[Federal Register Volume 84, Number 215 (Wednesday, November 6, 2019)]
[Notices]
[Pages 59878-59889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24186]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87433; File No. SR-EMERALD-2019-35]
Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Its 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 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.
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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 Fee
Schedule (the ``Fee Schedule'') to adopt the Exchange's system
connectivity fees.
The Exchange previously filed the proposal on August 23, 2019 (SR-
EMERALD-2019-31). That filing has been withdrawn and replaced with the
current filing (SR-EMERALD-2019-35).
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 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\ 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 Statement, the relevant section of which is attached [sic]
hereto as Exhibit 3, which is publicly available as part of the
Exchange's Form 1 Amendment.\4\ The
[[Page 59879]]
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 fees 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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\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).
\4\ See the complete Audited Unconsolidated Financial Statement
of MIAX Emerald, LLC, as of December 31, 2018, which is 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 adopt the network connectivity fees for the 1
Gigabit (``Gb'') 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 adopt network
connectivity fees for the 1Gb and 10Gb fiber connections for
connectivity to the Exchange's disaster recovery facility. Each of
these connections (with the exception of the 10Gb ULL) are shared
connections (collectively, the ``Shared Connections''), and thus can be
utilized to access the Exchange and both of the Exchange's affiliates,
Miami International Securities Exchange, LLC (``MIAX'') and MIAX PEARL,
LLC (``MIAX PEARL''). The 10Gb ULL connection is a dedicated connection
(``Dedicated Connection''), which provides network connectivity solely
to the trading platforms, market data systems, and test system
facilities of MIAX Emerald. These proposed fees are collectively
referred to herein as the ``Proposed Fees.'' The amounts of the
Proposed Fees for the Shared Connections are the same amounts that are
currently in place at MIAX and MIAX PEARL.\6\ While the Exchange is new
and only launched trading on March 1, 2019, since: (i) All of the
Proposed Fees (except for the fee relating to the 10Gb ULL connection)
relate to Shared Connections, and thus are the same amounts as are
currently in place at MIAX and MIAX PEARL; (ii) all of the Members of
MIAX Emerald are also members of either MIAX and/or MIAX PEARL, and
most of those Members already have connectivity to the Exchange via
existing Shared Connections (without paying any new incremental
connectivity fees), the Exchange is providing similar information to
that which was provided in the MIAX and PEARL Fee Filings, including
providing detail about the market participants impacted by the Proposed
Fees, as well as the costs incurred by the Exchange associated with
providing the connectivity alternatives, in order to provide
transparency and support relating to the Exchange's belief that the
Proposed Fees are reasonable, equitable, and non-discriminatory, and to
provide sufficient information for the Commission to determine that the
Proposed Fees are consistent with the Act.
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\5\ 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.
\6\ See SR-MIAX-2019-46 and SR-PEARL-2019-33 (the ``MIAX and
PEARL Fee Filings'').
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The Exchange initially filed the Proposed Fees on March 1, 2019,
designating the Proposed Fees immediately effective.\7\ The First
Proposed Rule Change was published for comment in the Federal Register
on March 20, 2019.\8\ The First Proposed Rule Change provided
information about the market participants impacted by the Proposed
Fees, as well as the additional costs incurred by the Exchange
associated with providing the connectivity alternatives, in order to
provide transparency and support relating to the Exchange's belief that
the Proposed Fees are reasonable, equitable, and non-discriminatory,
and to provide sufficient information for the Commission to determine
that the Proposed Fees are consistent with the Act.
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\7\ See Securities Exchange Act Release No. 85316 (March 14,
2019), 84 FR 10350 (March 20, 2019) (SR-EMERALD-2019-11) (the
``First Proposed Rule Change'').
\8\ 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'').\9\ 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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\9\ 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 First Proposed Rule Change.\10\
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\10\ 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 First Proposed Rule Change to support a
finding that the proposal should be approved by the Commission after
further review of the Proposed Fees. 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 First 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 First
Proposed Rule Change. Despite the objection to the Proposed Fees, 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.'' \11\ The IEX Letter specifically argued that
the Proposed Fees 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
Emerald and its affiliates considered changes to transaction fees as an
alternative to offsetting exchange costs.
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\11\ See IEX Letter, pg. 1.
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The Second Healthy Markets Letter did not object to the First
Proposed Rule
[[Page 59880]]
Change and the information provided by the Exchange in support of the
Proposed Fees. Specifically, the Second Healthy Markets Letter stated
that the First Proposed Rule Change was ``remarkably different,'' and
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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.\12\
On April 29, 2019, the Exchange withdrew the First Proposed Rule
Change.\13\
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\12\ See Second Healthy MarketsLetter, pg. 2.
\13\ See SR-EMERALD-2019-11.
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The Exchange refiled the Proposed Fees on April 30, 2019,
designating the Proposed Fees immediately effective.\14\ The Second
Proposed Rule Change was published for comment in the Federal Register
on May 16, 2019.\15\ The Second 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 Fees are
reasonable, equitable, and non-discriminatory, and that the Commission
should find that the Proposed Fees are consistent with the Act.
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\14\ See Securities Exchange Act Release No. 85839 (May 10,
2019), 84 FR 22192 (May 16, 2019) (SR-EMERALD-2019-20) (the ``Second
Proposed Rule Change'') (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change To Adopt System Connectivity
Fees).
\15\ Id.
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On May 21, 2019, the Commission issued the Staff Guidance on SRO
Rule Filings Relating to Fees.\16\
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\16\ 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 Second Proposed
Rule Change, after the Guidance was released.\17\ The Second IEX Letter
and the Third SIFMA Letter argued that the Exchange did not provide
sufficient information in its Second Proposed Rule Change to justify
the Proposed Fees 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 Second Proposed
Rule Change. Also, Healthy Markets did not comment on the Second
Proposed Rule Change.
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\17\ See Letter from John Ramsay, Chief Market Policy Officer,
IEX, 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 Second Proposed Rule
Change.\18\
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\18\ See SR-EMERALD-2019-20.
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The Exchange refiled the Proposed Fees on June 26, 2019,
designating the Proposed Fees immediately effective.\19\ The Third
Proposed Rule Change was published for comment in the Federal Register
on July 16, 2019.\20\ The Third Proposed Rule Change bolstered the
Exchange's previous cost-based discussion to support its claim that the
Proposed Fees 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 Second Proposed Rule Change.
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\19\ See Securities Exchange Act Release No. 86344 (July 10,
2019), 84 FR 34030 (July 16, 2019) (SR-EMERALD-2019-24) (the ``Third
Proposed Rule Change'').
\20\ Id.
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The Commission received three comment letters on the Third Proposed
Rule Change.\21\
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\21\ 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 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 Third Proposed Rule
Change.\22\
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\22\ See SR-EMERALD-2019-24.
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The Exchange refiled the Proposed Fee Increases on August 23, 2019,
designating the Proposed Fee Increases immediately effective.\23\ The
Fourth Proposed Rule Change was published for comment in the Federal
Register on July 16, 2019.\24\ The Fourth 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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\23\ See Securities Exchange Act Release No. 86839 (August 30,
2019), 84 FR 47009 (September 6, 2019) (SR-EMERALD-2019-31) (the
``Fourth Proposed Rule Change'').
\24\ Id.
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The Commission received only one comment letter on the Fourth
Proposed Rule Change, twelve days after the comment period deadline
ended.\25\ Of note, no member of the Exchange commented on the Fourth
Proposed Rule Change. Also, no issuer or other person using the
facilities of the Exchange commented on the Fourth Proposed Rule
Change. Also, no industry group that represents members, issuers, or
other persons using the facilities of the Exchange commented on the
Fourth Proposed Rule Change. Also, no operator of an options market
commented on the Fourth 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 Fourth
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),\26\ 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
[[Page 59881]]
between the identified costs and connectivity products and services as
stated in the Exchange's cost allocation analysis.
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\25\ See supra note 3.
\26\ See infra pages 16 to 18 (describing the differences in
equity market structure and options market structure).
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On October 22, 2019, the Exchange withdrew the Fourth Proposed Rule
Change.\27\
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\27\ See SR-EMERALD-2019-31.
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The Exchange is now refiling the Proposed Fees 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 Fees are consistent
with the Act because they (i) are reasonable, equitably allocated, not
unfairly discriminatory, and not an undue burden on competition; (ii)
comply with the BOX Order and the Guidance; (iii) are supported by
evidence (including data and analysis), constrained by significant
competitive forces; and (iv) are supported by specific information
(including quantitative information), fair and reasonable because they
will permit recovery of the Exchange's costs (less than all) and will
not result in excessive pricing or supra-competitive profit.
Accordingly, the Exchange believes that the Commission should find that
the Proposed Fees 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 offers to both Members and non-Members various
bandwidth alternatives for connectivity to the Exchange, to its primary
and secondary facilities, consisting of a 1Gb 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 also offers to both Members and non-Members various
bandwidth alternatives for connectivity to the Exchange, to its
disaster recovery facility, consisting of a 1Gb fiber connection and a
10Gb connection.
For the Shared Connections, 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
the Exchange and its affiliates, MIAX and MIAX PEARL, via a single,
shared connection. Any Member or non-Member can purchase a Shared
Connection.
For the Dedicated Connection, the Exchange's MENI is 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 the Exchange. Any Member or non-Member can
purchase a Dedicated Connection. The Exchange determined to design its
network architecture in a manner that offered 10Gb ULL connections as
dedicated connections (as opposed to shared connections) in order to
provide cost saving opportunities for itself and for its Members, by
reducing the amount of equipment that the Exchange would have to
purchase and to which the Members would have to connect. Accordingly,
the Exchange is able to offer to its Members 10Gb ULL connectivity at a
lower price point than is offered on MIAX and MIAX PEARL, the price
difference being reflective of the lower cost to the Exchange.
For the Shared Connections, 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, MIAX, and
MIAX PEARL 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. Thus, since all of
the Members of MIAX Emerald are also members of either MIAX and/or MIAX
PEARL, and most of those Members already have connectivity to the
Exchange via existing Shared Connections, most Members of MIAX Emerald
have instant connectivity to the Exchange without paying any new
incremental connectivity fees, as more fully-detailed below.
The Exchange proposes to establish the monthly network connectivity
fees for such connections for both Members and non-Members. As
discussed above, the amounts of the Proposed Fees for the Shared
Connections are the same amounts that are currently in place at MIAX
and MIAX PEARL. The amount of the Proposed Fee for the Dedicated
Connection is offered at a substantial discount to the amount currently
in place at MIAX and MIAX PEARL. The reasons for the substantial
discount are that the Dedicated Connection offers access to only a
single market (the Exchange), whereas the 10Gb ULL connection offered
by MIAX and MIAX PEARL offers access to two markets (MIAX and MIAX
PEARL), as well as cost savings the Exchange was able to achieve (and
thus pass through to its Members) as a result of a dedicated
architecture. The network connectivity fees for connectivity to the
Exchange's primary/secondary facility will be as follows: (a) 1,400 for
the 1Gb connection; and (b) $6,000 for the 10Gb ULL connection. The
network connectivity fees for connectivity to the Exchange's disaster
recovery facility will be as follows: (a) $550 for the 1Gb connection;
and (b) $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 \28\ in general, and
furthers the objectives of Section 6(b)(4) of the Act \29\ 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 \30\ 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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\28\ 15 U.S.C. 78f(b).
\29\ 15 U.S.C. 78f(b)(4).
\30\ 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.'' \31\
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\31\ 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
[[Page 59882]]
6(b)(4) of the Act, in that the Proposed Fees are fair, equitable and
not unreasonably discriminatory, because the fees for the connectivity
alternatives available on the Exchange, as proposed, 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
Emerald as compared to the much greater number of members at other
options exchanges (as further detailed below). MIAX Emerald is a brand
new exchange, having only commenced operations in March 2019. Not only
does MIAX Emerald 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 Emerald. Further, of the
number of Members that connect directly to MIAX Emerald, many such
Members do not purchase market data from MIAX Emerald. There are a
number of large market makers and broker-dealers that are members of
other options exchanges but not Members of MIAX Emerald. For example,
the following are not Members of MIAX Emerald: 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 Emerald, 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 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 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 Emerald or its affiliates, MIAX and MIAX PEARL, they do not
purchase connectivity to MIAX Emerald, and they do not purchase market
data from MIAX Emerald. 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 Emerald, 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.\32\ 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 a 10Gb ULL connection. The 1Gb connection is too small to
support those data feed products. MIAX Emerald 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.
---------------------------------------------------------------------------
\32\ 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 Emerald and its
affiliates. MIAX Emerald competes with eight (8) non-Members, who
resell MIAX Emerald connectivity. These are resellers of MIAX Emerald
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 Emerald (typically extranets and
service bureaus). When connectivity is re-sold by a third-party, MIAX
Emerald 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 Emerald to set its connectivity pricing as indirect
connectivity is a substitute for direct connectivity. In fact, there
are currently seven (7) non-Members that purchase 1Gb direct
connectivity that are able to access MIAX Emerald, MIAX and MIAX PEARL.
Those non-Members resell that connectivity to eight (8) customers, some
of whom are agency broker-dealers that have tens of customers of their
own. Some of those eight (8) customers also purchase connectivity
directly from MIAX Emerald and/or its affiliates, MIAX and MIAX PEARL.
Accordingly, indirect connectivity is a viable alternative used by non-
Members of MIAX Emerald, constraining the price that MIAX Emerald is
able to charge for connectivity to its Exchange.
[[Page 59883]]
The Exchange,\33\ MIAX,\34\ and MIAX PEARL \35\ are comprised of 41
distinct members amongst all three exchanges, excluding any additional
affiliates of such members that are also members of the Exchange, MIAX,
MIAX PEARL, or any combination thereof. Of those 41 distinct members,
28 of those distinct members are Members of MIAX Emerald. (Currently,
there are no Members of MIAX Emerald that are not also members of MIAX
or MIAX PEARL, or both.) Of those 28 distinct Members of MIAX Emerald,
there are 6 Members that have no connectivity to the Exchange. Members
are not forced to purchase connectivity to the Exchange, and these
Members have elected not to purchase such connectivity. Of note, these
same 6 Members also do not have connectivity to either MIAX or MIAX
PEARL. These Members either trade indirectly through other Members or
non-Members that have connectivity to the Exchange, or do not trade and
conduct another type of business on the Exchange. Of the remaining 22
distinct Members of MIAX Emerald, all 22 of those distinct Members
already had connectivity to the Exchange via existing Shared
Connections, thus providing all such 22 MIAX Emerald Members with
instant connectivity to the Exchange without paying any new incremental
connectivity fees.
---------------------------------------------------------------------------
\33\ The Exchange has 28 distinct Members, excluding affiliated
entities. See MIAX Emerald Exchange Member Directory, available at
https://www.miaxoptions.com.
\34\ MIAX has 38 distinct Members, excluding affiliated
entities. See MIAX Exchange Member Directory, available at https://www.miaxoptions.com.
\35\ MIAX PEARL has 36 distinct Members, excluding affiliated
entities. See MIAX PEARL Exchange Member Directory, available at
https://www.miaxoptions.com.
---------------------------------------------------------------------------
Further, of those 22 Members, 14 of such Members elected to
purchase additional connectivity to the Exchange, including additional
Shared Connections and additional Dedicated Connections. The Exchange
made available in advance to all of its prospective Members its
proposed connectivity pricing (subject to regulatory clearance), in
order for those prospective Members to make an informed decision about
whether to become a Member of the Exchange and whether to purchase
connectivity to the Exchange. Accordingly, each such Member made the
decision to become a Member of the Exchange and to purchase
connectivity to the Exchange, knowing in advance the connectivity
pricing. And the vast majority of the additional connectivity purchased
by those Members were for Dedicated Connections, the most expensive
connectivity option.
As a result, of those 22 Members, through existing Shared
Connections, newly purchased Shared Connections, and newly purchased
Dedicated Connections: 14 Members have 1Gb (primary/secondary)
connections; 13 Members have 10Gb ULL (primary/secondary) connections;
3 Members have 10Gb (disaster recovery) connections; and 10 Members
have 1Gb (disaster recovery) connections, or some combination of
multiple various connections. All such Members with those Shared
Connections and Dedicated Connections trade on MIAX Emerald.
The 6 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 6
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.
In addition, there are 5 non-Member service bureaus that already
have connectivity to the Exchange via existing Shared Connections, thus
providing all 5 of those non-Member service bureaus with instant
connectivity to the Exchange without paying any new incremental
connectivity fees. These non-Members freely purchased their
connectivity from one of the Exchange's affiliates, either MIAX or MIAX
PEARL, 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.
The Exchange believes that the Proposed Fees 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 two direct connectivity
alternatives and various indirect connectivity (via third-party)
alternatives, as described above. MIAX Emerald 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 ULL 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 Emerald, MIAX and MIAX PEARL
Members that connect (15 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 Fees ($6,000 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 pay 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. 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.
The Exchange launched trading on March 1, 2019. Thus, at the time
that the 14 Members who elected to purchase connectivity to the
Exchange, the Exchange was untested and unproven, and had 0% market
share of the U.S. options industry. For September of 2019, the Exchange
had only a 0.81% market share of the U.S. options industry in Equity/
Exchange Traded Fund (``ETF'') classes according to the OCC.\36\ For
September of 2019, the
[[Page 59884]]
Exchange's affiliate, MIAX, had only 3.87% market share of the U.S.
options industry in Equity/ETF classes according to the OCC.\37\ For
September of 2019, the Exchange's affiliate, MIAX PEARL, had only 5.30%
market share of the U.S. options industry in Equity/ETF classes
according to the OCC.\38\ The Exchange is not aware of any evidence
that a combined market share 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. Certainly, an untested and unproven exchange, with less
than 1% market share in any month, and no rule or requirement that a
market participant must join or connect to it, does not have anti-
competitive pricing power, with respect to setting the pricing for the
Dedicated Connections or the Shared Connections. If the Exchange were
to attempt to establish unreasonable connectivity pricing, then no
market participant would join or connect. Therefore, since 28 distinct
Members joined MIAX Emerald and 14 of those distinct Members purchased
additional connectivity to the Exchange, all knowing, in advance, the
connectivity fees, the Exchange believes the Proposed Fees are
reasonable, equitable, and not unfairly discriminatory.
---------------------------------------------------------------------------
\36\ See Exchange Market Share of Equity Products--2019, The
Options Clearing Corporation, available at https://www.theocc.com/webapps/exchange-volume.
\37\ Id.
\38\ 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 Emerald 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).\39\ 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.
---------------------------------------------------------------------------
\39\ 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 are proposing to access the Exchange indirectly through
another market participant. To illustrate, the Exchange has only 34
total Members (including all such Members' affiliate Members). However,
Cboe Exchange, Inc. (``Cboe'') has over 200 members,\40\ Nasdaq ISE,
LLC has approximately 100 members,\41\ and NYSE American LLC has over
80 members.\42\ 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 34 Members.
---------------------------------------------------------------------------
\40\ 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).
\41\ See Form 1/A, filed July 1, 2016 (https://www.sec.gov/Archives/edgar/vprr/1601/16019243.pdf).
\42\ See https://www.nyse.com/markets/american-options/membership#directory.
---------------------------------------------------------------------------
Further, since there are 41 distinct members amongst all three
exchanges, and only 28 of those distinct members decided to become
Members of MIAX Emerald, there were 13 distinct members that decided
not to become Members of MIAX Emerald. This further reinforces the fact
that all market participants are not required to be Members of the
Exchange and are not required to connect to the Exchange. It is a
choice whether to join and it is a choice to connect. Therefore, the
Exchange believes that the Proposed Fees are fair, equitable, and non-
discriminatory, as the fees are competitive.
With respect to the now MIAX Emerald Members that had Shared
Connections in place as of August 1, 2018 (via a previously purchased
Shared Connection from MIAX or MIAX PEARL), the Exchange finds it
compelling that all of those Members continued to purchase those Shared
Connections after August 1, 2018, when MIAX and MIAX PEARL increased
the connectivity fees for the Shared Connections to the current amounts
proposed by the Exchange herein. In particular, the Exchange believes
that the Proposed Fees for the Shared Connections are reasonable
because MIAX and MIAX PEARL, which charge the same amount for the
Shared Connections, did not lose any Members (or the number of Shared
Connections each Member purchased) or non-Member Shared Connections
when MIAX and MIAX PEARL proposed to increase the connectivity fees for
the Shared Connections on August 1, 2018. For example, with respect to
the Shared Connections maintained by now Members of MIAX Emerald who
had Shared Connections in place as of July 2018, 12 Members purchased
1Gb connections. The vast majority of those Members purchased multiple
such connections, the number of connections depending on their
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 12 Members
purchased 1Gb connections. Furthermore, the total number of connections
did not decrease from July to August.
Further, with respect to the Shared Connections maintained by now
Members of MIAX Emerald who had Shared Connections in place as of July
2018, of those Members and non-Members that bought multiple
connections, no firm dropped any connections beginning August 1, 2018,
when MIAX and MIAX PEARL increased its fees. Furthermore, the Exchange
understands that MIAX and MIAX PEARL did not receive any official
comment letters or complaints from any now Members of MIAX Emerald who
had Shared Connections in place as of July 2018 regarding the increased
fees regarding how the change 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
[[Page 59885]]
set too high (the R2G example),\43\ 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 Fees are fair, equitable, and non-discriminatory, as the fees
are competitive.
---------------------------------------------------------------------------
\43\ See supra note 39.
---------------------------------------------------------------------------
The Exchange believes that the Proposed Fees are equitably
allocated among Members and non-Members, as evidenced by the fact that
the fees 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--14
Members have 1Gb (primary/secondary) connections; 14 Members have 10Gb
ULL (primary/secondary) connections; 3 Members have 10Gb (disaster
recovery) connections; and 11 Members have 1Gb (disaster recovery)
connections, or some combination of multiple various 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 76% of the volume on the
Exchange. For example, for all of September 2019, 2.2 million contracts
of the 2.9 million contracts executed were done by the top market
making firms on the Exchange in simple (non-complex) 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 ULL network connection.
Pursuant to its extensive cost review described above, the Exchange
believes that the average cost to provide a 10Gb ULL network connection
is approximately 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 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
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 18 million quote messages per second. The
``premium-product'' network experience enables users of 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 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 Fees will permit recovery of
the Exchange's costs and will not result in excessive or supra-
competitive profit. The Proposed Fees will allow the Exchange to
recover a portion (less than all) of the costs incurred by the Exchange
associated with providing and maintaining the necessary hardware and
other infrastructure as well as network monitoring and support services
in order to provide the network connectivity services. The Exchange
believes that it is reasonable and appropriate to establish its fees
charged for use of its connectivity at a level that will partially
offset the costs to the Exchange associated with maintaining and
enhancing a state-of-the-art exchange network infrastructure in the
U.S. options industry.
The costs associated with making the network accessible to Exchange
Members and non-Members, through the expansion associated with new
Shared Connections and Dedicated Connections, as well as the general
expansion of a state-of-the-art infrastructure, are extensive, have
increased year-over-year in the past two years, and are projected to
increase year-over-year in the future. This is due to several factors,
including costs associated with maintaining and expanding a team of
highly-skilled network engineers, 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
costs, the Exchange notes that costs are associated with the
infrastructure and headcount to fully-support the advances in
infrastructure and expansion of network level services, including
customer monitoring, alerting and reporting. The Exchange incurs
technology expenses 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. Additionally, the Exchange incurred costs in the
expansion/buildout of the network leading up to the launch of
operations, and the network maintenance costs continue to increase
year-over-year. 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 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 Emerald 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 Emerald 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 Emerald and its affiliates is not
entirely fixed. Just the initial fixed cost buildout of the network
infrastructure of MIAX Emerald and its affiliates, including both
primary/secondary sites and disaster recovery, was over $30 million.
A more detailed breakdown of the expense increases since the
initial phases of the buildout of the Exchange over two years ago
include the following: With respect to the network, there has been 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
[[Page 59886]]
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 cost, this is the cost associated with MIAX Emerald consuming
connectivity/content from the equities markets in order to operate the
Exchange, causing MIAX Emerald to effectively pay its competitors for
this connectivity.
There was also significant capital expenditures over this same
period to upgrade and enhance the underlying technology components. The
Exchange believes that it is reasonable and appropriate to establish
its fees charged for use of its connectivity at a level that will
partially offset the costs to the Exchange associated with the
buildout, maintenance, and enhancement of its network infrastructure.
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/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. Connectivity fees, which
are charged for accessing the Exchange's data center network
infrastructure, are directly related to the network and offset costs
such costs.
Further, the Exchange invests significant resources in network R&D
to improve the overall performance and stability of its network. For
example, the Exchange has a number of network monitoring tools (some of
which were developed in-house, and some of which are licensed from
third-parties), that continually monitor, detect, and report network
performance, many of which serve as significant value-adds to the
Exchange's Members and enable the Exchange to provide a high level of
customer service. These tools detect and report performance issues, and
thus enable the Exchange to proactively notify a Member (and the SIPs)
when the Exchange detects a problem with a Member's connectivity. In
fact, the Exchange often receives inquiries from other industry
participants regarding the status of networking issues outside of the
Exchange's own network environment that are impacting the industry as a
whole via the SIPs, including inquiries from regulators, because the
Exchange has a superior, state-of the-art network that, through its
enhanced monitoring and reporting solutions, often detects and
identifies industry-wide networking issues ahead of the SIPs. The
Exchange also incurs costs associated with the maintenance and
improvement of existing tools and the development of new tools.
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, routine
R&D projects to improve the performance of the network's hardware
infrastructure result in additional cost. As an example, in the last
year, 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 also increases year-over-
year, and thus the Exchange believes that it is reasonable to offset a
portion of those costs through establishing network connectivity fees,
which are designed to recover those costs, as proposed herein. Overall,
the Proposed Fees are projected to offset only a portion of the
Exchange's network connectivity costs. 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. In fact, the Exchange often
receives inquiries from other industry participants regarding the
status of networking issues outside of the Exchange's own network
environment that are impacting the industry as a whole via the SIPs,
including inquiries from regulators, because the Exchange has a
superior, state-of the-art network that, through its enhanced
monitoring and reporting solutions, often detects and identifies
industry-wide networking issues ahead of the SIPs. 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 constitute 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 Fees are fair and reasonable because they will not
result in excessive pricing or supra-competitive profit, when comparing
the total annual expense of MIAX Emerald associated with providing
network connectivity services versus the total projected annual revenue
of the Exchange associated with providing network connectivity
services. For 2018, the total annual expense associated with providing
network connectivity services for MIAX Emerald was approximately $4.7
million. The $4.7 million in total annual expense is comprised of the
following, all of which are directly related to the provision of
network connectivity services by MIAX Emerald to its respective Members
and non-Members: (1) Third-party expense, relating to fees paid by MIAX
Emerald to third-parties for certain products and services; and (2)
internal expense, relating to the internal costs of MIAX Emerald to
provide the network connectivity services. All such expenses are more
fully-described below, and are mapped to MIAX Emerald's 2018 Statements
of Operations and Member's Deficit (the ``2018 Financial Statements'').
The $4.7 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
[[Page 59887]]
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 18 million quote messages per second. The
``premium-product'' network experience enables users of 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.\44\
---------------------------------------------------------------------------
\44\ See Third IEX Letter, pg. 5.
---------------------------------------------------------------------------
For 2018, total third-party expense, relating to fees paid by MIAX
Emerald to third-parties for certain products and services for the
Exchange to be able to provide network connectivity services, was
$728,246. 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 Emerald trading
system infrastructure; (2) Zayo Group Holdings, Inc. (``Zayo'') for
connectivity services (fiber and bandwidth connectivity) linking MIAX
Emerald's office locations in Princeton, NJ and Miami, FL to all data
center locations; (3) Secure Financial Transaction Infrastructure
(``SFTI''), \45\ 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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\45\ 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 Emerald does not allocate its 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 Emerald to provide the network connectivity services, was
$4,031,491. 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 connectivity for trading;
and (3) occupancy costs for leased office space for staff that support
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 Emerald does not allocate its entire costs contained
in those line items to the provision of network connectivity services.
MIAX Emerald's employee compensation and benefits expense relating
to providing network connectivity services was $3,262,226, which is
only a portion of the $10,193,837 total expense for employee
compensation and benefits that is stated in the 2018 Financial
Statements. MIAX Emerald's depreciation and amortization expense
relating to providing network connectivity services was $416,807, which
is only a portion of the $616,785 total expense for depreciation and
amortization that is stated in the 2018 Financial Statements. MIAX
Emerald's occupancy expense relating to providing network connectivity
services was $352,458, which is only a portion of the $732,720 total
expense for occupancy that is stated in the 2018 Financial Statements.
The total projected MIAX Emerald revenue for providing network
connectivity services, on a full year run rate, is $3.0 million.
However, since MIAX Emerald was launched on March 1, 2019, it did not
start collecting revenue for network connectivity services until March
1, 2019. Thus, for 2018, MIAX Emerald's expense for providing network
connectivity services was approximately $4.7 million, while its revenue
for providing network connectivity services was $0. For 2019, MIAX
Emerald projects 10 full months of revenue for network connectivity
services (March 1-December 31), of $2.5 million, however it also
projects increased expense for providing network connectivity services
for 2019, as compared to 2018. Nevertheless, utilizing 2018 expense
figures, for 2019, MIAX Emerald's expense for providing network
connectivity services would be approximately $4.7 million, while its
revenue for providing network connectivity services would be $2.5
million. On a fully annualized basis, utilizing 2018 expense figures
and 2019 projected revenue extrapolated out to a full year run rate,
MIAX Emerald's expense for providing network connectivity services
would be approximately $4.7 million, while its revenue for providing
network connectivity services would be $3
[[Page 59888]]
million. Accordingly, for both 2018 and 2019, the total MIAX Emerald
projected revenue for providing network connectivity services during
2018 ($0) and during 2019 ($2.5 million) is less than total actual and
projected MIAX Emerald expense for providing network connectivity
services for 2018 ($4.7 million) and 2019 (greater than $4.7 million).
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 Emerald. 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 also believes its proposal to offer 10Gb ULL
connections as dedicated connections furthers the objectives of Section
6(b)(5) of the Act \46\ 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. In particular, for the Dedicated Connection, the
Exchange's MENI is 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 the
Exchange. Any Member or non-Member can purchase a Dedicated Connection.
The Exchange determined to design its network architecture in a manner
that offered 10Gb ULL connections as dedicated connections (as opposed
to shared connections) in order to provide cost saving opportunities
for itself and for its Members, by reducing the amount of equipment
that the Exchange would have to purchase and to which the Members would
have to connect. A dedicated 10Gb ULL connection does not offer any
unfair advantage over a shared 10GB ULL connection, as is being offered
solely as a cost-saving measure to the Exchange and its Members.
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\46\ 15 U.S.C. 78f(b)(5).
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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.\47\ The
Exchange further notes that Phlx, ISE, Arca and NYSE American each
charge higher rates for such similar connectivity to primary and
secondary facilities,\48\ however the Exchange also notes that the
Exchange's 10Gb ULL connection is dedicated solely to one market (the
Exchange) whereas the Exchange believes that other exchanges offer a
shared 10Gb ULL connection to multiple markets. While MIAX Emerald's
proposed connectivity fees are substantially lower than the fees
charged by Phlx, ISE, Arca and NYSE American, MIAX Emerald believes
that it offers significant value to Members over other exchanges in
terms of network monitoring and reporting, which MIAX Emerald 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.\49\
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\47\ 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.
\48\ Id.
\49\ 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
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 Fees are negatively
impacting or would negatively impact their abilities to compete with
other market participants or that they are placed at a disadvantage.
The Exchange believes that the Proposed Fees do not place certain
market participants at a relative disadvantage to other market
participants because the connectivity pricing is associated with
relative usage of the various market participants and does not impose a
barrier to entry to smaller participants. As described above, the less
expensive 1Gb direct connection is generally purchased by market
participants that utilize less bandwidth. The market participants that
purchase 10Gb ULL direct connections utilize the most bandwidth, and
those are the participants that consume the most resources from the
network. Accordingly, the Proposed Fees do not favor certain categories
of market participants in a manner that would impose a burden on
competition; rather, the allocation of the Proposed Fees reflects the
network resources consumed by the various size of market participants--
lowest bandwidth consuming members pay the least, and highest bandwidth
consuming members pays the most, particularly since higher bandwidth
consumption translates to higher costs to the Exchange.
Inter-Market Competition
The Exchange believes the Proposed Fees do not place an undue
burden on competition on other SROs that is not necessary or
appropriate. In particular, options market participants are not forced
to connect to (and purchase market data from) all options exchanges, as
shown by the number of Members of the Exchange as compared to the much
greater number of members at other options exchanges (as described
above). Not only does MIAX Emerald 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 Emerald.
There are a number of large market makers and broker-dealers that are
members of other options exchange but not Members of MIAX Emerald.
Additionally, other exchanges have similar connectivity alternatives
for their participants, including similar
[[Page 59889]]
low-latency connectivity, but with much higher rates to connect.\50\
The Exchange is also unaware of any assertion that its existing fee
levels or the Proposed Fees would somehow unduly impair its competition
with other options exchanges. To the contrary, if the fees charged are
deemed too high by market participants, they can simply disconnect.
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\50\ See supra note 47.
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While the Exchange recognizes the distinction between connecting to
an exchange and trading at the exchange, the Exchange notes that it
operates in a highly competitive options market in which market
participants can readily connect and trade with venues they desire. In
such an environment, the Exchange must continually adjust its fees to
remain competitive with other exchanges. The Exchange believes that the
proposed changes reflect this competitive environment.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\51\ and Rule 19b-4(f)(2) \52\ 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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\51\ 15 U.S.C. 78s(b)(3)(A)(ii).
\52\ 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 protected]. Please include
File Number SR-EMERALD-2019-35 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-EMERALD-2019-35. 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-EMERALD-2019-35 and should be submitted
on or before November 27, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24186 Filed 11-5-19; 8:45 am]
BILLING CODE 8011-01-P