FR 2020-29133

Summary of the Document

The document presents a proposed rule change by MIAX PEARL, LLC, a self-regulatory organization. This proposal is to amend the existing Fee Schedule by increasing the number of additional Limited Service MEO Ports available to its members from eight to ten per "Matching Engine." Despite the intended expansion, the fees associated with these additional ports will remain unchanged. Each of the ninth and tenth ports will cost $400 per month, similar to the current pricing for the seventh and eighth ports. This proposal is primarily in response to increased customer demand and heightened market volatility, necessitating expanded network capacity.

The Securities and Exchange Commission (SEC) is currently reviewing the proposal and has invited public comments by January 26, 2021.

Significant Issues and Concerns

Several issues arise from the proposed changes:

1. Lack of Clarity on Equitable Access: The document does not adequately explain how the additional ports will ensure that no individual or organization gains an unfair advantage. It is crucial to ensure that expanding these ports benefits all users equally, maintaining a level playing field.

2. Complex Financial Analysis: The financial details surrounding the anticipated costs and revenues are presented in a complex manner. This could pose a challenge for readers without a specialized financial background, making it difficult for them to fully grasp the implications of these changes.

3. Immediate Implementation Concerns: The proposal is set to be effective immediately, raising concerns about whether there was sufficient opportunity for public feedback. A public comment period prior to its implementation could have provided necessary insights and opinions from those directly affected by the changes.

4. Justification of Fee Structure: The document lacks sufficient justification on how the exchange’s internal cost allocations align with maintaining fair trading practices. This omission could lead to skepticism about whether the fee structure is genuinely equitable.

5. Exploration of Alternatives: There is no mention of alternative methods that could have addressed the increased demand without necessitating a costly network expansion. Exploring such alternatives might have presented more cost-effective solutions.

6. Efficient Port Usage Encouragement: The document does not clearly articulate how the current fee structure encourages efficient usage of the ports by its members, leaving an area of ambiguity in terms of how efficiency is evaluated or promoted.

Impact on the Public

Broadly, the document highlights an initiative that could affect both public and private stakeholders. The proposed increase in ports is intended to accommodate growing demand and enhance trading agility. However, there are potential impacts that merit consideration:

1. General Public: For the general public, particularly investors, the proposal could mean better market access and improved efficiency in trading operations, ideally leading to implications such as tighter bid-ask spreads and improved liquidity.

2. Market Participants: Stakeholders such as traders, brokers, and financial institutions may see improved operational capabilities with additional ports; however, concerns about fairness and transparency could affect trust in the framework.

3. Regulatory Oversight: Given the document's complexity, the SEC's role in ensuring that these changes do not adversely affect market integrity or create disproportionate advantages is paramount. The public and stakeholders alike can benefit if the Commission addresses the identified concerns effectively.

Impact on Specific Stakeholders

• Exchange Members: Members who actively use the MIAX PEARL platform will experience direct impacts. They have the opportunity to expand their connectivity but must decide if the additional capacity justifies the associated costs.

• Smaller Firms or New Entrants: The unchanged fee structure could discourage smaller firms or new entrants with limited budgets from procuring additional ports, potentially consolidating benefits with larger firms with deeper resources.

• Regulators: They face the task of monitoring these changes to ensure they align with regulatory standards intended to guard against unfair practices and maintain a competitive market structure.

In conclusion, while the proposal offers expanded connectivity options, its execution would benefit from increased clarity and thorough consideration of the broader implications on market dynamics and fairness.

The document details a proposal by MIAX PEARL to amend the number of additional Limited Service MEO Ports available to its members, specifying that while the number of ports will increase, the existing fee structure will remain unchanged. This decision intends to meet rising customer demand due to increased market volatility, which has resulted in greater message traffic across their network.

The current fee structure involves charging members $200 per month for the third and fourth Limited Service MEO Ports, $300 per month for the fifth and sixth, and $400 per month for the seventh and eighth ports. Importantly, for the newly proposed ninth and tenth ports, the charge will remain at $400 per month. This unchanged fee structure is designed to encourage efficient port usage among members, making it clear that additional port usage is an optional business decision for each member, rather than a necessity enforced by MIAX PEARL.

From a financial perspective, the implementation of two additional ports requires a significant one-time capital expenditure of approximately $175,000 to cover network expansions through hardware, software, and support personnel. Projected annual revenues from these additional ports, assuming uptake by seven members, stand at approximately $67,200. However, the Exchange anticipates an annual loss of about $10,512 when excluding the initial capital expenditure, as annual operating expenses are expected to be about $77,712.

In examining these financial allocations related to identified issues, it appears that although the Exchange does not propose to change the fee structure, the financial justification of these fees and expenses might be overly complex and intricate for the average user, potentially obfuscating the real costs and benefits associated with the new ports. While the official stance is that the decision promotes fairness and equal access to service, there's no explicit discussion on how these fees ensure all entities maintain equitable access, or whether they merely reflect cost recovery for MIAX PEARL’s operational expenditures.

Furthermore, the decision to activate these changes immediately seems to have bypassed an adequate public consultation process, which could have offered valuable insights or alternatives potentially avoiding the need for additional costs. The document does mention a detailed breakdown of internal expenses, such as employee compensation, depreciation, and occupancy costs, allocating specific percentages of these towards the new service. However, it could be argued that the proportionality of these allocations to the fees charged lacks clarity for those outside specialized financial analysis circles.

In conclusion, while MIAX PEARL's proposal maintains the status quo of its fee structure and aims to address growing demands without directly imposing higher costs on its existing services, the financial details presented could benefit from a more straightforward explanation to ensure comprehensive understanding and acceptance among its stakeholders.