[Federal Register Volume 84, Number 215 (Wednesday, November 6, 2019)]
[Notices]
[Pages 59889-59900]
[FR Doc No: 2019-24187]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87432; File No. SR-PEARL-2019-33]

Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend the MIAX
PEARL Fee Schedule

October 31, 2019.
    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 October 22, 2019, MIAX PEARL, LLC (``MIAX PEARL'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') a
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange is filing a proposal to amend the MIAX PEARL Fee
Schedule (the ``Fee Schedule'') to modify certain of the Exchange's
system connectivity fees.
    The Exchange previously filed the proposal on August 23, 2019 (SR-
PEARL-2019-25). That filing has been withdrawn and replaced with the
current filing (SR-PEARL-2019-33).
    The text of the proposed rule change is available on the Exchange's
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX
PEARL's principal office, and at the Commission's Public Reference
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is refiling its proposal to amend the Fee Schedule in
order to provide additional analysis of its baseline revenues, costs,
and profitability (before the proposed fee change) and the Exchange's
expected revenues, costs, and profitability (following the proposed fee
change) for its network connectivity services. This additional analysis
includes information regarding its methodology for determining the
baseline costs and revenues, as well as expected costs and revenues,
for its network connectivity services. The Exchange is also refiling
its proposal in order to address certain points raised in the only
comment letter received by the Commission on the Exchange's prior
proposal to increase connectivity fees.\3\
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    \3\ See Letter from John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC (``IEX''), to Vanessa Countryman, Secretary,
Commission, dated October 9, 2019 (``Third IEX Letter,'' as further
described below).
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    In order to determine the Exchange's baseline costs associated with
providing network connectivity services, the Exchange conducted an
extensive cost review in which the Exchange analyzed every expense item
in the Exchange's general expense ledger to determine whether each such
expense relates to the provision of network connectivity services, and,
if such expense did so relate, what portion (or percentage) of such
expense actually supports the provision of network connectivity
services. The sum of all such portions of expenses represents the total
actual baseline cost of the Exchange to provide network connectivity
services. (For the avoidance of doubt, no expense amount was allocated
twice.) The Exchange is presenting the results of its cost review in a
way that corresponds directly with the Exchange's 2018 Audited
Unconsolidated Financial Statements, the relevant sections of which are
attached [sic] hereto as Exhibit 3, which are publicly available as
part of the Exchange's Form 1 Amendment.\4\ The purpose of presenting
it in this manner is to provide greater transparency into the
Exchange's actual and expected revenues, costs, and profitability
associated with providing network connectivity services. Based on this
analysis, the Exchange believes that its proposed fee increases are
fair and reasonable because they will permit recovery of less than all
of the Exchange's costs for providing the network connectivity services
and will not result in excessive pricing or supra-competitive profit,
when comparing the Exchange's total annual expense associated with
providing the network connectivity services versus the total projected
annual revenue the Exchange projects to collect for providing the
network connectivity services.
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    \4\ See the complete Audited Unconsolidated Financial Statements
of MIAX PEARL, LLC, LLC as of December 31, 2018, and the Audited
Unconsolidated Financial Statements of Miami International
Securities Exchange, LLC as of December 31, 2018, which are listed
under Exhibit D of MIAX Form 1 Amendment 2019-7 Annual Filing at
https://www.sec.gov/Archives/edgar/vprr/1900/19003680.pdf.
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    Specifically, the Exchange proposes to amend Sections 5(a) and (b)
of the Fee Schedule to increase the network connectivity fees for the 1
Gigabit (``Gb'') fiber connection, the 10Gb fiber connection, and the
10Gb ultra-low latency (``ULL'') fiber connection, which are charged to
both Members \5\ and non-Members of the Exchange for connectivity to
the Exchange's primary/secondary facility. The Exchange also proposes
to increase the network connectivity fees for the 1Gb and 10Gb fiber
connections for connectivity to the Exchange's disaster recovery
facility. Each of these connections are shared connections, and thus
can be utilized to access both the Exchange and the Exchange's
affiliate, Miami International Securities Exchange, LLC (``MIAX'').
These proposed fee increases are collectively referred to herein as the
``Proposed Fee Increases.''
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    \5\ The term ``Member'' means an individual or organization that
is registered with the Exchange pursuant to Chapter II of the
Exchange's Rules for purposes of trading on the Exchange as an
``Electronic Exchange Member'' or ``Market Maker.'' Members are
deemed ``members'' under the Exchange Act. See Exchange Rule 100.
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    The Exchange initially filed the Proposed Fee Increases on July 31,
2018, designating the Proposed Fee Increases effective August 1,
2018.\6\ The First Proposed Rule Change was published for comment in
the Federal Register on August 13, 2018.\7\ The Commission received one
comment letter on the proposal.\8\ The Proposed Fee Increases remained
in effect until they were temporarily suspended pursuant to a
suspension order (the ``Suspension Order'') issued by the Commission on
September 17, 2018.\9\ The Suspension Order also instituted proceedings
to determine whether to approve or disapprove the First Proposed Rule
Change.\10\
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    \6\ See Securities Exchange Act Release No. 83785 (August 7,
2018), 83 FR 40101 (August 13, 2018) (SR-PEARL-2018-16) (the ``First
Proposed Rule Change'').
    \7\ Id.
    \8\ See Letter from Tyler Gellasch, Executive Director, The
Healthy Markets Association, to Brent J. Fields, Secretary,
Commission, dated September 4, 2018 (``Healthy Markets Letter'').
    \9\ See Securities Exchange Act Release No. 34-84177 (September
17, 2018).
    \10\ Id.
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    The Healthy Markets Letter argued that the Exchange did not provide
sufficient information in its filing to support a finding that the
proposal is consistent with the Act. Specifically, the Healthy Markets
Letter objected to the Exchange's reliance on the fees of other
exchanges to demonstrate that its fee increases are consistent with the
Act. In addition, the Healthy Markets Letter argued that the Exchange
did not offer any details to support its basis for asserting that the
Proposed Fee Increases are consistent with the Act.
    On October 5, 2018, the Exchange withdrew the First Proposed Rule
Change.\11\ The Exchange refiled the Proposed Fee Increases on
September 18, 2018, designating the Proposed Fee Increases immediately
effective.\12\ The Second Proposed Rule Change was published for
comment in the Federal Register on October 10, 2018.\13\ The Commission
received one comment letter on the proposal.\14\ The Proposed Fee
Increases remained in effect until they were temporarily suspended
pursuant to a suspension order (the ``Second Suspension Order'') issued
by the Commission on October 3, 2018.\15\ The Second Suspension Order
also instituted proceedings to determine whether to approve or
disapprove the Second Proposed Rule Change.\16\
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    \11\ See Securities Exchange Act Release No. 84397 (October 10,
2018), 83 FR 52272 (October 16, 2018) (SR-PEARL-2018-16).
    \12\ See Securities Exchange Act Release No. 84358 (October 3,
2018), 83 FR 51022 (October 10, 2018) (SR-PEARL-2018-19) (the
``Second Proposed Rule Change'').
    \13\ Id.
    \14\ See Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel, and Ellen Greene, Managing Director
Financial Services Operations, The Securities Industry and Financial
Markets Association (``SIFMA''), to Brent J. Fields, Secretary,
Commission, dated October 15, 2018 (``SIFMA Letter'').
    \15\ See supra note 12.
    \16\ Id.
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    The SIFMA Letter argued that the Exchange did not provide
sufficient information in its filing to support a finding that the
proposal should be approved by the Commission after further review of
the proposed fee increases. Specifically, the SIFMA Letter objected to
the Exchange's reliance on the fees of other exchanges to justify its
own fee increases. In addition, the SIFMA Letter argued that the
Exchange did not offer any details

to support its basis for asserting that the Proposed Fee Increases are
reasonable. On November 23, 2018, the Exchange withdrew the Second
Proposed Rule Change.\17\
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    \17\ See Securities Exchange Act Release No. 84651 (November 26,
2018), 83 FR 61687 (November 30, 2018) (SR-PEARL-2018-19).
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    The Exchange refiled the Proposed Fee Increases on March 1, 2019,
designating the Proposed Fee Increases immediately effective.\18\ The
Third Proposed Rule Change was published for comment in the Federal
Register on March 20, 2019.\19\ The Third Proposed Rule Change provided
new information, including additional detail about the market
participants impacted by the Proposed Fee Increases, as well as the
additional costs incurred by the Exchange associated with providing the
connectivity alternatives, in order to provide more transparency and
support relating to the Exchange's belief that the Proposed Fee
Increases are reasonable, equitable, and non-discriminatory, and to
provide sufficient information for the Commission to determine that the
Proposed Fee Increases are consistent with the Act.
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    \18\ See Securities Exchange Act Release No. 85317 (March 14,
2019), 84 FR 10380 (March 20, 2019) (SR-PEARL-2019-08) (the ``Third
Proposed Rule Change'') (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Fee
Schedule).
    \19\ Id.
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    On March 29, 2019, the Commission issued its Order Disapproving
Proposed Rule Changes to Amend the Fee Schedule on the BOX Market LLC
Options Facility to Establish BOX Connectivity Fees for Participants
and Non-Participants Who Connect to the BOX Network (the ``BOX
Order'').\20\ In the BOX Order, the Commission highlighted a number of
deficiencies it found in three separate rule filings by BOX Exchange
LLC (``BOX'') to increase BOX's connectivity fees that prevented the
Commission from finding that BOX's proposed connectivity fees were
consistent with the Act. These deficiencies relate to topics that the
Commission believes should be discussed in a connectivity fee filing.
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    \20\ 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).
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    After the BOX Order was issued, the Commission received four
comment letters on the Third Proposed Rule Change.\21\
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    \21\ See Letter from Joseph W. Ferraro III, SVP & Deputy General
Counsel, MIAX, to Vanessa Countryman, Acting Secretary, Commission,
dated April 5, 2019 (``MIAX Letter''); Letter from Theodore R. Lazo,
Managing Director and Associate General Counsel, SIFMA, to Vanessa
Countryman, Acting Secretary, Commission, dated April 10, 2019
(``Second SIFMA Letter''); Letter from John Ramsay, Chief Market
Policy Officer, IEX, to Vanessa Countryman, Acting Secretary,
Commission, dated April 10, 2019 (``IEX Letter''); and Letter from
Tyler Gellasch, Executive Director, Healthy Markets, to Brent J.
Fields, Secretary, Commission, dated April 18, 2019 (``Second
Healthy Markets Letter'').
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    The Second SIFMA Letter argued that the Exchange did not provide
sufficient information in its Third Proposed Rule Change to support a
finding that the proposal should be approved by the Commission after
further review of the proposed fee increases. Specifically, the Second
SIFMA Letter argued that the Exchange's market data fees and
connectivity fees were not constrained by competitive forces, the
Exchange's filing lacked sufficient information regarding cost and
competition, and that the Commission should establish a framework for
determining whether fees for exchange products and services are
reasonable when those products and services are not constrained by
significant competitive forces.
    The IEX Letter argued that the Exchange did not provide sufficient
information in its Third Proposed Rule Change to support a finding that
the proposal should be approved by the Commission and that the
Commission should extend the time for public comment on the Third
Proposed Rule Change. Despite the objection to the Proposed Fee
Increases, the IEX Letter did find that ``MIAX has provided more
transparency and analysis in these filings than other exchanges have
sought to do for their own fee increases.'' \22\ The IEX Letter
specifically argued that the Proposed Fee Increases were not
constrained by competition, the Exchange should provide data on the
Exchange's actual costs and how those costs relate to the product or
service in question, and whether and how MIAX considered changes to
transaction fees as an alternative to offsetting exchange costs.
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    \22\ See IEX Letter, pg. 1.
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    The Second Healthy Markets Letter did not object to the Third
Proposed Rule Change and the information provided by the Exchange in
support of the Proposed Fee Increases. Specifically, the Second Healthy
Markets Letter stated that the Third Proposed Rule Change was
``remarkably different,'' and went on to further state as follows:

    The instant MIAX filings--along with their April 5th
supplement--provide much greater detail regarding users of
connectivity, the market for connectivity, and costs than the
Initial MIAX Filings. They also appear to address many of the issues
raised by the Commission staff's BOX disapproval order. This third
round of MIAX filings suggests that MIAX is operating in good faith
to provide what the Commission and staff seek.\23\

    \23\ See Second Healthy Markets Letter, pg. 2.
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    On April 29, 2019, the Exchange withdrew the Third Proposed Rule
Change.\24\
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    \24\ See SR-PEARL-2019-08.
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    The Exchange refiled the Proposed Fee Increases on April 30, 2019,
designating the Proposed Fee Increases immediately effective.\25\ The
Fourth Proposed Rule Change was published for comment in the Federal
Register on May 16, 2019.\26\ The Fourth Proposed Rule Change provided
further cost analysis information to squarely and comprehensively
address each and every topic raised for discussion in the BOX Order,
the IEX Letter and the Second SIFMA Letter to ensure that the Proposed
Fee Increases are reasonable, equitable, and non-discriminatory, and
that the Commission should find that the Proposed Fee Increases are
consistent with the Act.
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    \25\ See Securities Exchange Act Release No. 85837 (May 10,
2019), 84 FR 22214 (May 16, 2019) (SR-PEARL-2019-17) (the ``Fourth
Proposed Rule Change'') (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Amend the MIAX PEARL Fee
Schedule).
    \26\ Id.
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    On May 21, 2019, the Commission issued the Staff Guidance on SRO
Rule Filings Relating to Fees.\27\
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    \27\ 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 Commission received two comment letters on the Fourth Proposed
Rule Change, after the Guidance was released.\28\ The Second IEX Letter
and the Third SIFMA Letter argued that the Exchange did not provide
sufficient information in its Fourth Proposed Rule Change to justify
the Proposed Fee Increases based on the Guidance and the BOX Order. Of
note, however, is that unlike their previous comment letter, the Third
SIFMA Letter did not call for the Commission to suspend the Fourth
Proposed Rule Change. Also, Healthy Markets did not comment on the
Fourth Proposed Rule Change.
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    \28\ See Letter from John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC, to Vanessa Countryman, Acting Secretary,
Commission, dated June 5, 2019 (the ``Second IEX Letter'') and
Letter from Theodore R. Lazo, Managing Director and Associate
General Counsel, and Ellen Greene, Managing Director, SIFMA, to
Vanessa Countryman, Acting Secretary, Commission, dated June 6, 2019
(the ``Third SIFMA Letter'').
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    On June 26, 2019, the Exchange withdrew the Fourth Proposed Rule
Change.\29\
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    \29\ See SR-PEARL-2019-17.
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    The Exchange refiled the Proposed Fee Increases on June 26, 2019,
designating the Proposed Fee Increases

immediately effective.\30\ The Fifth Proposed Rule Change was published
for comment in the Federal Register on July 16, 2019.\31\ The Fifth
Proposed Rule Change bolstered the Exchange's previous cost-based
discussion to support its claim that the Proposed Fee Increases are
fair and reasonable because they will permit recovery of the Exchange's
costs and will not result in excessive pricing or supra-competitive
profit, in light of the Guidance issued by Commission staff subsequent
to the Fourth Proposed Rule Change, and primarily through the inclusion
of anticipated revenue figures associated with the provision of network
connectivity services.
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    \30\ See Securities Exchange Act Release No. 86343 (July 10,
2019), 84 FR 34003 (July 16, 2019) (SR-PEARL-2019-21) (the ``Fifth
Proposed Rule Change'').
    \31\ Id.
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    The Commission received three comment letters on the Fifth Proposed
Rule Change.\32\
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    \32\ See Letter from John Ramsay, Chief Market Policy Officer,
IEX, to Vanessa Countryman, Acting Secretary, Commission, dated
August 8, 2019 (``Third IEX Letter''); Letter from Tyler Gellasch,
Executive Director, Healthy Markets, to Vanessa Countryman, Acting
Secretary, Commission, dated August 5, 2019 (``Third Healthy Markets
Letter''); and Letter from Theodore R. Lazo, Managing Director and
Associate General Counsel and Ellen Greene, Managing Director
Financial Services Operations, SIFMA, to Vanessa Countryman, Acting
Secretary, Commission, dated August 5, 2019 (``Fourth SIFMA
Letter'').
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    Neither the Third Healthy Markets Letter nor the Fourth SIFMA
Letter called for the Commission to suspend or disapprove the Proposed
Fee Increases. In fact, the Third Healthy Markets Letter acknowledged
that ``it appears as though MIAX [PEARL] is operating in good faith to
provide what the Commission, its staff, and market participants the
information needed to appropriately assess the filings.'' The Third IEX
Letter only reiterated points from the Second IEX Letter and failed to
address any of the new information in the Fifth Proposed Rule Change
concerning the Exchange's revenue figures, cost allocation or that the
Proposed Fee Increases did not result in excessive pricing or a supra-
competitive profit for the Exchange.
    On August 23, 2019, the Exchange withdrew the Fifth Proposed Rule
Change.\33\
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    \33\ See SR-PEARL-2019-21.
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    The Exchange refiled the Proposed Fee Increases on August 23, 2019,
designating the Proposed Fee Increases immediately effective.\34\ The
Sixth Proposed Rule Change was published for comment in the Federal
Register on July 16, 2019.\35\ The Sixth Proposed Rule Change provided
greater detail and clarity concerning the Exchange's cost methodology
as it pertains to the Exchange's expenses for network connectivity
services, using a line-by-line analysis of the Exchange's general
expense ledger to determine what, if any, portion of those expenses
supports the provision of network connectivity services.
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    \34\ See Securities Exchange Act Release No. 86837 (August 30,
2019), 84 FR 46988 (September 6, 2019) (SR-PEARL-2019-25) (the
``Sixth Proposed Rule Change'').
    \35\ Id.
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    The Commission received only one comment letter on the Sixth
Proposed Rule Change, twelve days after the comment period deadline
ended.\36\ Of note, no member of the Exchange commented on the Sixth
Proposed Rule Change. Also, no issuer or other person using the
facilities of the Exchange commented on the Sixth Proposed Rule Change.
Also, no industry group that represents members, issuers, or other
persons using the facilities of the Exchange commented on the Sixth
Proposed Rule Change. Also, no operator of an options market commented
on the Sixth Proposed Rule Change. Also, no operator of a high
performance, ultra-low latency network, which network can support
access to three distinct exchanges and provides premium network
monitoring and reporting services to customers, commented on the Sixth
Proposed Rule Change. Rather, the only comment letter came from an
operator of a single equities market (equities market structure and
resulting network demands are fundamentally different from those in the
options markets),\37\ which operator also has a fundamentally different
business model (and agenda) than does the Exchange. That letter--the
Third IEX Letter--called for, among other things, the Exchange to
explain its basis for concluding that it incurred substantially higher
costs to provide lower-latency connections and further describe the
nature and closeness of the relationship between the identified costs
and connectivity products and services as stated in the Exchange's cost
allocation analysis.
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    \36\ See supra note 3.
    \37\ See infra pages 17 to 19 (describing the differences in
equity market structure and options market structure).
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    On October 22, 2019, the Exchange withdrew the Sixth Proposed Rule
Change.\38\
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    \38\ See SR-PEARL-2019-25.
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    The Exchange is now refiling the Proposed Fee Increases to provide
additional analysis of its baseline revenues, costs, and profitability
(before the proposed fee change) and the Exchange's expected revenues,
costs, and profitability (following the proposed fee change) for its
network connectivity services. This additional analysis includes
information regarding its methodology for determining the baseline
costs and revenues, as well as expected costs and revenues, for its
network connectivity services. The Exchange is also refiling its
proposal in order to address certain points raised in the Third IEX
Letter. The Exchange believes that the Proposed Fee Increases are
consistent with the Act because they (i) are reasonable, equitably
allocated, not unfairly discriminatory, and not an undue burden on
competition; (ii) comply with the BOX Order and the Guidance; (iii) are
supported by evidence (including data and analysis), constrained by
significant competitive forces; and (iv) are supported by specific
information (including quantitative information), fair and reasonable
because they will permit recovery of the Exchange's costs (less than
all) and will not result in excessive pricing or supra-competitive
profit. Accordingly, the Exchange believes that the Commission should
find that the Proposed Fee Increases are consistent with the Act. The
proposed rule change is immediately effective upon filing with the
Commission pursuant to Section 19(b)(3)(A) of the Act.
    The Exchange currently offers various bandwidth alternatives for
connectivity to the Exchange to its primary and secondary facilities,
consisting of a 1Gb fiber connection, a 10Gb fiber connection, and a
10Gb ULL fiber connection. The 10Gb ULL offering uses an ultra-low
latency switch, which provides faster processing of messages sent to it
in comparison to the switch used for the other types of connectivity.
The Exchange currently assesses the following monthly network
connectivity fees to both Members and non-Members for connectivity to
the Exchange's primary/secondary facility: (a) $1,100 for the 1Gb
connection; (b) $5,500 for the 10Gb connection; and (c) $8,500 for the
10Gb ULL connection. The Exchange also assesses to both Members and
non-Members a monthly per connection network connectivity fee of $500
for each 1Gb connection to the disaster recovery facility and a monthly
per connection network connectivity fee of $2,500 for each 10Gb
connection to the disaster recovery facility.
    The Exchange's MIAX Express Network Interconnect (``MENI'') can be
configured to provide Members and non-Members of the Exchange network
connectivity to the trading platforms, market data systems, test
systems, and

disaster recovery facilities of both the Exchange and its affiliate,
MIAX, via a single, shared connection. Members and non-Members
utilizing the MENI to connect to the trading platforms, market data
systems, test systems and disaster recovery facilities of the Exchange
and MIAX via a single, shared connection are assessed only one monthly
network connectivity fee per connection, regardless of the trading
platforms, market data systems, test systems, and disaster recovery
facilities accessed via such connection.
    The Exchange proposes to increase the monthly network connectivity
fees for such connections for both Members and non-Members. The network
connectivity fees for connectivity to the Exchange's primary/secondary
facility will be increased as follows: (a) From $1,100 to $1,400 for
the 1Gb connection; (b) from $5,500 to $6,100 for the 10Gb connection;
and (c) from $8,500 to $9,300 for the 10Gb ULL connection. The network
connectivity fees for connectivity to the Exchange's disaster recovery
facility will be increased as follows: (a) from $500 to $550 for the
1Gb connection; and (b) from $2,500 to $2,750 for the 10Gb connection.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Fee Schedule
is consistent with Section 6(b) of the Act \39\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \40\ in
particular, in that it provides for the equitable allocation of
reasonable dues, fees and other charges among Exchange Members and
issuers and other persons using any facility or system which the
Exchange operates or controls. The Exchange also believes the proposal
furthers the objectives of Section 6(b)(5) of the Act \41\ in that it
is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general to protect
investors and the public interest and is not designed to permit unfair
discrimination between customer, issuers, brokers and dealers.
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    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(4).
    \41\ 15 U.S.C. 78f(b)(5).
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    The Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. In Regulation NMS,
the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \42\
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    \42\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
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    The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act, in that the Proposed Fee Increases are fair,
equitable and not unreasonably discriminatory, because the fees for the
connectivity alternatives available on the Exchange, as proposed to be
increased, are constrained by significant competitive forces. The U.S.
options markets are highly competitive (there are currently 16 options
markets) and a reliance on competitive markets is an appropriate means
to ensure equitable and reasonable prices.
    The Exchange acknowledges that there is no regulatory requirement
that any market participant connect to the Exchange, or that any
participant connect at any specific connection speed. The rule
structure for options exchanges are, in fact, fundamentally different
from those of equities exchanges. In particular, options market
participants are not forced to connect to (and purchase market data
from) all options exchanges, as shown by the number of Members of MIAX
PEARL as compared to the much greater number of members at other
options exchanges (as further detailed below). Not only does MIAX PEARL
have less than half the number of members as certain other options
exchanges, but there are also a number of the Exchange's Members that
do not connect directly to MIAX PEARL. Further, of the number of
Members that connect directly to MIAX PEARL, many such Members do not
purchase market data from MIAX PEARL. There are a number of large
market makers and broker-dealers that are members of other options
exchange but not Members of MIAX PEARL. For example, the following are
not Members of MIAX PEARL: The D.E. Shaw Group, CTC, XR Trading LLC,
Hardcastle Trading AG, Ronin Capital LLC, Belvedere Trading, LLC,
Bluefin Trading, and HAP Capital LLC. In addition, of the market makers
that are connected to MIAX PEARL, it is the individual needs of the
market maker that require whether they need one connection or multiple
connections to the Exchange. The Exchange has market maker Members that
only purchase one connection (10Gb or 10Gb ULL) and the Exchange has
market maker Members that purchase multiple connections. It is all
driven by the business needs of the market maker. Market makers that
are consolidators that target resting order flow tend to purchase more
connectivity than Market Makers that simply quote all symbols on the
Exchange. Even though non-Members purchase and resell 10Gb and 10Gb ULL
connections to both Members and non-Members, no market makers currently
connect to the Exchange indirectly through such resellers.
    The argument that all broker-dealers are required to connect to all
exchanges is not true in the options markets. The options markets have
evolved differently than the equities markets both in terms of market
structure and functionality. For example, there are many order types
that are available in the equities markets that are not utilized in the
options markets, which relate to mid-point pricing and pegged pricing
which require connection to the SIPs and each of the equities exchanges
in order to properly execute those orders in compliance with best
execution obligations. In addition, in the options markets there is a
single SIP (OPRA) versus two SIPs in the equities markets, resulting in
fewer hops and thus alleviating the need to connect directly to all the
options exchanges. Additionally, in the options markets, the linkage
routing and trade through protection are handled by the exchanges, not
by the individual members. Thus not connecting to an options exchange
or disconnecting from an options exchange does not potentially subject
a broker-dealer to violate order protection requirements. Gone are the
days when the retail brokerage firms (the Fidelity's, the Schwab's, the
eTrade's) were members of the options exchanges--they are not members
of MIAX PEARL or its affiliates, MIAX and MIAX Emerald, they do not
purchase connectivity to MIAX PEARL, and they do not purchase market
data from MIAX PEARL. The Exchange further recognizes that the decision
of whether to connect to the Exchange is separate and distinct from the
decision of whether and how to trade on the Exchange. The Exchange
acknowledges that many firms may choose to connect to the Exchange, but
ultimately not trade on it, based on their particular business needs.
    To assist prospective Members or firms considering connecting to
MIAX PEARL, the Exchange provides information about the Exchange's
available connectivity alternatives in a Connectivity Guide, which
contains detailed specifications regarding, among other things,
throughput and latency for

each available connection.\43\ The decision of which type of
connectivity to purchase, or whether to purchase connectivity at all
for a particular exchange, is based on the business needs of the firm.
For example, if the firm wants to receive the top-of-market data feed
product or depth data feed product, due to the amount/size of data
contained in those feeds, such firm would need to purchase either the
10Gb or 10Gb ULL connection. The 1Gb connection is too small to support
those data feed products. MIAX PEARL notes that there are twelve (12)
Members that only purchase the 1Gb connectivity alternative. Thus,
while there is a meaningful percentage of purchasers of only 1Gb
connections (12 of 33), by definition, those twelve (12) members
purchase connectivity that cannot support the top-of-market data feed
product or depth data feed product and thus they do not purchase such
data feed products. Accordingly, purchasing market data is a business
decision/choice, and thus the pricing for it is constrained by
competition.
---------------------------------------------------------------------------

    \43\ See the MIAX Connectivity Guide at https://www.miaxoptions.com/sites/default/files/page-files/MIAX_Connectivity_Guide_v3.6_01142019.pdf.
---------------------------------------------------------------------------

    There is competition for connectivity to MIAX PEARL and its
affiliates. MIAX PEARL competes with nine (9) non-Members who resell
MIAX PEARL connectivity. These are resellers of MIAX PEARL
connectivity--they are not arrangements between broker-dealers to share
connectivity costs. Those non-Members resell that connectivity to
multiple market participants over that same connection, including both
Members and non-Members of MIAX PEARL (typically extranets and service
bureaus). When connectivity is re-sold by a third-party, MIAX PEARL
does not receive any connectivity revenue from that sale. It is
entirely between the third-party and the purchaser, thus constraining
the ability of MIAX PEARL to set its connectivity pricing as indirect
connectivity is a substitute for direct connectivity. There are
currently nine (9) non-Members that purchase connectivity to MIAX PEARL
and/or MIAX. Those non-Members resell that connectivity to eleven (11)
customers, some of whom are agency broker-dealers that have tens of
customers of their own. Some of those eleven (11) customers also
purchase connectivity directly from MIAX PEARL and/or MIAX.
Accordingly, indirect connectivity is a viable alternative that is
already being used by non-Members of MIAX PEARL, constraining the price
that MIAX PEARL is able to charge for connectivity to its Exchange.
    The Exchange \44\ and MIAX \45\ are comprised of 41 distinct
Members between the two exchanges, excluding any additional affiliates
of such Members that are also Members of MIAX PEARL, MIAX, or both. Of
those 41 distinct Members, 33 Members have purchased the 1Gb, 10Gb,
10Gb ULL connections or some combination of multiple various
connections. Furthermore, every Member who has purchased at least one
connection also trades on the Exchange, MIAX, or both. The 8 remaining
Members who have not purchased any connectivity to the Exchange are
still able to trade on the Exchange indirectly through other Members or
non-Member service bureaus that are connected. These 8 Members who have
not purchased connectivity are not forced or compelled to purchase
connectivity, and they retain all of the other benefits of Membership
with the Exchange. Accordingly, Members have the choice to purchase
connectivity and are not compelled to do so in any way.
---------------------------------------------------------------------------

    \44\ MIAX PEARL has 36 distinct Members, excluding affiliated
entities. See MIAX PEARL Exchange Member Directory, available at
https://www.miaxoptions.com/exchange-members/pearl.
    \45\ MIAX has 38 distinct Members, excluding affiliated
entities. See MIAX Exchange Member Directory, available at https://www.miaxoptions.com/exchange-members.
---------------------------------------------------------------------------

    The Exchange believes that the Proposed Fee Increases are fair,
equitable and not unreasonably discriminatory because the connectivity
pricing is directly related to the relative costs to the Exchange to
provide those respective services, and does not impose a barrier to
entry to smaller participants. Accordingly, the Exchange offers three
direct connectivity alternatives and various indirect connectivity (via
third-party) alternatives, as described above. MIAX PEARL recognizes
that there are various business models and varying sizes of market
participants conducting business on the Exchange. The 1Gb direct
connectivity alternative is 1/10th the size of the 10Gb direct
connectivity alternative. Because it is 1/10th of the size, it does not
offer access to many of the products and services offered by the
Exchange, such as the ability to quote or receive certain market data
products. Approximately just less than half of MIAX PEARL and MIAX
Members that connect (14 out of 33) purchase 1Gb connections. The 1Gb
direct connection can support the sending of orders and the consumption
of all market data feed products, other than the top-of-market data
feed product or depth data feed product (which require a 10Gb
connection). The 1Gb direct connection is generally purchased by market
participants that utilize less bandwidth and also generally do not
require the high touch network support services provided by the
Exchange. Accordingly, these connections consume the least resources of
the Exchange and are the least costly to the Exchange to provide. The
market participants that purchase 10Gb ULL direct connections utilize
the most bandwidth and also generally do require the high touch network
support services provided by the Exchange. Accordingly, these
connections consume the most resources of the Exchange and are the most
costly to the Exchange to provide. Accordingly, the Exchange believes
the allocation of the Proposed Fee Increases ($9,300 for a 10Gb ULL
connection versus $1,400 for a 1Gb connection) are reasonable based on
the resources consumed by the respective type of connection--lowest
resource consuming members pay the least, and highest resource
consuming members pays the most, particularly since higher resource
consumption translates directly to higher costs to the Exchange. The
10Gb ULL connection offers optimized connectivity for latency sensitive
participants and is approximately single digit microseconds faster in
round trip time for connection oriented traffic to the Exchange than
the 10Gb connection. This lower latency is achieved through more
advanced network equipment, such as advanced hardware and switching
components, which translates to increased costs to the Exchange. Market
participants that are less latency sensitive can purchase 10Gb direct
connections and quote in all products on the Exchange and consume all
market data feeds, and such 10Gb direct connections are priced lower
than the 10Gb ULL direct connections, offering smaller sized market
makers a lower cost alternative. 10Gb connections are less costly to
provide than 10Gb ULL connections, which require greater network
support services.
    With respect to options trading, the Exchange had only 5.30% market
share of the U.S. options industry in Equity/Exchange Traded Fund
(``ETF'') classes according to the OCC in September 2019.\46\ For
September 2019, the Exchange's affiliate, MIAX, had only 3.87% market
share of the U.S. options industry in Equity/ETF classes according to
the OCC.\47\ For September 2019, the Exchange's affiliate, MIAX

Emerald, had only 0.81% market share of the U.S. options industry in
Equity/ETF classes according to the OCC.\48\ The Exchange is not aware
of any evidence that a combined market share of less than 10% provides
the Exchange with anti-competitive pricing power. This, in addition to
the fact that not all broker-dealers are required to connect to all
options exchanges, supports the Exchange's conclusion that its pricing
is constrained by competition.
---------------------------------------------------------------------------

    \46\ See Exchange Market Share of Equity Products--2019, The
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
    \47\ Id.
    \48\ Id.
---------------------------------------------------------------------------

    Separately, the Exchange is not aware of any reason why market
participants could not simply drop their connections and cease being
Members of the Exchange if the Exchange were to establish unreasonable
and uncompetitive price increases for its connectivity alternatives.
Market participants choose to connect to a particular exchange and
because it is a choice, MIAX PEARL must set reasonable connectivity
pricing, otherwise prospective members would not connect and existing
members would disconnect or connect through a third-party reseller of
connectivity. No options market participant is required by rule,
regulation, or competitive forces to be a Member of the Exchange. As
evidence of the fact that market participants can and do disconnect
from exchanges based on connectivity pricing, see the R2G Services LLC
(``R2G'') letter based on BOX's proposed rule changes to increase its
connectivity fees (SR-BOX-2018-24, SR-BOX-2018-37, and SR-BOX-2019-
04).\49\ The R2G Letter stated, ``[w]hen BOX instituted a $10,000/month
price increase for connectivity; we had no choice but to terminate
connectivity into them as well as terminate our market data
relationship. The cost benefit analysis just didn't make any sense for
us at those new levels.'' Accordingly, this example shows that if an
exchange sets too high of a fee for connectivity and/or market data
services for its relevant marketplace, market participants can choose
to disconnect from the exchange.
---------------------------------------------------------------------------

    \49\ See Letter from Stefano Durdic, R2G, to Vanessa Countryman,
Acting Secretary, Commission, dated March 27, 2019 (the ``R2G
Letter'').
---------------------------------------------------------------------------

    Several market participants choose not to be Members of the
Exchange and choose not to access the Exchange, and several market
participants also access the Exchange indirectly through another market
participant. To illustrate, the Exchange has only 41 Members (including
all such Members' affiliate Members). However, Cboe Exchange, Inc.
(``Cboe'') has over 200 members,\50\ Nasdaq ISE, LLC has approximately
100 members,\51\ and NYSE American LLC has over 80 members.\52\ If all
market participants were required to be Members of the Exchange and
connect directly to the Exchange, the Exchange would have over 200
Members, in line with Cboe's total membership. But it does not. The
Exchange only has 41 Members (inclusive of Members' affiliates).
---------------------------------------------------------------------------

    \50\ See Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002831.pdf); Form 1/A, filed August 30,
2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002833.pdf);
Form 1/A, filed July 24, 2018 (https://www.sec.gov/Archives/edgar/vprr/1800/18002781.pdf); Form 1/A, filed August 30, 2018 (https://www.sec.gov/Archives/edgar/data/1473845/999999999718007832/9999999997-18-007832-index.htm).
    \51\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
    \52\ See https://www.nyse.com/markets/american-options/membership#directory.
---------------------------------------------------------------------------

    The Exchange finds it compelling that all of the Exchange's
existing Members continued to purchase the Exchange's connectivity
services during the period for which the Proposed Fee Increases took
effect in August 2018, particularly in light of the R2G disconnection
example cited above.\53\ In particular, the Exchange believes that the
Proposed Fee Increases are reasonable because the Exchange did not lose
any Members (or the number of connections each Member purchased) or
non-Member connections due to the Exchange increasing its connectivity
fees through the First Proposed Rule Change, which fee increase became
effective August 1, 2018. For example, in July 2018, fourteen (14)
Members purchased 1Gb connections, ten (10) Members purchased 10Gb
connections, and fifteen (15) Members purchased 10Gb ULL connections.
(The Exchange notes that 1Gb connections are purchased primarily by EEM
Members; 10Gb ULL connections are purchased primarily by higher volume
Market Makers quoting all products across both MIAX PEARL and MIAX; and
10Gb connections are purchased by higher volume EEMs and lower volume
Market Makers.) The vast majority of those Members purchased multiple
such connections with the actual number of connections depending on the
Member's throughput requirements based on the volume of their quote/
order traffic and market data needs associated with their business
model. After the fee increase, beginning August 1, 2018, the same
number of Members purchased the same number of connections.\54\
Furthermore, the total number of connections did not decrease from July
to August 2018, and in fact one Member even purchased two (2)
additional 10Gb ULL connections in August 2018, after the fee increase.
---------------------------------------------------------------------------

    \53\ See supra note 49.
    \54\ The Exchange notes that one Member downgraded one
connection in July of 2018, however such downgrade was done well
ahead of notice of the Proposed Fee Increase and was the result of a
change to the Member's business operation that was completely
independent of, and unrelated to, the Proposed Fee Increases.
---------------------------------------------------------------------------

    Also, in July 2018, four (4) non-Members purchased 1Gb connections,
two (2) non-Members purchased 10Gb connections, and one (1) non-Member
purchased 10Gb ULL connections. After the fee increase, beginning
August 1, 2018, the same non-Members purchased the same number of
connections across all available alternatives and two (2) additional
non-Members purchased three (3) more connections after the fee
increase. These non-Members freely purchased their connectivity with
the Exchange in order to offer trading services to other firms and
customers, as well as access to the market data services that their
connections to the Exchange provide them, but they are not required or
compelled to purchase any of the Exchange's connectivity options. MIAX
PEARL did not experience any noticeable change (increase or decrease)
in order flow sent by its market participants as a result of the fee
increase.
    Of those Members and non-Members that bought multiple connections,
no firm dropped any connections beginning August 1, 2018, when the
Exchange increased its fees. Nor did the Exchange lose any Members.
Furthermore, the Exchange did not receive any comment letters or
official complaints from any Member or non-Member purchaser of
connectivity regarding the increased fees regarding how the fee
increase was unreasonable, unduly burdensome, or would negatively
impact their competitiveness amongst other market participants. These
facts, coupled with the discussion above, showing that it is not
necessary to join and/or connect to all options exchanges and market
participants can disconnect if pricing is set too high (the R2G
example),\55\ demonstrate that the Exchange's fees are constrained by
competition and are reasonable and not contrary to the Law of Demand.
Therefore, the Exchange believes that the Proposed Fee Increases are
fair, equitable, and non-discriminatory, as the fees are competitive.
---------------------------------------------------------------------------

    \55\ See supra note 49.
---------------------------------------------------------------------------

    The Exchange believes that the Proposed Fee Increases are equitably

allocated among Members and non-Members, as evidenced by the fact that
the fee increases are allocated across all connectivity alternatives
according to the Exchange's costs to provide such alternatives, and
there is not a disproportionate number of Members purchasing any
alternative--fourteen (14) Members purchased 1Gb connections, ten (10)
Members purchased 10Gb connections, fifteen (15) Members purchased 10Gb
ULL connections, four (4) non-Members purchased 1Gb connections, two
(2) non-Members purchased 10Gb connections, and one (1) non-Member
purchased 10Gb ULL connections. The Exchange recognizes that the
relative fee increases are 27% for the 1Gb connection, 10.9% for the
10Gb connection, and 9.4% for the 10Gb ULL connection, but the Exchange
believes that percentage increase differentiation is appropriate, given
the actual costs to the Exchange to provide network connectivity and
the respective connection options, including the costs associated with
providing the different levels of service associated with the
respective connections.
    Further, the Exchange believes that the fees are equitably
allocated as the users of the higher bandwidth connections consume the
most resources of the Exchange. Also, these firms account for the vast
majority of the Exchange's trading volume. The purchasers of the 10Gb
ULL connectivity account for approximately 81% of the volume on the
Exchange. For example, for all of September 2019, approximately 15.5
million contracts of the approximately 19.1 million contracts executed
were done by the top market making firms of the Exchange's total
volume. The Exchange further believes that the fees are equitably
allocated, as the amount of the fees for the various connectivity
alternatives are directly related to the actual costs associated with
providing the respective connectivity alternatives. That is, the cost
to the Exchange of providing a 1Gb network connection is significantly
lower than the cost to the Exchange of providing a 10Gb or 10Gb ULL
network connection. Pursuant to its extensive cost review described
above, the Exchange believes that the average cost to provide a 10Gb/
10Gb ULL network connection is approximately 4 to 6 times more than the
average cost to provide a 1Gb connection. The simple hardware and
software component costs alone of a 10Gb/10Gb ULL connection are not 4
to 6 times more than the 1Gb connection. Rather, it is the associated
premium-product level network monitoring, reporting, and support
services costs that accompany a 10Gb/10Gb ULL connection which cause it
to be 4 to 6 times more costly to provide than the 1Gb connection. As
discussed above, the Exchange differentiates itself by offering a
``premium-product'' network experience, as an operator of a high
performance, ultra-low latency network with unparalleled system
throughput, which network can support access to three distinct options
markets and multiple competing market-makers having affirmative
obligations to continuously quote over 750,000 distinct trading
products (per exchange), and the capacity to handle approximately 10.7
million quote messages per second. The ``premium-product'' network
experience enables users of 10Gb and 10Gb ULL connections to receive
the network monitoring and reporting services for those approximately
750,000 distinct trading products. There is a significant, quantifiable
amount of research and development (``R&D'') effort, employee
compensation and benefits expense, and other expense associated with
providing the high touch network monitoring and reporting services that
are utilized by the 10Gb and 10Gb ULL connections offered by the
Exchange. These value add services are fully-discussed herein, and the
actual costs associated with providing these services are the basis for
the differentiated amount of the fees for the various connectivity
alternatives.
    The Exchange believes that its proposal is consistent with Section
6(b)(4) of the Act because the Proposed Fee Increases will permit
recovery of the Exchange's costs and will not result in excessive
pricing or supra-competitive profit. The Proposed Fee Increases will
allow the Exchange to recover a portion (less than all) of the
increased costs incurred by the Exchange associated with providing and
maintaining the necessary hardware and other network infrastructure as
well as network monitoring and support services in order to provide the
network connectivity services, since Exchange launched operations in
February 2017. Put simply, the costs of the Exchange to provide these
services have increased considerably over this time, as more fully-
detailed and quantified below. The Exchange believes that it is
reasonable and appropriate to increase its fees charged for use of its
connectivity to partially offset the increased costs the Exchange
incurred during this time associated with maintaining and enhancing a
state-of-the-art exchange network infrastructure in the U.S. options
industry.
    In particular, the Exchange's increased costs associated with
supporting its network are due to several factors, including increased
costs associated with maintaining and expanding a team of highly-
skilled network engineers (the Exchange also hired additional network
engineering staff in 2017 and 2018), increasing fees charged by the
Exchange's third-party data center operator, and costs associated with
projects and initiatives designed to improve overall network
performance and stability, through the Exchange's R&D efforts.
    In order to provide more detail and to quantify the Exchange's
increased costs, the Exchange notes that increased costs are associated
with the infrastructure and increased headcount to fully-support the
advances in infrastructure and expansion of network level services,
including customer monitoring, alerting and reporting. Additional
technology expenses were incurred related to expanding its Information
Security services, network monitoring and customer reporting, as well
as Regulation SCI mandated processes associated with network
technology. All of these additional expenses have been incurred by the
Exchange since became operational in February 2017.
    Additionally, while some of the expense is fixed, much of the
expense is not fixed, and thus increases as the number of connections
increase. For example, new 1Gb, 10Gb, and 10Gb ULL connections require
the purchase of additional hardware to support those connections as
well as enhanced monitoring and reporting of customer performance that
MIAX PEARL and its affiliates provide. And 10Gb ULL connections require
the purchase of specialized, more costly hardware. Further, as the
total number of all connections increase, MIAX PEARL and its affiliates
need to increase their data center footprint and consume more power,
resulting in increased costs charged by their third-party data center
provider. Accordingly, the cost to MIAX PEARL and its affiliates is not
entirely fixed. Just the initial fixed cost buildout of the network
infrastructure of MIAX PEARL and its affiliates, including both
primary/secondary sites and disaster recovery, was over $30 million.
These costs have increased over 10% since the Exchange became
operational in February 2017. As these network connectivity-related
expenses increase, MIAX PEARL and its affiliates look to offset those
costs through increased connectivity fees.
    A more detailed breakdown of the expense increases since February
2017 include an approximate 70% increase in

technology-related personnel costs in infrastructure, due to expansion
of services/support (increase of approximately $800,000); an
approximate 10% increase in datacenter costs due to price increases and
footprint expansion (increase of approximately $500,000); an
approximate 5% increase in vendor-supplied dark fiber due to price
increases and expanded capabilities (increase of approximately
$25,000); and a 30% increase in market data connectivity fees (increase
of approximately $200,000). Of note, regarding market data connectivity
fee increased cost, this is the cost associated with MIAX PEARL
consuming connectivity/content from the equities markets in order to
operate the Exchange, causing MIAX PEARL to effectively pay its
competitors for this connectivity. While the Exchange and MIAX have
incurred a total increase in connectivity expenses since January 2017
(the last time connectivity fees were raised) of approximately $1.5
million per year (as described above), the total increase in
connectivity revenue amount as a result of the Proposed Fee Increases
is projected to be approximately $1.2 million per year for MIAX PEARL
and MIAX. Accordingly, the total projected MIAX PEARL and MIAX
connectivity revenue as a result of the proposed increase, on an
annualized basis, is less than the total annual actual MIAX PEARL and
MIAX connectivity expense. Accordingly, the Proposed Fee Increases are
fair and reasonable because they will not result in excessive pricing
or supra-competitive profit, when comparing the increase in actual
costs to the Exchange (since February 2017) versus the projected
increase in annual revenue. The Exchange also incurred additional
significant capital expenditures over this same period to upgrade and
enhance the underlying technology components, as more fully-detailed
below.
    Further, because the costs of operating a data center are
significant and not economically feasible for the Exchange, the
Exchange does not operate its own data centers, and instead contracts
with a third-party data center provider. The Exchange notes that
larger, dominant exchange operators own and operate their data centers,
which offers them greater control over their data center costs. Because
those exchanges own and operate their data centers as profit centers,
the Exchange is subject to additional costs. As a result, the Exchange
is subject to fee increases from its data center provider, which the
Exchange experienced in 2017 and 2018 of approximately 10%, as cited
above. Connectivity fees, which are charged for accessing the
Exchange's data center network infrastructure, are directly related to
the network and offset such costs.
    Further, the Exchange invests significant resources in network R&D,
which are not included in direct expenses to improve the overall
performance and stability of its network. For example, the Exchange has
a number of network monitoring tools (some of which were developed in-
house, and some of which are licensed from third-parties), that
continually monitor, detect, and report network performance, many of
which serve as significant value-adds to the Exchange's Members and
enable the Exchange to provide a high level of customer service. These
tools detect and report performance issues, and thus enable the
Exchange to proactively notify a Member (and the SIPs) when the
Exchange detects a problem with a Member's connectivity. In fact, the
Exchange often receives calls from other industry participants
regarding the status of networking issues outside of the Exchange's own
network environment that are impacting the industry as a whole via the
SIPs, including calls from regulators, because the Exchange has a
superior, state-of the-art network that, through its enhanced
monitoring and reporting solutions, often detects and identifies
industry-wide networking issues ahead of the SIPs. The costs associated
with the maintenance and improvement of existing tools and the
development of new tools resulted in significant increased cost to the
Exchange since February 2017 and are loss leaders for the Exchange to
provide these added benefits for Members and non-Members.
    Certain recently developed network aggregation and monitoring tools
provide the Exchange with the ability to measure network traffic with a
much more granular level of variability. This is important as Exchange
Members demand a higher level of network determinism and the ability to
measure variability in terms of single digit nanoseconds. Also, the
Exchange routinely conducts R&D projects to improve the performance of
the network's hardware infrastructure. As an example, in the last year,
the Exchange's R&D efforts resulted in a performance improvement,
requiring the purchase of new equipment to support that improvement,
and thus resulting in increased costs in the hundreds of thousands of
dollars range. In sum, the costs associated with maintaining and
enhancing a state-of-the-art exchange network in the U.S. options
industry is a significant expense for the Exchange that continues to
increase, and thus the Exchange believes that it is reasonable to
offset a portion of those increased costs by increasing its network
connectivity fees, which are designed to recover those costs, as
proposed herein. The Exchange invests in and offers a superior network
infrastructure as part of its overall options exchange services
offering, resulting in significant costs associated with maintaining
this network infrastructure, which are directly tied to the amount of
the connectivity fees that must be charged to access it, in order to
recover those costs. As detailed in the Exchange's 2018 Audited
Unconsolidated Financial Statements, the Exchange only has four primary
sources of revenue: Transaction fees, access fees (of which network
connectivity constitutes the majority), regulatory fees, and market
data fees. Accordingly, the Exchange must cover all of its expenses
from these four primary sources of revenue.
    The Proposed Fee Increases are fair and reasonable because they
will not result in excessive pricing or supra-competitive profit, when
comparing the total annual expense of MIAX PEARL and MIAX collected for
providing network connectivity services versus the total projected
annual revenue of both exchanges associated with providing network
connectivity services. For 2018, the total annual expense associated
with providing network connectivity services (that is, the shared
network connectivity of MIAX PEARL and MIAX, but excluding MIAX
Emerald) was approximately $19.3 million. The $19.3 million in total
annual expense is comprised of the following, all of which is directly
related to the provision of network connectivity services by MIAX PEARL
and MIAX to their respective Members and non-Members: (1) Third-party
expense, relating to fees paid by MIAX PEARL and MIAX to third-parties
for certain products and services; and (2) internal expense, relating
to the internal costs of MIAX PEARL and MIAX to provide the network
connectivity services. All such expenses are more fully-described
below, and are mapped to the MIAX PEARL and MIAX 2018 Statements of
Operations and Member's Deficit (the ``2018 Financial Statements'').
The $19.3 million in total annual expense is directly related to the
provision of network connectivity services and not any other product or
service offered by the Exchange. It does not, as the Third IEX Letter
baselessly

claims, include general costs of operating matching systems and other
trading technology. (And as stated previously, no expense amount was
allocated twice.) As discussed, the Exchange conducted an extensive
cost review in which the Exchange analyzed every expense item in the
Exchange's general expense ledger (this includes over 150 separate and
distinct expense items) to determine whether each such expense relates
to the provision of network connectivity services, and, if such expense
did so relate, what portion (or percentage) of such expense actually
supports the provision of network connectivity services, and thus bears
a relationship that is, ``in nature and closeness,'' directly related
to network connectivity services. The sum of all such portions of
expenses represents the total actual baseline cost of the Exchange to
provide network connectivity services.
    As discussed above, the Exchange differentiates itself by offering
a ``premium-product'' network experience, as an operator of a high
performance, ultra-low latency network with unparalleled system
throughput, which network can support access to three distinct options
markets and multiple competing market-makers having affirmative
obligations to continuously quote over 750,000 distinct trading
products (per exchange), and the capacity to handle approximately 38
million quote messages per second. The ``premium-product'' network
experience enables users of 10Gb and 10Gb ULL connections to receive
the network monitoring and reporting services for those approximately
750,000 distinct trading products. Thus, the Exchange is acutely aware
of and can isolate the actual costs associated with providing such a
service to its customers, a significant portion of which relates to the
premium, value-add customer network monitoring and support services
that accompany the service, as fully-described above. IEX, on the other
hand, does not offer such a network, and thus has no legal basis to
offer a qualified opinion on the Exchange's costs associated with
operating such a network. In fact, IEX differentiates itself as a
provider of low cost connectivity solutions to an intentionally delayed
trading platform--quite the opposite from the Exchange. Thus, there is
no relevant comparison between IEX network connectivity costs and the
Exchange's network connectivity costs, and IEX's attempt to do so in
the Third IEX Letter is ill-informed and self-serving.\56\
---------------------------------------------------------------------------

    \56\ See Third IEX Letter, pg. 5.
---------------------------------------------------------------------------

    For 2018, total third-party expense, relating to fees paid by MIAX
PEARL and MIAX to third-parties for certain products and services for
the Exchange to be able to provide network connectivity services, was
$5,052,346. This includes, but is not limited to, a portion of the fees
paid to: (1) Equinix, for data center services, for the primary,
secondary, and disaster recovery locations of the MIAX PEARL and MIAX
trading system infrastructure; (2) Zayo Group Holdings, Inc. (``Zayo'')
for connectivity services (fiber and bandwidth connectivity) linking
MIAX PEARL and MIAX office locations in Princeton, NJ and Miami, FL to
all data center locations; (3) Secure Financial Transaction
Infrastructure (``SFTI''),\57\ which supports connectivity and feeds
for the entire U.S. options industry; (4) various other services
providers (including Thompson Reuters, NYSE, Nasdaq, and Internap),
which provide content, connectivity services, and infrastructure
services for critical components of options connectivity; and (5)
various other hardware and software providers (including Dell and
Cisco, which support the production environment in which Members and
non-Members connect to the network to trade, receive market data,
etc.).
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    \57\ In fact, on October 22, 2019, the Exchange was notified by
SFTI that it is again raising its fees charged to the Exchange by
approximately 11%, without having to show that such fee change
complies with the Act by being reasonable, equitably allocated, and
not unfairly discriminatory. It is unfathomable to the Exchange
that, given the critical nature of the infrastructure services
provided by SFTI, that its fees are not required to be rule-filed
with the Commission pursuant to Section 19(b)(1) of the Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4,
respectively.
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    All of the third-party expense described above is contained in the
information technology and communication costs line item under the
section titled ``Operating Expenses Incurred Directly or Allocated From
Parent'' of the 2018 Financial Statements. For clarity, only a portion
of all fees paid to such third-parties is included in the third-party
expense herein (only the portion that actually supports the provision
of network connectivity services and no expense amount is allocated
twice). Accordingly, MIAX PEARL and MIAX do not allocate their entire
information technology and communication costs to the provision of
network connectivity services.
    For 2018, total internal expense, relating to the internal costs of
MIAX PEARL and MIAX to provide the network connectivity services, was
$14,271,870. This includes, but is not limited to, costs associated
with: (1) Employee compensation and benefits for full-time employees
that support network connectivity services, including staff in network
operations, trading operations, development, system operations,
business, etc., as well as staff in general corporate departments (such
as legal, regulatory, and finance) that support those employees and
functions; (2) depreciation and amortization of hardware and software
used to provide network connectivity services, including equipment,
servers, cabling, purchased software and internally developed software
used in the production environment to support the provision of network
connectivity for trading; and (3) occupancy costs for leased office
space for staff that support the provision of network connectivity
services. The breakdown of these costs is more fully-described below.
    All of the internal expenses described above are contained in the
following line items under the section titled ``Operating Expenses
Incurred Directly or Allocated From Parent'' in the 2018 Financial
Statements: (1) Employee compensation and benefits; (2) Depreciation
and amortization; and (3) Occupancy costs. For clarity, only a portion
of all such internal expenses are included in the internal expense
herein (only the portion that supports the provision of network
connectivity services), and no expense amount is allocated twice).
Accordingly, MIAX PEARL and MIAX do not allocate their entire costs
contained in those line items to the provision of network connectivity
services.
    MIAX's and MIAX PEARL's combined employee compensation and benefits
expense relating to providing network connectivity services was
$5,264,151, which is only a portion of the $11,997,098 (for MIAX) and
$8,545,540 (for MIAX PEARL) total expense for employee compensation and
benefits that is stated in the 2018 Financial Statements. MIAX's and
MIAX PEARL's combined depreciation and amortization expense relating to
providing network connectivity services was $8,269,048, which is only a
portion of the $6,179,506 (for MIAX) and $4,783,245 (for MIAX PEARL)
total expense for depreciation and amortization that is stated in the
2018 Financial Statements. MIAX's and MIAX PEARL's combined occupancy
expense relating to providing network connectivity services was
$738,669, which is only a portion of the $945,431 (for MIAX) and
$581,783 (for MIAX PEARL) total expense for occupancy

that is stated in the 2018 Financial Statements.
    Accordingly, the total projected MIAX and MIAX PEARL combined
revenue for providing network connectivity services, reflective of the
proposed increase, on an annualized basis, of $14.5 million, is less
than total annual actual MIAX PEARL and MIAX combined expense for
providing network connectivity services during 2018 of approximately
$19.3 million. MIAX PEARL and MIAX project comparable combined expenses
for providing network connectivity services for 2019, as compared to
2018.
    For the avoidance of doubt, none of the expenses included herein
relating to the provision of network connectivity services relate to
the provision of any other services offered by MIAX PEARL and MIAX.
Stated differently, no expense amount of the Exchange is allocated
twice.
    Accordingly, the Proposed Fee Increases are fair and reasonable
because they do not result in excessive pricing or supra-competitive
profit, when comparing the actual network connectivity costs to the
Exchange versus the projected network connectivity annual revenue,
including the increased amount. Additional information on overall
revenue and expense of the Exchange can be found in the Exchange's 2018
Financial Statements.
    The Exchange notes that other exchanges have similar connectivity
alternatives for their participants, including similar low-latency
connectivity. For example, Nasdaq PHLX LLC (``Phlx''), NYSE Arca, Inc.
(``Arca''), NYSE American LLC (``NYSE American'') and Nasdaq ISE, LLC
(``ISE'') all offer a 1Gb, 10Gb and 10Gb low latency ethernet
connectivity alternatives to each of their participants.\58\ The
Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities.\59\ While MIAX PEARL's proposed connectivity fees
are substantially lower than the fees charged by Phlx, ISE, Arca and
NYSE American, MIAX PEARL believes that it offers significant value to
Members over other exchanges in terms of network monitoring and
reporting, which MIAX PEARL believes is a competitive advantage, and
differentiates its connectivity versus connectivity to other exchanges.
Additionally, the Exchange's proposed connectivity fees to its disaster
recovery facility are within the range of the fees charged by other
exchanges for similar connectivity alternatives.\60\
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    \58\ See Phlx and ISE Rules, General Equity and Options Rules,
General 8, Section 1(b). Phlx and ISE each charge a monthly fee of
$2,500 for each 1Gb connection, $10,000 for each 10Gb connection and
$15,000 for each 10Gb Ultra connection, which the equivalent of the
Exchange's 10Gb ULL connection. See also NYSE American Fee Schedule,
Section V.B, and Arca Fees and Charges, Co-Location Fees. NYSE
American and Arca each charge a monthly fee of $5,000 for each 1Gb
circuit, $14,000 for each 10Gb circuit and $22,000 for each 10Gb LX
circuit, which the equivalent of the Exchange's 10Gb ULL connection.
    \59\ Id.
    \60\ See Nasdaq ISE, Options Rules, Options 7, Pricing Schedule,
Section 11.D. (charging $3,000 for disaster recovery testing &
relocation services); see also Cboe Exchange, Inc. (``Cboe'') Fees
Schedule, p. 14, Cboe Command Connectivity Charges (charging a
monthly fee of $2,000 for a 1Gb disaster recovery network access
port and a monthly fee of $6,000 for a 10Gb disaster recovery
network access port).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    MIAX PEARL does not believe that the proposed rule changes will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intra-Market Competition
    The Exchange does not believe that the proposed rule change would
place certain market participants at the Exchange at a relative
disadvantage compared to other market participants or affect the
ability of such market participants to compete. In particular, the
Exchange has received no official complaints from Members, non-Members
(extranets and service bureaus), third-parties that purchase the
Exchange's connectivity and resell it, and customers of those
resellers, that the Exchange's fees or the Proposed Fee Increases are
negatively impacting or would negatively impact their abilities to
compete with other market participants or that they are placed at a
disadvantage. The Exchange believes that the Proposed Fee Increases do
not place certain market participants at a relative disadvantage to
other market participants because the connectivity pricing is
associated with relative usage of the various market participants and
does not impose a barrier to entry to smaller participants. As
described above, the less expensive 1Gb direct connection is generally
purchased by market participants that utilize less bandwidth. The
market participants that purchase 10Gb ULL direct connections utilize
the most bandwidth, and those are the participants that consume the
most resources from the network. Accordingly, the Proposed Fee
Increases do not favor certain categories of market participants in a
manner that would impose a burden on competition; rather, the
allocation of the Proposed Fee Increases reflects the network resources
consumed by the various size of market participants--lowest bandwidth
consuming members pay the least, and highest bandwidth consuming
members pays the most, particularly since higher bandwidth consumption
translates to higher costs to the Exchange.
Inter-Market Competition
    The Exchange believes the Proposed Fee Increases do not place an
undue burden on competition on other SROs that is not necessary or
appropriate. In particular, options market participants are not forced
to connect to (and purchase market data from) all options exchanges, as
shown by the number of Members of MIAX PEARL as compared to the much
greater number of members at other options exchanges (as described
above). Not only does MIAX PEARL have less than half the number of
members as certain other options exchanges, but there are also a number
of the Exchange's Members that do not connect directly to MIAX PEARL.
There are a number of large market makers and broker-dealers that are
members of other options exchange but not Members of MIAX PEARL.
Additionally, other exchanges have similar connectivity alternatives
for their participants, including similar low-latency connectivity, but
with much higher rates to connect.\61\ The Exchange is also unaware of
any assertion that its existing fee levels or the Proposed Fee
Increases would somehow unduly impair its competition with other
options exchanges. To the contrary, if the fees charged are deemed too
high by market participants, they can simply disconnect. While the
Exchange recognizes the distinction between connecting to an exchange
and trading at the exchange, the Exchange notes that it operates in a
highly competitive options market in which market participants can
readily connect and trade with venues they desire. In such an
environment, the Exchange must continually adjust its fees to remain
competitive with other exchanges. The Exchange believes that the
proposed changes reflect this competitive environment.
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    \61\ See supra note 58.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\62\ and Rule 19b-4(f)(2) \63\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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    \62\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \63\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-PEARL-2019-33 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-PEARL-2019-33. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2019-33 and should be submitted on
or before November 27, 2019.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
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    \64\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24187 Filed 11-5-19; 8:45 am]
BILLING CODE 8011-01-P