
submitted this filing.

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    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.

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 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
Exchange's network connectivity fees for its 10 gigabit (``Gb'') ultra-
low latency (``ULL'') fiber connection for Members \4\ and non-Members
(the ``Proposed Access Fees'').
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    \4\ 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.
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    The Exchange currently offers various bandwidth alternatives for
connectivity to the Exchange, to its primary and secondary facilities,
consisting of a 1Gb fiber connection, a 10Gb fiber connection, and a
10Gb ULL fiber connection. The 10Gb ULL offering uses an ultra-low
latency switch, which provides faster processing of messages sent to it
in comparison to the switch used for the other types of connectivity.
The Exchange currently assesses the following monthly network
connectivity fees to both Members and non-Members for connectivity to
the Exchange's primary/secondary facility: (a) $1,400 for the 1Gb
connection; (b) $6,100 for the 10Gb connection; and (c) $9,300 for the
10Gb ULL connection.
    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, Miami International Securities Exchange, LLC (``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 are assessed only one monthly network connectivity
fee per connection, regardless of the trading platforms, market data
systems, test systems, and disaster recovery facilities accessed via
such connection. The Exchange now proposes to increase the monthly
network connectivity fees for its 10Gb ULL connections for both Members
and non-Members from $9,300 to $10,000 per connection.
* * * * *
    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 increase meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among members and markets. The
Exchange believes this high standard is especially important when an
exchange imposes various access fees for market participants to access
an exchange's marketplace. The Exchange deems connectivity fees to be
access fees. The Exchange believes that it is important to demonstrate
that these fees are based on its costs and reasonable business needs.
Accordingly, the Exchange believes the Proposed Access Fees will allow
the Exchange to offset expense the Exchange has and will incur, and
that the Exchange is providing sufficient transparency (as described
below) into how the Exchange determined to charge such fees.
Accordingly, the Exchange is providing an analysis of its revenues,
costs, and profitability for the Proposed Access Fees. This analysis
includes information regarding its methodology for determining the
costs and revenues associated with the Proposed Access Fees.
    In order to determine the Exchange's costs associated with
providing the Proposed Access Fees, the Exchange conducted 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 services included in the Proposed Access Fees. The sum of
all such portions of expenses represents the total cost of the Exchange
to provide the Proposed Access Fees. For the avoidance of doubt, no
expense amount was allocated twice. The Exchange is also providing
detailed information regarding the Exchange's cost allocation
methodology--namely, information that explains the Exchange's rationale
for determining that it was reasonable to allocate certain expenses
described in this filing towards the total cost to the Exchange to
provide the Proposed Access Fees.
    In order to determine the Exchange's projected revenues associated
with providing the Proposed Access Fees, the Exchange analyzed the
number of Members and non-Members currently utilizing the Exchange's
services associated with the Proposed Access Fees during 2020, and,
utilizing a recently completed monthly billing cycle, extrapolated
annualized revenue on a going-forward basis. The Exchange is presenting
its revenue and expense associated with the Proposed Access Fees in
this filing in a manner that is consistent with how the Exchange
presents its revenue and expense in its Audited Unconsolidated
Financial Statements. The Exchange's most recent Audited Unconsolidated
Financial Statement is for 2019. However, since the revenue and expense
associated with the Proposed Access Fees were not in place in 2019 (or
2020), the Exchange believes its 2019 Audited Unconsolidated Financial
Statement is not useful for analyzing the reasonableness of the total
annual revenue and costs associated with the Proposed Access Fees.
Accordingly, the Exchange believes it is more appropriate to analyze
the Proposed Access Fees utilizing its 2020 (actual for the first 11
months and projected for the final 1 month) revenue and costs, as
described herein, which utilize the same presentation methodology as
set forth in the Exchange's previously-issued Audited Unconsolidated
Financial Statements. Based on this analysis, the Exchange believes
that the Proposed Access Fees are fair and reasonable because they will
not result in excessive pricing or supra-competitive profit when
comparing the Exchange's total annual expense associated with providing
the services associated with the Proposed Access Fees versus the total
projected annual revenue the Exchange will collect for providing those
services.
* * * * *
    On March 29, 2019, the Commission issued its 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 (the ``BOX Order'').\5\ On May 21, 2019, the Commission
issued the Staff Guidance on SRO Rule Filings Relating to Fees.\6\
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    \5\ 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).
    \6\ 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'').
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    The Exchange believes that the Proposed Access Fees are consistent
with the Act because they (i) are reasonable, equitably allocated, not
unfairly discriminatory, and not an undue burden on competition; (ii)
comply with the BOX Order and the Guidance; (iii) are supported by
evidence (including data and analysis), constrained by significant
competitive forces; and (iv) are supported by specific information
(including quantitative information), fair and reasonable because they
will permit recovery of the Exchange's costs (less than all) and will
not result in excessive pricing or supra-competitive profit.
Accordingly, the Exchange believes that the Commission should find that
the Proposed Access Fees are consistent with the Act.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \7\ in general, and furthers
the objectives of Section 6(b)(4) of the Act \8\ in particular, in that
it provides for the equitable allocation of reasonable dues, fees and
other charges among Exchange Members and issuers and other persons
using any facility or system which the Exchange operates or controls.
The Exchange also believes the proposal furthers the objectives of
Section 6(b)(5) of the Act \9\ in that it is designed 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 is not
designed to permit unfair discrimination between customers, issuers,
brokers and dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ 15 U.S.C. 78f(b)(5).
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    For November 2020, the Exchange had only a 3.39% market share of
the U.S. options industry.\10\ The Exchange is not aware of any
evidence that a market share of approximately 3-4% provides the
Exchange with anti-competitive pricing power. If the Exchange were to
attempt to establish unreasonable pricing, then no market participant
would join or connect, and existing market participants would
disconnect.
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    \10\ See The Options Clearing Corporation (``OCC'') publishes
options and futures volume in a variety of formats, including daily
and monthly volume by exchange, available here: https://www.theocc.com/market-data/volume/default.jsp.
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    Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections and cease being
Members of the Exchange if the Exchange were to establish unreasonable
and uncompetitive price increases for its connectivity alternatives.
Market participants choose to connect to a particular exchange and
because it is a choice, the Exchange must set reasonable connectivity
pricing, otherwise prospective members would not connect and existing
members would disconnect or connect through a third-party reseller of
connectivity. 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 disconnect
from exchanges based on connectivity pricing, R2G Services LLC
(``R2G'') filed a comment letter after BOX's proposed rule changes to
increase its connectivity fees (SR-BOX-2018-24, SR-BOX-2018-37, and SR-
BOX-2019-04).\11\ The R2G Letter stated, ``[w]hen 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 didn't make any sense for
us at those new levels.'' Accordingly, this example shows that if an
exchange sets too high of a fee for connectivity and/or market data
services for its relevant marketplace, market participants can choose
to disconnect from the exchange.
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    \11\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman,
Acting Secretary, Commission, dated March 27, 2019 (the ``R2G
Letter'').
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    The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the Proposed Access Fees will not result in
excessive or supra-competitive profit. The costs associated with
providing access to Exchange Members and non-Members, as well as the
general expansion of a state-of-the-art infrastructure, are extensive,
have increased year-over-year, and are projected to increase year-over-
year in the future.
    The Exchange believes the proposed increase to the 10Gb ULL
connection is an equitable allocation of reasonable fees because 10Gb
ULL purchasers: (1) Consume the most bandwidth and resources of the
network; (2) transact the vast majority of the volume on the Exchange;
and (3) require the high touch network support services provided by the
Exchange and its staff, including more costly network monitoring,
reporting and support services, resulting in a much higher cost to the
Exchange.
    The Exchange believes that the proposed increase to the 10Gb ULL
fees are equitably allocated among users of the network connectivity
alternatives, as the users of the 10Gb ULL connections consume the most
bandwidth and resources of the network. Specifically, the Exchange
notes that these users account for approximately greater than 99% of
message traffic over the network, while the users of the 1Gb
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. However, in order 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. 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 Member and non-Member users
benefit, but is designed and maintained from a capacity standpoint to
specifically handle the message rate and performance requirements of
10Gb and 10Gb ULL users.

    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 94% of the volume on the
Exchange for the month of November 2020. This overall volume percentage
(94% 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 the same
recently completed billing cycle described above, Exchange Members and
non-Members that purchased 10Gb ULL connections accounted for
approximately 87% 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 13% of the revenue collected by the Exchange from all
connectivity alternatives.
    The Exchange further believes that the fees are equitably
allocated, as the amount of the fees for the various connectivity
alternatives are directly related to the actual costs associated with
providing the respective connectivity alternatives. That is, the cost
to the Exchange of providing a 1Gb network connection is significantly
lower than the cost to the Exchange of providing a 10Gb or 10Gb ULL
network connection. Pursuant to its extensive cost review described
above, the Exchange believes that the average cost to provide a 10Gb
ULL network connection is approximately 8 times more than the average
cost to provide a 1Gb connection. The simple hardware and software
component costs alone of a 10Gb ULL connection is not 8 times more than
the 1Gb connection. Rather, it is the associated premium-product level
network monitoring, reporting, and support services costs that
accompany a 10Gb ULL connection which causes it to be 8 times more
costly to provide than the 1Gb connection. Accordingly, the Exchange
believes it is equitable to allocate those network infrastructure costs
that accompany a 10Gb ULL connection to the purchasers of those
connections, and not to purchasers of 1Gb connections.
    As discussed above, the Exchange differentiates itself by offering
a ``premium-product'' network experience, as an operator of a high
performance, ultra-low latency network with unparalleled system
throughput, which network can support access to three distinct options
markets and multiple competing market-makers having affirmative
obligations to continuously quote over 750,000 distinct trading
products (per exchange), and the capacity to handle approximately 10.7
million quote messages per second. The ``premium-product'' network
experience enables users of 10Gb and 10Gb ULL connections to receive
the network monitoring and reporting services for those approximately
750,000 distinct trading products. There is a significant, quantifiable
amount of research and development (``R&D'') effort, employee
compensation and benefits expense, and other expense associated with
providing the high touch network monitoring and reporting services that
are utilized by the 10Gb and 10Gb ULL connections offered by the
Exchange. These value add services are fully-discussed herein, and the
actual costs associated with providing these services are the basis for
the differentiated amount of the fees for the various connectivity
alternatives.
    In order to provide more detail and to quantify the Exchange's
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 10Gb ULL connections require the purchase of
additional hardware to support those connections as well as enhanced
monitoring and reporting of customer performance that MIAX PEARL and
its affiliates provide. Further, as the total number of all connections
increase, MIAX PEARL and its affiliates 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 MIAX PEARL and its affiliates is not fixed. The Exchange
believes the Proposed Access Fees are reasonable in order to offset the
costs to the Exchange associated with providing access to its network
infrastructure.
    Further, because the costs of operating its own data center are
significant and not economically feasible for the Exchange at this
time, the Exchange does not operate its own data centers, and instead
contracts with a third-party data center provider. The Exchange notes
that other competing exchange operators own/operate their data centers,
which offers them greater control over their data center costs. Because
those exchanges own and operate their data centers as profit centers,
the Exchange is subject to additional costs. The Proposed Access Fees,
which are charged for accessing the Exchange's data center network
infrastructure, are directly related to the network and offset such
costs.
    The Exchange invests significant resources in network R&D to
improve the overall performance and stability of its network. For
example, the Exchange has a number of network monitoring tools (some of
which were developed in-house, and some of which are licensed from
third-parties), that continually monitor, detect, and report network
performance, many of which serve as significant value-adds to the
Exchange's Members and enable the Exchange to provide a high level of
customer service. These tools detect and report performance issues, and
thus enable the Exchange to proactively notify a Member (and the SIPs)
when the Exchange detects a problem with a Member's connectivity. In
fact, the Exchange often receives inquiries from other industry
participants regarding the status of networking issues outside of the
Exchange's own network environment that are impacting the industry as a
whole via the SIPs, including inquiries from regulators, because the
Exchange has a superior, state-of the-art network that, through its
enhanced monitoring and reporting solutions, often detects and
identifies industry-wide networking issues ahead of the SIPs. The
Exchange also incurs costs associated with the maintenance and
improvement of existing tools and the development of new tools.
    Additionally, certain Exchange-developed network aggregation and
monitoring tools provide the Exchange with the ability to measure
network traffic with a much more granular level of variability. This is
important as Exchange Members demand a higher level of network
determinism and the ability to measure variability in terms of single
digit nanoseconds. Also, routine R&D projects to improve the
performance of the network's hardware infrastructure result in
additional cost. In sum, the costs associated with maintaining and
enhancing a state-of-the-art exchange network in the U.S. options
industry is a significant expense

for the Exchange that also increases year-over-year, and thus the
Exchange believes that it is reasonable to offset those costs through
the Proposed Access Fees. The Exchange invests in and offers a superior
network infrastructure as part of its overall options exchange services
offering, resulting in significant costs associated with maintaining
this network infrastructure, which are directly tied to the amount of
the Proposed Access Fees that must be charged to access it, in order to
recover those costs.
    For the avoidance of doubt, none of the expenses included herein
relating to the services associated with the Proposed Access Fees also
relate to the provision of any other services offered by the Exchange.
Stated differently, no expense amount of the Exchange is allocated
twice. The Exchange notes that it made certain representations in a
previous filing \12\ regarding its expense allocation for the provision
of additional limited service ports. The Exchange represents that none
of the expenses allocated to the provision of additional limited
service ports are also allocated to the services associated with the
Proposed Access Fees--that is, there is no overlap of any such expenses
that are included in the costs associated with services the Exchange
provides for the Proposed Access Fees and for the services the Exchange
provides for ports. Lastly, the Exchange notes that, with respect to
the MIAX PEARL expenses included herein, those expenses 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.
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    \12\ See Securities Exchange Act Release No. 90812 (December 29,
2020) (SR-PEARL-2020-35).
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    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 supra-
competitive profit, when comparing the total annual expense of MIAX
PEARL and MIAX associated with providing these services versus the
total projected annual revenue for both exchanges from these services.
For 2020, the total annual expense for providing network connectivity
services (that is, the shared network connectivity of MIAX PEARL and
MIAX, but excluding MIAX Emerald) is projected to be approximately
$17.9 million. The $17.9 million in projected total annual expense is
comprised of the following, all of which are directly related to the
services associated with the Proposed Access Fees for MIAX PEARL and
MIAX: (1) Third-party expense, relating to fees paid by MIAX PEARL and
MIAX to third-parties for certain products and services; and (2)
internal expense, relating to the internal costs of MIAX PEARL and MIAX
to provide the services associated with the Proposed Access Fees. As
noted above, the Exchange believes it is more appropriate to analyze
the Proposed Access Fees utilizing its 2020 (actual for the first 11
months and projected for the final 1 month) revenue and costs, which
utilize the same presentation methodology as set forth in the
Exchange's previously-issued Audited Unconsolidated Financial
Statements.\13\ The $17.9 million in projected total annual expense is
directly related to the services associated with providing network
connectivity services, 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 every expense item in the
Exchange's general expense ledger (this includes over 150 separate and
distinct expense items) to determine whether each such expense relates
to the 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 represents the total cost to
the Exchange to provide the services associated with the Proposed
Access Fees.
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    \13\ 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 2020 Form 1 Amendment, which will be filed in 2021.
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    For 2020, total third-party expense, relating to fees paid by MIAX
PEARL and MIAX to third-parties for certain products and services for
the Exchange to be able to provide network connectivity services, is
projected to be $4,079,910. This includes, but is not limited to, a
portion of the fees paid to: (1) Equinix, for data center services, for
the primary, secondary, and disaster recovery locations of the MIAX
PEARL and MIAX trading system infrastructure; (2) Zayo Group Holdings,
Inc. (``Zayo'') for connectivity services (fiber and bandwidth
connectivity) linking MIAX PEARL and MIAX office locations in
Princeton, NJ and Miami, FL to all data center locations; (3) Secure
Financial Transaction Infrastructure (``SFTI''),\14\ which supports
connectivity and feeds for the entire U.S. options industry; (4)
various other services providers (including Thompson Reuters, NYSE,
Nasdaq, and Internap), which provide content, connectivity services,
and infrastructure services for critical components of options
connectivity; and (5) various other hardware and software providers
(including Dell and Cisco, which support the production environment in
which Members and non-Members connect to the network to trade, receive
market data, etc.).
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    \14\ In fact, on October 22, 2019, the Exchange was notified by
SFTI that it is again raising its fees charged to the Exchange by
approximately 11%, without having to show that such fee change
complies with the Act by being reasonable, equitably allocated, and
not unfairly discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure services
provided by SFTI, that its fees are not required to be rule-filed
with the Commission pursuant to Section 19(b)(1) of the Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively.
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    For clarity, only a portion of all fees paid to such third-parties
is included in the third-party expense herein, and no expense amount is
allocated twice. Accordingly, MIAX PEARL and MIAX do not allocate their
entire information technology and communication costs to the services
associated with the Proposed Access Fees.
    The Exchange believes it is reasonable to allocate such third-party
expense described above towards the total cost to the Exchange to
provide the services associated with the Proposed Access Fees. In
particular, the Exchange believes it is reasonable to allocate the
identified portion of the Equinix expense because Equinix operates the
data centers (primary, secondary, and disaster recovery) that host the
Exchange's network infrastructure. This includes, among other things,
the necessary storage space, which continues to expand and increase in
cost, power to operate the network infrastructure, and cooling
apparatuses to ensure the Exchange's network infrastructure maintains
stability.

Without these services from Equinix, the Exchange would not be able to
operate and support the network and provide the services associated
with the Proposed Access Fees to its Members and non-Members and their
customers. The Exchange did not allocate all of the Equinix expense
toward the cost of providing network connectivity services, only that
portion which the Exchange identified as being specifically mapped to
providing network connectivity services, approximately 68% of the total
Equinix expense. The Exchange believes this allocation is reasonable
because it represents the Exchange's actual cost to provide the
services associated with the Proposed Access Fees, and not any other
service, as supported by its cost review.
    The Exchange believes it is reasonable to allocate the identified
portion of the Zayo expense because Zayo provides the internet, fiber
and bandwidth connections with respect to the network, linking MIAX
PEARL with its affiliates, MIAX and MIAX Emerald, as well as the data
center and disaster recovery locations. As such, all of the trade data,
including the billions of messages each day per exchange, flow through
Zayo's infrastructure over the Exchange's network. Without these
services from Zayo, the Exchange would not be able to operate and
support the network and provide the services associated with the
Proposed Access Fees to its Members and non-Members and their
customers. The Exchange did not allocate all of the Zayo expense toward
the cost of providing network connectivity services, only that portion
which the Exchange identified as being specifically mapped to providing
network connectivity services, approximately 62% of the total Zayo
expense. The Exchange believes this allocation is reasonable because it
represents the Exchange's actual cost to provide the services
associated with the Proposed Access Fees, and not any other service, as
supported by its cost review.
    The Exchange believes it is reasonable to allocate the identified
portion of the SFTI expense and various other service providers'
(including Thompson Reuters, NYSE, Nasdaq, and Internap) expense
because those entities provide connectivity and feeds for the entire
U.S. options industry as well as the content, connectivity services,
and infrastructure services for critical components of the network.
Without these services from SFTI and various other service providers,
the Exchange would not be able to operate and support the network and
provide the services associated with the Proposed Access Fees to its
Members and non-Members and their customers. The Exchange did not
allocate all of the SFTI and other service providers' expense toward
the cost of providing network connectivity services, only that portion
which the Exchange identified as being specifically mapped to providing
network connectivity services, approximately 89% of the total SFTI and
other service providers' expense. The Exchange believes this allocation
is reasonable because it represents the Exchange's actual cost to
provide the services associated with the Proposed Access Fees, and not
any other service, as supported by its cost review.
    The Exchange believes it is reasonable to allocate the identified
portion of the other hardware and software provider expense because
this includes costs for dedicated hardware licenses for switches and
servers, as well as dedicated software licenses for security monitoring
and reporting across the network. Without this hardware and software,
the Exchange would not be able to operate and support the network and
provide the services associated with the Proposed Access Fees to its
Members and non-Members and their customers. The Exchange did not
allocate all of the hardware and software provider expense toward the
cost of providing network connectivity services, only that portion
which the Exchange identified as being specifically mapped to providing
network connectivity services, approximately 54% of the total hardware
and software provider expense. The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the services associated with the Proposed Access Fees, and not any
other service, as supported by its cost review.
    For 2020, total projected internal expense, relating to the
internal costs of MIAX PEARL and MIAX to provide network connectivity
services, is projected to be $13,831,434. This includes, but is not
limited to, costs associated with: (1) Employee compensation and
benefits for full-time employees that support the services associated
with the Proposed Access Fees, 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; (2)
depreciation and amortization of hardware and software used to provide
the services associated with the Proposed Access Fees, 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 the services associated with the Proposed Access
Fees. The breakdown of these costs is more fully-described below. For
clarity, only a portion of all such internal expenses are included in
the internal expense herein, and no expense amount is allocated twice.
Accordingly, the Exchange and MIAX do not allocate their entire costs
contained in those items to the services associated with the Proposed
Access Fees.
    The Exchange believes it is reasonable to allocate such internal
expense described above towards the total cost to the Exchange to
provide the services associated with the Proposed Access Fee. In
particular, MIAX PEARL's and MIAX's combined employee compensation and
benefits expense relating to providing network connectivity services is
projected to be approximately $6,892,689, which is only a portion of
the $9,727,857 (for MIAX PEARL) and $11,811,796 (for MIAX) total
projected expense for employee compensation and benefits. The Exchange
believes it is reasonable to allocate the identified portion of such
expense because this includes the time spent by employees of several
departments, including Technology, Back Office, Systems Operations,
Networking, Business Strategy Development (who create the business
requirement documents that the Technology staff use to develop network
features and enhancements), Trade Operations, Finance (who provide
billing and accounting services relating to the network), and Legal
(who provide legal services relating to the network, such as rule
filings and various license agreements and other contracts). As part of
the extensive cost review conducted by the Exchange, the Exchange
reviewed the amount of time spent by each employee on matters relating
to the provision of services associated with the Proposed Access Fees.
Without these employees, the Exchange would not be able to operate and
support the network and provide network and provide the services
associated with the Proposed Access Fees to its Members and non-Members
and their customers. The Exchange did not allocate all of the employee
compensation and benefits expense toward the cost of providing network
connectivity services, only the portions which the Exchange identified

as being specifically mapped to providing network connectivity
services, approximately 32% of the total employee compensation and
benefits expense. The Exchange believes this allocation is reasonable
because it represents the Exchange's actual cost to provide the
services associated with the Proposed Access Fees, and not any other
service, as supported by its cost review.
    MIAX PEARL's and MIAX's combined depreciation and amortization
expense relating to providing network connectivity services is
projected to be $6,378,337, which is only a portion of the $3,342,621
(for MIAX PEARL) and $5,276,753 (for MIAX) total projected expense for
depreciation and amortization. The Exchange believes it is reasonable
to allocate the identified portion of such expense because such expense
includes the actual cost of the computer equipment, such as dedicated
servers, computers, laptops, monitors, information security appliances
and storage, and network switching infrastructure equipment, including
switches and taps that were purchased to operate and support the
network and provide the services associated with the Proposed Access
Fees. Without this equipment, the Exchange would not be able to operate
the network and provide the services associated with the Proposed
Access Fees to its Members and non-Members and their customers. The
Exchange did not allocate all of the depreciation and amortization
expense toward the cost of providing network connectivity services,
only the portion which the Exchange identified as being specifically
mapped to providing network connectivity services, approximately 74% of
the total depreciation and amortization expense, as these services
would not be possible without relying on such equipment. The Exchange
believes this allocation is reasonable because it represents the
Exchange's actual cost to provide the services associated with the
Proposed Access Fees, and not any other service, as supported by its
cost review.
    MIAX PEARL's and MIAX's combined occupancy expense relating to
providing network connectivity services is projected to be $560,408,
which is only a portion of the $528,425 (for MIAX PEARL) and $615,264
(for MIAX) total projected expense for occupancy. The Exchange believes
it is reasonable to allocate the identified portion of such expense
because such expense represents the portion of the Exchange's cost to
rent and maintain a physical location for the Exchange's staff who
operate and support the network, including providing the services
associated with the Proposed Access Fees. This amount consists
primarily of rent for the Exchange's Princeton, NJ office, as well as
various related costs, such as physical security, property management
fees, property taxes, and utilities. The Exchange operates its Network
Operations Center (``NOC'') and Security Operations Center (``SOC'')
from its Princeton, New Jersey office location. A centralized office
space is required to house the staff that operates and supports the
network. The Exchange currently has approximately 150 employees.
Approximately two-thirds of the Exchange's staff are in the Technology
department, and the majority of those staff have some role in the
operation and performance of the services associated with the Proposed
Access Fees. Without this office space, the Exchange would not be able
to operate and support the network and provide the services associated
with the Proposed Access Fees to its Members and non-Members and their
customers. Accordingly, the Exchange believes it is reasonable to
allocate the identified portion of its occupancy expense because such
amount represents the Exchange's actual cost to house the equipment and
personnel who operate and support the Exchange's network infrastructure
and the services associated with the Proposed Access Fees. The Exchange
did not allocate all of the occupancy expense toward the cost of
providing network connectivity services, only that portion which the
Exchange identified as being specifically mapped to providing the
services associated with the Proposed Access Fees, approximately 49% of
the total occupancy expense. The Exchange believes this allocation is
reasonable because it represents the Exchange's actual cost to provide
the services associated with the Proposed Access Fees, and not any
other service, as supported by its cost review.
    The Exchange's monthly projected revenue for the Proposed Access
Fees is based on MIAX PEARL and MIAX Members and non-Members purchasing
140 10Gb ULL connections, based on a recent billing cycle. Accordingly,
based on current assumptions and approximations, the Exchange and MIAX
PEARL project total combined monthly revenue from 10Gb ULL connections
of approximately $1,400,000.\15\
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    \15\ The Exchange also projects an additional $215,000 in
monthly revenue through non-10Gb ULL connections, however the
Exchange is not proposing to adjust the fees for those connections
at this time.
---------------------------------------------------------------------------

    On a going-forward, fully-annualized basis, the Exchange and MIAX
project that their annualized revenue for providing the services
associated with the Proposed Access Fees to be approximately $16.8
million per annum, based on a most recently completed billing cycle.
The Exchange and MIAX project that their annualized revenue for
providing network connectivity services (all connectivity alternatives)
to be approximately $19.4 million per annum.\16\ The Exchange and MIAX
project that their annualized expense for providing network
connectivity services (all connectivity alternatives) to be
approximately $17.9 million per annum. Accordingly, on a fully-
annualized basis, the Exchange believes its total projected revenue for
the providing network connectivity services (all additional
connectivity alternatives) will not result in excessive pricing or
supra-competitive profit, as the Exchange will make only an 8% profit
margin on network connectivity services ($19.4 million - $17.9 million
= $1.5 million per annum). Additionally, this profit margin does not
take into account the cost of capital expenditures (``CapEX'') the
Exchange and MIAX are projected to spend in each year on CapEx going
forward.
---------------------------------------------------------------------------

    \16\ See id.
---------------------------------------------------------------------------

    The Exchange believes it is reasonable, equitable and not unfairly
discriminatory to allocate the respective percentages of each expense
category described above towards the total cost to the Exchange of
operating and supporting the network, including providing the services
associated with the Proposed Access Fees because the Exchange performed
a line-by-line item analysis of all the expenses of the Exchange, and
has determined the expenses that directly relate to operation and
support of the network. Further, the Exchange notes that, without the
specific third-party and internal items listed above, the Exchange
would not be able to operate and support the network, including
providing the services associated with the Proposed Access Fees to its
Members and non-Members and their customers. Each of these expense
items, including physical hardware, software, employee compensation and
benefits, occupancy costs, and the depreciation and amortization of
equipment, have been identified through a line-by-line item analysis to
be integral to the operation and support of the network. The Proposed
Access Fees are intended to recover the Exchange's costs of operating
and supporting the network. Accordingly, the Exchange believes that the
Proposed Access Fee increases are fair and reasonable because they do
not

result in excessive pricing or supra-competitive profit, when comparing
the actual network operation and support costs to the Exchange versus
the projected annual revenue from the Proposed Access Fees, including
the increased amount.

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 not necessary or appropriate in
furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange does not believe that the proposed rule 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. In particular, the
Exchange has received no official complaints from Members, non-Members
(extranets and service bureaus), third-parties that purchase the
Exchange's connectivity and resell it, and customers of those
resellers, that the Exchange's fees or the Proposed Access Fees are
negatively impacting or would negatively impact their abilities to
compete with other market participants or that they are placed at a
disadvantage.
    The Exchange believes that the Proposed Access Fees do not place
certain market participants at a relative disadvantage to other market
participants because the connectivity pricing is associated with
relative usage of the various market participants and does not impose a
barrier to entry to smaller participants. As described above, the less
expensive 1Gb direct connection is generally purchased by market
participants that utilize less bandwidth. The market participants that
purchase 10Gb ULL direct connections utilize the most bandwidth, and
those are the participants that consume the most resources from the
network. Accordingly, the Proposed Access Fees do not favor certain
categories of market participants in a manner that would impose a
burden on competition; rather, the allocation of the Proposed Access
Fees reflects the network resources consumed by the various size of
market participants--lowest bandwidth consuming members pay the least,
and highest bandwidth consuming members pays the most, particularly
since higher bandwidth consumption translates to higher costs to the
Exchange.
Inter-Market Competition
    The Exchange believes the Proposed Access Fees do not place an
undue burden on competition on other SROs that is not necessary or
appropriate. In particular, options market participants are not forced
to connect to (and purchase market data from) all options exchanges.
Not only does MIAX PEARL have less than half the number of members as
certain other options exchanges, but there are also a number of the
Exchange's Members that do not connect directly to MIAX PEARL or MIAX.
There are a number of large market makers and broker-dealers that are
members of other options exchange but not Members of MIAX PEARL or
MIAX. Additionally, other exchanges have similar connectivity
alternatives for their participants, including similar low-latency
connectivity, but with much higher rates to connect. The Exchange is
also unaware of any assertion that its existing fee levels or the
Proposed Access Fees would somehow unduly impair its competition with
other options exchanges. To the contrary, if the fees charged are
deemed too high by market participants, they can simply disconnect.
    While the Exchange recognizes the distinction between connecting to
an exchange and trading at the exchange, the Exchange notes that it
operates in a highly competitive options market in which market
participants can readily connect and trade with venues they desire. In
such an environment, the Exchange must continually adjust its fees to
remain competitive with other exchanges. The Exchange believes that the
proposed changes reflect this competitive environment.

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\17\ and Rule 19b-4(f)(2) \18\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change 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. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \18\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change 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<EMAIL_ADDRESS>Please include
File Number SR-PEARL-2021-01 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-2021-01. 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-2021-01 and

should be submitted on or before February 19, 2021.
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-01940 Filed 1-28-21; 8:45 am]
BILLING CODE 8011-01-P