[Federal Register Volume 87, Number 95 (Tuesday, May 17, 2022)]
[Notices]
[Pages 29928-29945]
[FR Doc No: 2022-10519]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94889; File No. SR-EMERALD-2022-19]

Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing of a Proposed Rule Change To Amend Its Fee Schedule To Increase
Certain Connectivity Fees and Adopt a Tiered-Pricing Structure for
Additional Limited Service MIAX Emerald Express Interface Ports;
Suspension of and Order Instituting Proceedings To Determine Whether To
Approve or Disapprove the Proposed Rule Change

May 11, 2022.
    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 May 2, 2022, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I and II 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 and is, pursuant to Section 19(b)(3)(C) of the Act, hereby: (i)
Temporarily suspending the proposed rule change; and (ii) instituting
proceedings to determine whether to approve or disapprove the proposed
rule change.
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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 Emerald Options
Fee Schedule (the ``Fee Schedule'') to amend certain connectivity and
port fees.
    The text of the proposed rule change is available on the Exchange's
website at http://www.miaxoptions.com/rule-filings/emerald, at MIAX'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 [sic] 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 its Fee Schedule to increase the
fees for a 10 gigabit (``Gb'') ultra-low latency (``ULL'') fiber
connection and adopt a tiered-pricing structure for Limited Service
MIAX Emerald Express Interface (``MEI'') Ports \3\ available to Market
Makers.\4\ The Exchange last increased the fees for both 10Gb ULL fiber
connections and Limited Service MEI Ports beginning with a series of
filings on October 1, 2020 (with the final filing made on March 24,
2021).\5\ Prior to that fee change, the Exchange provided Limited
Service MEI Ports for $50 per port, after the first two Limited Service
MEI Ports that are provided free of charge, and the Exchange incurred
all the costs associated to provide those first two Limited Service MEI
Ports since it commenced operations in March 2019. The Exchange then
increased the fee by $50 to a modest $100 fee per Limited Service MEI
Port and increased the fee for 10Gb ULL fiber connections from $6,000
to $10,000 per month.
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    \3\ The MIAX Emerald Express Interface (``MEI'') is a connection
to the MIAX Emerald System that enables Market Makers to submit
simple and complex electronic quotes to MIAX Emerald. See the
Definitions Section of the Fee Schedule.
    \4\ The term ``Market Makers'' refers to Lead Market Makers
(``LMMs''), Primary Lead Market Makers (``PLMMs''), and Registered
Market Makers (``RMMs'') collectively. See the Definitions Section
of the Fee Schedule and Exchange Rule 100.
    \5\ See Securities Exchange Act Release Nos. 91460 (April 1,
2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-11); 90184
(October 14, 2020), 85 FR 66636 (October 20, 2020) (SR-EMERALD-2020-
12); 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR-
EMERALD-2020-17); 91032 (February 1, 2021), 86 FR 8428 (February 5,
2021) (SR-EMERALD-2021-02); and 91200 (February 24, 2021), 86 FR
12221 (March 2, 2021) (SR-EMERALD-2021-07).
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    Also, in that fee change, the Exchange adopted fees for providing
five different types of ports for the first time. These ports were FIX
Ports, MEI Ports, Clearing Trade Drop Ports, FIX Drop Copy Ports, and
Purge Ports.\6\ Again, the Exchange absorbed all costs associated with
providing these ports since its launch in March 2019. As explained in
that filing, expenditures, as well as research and development
(``R&D'') in numerous areas resulted in a material increase in expense
to the Exchange and were the primary drivers for that proposed fee
change. In that filing, the Exchange allocated a total of $9.3 million
in expenses to providing 10Gb ULL fiber connectivity, additional
Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop
Ports, FIX Drop Copy Ports, and Purge Ports.\7\
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    \6\ See id. for a description of each of these ports.
    \7\ See supra note 5.
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    Since the time of that filing, the Exchange experienced an increase
in expenses, particularly regarding internal expenses. For example,
from October 2020 to March 2022 expenses related to employee
compensation increased from $9,354,900 to $9,900,032 and occupancy
expense increased from $473,323 to $538,916. In addition, from October
2020 to March 2022, the Exchange's third party related expense
increased as well. In October 2020, the exchange allocated $1,932,519
of its third party expenses to providing the following seven types of
connectivity and access: 10Gb ULL fiber connectivity, additional
Limited Service MEI Ports, FIX Ports, MEI Ports, Clearing Trade Drop
Ports, FIX Drop Copy Ports, and Purge Ports. As described more fully
below, the Exchange is now allocating $2,011,286 of its third party
expense to the following two types of connectivity and access: 10Gb ULL
connectivity and Limited Service MEI Ports, which represents only a
portion of its total third party expense of $3,108,431. As discussed
more fully below, the Exchange recently calculated its annual aggregate
costs for providing 10Gb ULL connectivity and Limited Service MEI Ports
to be $10,483,343, or $873,612 per month. The Exchange now proposes to
amend the Fee Schedule to amend the fees for 10Gb ULL connectivity and
Limited Service MEI Port in order to recoup these ongoing costs and as
a result of the increase in expenses described above.
    First, the Exchange proposes to amend the Fee Schedule to increase
the fees for Members \8\ and non-Members to access the Exchange's
System Networks \9\ via a 10Gb ULL fiber connection. Specifically, the
Exchange proposes to amend Sections (5)(a)-(b) of the Fee Schedule to
increase the 10Gb ULL connectivity fee for Members and non-Members from
$10,000 per month to $12,000 per month (``10Gb ULL Fee''). Prior to the
proposed fee change, the Exchange assessed Members and

non-Members a flat monthly fee of $10,000 per 10Gb ULL connection for
access to the Exchange's primary and secondary facilities.\10\
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    \8\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
    \9\ The Exchange's System Networks consist of the Exchange's
extranet, internal network, and external network.
    \10\ The Exchange notes that it employed a tiered pricing
structure for 10Gb ULL connectivity from August 2021 through March
2022 (except for certain months where the Exchange's 10Gb ULL
connectivity fee was rolled-back to $10,000 per month). See infra
notes 26 to 28.
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    The Exchange will continue to assess monthly Member and non-Member
network connectivity fees for connectivity to the primary and secondary
facilities in any month the Member or non-Member is credentialed to use
any of the Exchange APIs or market data feeds in the production
environment. The Exchange proposes to pro-rate the fees when a Member
or non-Member makes a change to the connectivity (by adding or deleting
connections) with such pro-rated fees based on the number of trading
days that the Member or non-Member has been credentialed to utilize any
of the Exchange APIs or market data feeds in the production environment
through such connection, divided by the total number of trading days in
such month multiplied by the applicable monthly rate. The Exchange will
continue to assess monthly Member and non-Member network connectivity
fees for connectivity to the disaster recovery facility in each month
during which the Member or non-Member has established connectivity with
the disaster recovery facility.
    Second, the Exchange proposes to amend Section (5)(d) of the Fee
Schedule to adopt a tiered-pricing structure for Limited Service MEI
Ports available to Market Makers. The Exchange allocates two (2) Full
Service MEI Ports \11\ and two (2) Limited Service MEI Ports \12\ per
matching engine \13\ to which each Market Maker connects. Market Makers
may also request additional Limited Service MEI Ports for each matching
engine to which they connect. The Full Service MEI Ports and Limited
Service MEI Ports all include access to the Exchange's primary and
secondary data centers and its disaster recovery center. Market Makers
may request additional Limited Service MEI Ports above the first two
that are included for free for each matching engine. Prior to the
proposed fee change, Market Makers were assessed a $100 monthly fee for
each Limited Service MEI Port for each matching engine above the first
two Limited Service MEI Ports that are included for free.
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    \11\ ``Full Service MEI Ports'' means a port which provides
Market Makers with the ability to send Market Maker simple and
complex quotes, eQuotes, and quote purge messages to the MIAX
Emerald System. Full Service MEI Ports are also capable of receiving
administrative information. Market Makers are limited to two Full
Service MEI Ports per Matching Engine. See the Definitions Section
of the Fee Schedule.
    \12\ ``Limited Service MEI Ports'' means a port which provides
Market Makers with the ability to send simple and complex eQuotes
and quote purge messages only, but not Market Maker Quotes, to the
MIAX Emerald System. Limited Service MEI Ports are also capable of
receiving administrative information. Market Makers initially
receive two Limited Service MEI Ports per Matching Engine. See the
Definitions Section of the Fee Schedule.
    \13\ ``Matching Engine'' means a part of the MIAX Emerald
electronic system that processes options orders and trades on a
symbol-by-symbol basis. Some Matching Engines will process option
classes with multiple root symbols, and other Matching Engines may
be dedicated to one single option root symbol (for example, options
on SPY may be processed by one single Matching Engine that is
dedicated only to SPY). A particular root symbol may only be
assigned to a single designated Matching Engine. A particular root
symbol may not be assigned to multiple Matching Engines. See the
Definitions Section of the Fee Schedule.
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    The Exchange now proposes to move from a flat monthly fee per
Limited Service MEI Port for each matching engine to a tiered-pricing
structure for Limited Service MEI Ports for each matching engine under
which the monthly fee would vary depending on the number of Limited
Service MEI Ports each Market Maker elects to purchase. Specifically,
the Exchange will continue to provide the first and second Limited
Service MEI Ports for each matching engine free of charge. For Limited
Service MEI Ports, the Exchange proposes to adopt the following tiered-
pricing structure: (i) The third and fourth Limited Service MEI Ports
for each matching engine will increase from the current flat monthly
fee of $100 to $200 per port; (ii) the fifth and sixth Limited Service
MEI Ports for each matching engine will increase from the current flat
monthly fee of $100 to $300 per port; and (iii) the seventh or more
Limited Service MEI Ports will increase from the current monthly flat
fee of $100 to $400 per port.\14\ The Exchange believes a tiered-
pricing structure will encourage Market Makers to be more efficient
when determining how to connect to the Exchange. This should also
enable the Exchange to better monitor and provide access to the
Exchange's network to ensure sufficient capacity and headroom in the
System \15\ in accordance with its fair access requirements under
Section 6(b)(5) of the Act.\16\
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    \14\ As noted in the Fee Schedule, Market Makers will continue
to be limited to fourteen Limited Service MEI Ports per Matching
Engine. The Exchange also proposes to make a ministerial clarifying
change to remove the defined term ``Additional Limited Service MEI
Ports'' as a result of moving to a tiered pricing structure where
the first two Limited Service MEI Ports continue to be provided free
of charge. The Exchange proposes to make a related change to add the
term ``Limited Service MEI Ports'' after the word ``fourteen'' in
the Fee Schedule.
    \15\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See the Definitions
Section of the Fee Schedule and Exchange Rule 100.
    \16\ See 15 U.S.C. 78f(b). The Exchange may offer access on
terms that are not unfairly discriminatory among its Members, and
ensure sufficient capacity and headroom in the System. The Exchange
monitors the System's performance and makes adjustments to its
System based on market conditions and Member demand.
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    The Exchange believes that other exchanges' connectivity and port
fees are useful examples and provides the following table for
comparison purposes only to show how the Exchange's proposed fees
compare to fees currently charged by other options exchanges for
similar connectivity and port access. As shown by the below table, the
Exchange's proposed fees are similar to or less than fees charged for
similar access to other options exchanges.

------------------------------------------------------------------------
                                      Type of         Monthly fee (per
            Exchange               connection or     connection or per
                                       port                port)
------------------------------------------------------------------------
MIAX Emerald (as proposed)       10Gb ULL          $12,000.
 (equity options market share     connection.      1-2 ports. FREE (not
 of 4.49% as of April 12, 2022   Limited Service    changed in this
 for the month of April) \17\.    MEI Port.         proposal).
                                                   3-4 ports. $200.
                                                   5-6 ports. $300.
                                                   7 or more ports.
                                                    $400.
The NASDAQ Stock Market LLC      10Gb Ultra fiber  $15,000.
 (``NASDAQ'') \18\ (equity        connection.
 options market share of 8.31%
 as of April 12, 2022 for the
 month of April) \19\.

                                 SQF Port........  1-5 ports. $1,500.
                                                   6-20 ports. $1,000.
                                                   21 or more ports.
                                                    $500.
Nasdaq ISE LLC (``ISE'') \20\    10Gb Ultra fiber  $15,000.
 (equity options market share     connection.      $1,100.
 of 5.28% as of April 12, 2022   SQF Port........
 for the month of April) \21\.
NYSE American LLC (``NYSE        10Gb LX LCN       $22,000.
 American'') \22\ (equity         connection.      Ports 1-40. $450.
 options market share of 7.86%   Order/Quote       Ports 41 and greater.
 as of April 12, 2022 for the     Entry Port.       $150.
 month of April) \23\.
Nasdaq GEMX, LLC (``GEMX'')      10Gb Ultra        $15,000.
 \24\ (equity options market      connection.      $1,250.
 share of 2.31% as of April 12,  SQF Port........
 2022 for the month of April)
 \25\.
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Implementation and Procedural History
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    \17\ See ``The market at a glance,'' available at https://www.miaxoptions.com/ (last visited April 12, 2022).
    \18\ See NASDAQ Pricing Schedule, Options 7, Section 3, Ports
and Other Services and NASDAQ Rules, General 8: Connectivity,
Section 1. Co-Location Services.
    \19\ See supra note 17.
    \20\ See ISE Pricing Schedule, Options 7, Section 7,
Connectivity Fees and ISE Rules, General 8: Connectivity.
    \21\ See supra note 17.
    \22\ See NYSE American Options Fee Schedule, Section V.A. Port
Fees and Section V.B. Co-Location Fees.
    \23\ See supra note 17.
    \24\ See GEMX Pricing Schedule, Options 7, Section 6,
Connectivity Fees and GEMX Rules, General 8: Connectivity.
    \25\ See supra note 17.
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    The proposed rule change will be effective May 2, 2022. The
Exchange initially filed proposals to adopt tiered-pricing structures
for the 10Gb ULL connections and Limited Service MEI Ports, with the
proposed fees being effective beginning August 1, 2021. Between August
2021 and February 2022, the Exchange withdrew and refiled the proposed
rule changes, each time to meaningfully attempt to provide additional
justification for the proposed fee changes, provide enhanced details
regarding the Exchange's cost methodology, and address questions
contained in the Commission's suspension orders. The Exchange received
six comment letters from three separate commenters on the filings.\26\
This revised proposal provided additional details regarding the
Exchange's cost methodology, revenue projections, and responded to
various questions and requests for information contained in the
Commission's suspension orders.\27\ On April 1, 2022, the Exchange
submitted revised proposals (separate filings for 10Gb ULL connectivity
and Limited Service MEI Ports) to provide additional clarity regarding
the Exchange's cost justifications and those proposals were
subsequently suspended by the Commission.\28\ The Exchange withdrew
those proposals and submitted this revised filing on May 2, 2022. This
newest revised filing builds upon the additional details regarding the
Exchange's cost methodology and revenue projections, and includes the
Exchange's responses to various questions and requests for information
contained in the Commission's suspension orders.
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    \26\ See letters from Richard J. McDonald, Susquehanna
International Group, LLC (``SIG''), to Vanessa Countryman,
Secretary, Commission, dated September 7, 2021, October 1, 2021,
October 26, 2021, and March 15, 2022 (``SIG Letters''). See also
letter from Tyler Gellasch, Executive Director, Healthy Markets
Association (``HMA''), to Hon. Gary Gensler, Chair, Commission,
dated October 29, 2021 (``HMA Letter''); and letter from Ellen
Green, Managing Director, Equity and Options Market Structure,
Securities Industry and Financial Markets Association (``SIFMA''),
to Vanessa Countryman, Secretary, Commission, dated November 26,
2021 (``SIFMA Letter'').
    \27\ See Securities Exchange Act Release Nos. 93644 (November
22, 2021), 86 FR 67750 (November 29, 2021) (SR-EMERALD-2021-29);
94089 (January 27, 2022); 87 FR 5910 (February 2, 2022) (SR-EMERALD-
2021-42); 94257 (February 15, 2022), 87 FR 9678 (February 22, 2022)
(SR-EMERALD-2022-04); 93640 (November 22, 2021), 86 FR 67745
(November 29, 2021) (SR-EMERALD-2021-31); 94087 (January 27, 2022),
87 FR 5918 (February 2, 2022) (SR-EMERALD-2021-43); and 94260
(February 15, 2022), 87 FR 9695 (February 22, 2022) (SR-EMERALD-
2022-05).
    \28\ See Securities Exchange Act Release Nos. 94717 (April 14,
2022), 87 FR 23648 (April 20, 2022) (SR-EMERALD-2022-13); and 94718
(April 14, 2022), 87 FR 23633 (April 20, 2022) (SR-EMERALD-2022-15).
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2. Statutory Basis
    The Exchange believes that the proposed fees are consistent with
Section 6(b) of the Act \29\ in general, and furthers the objectives of
Section 6(b)(4) of the Act \30\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among Members and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposed
fees further the objectives of Section 6(b)(5) of the Act \31\ in that
they are designed to promote just and equitable principles of trade,
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general protect investors
and the public interest and are not designed to permit unfair
discrimination between customers, issuers, brokers and dealers.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(4).
    \31\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the information provided to justify the
proposed fees meets or exceeds the amount of detail required in respect
of proposed fee changes as set forth in recent Commission and
Commission Staff guidance. On March 29, 2019, the Commission issued an
Order disapproving a proposed fee change by the BOX Market LLC Options
Facility to establish connectivity fees for its BOX Network (the ``BOX
Order'').\32\ On May 21, 2019, the Commission Staff issued guidance
``to assist the national securities exchanges and FINRA . . . in
preparing Fee Filings that meet their burden to demonstrate that
proposed fees are consistent with the requirements of the Securities
Exchange Act.'' \33\ Based on both the BOX Order and the Guidance, the
Exchange believes that the proposed fees are consistent with the Act
because they are: (i) Reasonable, equitably allocated, not unfairly
discriminatory, and not an undue burden on competition; (ii) comply
with the BOX Order and the Guidance; and (iii) supported by evidence
(including comprehensive revenue and cost data and analysis) that they
are fair and reasonable and will not result in excessive pricing or
supra-competitive profit.
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    \32\ 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) (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).
    \33\ 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 Proposed Fees Will Not Result in a Supra-Competitive Profit
    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 amendment meets the requirements of the Act that fees be
reasonable, equitably allocated, not unfairly discriminatory, and not
create an undue burden on competition among market participants. The
Exchange believes this high standard is especially important when an
exchange imposes various fees for market participants to access an
exchange's marketplace.
    In the Guidance, the Commission Staff states that, ``[a]s an
initial step in assessing the reasonableness of a fee, staff considers
whether the fee is constrained by significant competitive forces.''
\34\ The Guidance further states that, ``. . . even where an SRO cannot
demonstrate, or does not assert, that significant competitive forces
constrain the fee at issue, a cost-based discussion may be an
alternative basis upon which to show consistency with the Exchange
Act.'' \35\ In the Guidance, the Commission Staff further states that,
``[i]f an SRO seeks to support its claims that a proposed fee is fair
and reasonable because it will permit recovery of the SRO's costs, or
will not result in excessive pricing or supra-competitive profit,
specific information, including quantitative information, should be
provided to support that argument.'' \36\ The Exchange does not assert
that the proposed fees are constrained by competitive forces. Rather,
the Exchange asserts that the proposed fees are reasonable because they
will permit recovery of the Exchange's costs in providing access
services to supply 10Gb ULL connectivity and Limited Service MEI Ports
and will not result in the Exchange generating a supra-competitive
profit.
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    \34\ See id.
    \35\ Id.
    \36\ Id.
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    The Guidance defines ``supra-competitive profit'' as ``profits that
exceed the profits that can be obtained in a competitive market.'' \37\
The Commission Staff further states in the Guidance that ``the SRO
should provide an analysis of the SRO's baseline revenues, costs, and
profitability (before the proposed fee change) and the SRO's expected
revenues, costs, and profitability (following the proposed fee change)
for the product or service in question.'' \38\ The Exchange provides
this analysis below.
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    \37\ Id.
    \38\ Id.
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    The proposed fees are based on a cost-plus model. The Exchange
believes that it is important to demonstrate that the proposed fees are
based on its costs and reasonable business needs and believes the
proposed fees will allow the Exchange to begin to offset expenses.
However, as discussed more fully below, such fees may also result in
the Exchange recouping less than, or more than, all of its costs of
providing 10Gb ULL connectivity and Limited Service MEI Ports because
of the uncertainty of forecasting subscriber decision making with
respect to firms' access needs. The Exchange believes that the proposed
fees will not result in excessive pricing or supra-competitive profit
based on the total expenses the Exchange incurs versus the total
revenue the Exchange projects to collect, and therefore meets the
standards in the Act as interpreted by the Commission and the
Commission Staff in the BOX Order and the Guidance.
    The suspension orders sought additional information and comments on
various aspects of the prior proposed fee changes. In many respects,
the Commission's questions about the prior proposed fee changes raise
broader questions around the factors the Commission should consider and
the type of data and analysis an exchange should provide in considering
whether market data, port fees, or connectivity fees are fair and
reasonable under a cost-based methodology. The suspension orders also
sought more specific information regarding the allocation of third-
party expenses, such as the overall estimated cost for each category of
external expenses or at minimum the total applicable third-party
expenses and percentage allocation or statements regarding the
Exchange's overall estimated costs for the internal expense categories
and general shared expenses figure. The Exchange added this additional
information below.
    In this filing, the Exchange offers a conceptual framework for
further considering the Commission's questions that draws on the
Exchange's own experience over several years of analyzing its own
costs. The elements of that framework are as follows:
    First, the Exchange proposes a flat, simple 10Gb ULL Fee that
imposes a single monthly fee for Members and non-Members. The Exchange
believes this relatively simple, flat fee structure is transparent and
easy for users to apply, and also helps show that it meets the
objectives of the Act. The Exchange also proposes a tiered-pricing
structure for its Limited Service MEI Ports that continues to provide
the first and second Limited Service MEI Ports free of charge for each
matching engine. The Exchange believes the proposed tiered-pricing
structure for Limited Service MEI Ports is also transparent and easy
for users to apply, and is a common pricing method used by other
options exchanges when charging for port connectivity.\39\
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    \39\ See supra notes 18 and 22.
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    The Exchange then conducted an extensive cost review in which the
Exchange analyzed nearly every expense item in the Exchange's general
expense ledger to determine whether each such expense relates to
providing 10Gb ULL connectivity and Limited Service MEI Ports. That
methodology does not allow for ``double-counting'' of the same costs
for different classes of exchange products--for example transaction
services, market data, physical connectivity, ``logical'' port
connections or regulatory resources. As a result of this review, the
Exchange determined that it experienced an increase in costs since
October 2020 as set forth above and determined to propose to increase
select connectivity fees as described herein to attempt to recoup this
increased expense.
    The Exchange then sought to narrowly allocate specific costs to
10Gb ULL connectivity and Limited Service MEI Ports to which the
proposed fees would apply. In this filing, the Exchange provided more
detail about how that allocation was determined and included
information about tangential cost items that were not included. In
determining what portion (or percentage) to allocate to access
services, each Exchange department head, in coordination with other
Exchange personnel, determined the expenses that support access
services and System Networks associated with 10Gb ULL connectivity and
Limited Service MEI Ports. This included numerous meetings between the
Exchange's Chief Information Officer, Chief Financial Officer, Head of
Strategic Planning and Operations, Chief Technology Officer, various
members of the Legal Department, and other group leaders. The analysis
also included each department head meeting with the divisions of teams
within each department to determine the amount of time and resources
allocated by employees within each division towards the access services
and System Networks associated with 10Gb ULL connectivity and Limited
Service MEI Ports. The Exchange reviewed each

individual expense to determine if such expense was related to 10Gb ULL
connectivity and Limited Service MEI Ports. Once the expenses were
identified, the Exchange department heads, with the assistance of the
Exchange's internal finance department, reviewed such expenses
holistically on an Exchange-wide level to determine what portion of
that expense supports providing access services and the System
Networks. The sum of all such portions of expenses represents the total
cost to the Exchange to provide access services associated with 10Gb
ULL connectivity and Limited Service MEI Ports. For the avoidance of
doubt, no expense amount is allocated twice. Specifically, no expense
amount is allocated to more than one expense category within this
filing and no expense amount that is allocated as a cost to provide and
maintain access to the 10Gb ULL connectivity and Limited Service MEI
Ports in this filing have been or will be allocated as a cost to
provide any other exchange product or service in any other fee filing.
In the suspension orders, the Commission questioned whether further
explanation of the Exchange's cost analysis was necessary. The Exchange
provides further details concerning its cost analysis in response to
this question.
    The Exchange believes exchanges, like all businesses, should be
provided flexibility when developing and applying a methodology to
allocate costs and resources they deem necessary to operate their
business, including providing market data and access services. The
Exchange notes that costs and resource allocations may vary from
business to business and, likewise, costs and resource allocations may
differ from exchange to exchange when it comes to providing market data
and access services. It is a business decision that must be evaluated
by each exchange as to how to allocate internal resources and what
costs to incur internally or via third parties that it may deem
necessary to support its business and its provision of market data and
access services to market participants.
    Finally, the Exchange acknowledges that it is difficult to predict
how much revenue the Exchange will receive from the proposed fees with
precision. The analysis conducted by the Exchange is designed to make a
fair and reasonable assessment of costs and resources allocated to
support the provision of access services associated with the proposed
fees. The Exchange further acknowledges that this assessment can only
capture a moment in time and that costs and resource allocations may
change. That is why the Exchange historically, and on an ongoing basis,
reviews its costs and resource allocations to ensure it appropriately
allocates resources to properly provide services to the Exchange's
constituents. As part of this proposed rule change, and as described
further below, the Exchange is committing to conduct an annual cost
review with respect to fees that are cost justified in this proposed
rule change beginning one year from the date of this proposal, and
annually thereafter. The Exchange expects that it may propose to adjust
fees at that time, either to increase fees in the event that revenues
fail to reasonably cover costs at the estimated margin set forth below,
or to decrease fees in the event that revenue materially exceeds the
Exchange's current projections. In the event that the Exchange
determines to propose a fee change, updated cost estimates will be
included in a rule filing proposing the fee change.
    The Exchange believes applying this framework to the proposed fees
shows that they are consistent with the requirements of the Act,
leaving aside that the proposed fees are relatively similar to fees
charged by other exchanges for connectivity and port access.
Exchange Costs and Cost Methodology
    The Exchange notes that there are material costs associated with
providing the infrastructure and headcount to fully support access to
the Exchange via connectivity and ports. As described below, 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. Both fixed and variable
expenses have significant impact on the Exchange's overall costs to
provide 10Gb ULL connectivity and Limited Service MEI Ports. For
example, to accommodate new Members, the Exchange may need to purchase
additional hardware to support those Members and provide access through
10Gb ULL connectivity and Limited Service MEI Ports.\40\ Further, as
the total number of 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 fees are a reasonable attempt to offset those
costs associated with providing access to and maintaining its System
Networks' infrastructure.
---------------------------------------------------------------------------

    \40\ The Exchange is not considering future costs associated
with accommodating new 10Gb ULL connectivity and Limited Service MEI
Ports subscriptions.
---------------------------------------------------------------------------

    The Exchange estimated its total annual expense to provide 10Gb ULL
connectivity and Limited Service MEI Ports based on the following
general expense categories: (1) External expenses, which include fees
paid to third parties for certain products and services; (2) internal
expenses relating to the internal costs to provide the services
associated with 10Gb ULL connectivity and Limited Service MEI Ports;
and (3) general shared expenses.\41\ The below table details each of
these individual external and internal annual costs considered by the
Exchange to be directly related to offering 10Gb ULL connectivity and
Limited Service MEI Ports, and not any other product or service offered
by the Exchange. The below table also details the general shared
expense allocated to this proposal. Each of these expenses are
discussed in more detail further below.
---------------------------------------------------------------------------

    \41\ The percentage allocations used in this proposed rule
change may differ from past filings from the Exchange or its
affiliates due to adjustments to internal resource allocations, and
different system architecture of the Exchange as compared to its
affiliates.
---------------------------------------------------------------------------

    For 2022, the total annual expense for providing the access
services associated with providing 10Gb ULL connectivity and Limited
Service MEI Ports is estimated to be $10,483,343, or $873,612 per
month. The Exchange utilized its estimated 2022 revenue and costs,
which utilize the same methodology set forth in the Exchange's
previously-issued Audited Unconsolidated Financial Statements.\42\
---------------------------------------------------------------------------

    \42\ 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. 87877 (December 31, 2019), 85 FR 738 (January 7, 2020)
(SR-EMERALD-2019-39). Accordingly, the third-party expense described
in this filing is attributed to the same line item for the
Exchange's 2022 Form 1 Amendment, which will be filed in 2023. In
its suspension orders, the Commission also asked should the Exchange
use cost projections or actual costs estimated for 2021 in a filing
made in 2022, or make cost projections for 2022. The Exchange
utilized expenses from its most recent audited financial statement
as those numbers are more reliable than more recent unaudited
numbers, which may be subject to change.

------------------------------------------------------------------------
                            External expenses
-------------------------------------------------------------------------
                                    Percentage of total expense amount
                                                 allocated
            Category             ---------------------------------------
                                       10Gb ULL         Limited service
                                     connectivity          MEI ports
------------------------------------------------------------------------
Data Center Provider............  62%...............  2.4%.
Fiber Connectivity Provider.....  62%...............  1.9%.
Security Financial Transaction    89%...............  2.4%.
 Infrastructure (``SFTI''), and
 Other Connectivity and Content
 Service Providers.
Hardware and Software Providers.  51%...............  1.5%.
                                 ---------------------------------------
    Total of External Expenses..  $2,011,286.\43\
------------------------------------------------------------------------

                            Internal expenses
-------------------------------------------------------------------------
                                         Expense amount allocated
                                 ---------------------------------------
            Category                   10Gb ULL         Limited service
                                     connectivity          MEI ports
------------------------------------------------------------------------
Employee Compensation...........  $3,259,251          $916,303
                                   (representing 33%   (representing
                                   of total            9.3% of total
                                   $9,900,032          $9,900,032
                                   expense).           expense).
Depreciation and Amortization...  $2,164,610          $81,932
                                   (representing       (representing
                                   64.3% of total      2.4% of total
                                   $3,363,841          $3,363,841
                                   expense).           expense).
Occupancy.......................  $284,947            $10,501
                                   (representing 53%   (representing
                                   of total $538,916   1.9% of total
                                   expense).           $538,916
                                                       expense).
                                 ---------------------------------------
    Total of Internal Expenses..  $6,717,544.
                                 ---------------------------------------
    Total Allocated Shared        $1,754,513 (representing 61% of total
     Expenses.                     $2,872,232 expense).
                                 ---------------------------------------
        Total External +          $10,483,343.
         Internal + Allocated
         Shared Expenses.
------------------------------------------------------------------------

    In its suspension orders, the Commission solicited commenters'
views on whether the Exchange has provided sufficient detail on the
identity and nature of services provided by third parties. The
Commission further solicited commenters' views on whether the Exchange
has provided sufficient detail on the elements that go into
connectivity and port costs, including how shared costs are allocated
and attributed to connectivity and port expenses, to permit an
independent review and assessment of the reasonableness of purported
cost-based fees and the corresponding profit margin thereon. In
response, the Exchange provides additional detail regarding the
identity and nature of services provided by third parties, the elements
that go into connectivity and port costs, and how expenses are
allocated. The Exchange believes this additional detail is sufficient
to support a finding that the proposed fees are consistent with the
Exchange Act.
---------------------------------------------------------------------------

    \43\ The Exchange does not believe it is appropriate to disclose
the actual amount it pays to each individual third party provider as
those fee arrangements are competitive or the Exchange is
contractually prohibited from disclosing that number.
---------------------------------------------------------------------------

    For clarity, the Exchange took a conservative approach in
determining the expense and the percentage of that expense to be
allocated to providing 10Gb ULL connectivity and Limited Service MEI
Ports. The Exchange describes below the analysis conducted for each
expense and the resources or determinations that were considered when
determining the amount necessary to allocate to each expense. The
Exchange notes that, without the specific external and internal expense
items, the Exchange would not be able to provide access to its System
Networks through 10Gb ULL connectivity and Limited Service MEI Ports.
Each of these expense items, including physical hardware, software,
employee compensation and benefits, occupancy costs, and the
depreciation and amortization of equipment, were identified through a
line-by-line cost analysis and determined to be integral to providing
access to its System Networks through 10Gb ULL connectivity and Limited
Service MEI Ports for the reasons discussed below. Only a portion of
all fees paid to such third parties are included in the third party
expenses described herein, and, again, no expense amount is allocated
twice. For example, the Exchange does not allocate its entire
information technology and communication costs to providing access to
its System Networks through 10Gb ULL connectivity and Limited Service
MEI Ports because it determined that a portion of those costs are
attributable to other areas of the Exchange's operations, such as
transaction services, market data, and other forms of connectivity
offered by the Exchange. This may result in the Exchange under
allocating an expense to provide access to its System Networks through
10Gb ULL connectivity and Limited Service MEI Ports, and such expenses
may actually be higher than what the Exchange allocated as part of this
proposal.\44\
---------------------------------------------------------------------------

    \44\ The Exchange notes that expenses associated with its
affiliates, MIAX and MIAX Pearl (the options and equities markets),
are accounted for separately and are not included within the scope
of this filing.
---------------------------------------------------------------------------

    Further, as part its ongoing assessment of costs and expenses, the
Exchange recently conducted a periodic thorough review of its expenses
and resource allocations, which resulted in revised percentage
allocations in this filing as compared to prior versions of this
proposed fee change that were previously withdrawn by the Exchange. The
revised percentages are, among other things, the result of the shifting
of internal resources in response to business objectives. Therefore,
the percentage allocations used in this proposed rule change may differ
from past filings from the Exchange or its affiliates due to
adjustments to internal resource allocations, and different system
architecture of the Exchange as compared to its affiliates.\45\
---------------------------------------------------------------------------

    \45\ The Exchange notes that the expense allocations differ from
the Exchange's filing earlier in 2021, SR-EMERALD-2021-11, because
that prior filing pertained to several different access fees, which
the Exchange had not been charging for since the Exchange launched
operations in March 2019. See Securities Exchange Act Release No.
91460 (April 2, 2021), 86 FR 18349 (April 8, 2021) (SR-EMERALD-2021-
11) (adopting fees for FIX Ports, MEI Ports, Purge Ports, Clearing
Trade Drop Ports, and FIX Drop Copy Ports, all of which had been
free for market participants for over two years since inception).

---------------------------------------------------------------------------

    The Exchange believes it is reasonable to consider the expense and
revenue for 10Gb ULL connectivity and Limited Service MEI Ports
together because ports and connectivity are inextricably linked
components of the network infrastructure, and that both are necessary
for a market participant to access the Exchange. The various types of
connectivity and port alternatives that the Exchange offers provide a
wide array of access alternatives necessary for a market participant to
conduct its business using the Exchange, which is a business decision
to be made by each particular type of market participant. The different
types of connectivity and port alternatives allows Members to conduct
their different business strategies--some Members put an emphasis on
speed, while others emphasize other strategies, such as redundancy and
certainty of execution. The Exchange does not require a Member to have
a certain framework for accessing the Exchange, but provides various
connectivity and port alternatives for each Member's distinct business
lines.
External Expense Allocations
    For 2022, annual expenses relating to fees paid by the Exchange to
third parties for products and services necessary to provide 10Gb ULL
connectivity and Limited Service MEI Ports are estimated to be
$2,011,286.\46\ This includes a portion of the fees paid to: (1) A
third party data center provider, including for the primary, secondary,
and disaster recovery locations of the Exchange's trading system
infrastructure; (2) a fiber connectivity provider for network services
(fiber and bandwidth products and services) linking the Exchange's and
its affiliates' office locations in Princeton, New Jersey and Miami,
Florida, to all data center locations; (3) SFTI, which supports
connectivity feeds for the entire U.S. options industry and various
other content and connectivity service providers, which provide
content, connectivity services, and infrastructure services for
critical components of options connectivity and network services; and
(4) hardware and software providers, which support the production
environment in which Members and non-Members connect to the network to
trade and receive market data.\47\
---------------------------------------------------------------------------

    \46\ See supra note 43.
    \47\ Id.
---------------------------------------------------------------------------

Data Center Space and Operations Provider
    The Exchange does not own the primary data center or the secondary
data center, but instead leases space in data centers operated by third
parties where the Exchange houses servers, switches and related
equipment. Data center costs include an allocation of the costs the
Exchange incurs to provide physical connectivity in the third party
data centers where it maintains its equipment as well as related costs.
The data center provider operates the data centers (primary, secondary,
and disaster recovery) that host the Exchange's network infrastructure.
Without the retention of a third party data center, the Exchange would
not be able to operate its systems, provide a trading platform for
market participants, and produce and distribute market data. The
Exchange does not employ a separate fee to cover its data center
expense and recoups that expense, in part, by charging for 10Gb ULL
connectivity and Limited Service MEI Ports.
    The Exchange reviewed its data center footprint and space utilized,
including its total rack space, cage usage, number of servers,
switches, cabling within the data center, heating and cooling of
physical space, storage space, and monitoring and divided its data
center expenses among providing transaction services, market data,
connectivity (10Gb ULL and 1Gb ULL separately), and ports based on
space utilized by each area.\48\ Based on this review, the Exchange
determined that 62% of the total applicable data center provider
expense is applicable to providing 10Gb ULL connectivity and 2.4%
Limited Service MEI Ports. The Exchange reviewed space utilized to
house rack space, cage usage, servers, switches, cabling, storage
space, heating and cooling of physical space, and monitoring, and
identified that a small portion of that footprint is dedicated to
equipment used to support 10Gb ULL connectivity and Limited Service MEI
Ports.
---------------------------------------------------------------------------

    \48\ The Investors Exchange, Inc. (``IEX'') also allocated data
center costs to produce market data based on space utilized. See
Securities Exchange Act Release No. 94630 (April 7, 2022), 87 FR
21945, at page 21949 (April 13, 2022) (SR-IEX-2022-02) (``IEX Market
Data Fee Proposal'') (noting that ``[d]ata Center costs consist of
the fees charged by the third-party data centers used by IEX and
represent less than 10% the Exchange's total data center costs based
on space utilized'' (emphasis added)).
---------------------------------------------------------------------------

    The Exchange believes this allocation is reasonable because it
represents the costs associated with housing the Exchange's equipment
dedicated to supporting 10Gb ULL connectivity and Limited Service MEI
Ports. 10Gb ULL connectivity and Limited Service MEI Ports are core
means of access to the Exchange's network, providing several methods
for market participants to send and receive order and trade messages,
as well as receive market data. A large portion of the Exchange's data
center expense is due to space utilized to provide and maintain
connectivity and port access to the Exchange's System Networks,
including providing cabling within the data center between market
participants and the Exchange. The Exchange excluded from this
allocation servers and space that are dedicated to market data. The
Exchange also did not allocate the remainder of the data center expense
because it pertains to space utilized by other areas of the Exchange's
operations, such as 1Gb ULL connectivity, other types of ports, market
data, and transaction services.
Fiber Connectivity Provider
    The Exchange engages a third party service provider that provides
the internet, fiber and bandwidth connections between the Exchange's
System Networks, primary and secondary data centers, and office
locations in Princeton and Miami. Fiber connectivity is necessary for
the Exchange to switch to its secondary data center in the case of an
outage in its primary data center. Fiber connectivity also allows the
Exchange's National Operations & Control Center (``NOCC'') and Security
Operations Center (``SOC'') in Princeton to communicate with the
Exchange's primary and secondary data centers. As such, all trade data,
including the billions of messages each day, flow through this third
party provider's infrastructure over the Exchange's network. Fiber
connectivity is also necessary for personnel responsible for overseeing
and providing customer service related to supporting 10Gb ULL
connectivity and Limited Service MEI Ports, receiving relevant data and
being able to communicate between the Exchange's various locations and
data centers. Without these services, the Exchange would not be able to
operate and support the network and provide and maintain access
services and System Networks associated with the 10Gb ULL connectivity
and Limited Service MEI Ports to its Members and their customers.
Without the retention of a third party fiber connectivity provider, the
Exchange would not be able to

communicate between its data centers and office locations in a manner
necessary to maintain and support 10Gb ULL connectivity and Limited
Service MEI Ports. Fiber connectivity is a necessary integral means to
disseminate information, including data related to supporting 10Gb ULL
connectivity and Limited Service MEI Ports, from the Exchange's primary
data center to other Exchange locations. It is necessary for Exchange
employees located in various locations to be able to communicate and
receive the necessary data to maintain and provide customer support
related to 10Gb ULL connectivity and Limited Service MEI Ports. The
Exchange would not be able to operate and support the network and
provide and maintain access services and System Networks associated
with 10Gb ULL connectivity and Limited Service MEI Ports without third
party fiber connectivity. The Exchange does not employ a separate fee
to cover its fiber connectivity expense and recoups that expense, in
part, by charging for 10Gb ULL connectivity and Limited Service MEI
Ports.
    The Exchange reviewed it costs to retain fiber connectivity from a
third party, including the ongoing costs to support fiber connectivity,
ensuring adequate bandwidth and infrastructure maintenance to support
exchange operations, and ongoing network monitoring and maintenance.
Based on this review, the Exchange determined that 62% of the total
fiber connectivity expense was applicable to providing and maintaining
access services and System Networks associated with 10Gb ULL
connectivity and 1.9% to Limited Service MEI Ports. The Exchange
reviewed its total fiber connectivity expense and allocated it among
transaction services, connectivity, ports, market data, and
administrative operations, based on usage. The Exchange then further
divided up its fiber connectivity costs related to connectivity and
ports and identified the portion that is attributable to supporting
10Gb ULL connectivity and Limited Service MEI Ports, also based on
usage. This allocation is, therefore, based on the amount of bandwidth
and fiber connectivity the Exchange calculated is utilized to support
exchange operations, and ongoing network monitoring and maintenance
that are necessary to provide 10Gb ULL connectivity and Limited Service
MEI Ports. The Exchange believes this allocation is reasonable because
10Gb ULL connectivity and Limited Service MEI Ports are core means of
access to the Exchange's network, providing several methods for market
participants to send and receive order and trade messages, as well as
receive market data. A large portion of the Exchange's fiber
connectivity expense is due to providing and maintaining connectivity
between the Exchange's System Networks, data centers, and office
locations and is core to the daily operation of the Exchange. The
Exchange also excluded from this allocation fiber connectivity usage
related to other business lines, such as transaction services, market
data, and other forms of connectivity offered by the Exchange, or
unrelated administrative services. The Exchange also did not allocate
the remainder of this expense because it pertains to other areas of the
Exchange's operations and does not directly relate to providing and
maintaining access services and System Networks associated with 10Gb
ULL connectivity and Limited Service MEI Ports. The Exchange believes
this allocation is reasonable because it represents the Exchange's cost
to providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports.
Connectivity and Content Services Provided by SFTI and Other Providers
    The Exchange relies on SFTI and various other connectivity and
content service providers for connectivity and data feeds for the
entire U.S. options industry, as well as content, connectivity, and
infrastructure services for critical components of the network that are
necessary to provide and maintain its System Networks and access to its
System Networks via 10Gb ULL connectivity and Limited Service MEI
Ports. Specifically, the Exchange utilizes SFTI and other content
service provider to connect to other national securities exchanges, the
Options Price Reporting Authority (``OPRA''), and to receive market
data from other exchanges and market data providers. SFTI is operated
by the Intercontinental Exchange, the parent company of five registered
exchanges, and has become integral to the U.S. markets. The Exchange
understands SFTI provides services to most, if not all, of the other
U.S. exchanges and other market participants. Connectivity and market
data provided by SFTI and other service is critical to the Exchanges
daily operations and performance of its System Networks to which market
participants connect to via 10Gb ULL connectivity and Limited Service
MEI Ports. Without services from SFTI and various other service
providers, the Exchange would not be able to connect to other national
securities exchanges, market data providers, or OPRA and, therefore,
would not be able to operate and support its System Networks. The
Exchange does not employ a separate fee to cover its SFTI and content
service provider expense and recoups that expense, in part, by charging
for 10Gb ULL connectivity and Limited Service MEI Ports.
    The Exchange reviewed it costs to retain SFTI and other content
service providers, including network monitoring and maintenance,
remediation of connectivity related issues, and ongoing administrative
activities related to connectivity management. Based on this review,
the Exchange determined that 89% of the total applicable SFTI and other
service provider expense is allocated to providing and maintaining
access services and System Networks associated with 10Gb ULL
connectivity and 2.4% to Limited Service MEI Ports. The Exchange
reviewed its total SFTI and other service provider expense and
allocated it among transaction services, connectivity, ports, other
market data products, and administrative operations, based on usage.
The Exchange then further divided up its SFTI and other service
provider costs related to connectivity and ports and identified the
portion that is attributable to supporting 10Gb ULL connectivity and
Limited Service MEI Ports, also based on usage. This allocation is,
therefore, based on the amount of SFTI and other service provider
resources utilized to support exchange operations, and ongoing network
monitoring and maintenance that are necessary to provide 10Gb ULL
connectivity and Limited Service MEI Ports. SFTI and other content
service providers are key vendors and necessary components in providing
access to the Exchange. The primary service SFTI provides for the
Exchange is connectivity to other national securities exchanges and
their disaster recovery facilities and, therefore, a vast portion of
this expense is allocated to providing access to the System Networks
via 10Gb ULL connectivity and Limited Service MEI Ports. Connectivity
via SFTI is necessary for purposes of order routing and accessing
disaster recovery facilities in the case of a system outage. Engaging
SFTI and other like vendors provides purchasers of 10Gb ULL
connectivity to other national securities exchanges for purposes of
order routing and disaster recovery. The Exchange did not allocate a
portion of this expense that relates to the receipt of market data from
other national securities exchanges and

OPRA. The Exchange also did not allocate the remainder of this expense
because it pertains to other areas of the Exchange's operations and
does not directly relate to providing and maintaining the System
Networks or access to its System Networks via 10Gb ULL connectivity or
Limited Service MEI Ports, such as transaction services, market data,
other forms of connectivity offered by the Exchange, or unrelated
administrative services. The Exchange believes this allocation is
reasonable because it represents the Exchange's cost to provide and
maintain its System Networks and access to its System Networks via 10Gb
ULL connectivity and Limited Service MEI Ports, and not any other
service, as supported by its cost review.
Hardware and Software Providers
    The Exchange relies on dozens of third party hardware and software
providers for equipment necessary to operate its System Networks. This
includes either the purchase or licensing of physical equipment, such
as servers, switches, cabling, and devices needed by Exchange personnel
to monitor servers and the health 10Gb ULL connectivity and Limited
Service MEI Ports. This consists of real-time monitoring of system
performance, integrity, and latency of 10Gb ULL connectivity and
Limited Service MEI Ports. It also includes the Exchange purchasing or
licensing software necessary for security monitoring, data analysis and
Exchange operations. Hardware and software providers are necessary to
maintain its System Networks and provide access to its System Networks
via a 10Gb ULL connectivity and Limited Service MEI Ports. Hardware and
software equipment and licenses for that equipment are also necessary
to operate and monitor physical assets necessary to offer physical
connectivity to the Exchange. Hardware and software equipment and
licenses are key to the operation of the Exchange and, without them,
the Exchange would not be able to operate and support its System
Networks and provide access to its Members and their customers. The
Exchange does not employ a separate fee to cover its hardware and
software expense and recoups that expense, in part, by charging for
10Gb ULL connectivity and Limited Service MEI Ports.
    The Exchange reviewed its hardware and software related costs,
including software patch management, vulnerability management,
administrative activities related to equipment and software management,
professional services for selection, installation and configuration of
equipment and software supporting exchange operations. The Exchange
then divided those costs among transaction services, ports,
connectivity, market data, and other Exchange operations based on
whether all of that hardware or software is based on usage. The
Exchange then reviewed the amount allocated to connectivity and ports
generally and what portion of that hardware and software equipment or
license is used to support 10Gb ULL connectivity and Limited Service
MEI Ports specifically. Based on this review, the Exchange determined
that 51% of the total applicable hardware and software expense is
allocated to providing and maintaining access services and System
Networks associated with 10Gb ULL connectivity and 1.5% to Limited
Service MEI Ports. These percentages reflect the amount of hardware and
software equipment and licenses dedicated to support 10Gb ULL
connectivity and Limited Service MEI Ports.\49\ Hardware and software
equipment and licenses are key to the operation of the Exchange and its
System Networks. Without them, the Exchange would not be able to
provide and maintain access services and System Networks associated
with 10Gb ULL connectivity and Limited Service MEI Ports. The Exchange
only allocated the portion of this expense to the hardware and software
that is related to 10Gb ULL connectivity and Limited Service MEI Ports,
such as operating servers and equipment necessary to provide and
maintain access services and System Networks associated with 10Gb ULL
connectivity and Limited Service MEI Ports. The Exchange, therefore,
did not allocate portions of its hardware and software expense that
related to other areas of the Exchange's business, such as hardware and
software used for market data or unrelated administrative services. The
Exchange also did not allocate the remainder of this expense because it
pertains to other areas of the Exchange's operations, such as
transaction services, market data, and other forms of connectivity
offered by the Exchange, and is not directly relate to providing 10Gb
ULL connectivity or Limited Service MEI Ports. The Exchange believes
this allocation is reasonable because it represents the Exchange's cost
to provide and maintain access services and System Networks associated
with 10Gb ULL connectivity and Limited Service MEI Ports, and not any
other service, as supported by its cost review.
---------------------------------------------------------------------------

    \49\ The Exchange notes that IEX used a similar methodology to
allocate hardware costs to market data. See supra note 48, IEX
Market Data Fee Proposal, at page 21950 (noting that ``IEX only
included hardware specifically dedicated to the market data feeds in
calculating the costs of providing market data'').
---------------------------------------------------------------------------

Internal Expense Allocations
    For 2022, total internal annual expenses relating to the Exchange
providing and maintaining its System Networks and access to its System
Networks for 10Gb ULL connectivity and Limited Service MEI Ports is
estimated to be $6,717,544. This includes costs associated with: (1)
Employee compensation and benefits for full-time employees that support
the System Networks and access to System Networks via 10Gb ULL
connectivity and Limited Service MEI Ports, 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 as well as important system upgrades; (2) depreciation and
amortization of hardware and software used to provide and maintain
access services and System Networks associated with the 10Gb ULL
connectivity and Limited Service MEI Ports, 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
and maintain the System Networks and access to System Networks via 10Gb
ULL connectivity and Limited Service MEI Ports.
Employee Compensation and Benefits
    Human personnel are key to exchange operations and supporting the
Exchange's ongoing provision of 10Gb ULL connectivity and Limited
Service MEI Ports. The Exchange reviewed its employee compensation and
benefits expense and the portion of that expense allocated to providing
10Gb ULL connectivity and Limited Service MEI Ports. As part of this
review, the Exchange considered employees whose functions include
providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports and
used a blended rate of compensation reflecting salary, stock and bonus
compensation, bonuses, benefits, payroll taxes, and 401K matching
contributions.\50\
---------------------------------------------------------------------------

    \50\ For purposes of this allocation, the Exchange did not
consider expenses related to office space, supplies, or equipment
use by employees who support 10Gb ULL connectivity and Limited
Service MEI Ports.

---------------------------------------------------------------------------

    In its suspension orders, the Commission asked the Exchange provide
more detail about the methodology the Exchange used to determine how
much of an employee's time is devoted to connectivity and port related
activities. In considering the cost of personnel, the Exchange
generally considered the time spent on various access service projects
and initiatives through project management tracking tools and analysis
of employee resource allocations, among its Technology Team in the
following areas: Technical Operations, Software Engineering, Quality
Assurance, and Infrastructure. The Exchange did not consider non-
Technology Teams such as Market Operations, Project Management,
Regulatory, Legal, and Accounting/Finance.\51\
---------------------------------------------------------------------------

    \51\ The Exchange notes that IEX used a similar methodology to
allocate employee compensation related costs to market data. See
supra note 48, IEX Market Data Fee Proposal, at page 29150 (noting
that ``[f]or personnel costs, IEX calculated an allocation of
employee time for employees whose functions include providing and
maintaining IEX Data and/or the proprietary market data feeds used
to transmit IEX Data, and used a blended rate of compensation
reflecting salary, stock and bonus compensation, benefits, payroll
taxes, and 401(k) matching contributions'').
---------------------------------------------------------------------------

    Based on this review, the Exchange determined to allocate
$4,175,554 in combined employee compensation and benefits expense to
provide and maintain access services and System Networks associated
with 10Gb ULL connectivity and Limited Service MEI Ports. This is only
a portion of the $9,900,032 total projected expense for employee
compensation and benefits. Of that total, the Exchange allocated
approximately 33% of the total applicable employee compensation and
benefits expense to providing and maintaining access services and
System Networks associated with 10Gb ULL connectivity and 9.3% to
Limited Service MEI Ports. The Exchange determined the cost allocation
for employees who perform work in support of providing and maintaining
access services and System Networks associated with 10Gb ULL
connectivity and Limited Service MEI Ports to arrive at full time
equivalents (``FTE'') of 9.9 FTEs across all the identified personnel
related to 10Gb ULL connectivity and 2.8 FTEs across all the identified
personnel related to Limited Service MEI Ports. The Exchange then
multiplied the FTE times a blended compensation rate for all relevant
Exchange personnel to determine the personnel costs associated with
providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports.
Senior staff also reviewed these time allocations with department heads
and team leaders to determine whether those allocations were
appropriate. These employees are critical to the Exchange to providing
and maintaining access services and System Networks associated with
10Gb ULL connectivity and Limited Service MEI Ports. The Exchange
determined the above allocation based on the personnel whose work
focused on functions necessary to providing and maintaining access
services and System Networks associated with 10Gb ULL connectivity and
Limited Service MEI Ports. The Exchange does not charge a separate fee
regarding employees who support 10Gb ULL connectivity and Limited
Service MEI Ports and the Exchange seeks to recoup those expenses, in
part, by charging for 10Gb ULL connectivity and Limited Service MEI
Ports.
    The Exchange believes it is appropriate to include incentive
compensation in the blended personnel compensation rate on the same
basis as other personnel costs for in-scope employees because incentive
compensation is a part of the total personnel costs associated with the
Exchange's provision of 10Gb ULL connectivity and Limited Service MEI
Ports. Moreover, the Exchange notes that it has taken a conservative
approach in determining which employees to include in its cost
analysis, in terms of function and percent allocation, so that the
included personnel costs are directly and closely tied to the costs of
providing 10Gb ULL connectivity and Limited Service MEI Ports. The FTE
allocation represents just 42.2% of the Exchange's overall personnel
costs. Consistent with the Exchange's conservative methodology to limit
costs allocated to 10Gb ULL connectivity and Limited Service MEI Ports,
this approach includes only a de minimis personnel cost allocation for
senior level executives and no allocation for members of the Exchange's
board of directors. Accordingly, the Exchange believes that the
allocated personnel expenses included are appropriately attributable to
10Gb ULL connectivity and Limited Service MEI Ports.
Depreciation and Amortization
    A key expense incurred by the Exchange relates to the depreciation
and amortization of equipment that the Exchange procured to provide and
maintain access services and System Networks associated with 10Gb ULL
connectivity and Limited Service MEI Ports. The Exchange reviewed all
of its physical assets and software, owned and leased, and determined
whether each asset is related to providing and maintaining the 10Gb ULL
connectivity and Limited Service MEI Ports, and added up the
depreciation of those assets. All physical assets and software, which
includes assets used for testing and monitoring of Exchange
infrastructure, were valued at cost and depreciated or leased over
periods ranging from three to five years. Based on the Exchange's
experience, this depreciation period equals the typical life expectancy
of those assets. In determining the amount of depreciation and
amortization to apply to providing and maintaining access services and
System Networks associated with 10Gb ULL connectivity and Limited
Service MEI Ports, the Exchange considered the depreciation of hardware
and software that are key to the operation of the Exchange and its
provision of 10Gb ULL connectivity and Limited Service MEI Ports. This
includes servers, computers, laptops, monitors, information security
appliances and storage, and network switching infrastructure equipment,
including switches and taps that were previously purchased to provide
and maintain access services and System Networks associated with 10Gb
ULL connectivity and Limited Service MEI Ports. Without them, market
participants would not be able to access the Exchange. The Exchange
seeks to recoup a portion of its depreciation expense by charging for
10Gb ULL connectivity and Limited Service MEI Ports.
    Based on this review, the Exchange determined to allocate
$2,246,542 in combined depreciation and amortization expense to
providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports.
This is only a portion of the $3,363,841 total projected expense for
depreciation and amortization. This allocation represents approximately
64.3% of the total applicable depreciation expense to providing and
maintaining access services and System Networks associated with 10Gb
ULL connectivity and 2.4% to Limited Service MEI Ports. For purposes of
the allocation of these costs to 10Gb ULL connectivity and Limited
Service MEI Ports, the Exchange allocates the annual depreciation
(i.e., one-third or one-fifth of the initial asset value based on the
typical life expectancy of those assets). One-third or one-fifth of the
cost of each asset is included in the annual costs allocated to 10Gb
ULL connectivity and Limited Service MEI Ports. The

Exchange only included assets specifically dedicated to 10Gb ULL
connectivity and Limited Service MEI Ports in calculating the costs of
providing 10Gb ULL connectivity and Limited Service MEI Ports. This
means that physical assets used for such as transaction services,
market data, other forms of connectivity offered by the Exchange, or
other Exchange operations were excluded from the calculation.\52\ The
Exchange, therefore, did not allocate portions of depreciation expense
that relates to other areas of the Exchange's business, such as the
depreciation of hardware and software used for market data, unrelated
administrative services, or other connectivity or ports offered by the
Exchange. All of the expenses outlined in this proposed fee change
refer to the operating expenses of the Exchange. In the suspension
orders, the Commission asked for additional detail or explanation to
ensure that no expense amount is allocated twice. The Exchange did not
included any future capital expenditures within these costs ensuring
that no cost is counted twice. Depreciation and amortization represent
the expense of previously purchased hardware and internally developed
software spread over the useful life of the assets. Due to the fact
that the Exchange has only included operating expense and historical
purchases, there is no double counting of expenses in the Exchange's
cost estimates.
---------------------------------------------------------------------------

    \52\ The Exchange notes that IEX used a similar methodology to
allocate hardware costs to market data. See supra note 48, IEX
Market Data Fee Proposal at note 54, at page 21950 (noting that
``[h]ardware is depreciated on a straight-line three-year period,
which in IEX's experience, is equal to the typical life expectancy
of those assets. As noted above, one-third of the cost of each
hardware asset is included in the annual costs allocated to market
data. IEX only included hardware specifically dedicated to the
market data feeds in calculating the costs of providing market data.
This means that physical assets used for both order entry and market
data were excluded from the calculation'').
---------------------------------------------------------------------------

Occupancy
    The Exchange rents and maintains multiple physical locations to
house staff and equipment necessary to support access to System
Networks via 10Gb ULL connectivity and Limited Service MEI Ports. The
Exchange's occupancy expense is not limited to the housing of personnel
and includes locations used to store equipment necessary for Exchange
operations. In determining the amount of its occupancy related expense,
the Exchange considered actual physical space used to house employees
whose functions include providing and maintaining access services and
System Networks associated with 10Gb ULL connectivity and Limited
Service MEI Ports. Similarly, the Exchange also considered the actual
physical space used to house hardware and other equipment necessary to
provide and maintain the 10Gb ULL connectivity and Limited Service MEI
Ports. The Exchange maintains staff that support 10Gb ULL connectivity
and Limited Service MEI Ports in various locations and needs to provide
workplaces for that staff as well as space to house hardware and
equipment necessary for those employees to perform those functions.\53\
This equipment includes computers, servers, and accessories necessary
to support the access to the System Networks via 10Gb ULL connectivity
and Limited Service MEI Ports. Based on this review, the Exchange
determined to allocate $295,448 of its combined occupancy expense to
providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports.
According to the Exchange's calculations, it allocated approximately
53% of the total applicable occupancy expense to providing and
maintaining access services and System Networks associated with 10Gb
ULL connectivity and 1.93% to Limited Service MEI Ports. This is only a
portion of the $538,916 total projected expense for occupancy. The
Exchange believes this allocation is reasonable because it represents
the Exchange's cost to rent and maintain a physical location for the
Exchange's staff who operate and support 10Gb ULL connectivity and
Limited Service MEI Ports. The Exchange considered the rent paid for
the Exchange's Princeton and Miami offices, as well as various related
costs, such as physical security, property management fees, property
taxes, and utilities at each of those locations. The Exchange did not
include occupancy expenses related to housing employees and equipment
related to other Exchange operations, such as transaction and
administrative services.
---------------------------------------------------------------------------

    \53\ For the avoidance of doubt, the Exchange did not include
within this cost any portion of its costs related to third party
fiber connectivity used by Exchange staff in different office
locations to communicate as part of their role in supporting 10Gb
ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

Allocated Shared Expense
    Finally, a limited portion of general shared expenses was allocated
to providing and maintaining access services and System Networks
associated with 10Gb ULL connectivity and Limited Service MEI Ports as
without these general shared costs, the Exchange would not be able to
operate in the manner that it does. The costs included in general
shared expenses include recruiting and training, marketing and
advertising costs, professional fees for legal, tax and accounting
services, and telecommunications costs. For 2022, the Exchange's
general shared combined expense allocated to 10Gb ULL connectivity and
Limited Service MEI Ports is estimated to be $1,754,513. This
represents approximately 61% of the $2,872,232 total projected general
shared combined expense. The Exchange used the weighted average of the
above allocations to determine the amount of general shared expenses to
allocate to the Exchange. Next, based on additional management and
expense analysis, these fees are allocated to the proposal.
Revenue and Estimated Profit Margin
    The Exchange only has four primary sources of revenue and cost
recovery mechanisms to fund all of its operations: transaction fees,
access fees, regulatory fees, and market data fees. Accordingly, the
Exchange must cover all of its expenses from these four primary sources
of revenue and cost recovery mechanisms.
    To determine the Exchange's estimated revenue associated with 10Gb
ULL connectivity and Limited Service MEI Ports, the Exchange analyzed
the number of Members and non-Members currently utilizing 10Gb ULL
connectivity and Limited Service MEI Ports and used a recent monthly
billing cycle representative of current monthly revenue. The Exchange
also provided its baseline by analyzing March 2022, the monthly billing
cycle prior to the proposed fees, and compared this to its expenses for
that month. As discussed below, the Exchange does not believe it is
appropriate to factor into its analysis future revenue growth or
decline into its estimates for purposes of these calculations, given
the uncertainty of such estimates due to the continually changing
access needs of market participants and potential changes in internal
and external expenses, as well as because the Exchange is committing to
review this cost analysis for these fees on an annual basis going
forward.
    For March 2022, prior to the proposed fees, the Exchange had 102
10Gb ULL connections and 877 Limited Service MEI Ports purchased, for
which the Exchange charged a total of $1,045,839 (including charges for
connections that were dropped or added mid-month, resulting in pro-
rated charges). This resulted in a profit of $172,227 for that

month (a profit margin of 16%). For April 2022, the Exchange
anticipates that 98 10Gb ULL connections and 841 Limited Service MEI
Ports will be charged for (as of the date of this filing).\54\ Assuming
the Exchange charges its proposed monthly rate of $12,000 per 10Gb ULL
fiber connection and the proposed tiered-pricing rates for Limited
Service MEI Ports, the Exchange would generate revenue of $1,374,100
for April 2022 (not including potential pro-rated connection charges
for mid-month connections) for 10Gb ULL connectivity and Limited
Service MEI Port fees combined. This would result in a profit of
$500,488 ($1,374,100 minus $873,612) for April (a 36.4% profit margin).
As discussed above, the Exchange believes it is reasonable to consider
the expense and revenue for 10Gb ULL connectivity and Limited Service
MEI Ports together because ports and connectivity are inextricably
linked components of the network infrastructure, and that both are
necessary for a market participant to access the Exchange.
---------------------------------------------------------------------------

    \54\ The Exchange notes that the number of subscribers of 10Gb
ULL connections and Limited Service MEI Ports may change over time.
For example, from June 2021 to April 2022, the Exchange had the
following number of subscribers of 10Gb ULL connectivity per month:
June (97); July (98); August (104); September (97); October (100);
November (102); December (104); January (98); February (100); March
(102); April (98). From June 2021 to April 2022, the Exchange had
the following number of Limited Service MEI Ports utilized per
month: June (601); July (625); August (825); September (828);
October (864); November (840); December (840); January (864);
February (850); March (877); April (841).
---------------------------------------------------------------------------

    The Exchange believes that conducting the above analysis on a per
month basis is reasonable as the revenue generated from access services
subject to the proposed fee generally remains static from month to
month. The Exchange also conducted the above analysis on a per month
basis to comply with the Commission Staff's Guidance, which requires a
baseline analysis to assist in determining whether the proposal
generates a supra-competitive profit. The Exchange cautions that this
profit margin may also fluctuate from month to month based on the
uncertainty of predicting how many connections and ports may be
purchased from month to month as Members and non-Members are free to
add and drop connections and ports at any time based on their own
business decisions.
    The Exchange believes the proposed profit margin is reasonable and
will not result in a ``supra-competitive'' profit. The Guidance defines
``supra-competitive profit'' as ``profits that exceed the profits that
can be obtained in a competitive market.'' \55\ Until recently, the
Exchange has operated at a cumulative net annual loss since it launched
operations in 2019.\56\ The Exchange has operated at a net loss due to
a number of factors, one of which is choosing to forgo revenue by
offering certain products, such as connectivity, at lower rates than
other options exchanges to attract order flow and encourage market
participants to experience the high determinism, low latency, and
resiliency of the Exchange's trading systems. The Exchange should not
now be penalized for seeking to raise it fees to near market rates
after offering such products as discounted prices. Therefore, the
Exchange believes the proposed fees are reasonable because they are
based on both relative costs to the Exchange to provide 10Gb ULL
connectivity and Limited Service MEI Ports, the extent to which the
product drives the Exchange's overall costs and the relative value of
the product, as well as the Exchange's objective to make access to its
Systems broadly available to market participants. The Exchange also
believes the proposed fees are reasonable because they are designed to
generate annual revenue to recoup the Exchange's costs of providing
10Gb ULL connectivity and Limited Service MEI Ports.
---------------------------------------------------------------------------

    \55\ See supra note 33.
    \56\ The Exchange has incurred a cumulative loss of $22 million
since its inception in 2019 to 2020, the last year for which the
Exchange's Form 1 data is available. See Exchange's Form 1/A,
Application for Registration or Exemption from Registration as a
National Securities Exchange, filed July 28, 2021, available at
https://sec.report/Document/9999999997-21-004557/.
---------------------------------------------------------------------------

    The Exchange notes that its revenue estimate is based on
projections and will only be realized to the extent such revenue
actually produces the revenue estimated. As a generally new entrant to
the hyper-competitive exchange environment, and an exchange focused on
driving competition, the Exchange does not yet know whether such
expectations will be realized. For instance, in order to generate the
revenue expected from 10Gb ULL connectivity and Limited Service MEI
Ports, the Exchange will have to be successful in retaining existing
clients that wish to utilize 10Gb ULL connectivity and Limited Service
MEI Ports or obtaining new clients that will purchase such access. To
the extent the Exchange is successful in encouraging new clients to
utilize 10Gb ULL connectivity and Limited Service MEI Ports, the
Exchange does not believe it should be penalized for such success. The
Exchange, like other exchanges, is, after all, a for-profit business.
While the Exchange believes in transparency around costs and potential
margins, the Exchange does not believe that these estimates should form
the sole basis of whether or not a proposed fee is reasonable or can be
adopted. Instead, the Exchange believes that the information should be
used solely to confirm that an Exchange is not earning supra-
competitive profits, and the Exchange believes this proposal
demonstrates this fact.
    Further, the proposed profit margin reflects the Exchange's efforts
to control its costs. A profit margin should not be judged alone based
on its size, but whether the ultimate fee reflects the value of the
services provided and is in line with other exchanges. A profit margin
on one exchange should not be deemed excessive where that exchange has
been successful in controlling costs, but not excessive where an
exchange is charging the same fee but has a lower profit margin due to
higher costs.
    The expected profit margin is reasonable because the Exchange
offers a premium System Network, System Networks connectivity, and a
highly deterministic trading environment. The Exchange is recognized as
a leader in network monitoring, determinism, risk protections, and
network stability. For example, the Exchange experiences approximately
a 95% determinism rate, system throughput of approximately 18 million
quotes and average round trip latency rate of approximately 18
microseconds for a single quote. The Exchange provides extreme
performance and radical scalability designed to match the unique needs
of trading differing asset class/market model combinations. The
Exchange's systems offer two customer interfaces, FIX gateway for
orders, and ultra-low latency MEI interface and data feeds with best-
in-class wire order determinism. The Exchange also offers automated
continuous testing to ensure high reliability, advanced monitoring and
systems security, and employs a software architecture that results in
minimizing the demands on power, space, and cooling while allowing for
rapid scalability, resiliency and fault isolation. The Exchange also
provides latency equalized cross-connects in the primary data center
ensures fair and cost efficient access to the Exchange's Systems. The
Exchange, therefore, believes the anticipated profit margin is
reasonable because it reflects the Exchange's cost controls and the
quality of the Exchange's systems.
    Finally, the Exchange believes that the proposed fees are
reasonable because they will not impose onerous audit requirements on
subscribers,

because there will be no need to substantiate the number of users of
10Gb ULL connectivity and Limited Service MEI Ports or the manner in
which it is being used.
Annual Review of Fees
    In its suspension orders, the Commission asks whether exchanges
should periodically reevaluate fees on an ongoing and periodic basis in
order to assure that actual revenue aligns with a reasonable cost-plus
model. As described above and as part of this proposed rule change, the
Exchange is committing to conduct a one year review of the fees that
are cost justified as part of this proposed rule change after the date
of this proposal, and annually thereafter. The Exchange expects that it
may propose to adjust fees at that time, either to increase fees in the
event that revenues fail to reasonably cover costs at the estimated
margin set forth below [sic], or to decrease fees in the event that
revenue materially exceeds the Exchange's current projections. In the
event that the Exchange determines to propose a fee change, updated
cost estimates will be included in a rule filing proposing the fee
change. The Exchange believes this approach will further increase
transparency around market data costs and help to ensure that Exchange
fees continue to be reasonably related to costs.
The Proposed Fees Are Reasonable When Compared to the Fees of Other
Options Exchanges With Similar Market Share
    The Exchange does not have visibility into other options exchanges'
costs to provide connectivity and port access or their fee markup over
those costs, and therefore cannot use other exchange's connectivity and
port fees as benchmarks to determine a reasonable markup over the costs
of providing such access. Nevertheless, the Exchange believes the other
exchanges' 10Gb connectivity and port fees are useful examples of
alternative approaches to providing and charging for access
notwithstanding that the competing exchanges may have different system
architectures that may result in different cost structures for the
provision of connectivity and ports. To that end, the Exchange believes
the proposed fees are reasonable because the proposed fees are similar
to or less than fees charged for similar connectivity and port access
provided by other options exchanges with comparable market shares.
    As described in the table below, the Exchange's proposed fees
remain similar to or less than fees charged for similar connectivity
and port access provided by other options exchanges with similar market
share. In the each of the below cases, the Exchange's proposed fees are
still significantly lower than that of competing options exchanges with
similar market share. Each of the market data rates in place at
competing options exchanges were filed with the Commission for
immediate effectiveness and remain in place today.

------------------------------------------------------------------------
                                      Type of         Monthly fee (per
            Exchange               connection or     connection or per
                                       port                port)
------------------------------------------------------------------------
MIAX Emerald (as proposed)       10Gb ULL          $12,000.
 (equity options market share     connection.      1-2 ports. FREE (not
 of 4.49% as of April 12, 2022   Limited Service    changed in this
 for the month of April) \57\.    MEI Port.         proposal).
                                                   3-4 ports. $200.
                                                   5-6 ports. $300.
                                                   7 or more ports.
                                                    $400.
NASDAQ \58\ (equity options      10Gb Ultra fiber  $15,000.
 market share of 8.31% as of      connection.      1-5 ports. $1,500.
 April 12, 2022 for the month    SQF Port........  6-20 ports. $1,000.
 of April) \59\.                                   21 or more ports.
                                                    $500.
ISE \60\ (equity options market  10Gb Ultra fiber  $15,000.
 share of 5.28% as of April 12,   connection.      $1,100.
 2022 for the month of April)    SQF Port........
 \61\.
NYSE American \62\ (equity       10Gb LX LCN       $22,000.
 options market share of 7.86%    connection.      Ports 1-40. $450.
 as of April 12, 2022 for the    Order/Quote       Ports 41 and greater.
 month of April) \63\.            Entry Port.       $150.
GEMX \64\ (equity options        10Gb Ultra        $15,000.
 market share of 2.31% as of      connection.      $1,250.
 April 12, 2022 for the month    SQF Port........
 of April) \65\.
------------------------------------------------------------------------

The Proposed Pricing Is Not Unfairly Discriminatory and Provides for
the Equitable Allocation of Fees, Dues, and Other Charges
---------------------------------------------------------------------------

    \57\ See supra note 17.
    \58\ See supra note 18.
    \59\ See supra note 17.
    \60\ See supra note 20.
    \61\ See supra note 17.
    \62\ See supra note 22.
    \63\ See supra note 17.
    \64\ See supra note 24.
    \65\ See supra note 17.
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees are reasonable, fair,
equitable, and not unfairly discriminatory because they are designed to
align fees with services provided and will apply equally to all
subscribers.
10Gb ULL Connectivity
    The Exchange believes that the proposed 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 MIAX Emerald and a vast
majority choose to connect to all twelve (12) matching engines. The
Exchange believes that other exchanges require firms to connect to
multiple matching engines.\66\ For the foregoing reasons, the Exchange
believes that the proposed fees are reasonable, equitably allocated,
and not unfairly discriminatory.
---------------------------------------------------------------------------

    \66\ See Specialized Quote Interface Specification, Nasdaq PHLX,
Nasdaq Options Market, Nasdaq BX Options, Version 6.5a, Section 2,
Architecture (revised August 16, 2019), available at http://www.nasdaqtrader.com/content/technicalsupport/specifications/TradingProducts/SQF6.5a-2019-Aug.pdf. The Exchange notes that it is
unclear whether the NASDAQ exchanges include connectivity to each
matching engine for the single fee or charge per connection, per
matching engine. See also NYSE Technology FAQ and Best Practices:
Options, Section 5.1 (How many matching engines are used by each
exchange?) (September 2020). The Exchange notes that NYSE provides a
link to an Excel file detailing the number of matching engines per
options exchange, with Arca and Amex having 19 and 17 matching
engines, respectively.
---------------------------------------------------------------------------

    The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity and port
alternatives, as the users of 10Gb ULL connections consume the more
bandwidth and network resources than users of 1Gb ULL connection.

Specifically, the Exchange notes that 10Gb ULL connection users account
for approximately more than 99% of message traffic over the network,
while the users of the 1Gb ULL 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 and the capacity to handle approximately 18 million
quote messages per second. On an average day, the Exchange handles over
approximately 3 billion total messages. Of those, users of the 10Gb ULL
connections generate approximately 3 billion messages, and users of the
1Gb connections generate 500,000 messages. 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. The Exchange must also purchase additional storage
capacity on an ongoing basis to ensure it has sufficient capacity to
store these messages as part of it surveillance program and to satisfy
its record keeping requirements under the Exchange Act.\67\ Thus, as
the number of messages an entity increases, certain other costs
incurred by the Exchange that are correlated to, though not directly
affected by, connection costs (e.g., storage costs, surveillance costs,
service expenses) also increase. 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
market participants' benefit.
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
---------------------------------------------------------------------------

    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 95.8% of the volume on the
Exchange. This overall volume percentage (95.8% of total Exchange
volume) is in line with the amount of network connectivity revenue
collected from 10Gb ULL purchasers (99.8% of total Exchange
connectivity revenue). For example, utilizing a recent billing cycle,
Exchange Members and non-Members that purchased 10Gb ULL connections
accounted for approximately 99.8% of the total network connectivity
revenue collected by the Exchange from all connectivity alternatives;
and Members and non-Members that purchased 1Gb connections accounted
for approximately 0.2% of the revenue collected by the Exchange from
all connectivity alternatives.
Limited Service MEI Ports
    The Exchange believes that the proposed fees are equitably
allocated among users of the network connectivity alternatives, as the
users of the Limited Service MEI Ports consume the most bandwidth and
resources of the network. Specifically, like above for the 10Gb ULL
connectivity, the Exchange notes that the Market Makers who take the
maximum amount of Limited Service MEI Ports account for approximately
greater than 99% of message traffic over the network, while Market
Makers with fewer Limited Service MEI Ports account for approximately
less than 1% of message traffic over the network. In the Exchange's
experience, Market Makers who only utilize the two free Limited Service
MEI Ports do not have a business need for the high performance network
solutions required by Market Makers who take the maximum amount of
Limited Service MEI Ports. The Exchange's high performance network
solutions and supporting infrastructure (including employee support),
provides unparalleled system throughput and the capacity to handle
approximately 18 million quote messages per second. On an average day,
the Exchange handles over approximately 7.5 billion total quotes. Of
that total, Market Makers with the maximum amount of Limited Service
MEI Ports generate approximately 5 billion messages, and Market Makers
who utilize the two free Limited Service MEI Ports generate
approximately 1.8 billion messages. Specifically, Market Makers who
utilize only one to two Limited Service MEI ports for free submitted an
average of 375,821,358 quotes per day for the month of April 2022. Also
for April 2022, Market Makers who utilized three to four Limited
Service MEI ports submitted an average of 533,527,402 quotes per day
and Market Makers who utilized seven or more Limited Service MEI ports
submitted an average of 1,056,292,513 quotes per day.\68\
---------------------------------------------------------------------------

    \68\ The Exchange notes that no firm utilized five to six
Limited Service Ports in April 2022.
---------------------------------------------------------------------------

    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. The Exchange must also
purchase additional storage capacity on an ongoing basis to ensure it
has sufficient capacity to store these messages as part of it
surveillance program and to satisfy its record keeping requirements
under the Exchange Act.\69\ Thus, as the number of connections a Market
Maker has increases, certain other costs incurred by the Exchange that
are correlated to, though not directly affected by, connection costs
(e.g., storage costs, surveillance costs, service expenses) also
increase. The Exchange sought to design the proposed tiered-pricing
structure to set the amount of the fees to relate to the number of
connections a firm purchases. The more connections purchased by a
Market Maker likely results in greater expenditure of Exchange
resources and increased cost to the Exchange. With this in mind, the
Exchange proposes no fee or lower fees for those Market Makers who
receive fewer Limited Service MEI Ports since those Market Makers
generally tend to send the least amount of orders and messages over
those connections. Given this difference in network utilization rate,
the Exchange believes that it is reasonable, equitable, and not
unfairly discriminatory that Market Makers who take the most Limited
Service MEI Ports 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 those Market
Makers.
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    \69\ 17 CFR 240.17a-1 (recordkeeping rule for national
securities exchanges, national securities associations, registered
clearing agencies and the Municipal Securities Rulemaking Board).
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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 that is not

necessary or appropriate in furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange believes the proposed fees will not result in any
burden on intra-market competition that is not necessary or appropriate
in furtherance of the purposes of the Act because the proposed fees
will allow the Exchange to recoup some of its costs in providing 10Gb
ULL connectivity and Limited Service MEI Ports at below market rates to
market participants since the Exchange launched operations. As
described above, the Exchange has operated at a cumulative net annual
loss since it launched operations in 2019 \70\ due to providing a low
cost alternative to attract order flow and encourage market
participants to experience the high determinism and resiliency of the
Exchange's trading Systems. To do so, the Exchange chose to waive the
fees for some non-transaction related services and Exchange products or
provide them at a very marginal cost, which was not profitable to the
Exchange. This resulted in the Exchange forgoing revenue it could have
generated from assessing any fees or higher fees. The Exchange could
have sought to charge higher fees at the outset, but that could have
served to discourage participation on the Exchange. Instead, the
Exchange chose to provide a low cost exchange alternative to the
options industry, which resulted in lower initial revenues. Examples of
this are 10Gb ULL connectivity and Limited Service MEI Ports, for which
the Exchange only now seeks to adopt fees at a level similar to or
lower than those of other options exchanges.
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    \70\ See supra note 56.
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    Further, the Exchange does not believe that the proposed fee
increase for the 10Gb ULL connection 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. As is the case with the current proposed flat
fee, the proposed fee would apply uniformly to all market participants
regardless of the number of connections they choose to purchase. The
proposed fee does not favor certain categories of market participants
in a manner that would impose an undue burden on competition.
Inter-Market Competition
    The Exchange also does not believe that the proposed rule change
will result in any burden on inter-market competition that is not
necessary or appropriate in furtherance of the purposes of the Act. As
discussed above, options market participants are not forced to connect
to all options exchanges. There is no reason to believe that our
proposed price increase will harm another exchange's ability to
compete. There are other options markets of which market participants
may connect to trade options. There is also a possible range of
alternative strategies, including routing to the exchange through
another participant or market center or accessing the Exchange
indirectly. Market participants are free to choose which exchange or
reseller to use to satisfy their business needs. Accordingly, the
Exchange does not believe its proposed fee changes impose any burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Act.

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. Suspension of the Proposed Rule Change

    Pursuant to Section 19(b)(3)(C) of the Act,\71\ at any time within
60 days of the date of filing of a proposed rule change pursuant to
Section 19(b)(1) of the Act,\72\ 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.
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    \71\ 15 U.S.C. 78s(b)(3)(C).
    \72\ 15 U.S.C. 78s(b)(1).
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    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.\73\ 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.'' \74\
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    \73\ 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'').
    \74\ See id.
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    Among other things, exchange proposed rule changes are subject to
Section 6 of the Act, including Sections 6(b)(4), (5), and (8), which
requires 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; \75\ (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; \76\
and (3) not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\77\
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    \75\ 15 U.S.C. 78f(b)(4).
    \76\ 15 U.S.C. 78f(b)(5).
    \77\ 15 U.S.C. 78f(b)(8).
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    In temporarily suspending the Exchange's fee change, the Commission
intends to further consider whether the proposed fees are 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 be designed to 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.\78\
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    \78\ See 15 U.S.C. 78f(b)(4), (5), and (8), respectively.
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    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.\79\
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    \79\ 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).
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IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Rule Change

    The Commission is instituting proceedings pursuant to Sections

19(b)(3)(C) \80\ and 19(b)(2)(B) \81\ of the Act to determine whether
the Exchange's proposed rule change should be approved or disapproved.
Institution of such proceedings is appropriate at this time in view of
the legal and policy issues raised by the proposed rule change.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described below, the Commission seeks and encourages
interested persons to provide comments on the proposed rule change to
inform the Commission's analysis of whether to approve or disapprove
the proposed rule change.
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    \80\ 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.
    \81\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\82\ the Commission is
providing notice of the grounds for possible disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of whether the Exchange has sufficiently
demonstrated how the proposed rule change is consistent with Sections
6(b)(4),\83\ 6(b)(5),\84\ and 6(b)(8) \85\ of the Act. Section 6(b)(4)
of the Act 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. Section 6(b)(5) of the Act requires that the rules of a
national securities exchange be designed, among other things, 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 not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. Section 6(b)(8) of the Act
requires that the rules of a national securities exchange not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
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    \82\ 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.
    \83\ 15 U.S.C. 78f(b)(4).
    \84\ 15 U.S.C. 78f(b)(5).
    \85\ 15 U.S.C. 78f(b)(8).
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    The Commission asks that commenters address the sufficiency 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.
In particular, the Commission seeks comment on the following aspects of
the proposal and asks commenters to submit data where appropriate to
support their views:
    1. Cost Estimates and Allocation. The Exchange states that it is
not asserting that the proposed fees are constrained by competitive
forces.\86\ Rather, the Exchange states that its proposed fees are
based on a ``cost-plus model,'' employing a ``conservative approach,''
and that the expenses are ``directly related'' to 10Gb ULL connectivity
and Limited Service MEI Ports, and not any other product or service
offered by the Exchange.\87\ In explaining its costs, should the
Exchange identify more specifically which, if any, of its costs are
incurred solely to provide 10Gb ULL connectivity and solely to provide
Limited Service MEI Ports? Regarding the allocations provided by the
Exchange as described in greater detail above, do commenters believe
that the Exchange provided sufficient detail about how it determined
these allocations and why they are reasonable? \88\ Why or why not? Do
commenters believe that the Exchange provided sufficient context to
permit an independent review and assessment of the reasonableness of
the allocations? Do commenters believe that the Exchange provided
sufficient detail or explanation to support its claim that ``no expense
amount is allocated twice,'' \89\ whether among the sub-categories of
expenses in this filing, across the Exchange's fee filings for other
products or services, or over time?
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    \86\ See supra Section II.A.2.
    \87\ See id.
    \88\ See id.
    \89\ See id.
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    2. Revenue Estimates and Profit Margin Range. The Exchange uses a
single monthly revenue figure (April 2022) as the basis for calculating
its projected combined profit margin of 36.4%.\90\ The Exchange argues
that projecting revenues on a per month basis is reasonable ``as the
revenue generated from access services subject to the proposed fee
generally remains static from month to month.'' \91\ Yet the Exchange
also acknowledges that ``profit margin may also fluctuate from month to
month based on the uncertainty of predicting how many connections and
ports may be purchased from month to month as Members and non-Members
are free to add and drop connections and ports at any time based on
their own business decisions.'' \92\ Do commenters believe a single
month provides a reasonable basis for a revenue projection? If not, why
not? Should the Exchange provide a range of profit margins that it
believes are reasonably possible, and the reasons therefor? The
Exchange also provided its baseline by analyzing March 2022.\93\ Do
commenters believe that March 2022 is an appropriate month for a
baseline? What are commenters' views on the Exchange providing a
combined profit margin for both 10Gb ULL connectivity and Limited
Service MEI Ports, rather than separate margins for each?
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    \90\ See id.
    \91\ See id.
    \92\ See id.
    \93\ See id.
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    3. Reasonableness. The Exchange states that its proposed fees are
``reasonable because they will permit recovery of the Exchange's costs
in providing access services to supply 10Gb ULL connectivity and
Limited Service MEI Ports and will not result in the Exchange
generating a supra-competitive profit.'' \94\ The Exchange offers
several justifications for why its estimated profit margin (which is
blended and not discussed separately for each service) is not a supra-
competitive profit, including: (a) When it launched operations in 2019,
it chose to forgo revenue by offering certain products at lower rates
than other options exchanges to attract order flow; (b) the Exchange
has been successful in controlling its costs; (c) a profit margin
should not be judged alone based on its size, but on whether the
ultimate fee reflects the value of the services provided, and (d) the
Exchange's proposed fees remain similar to or less than fees charged
for access provided by other options exchanges with similar market
share. Do commenters agree that these factors are relevant to
assessment of whether the fees are reasonable for each service? Should
such an assessment include consideration of any factors other than
costs; and if so, what factors should be considered, and why?
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    \94\ See id.
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    4. Periodic Reevaluation. The Exchange has stated that it will