FR 2021-01940

Summary of the Document

The document is a notice from MIAX PEARL, LLC, a financial trading organization, to the Securities and Exchange Commission (SEC) about a proposed change in their fee schedule. MIAX PEARL plans to increase the monthly fees charged to its members and non-members for using a high-speed, ultra-low latency internet connection. This fee will be raised from $9,300 to $10,000 per month. This type of connection is crucial for participants who require rapid data exchanges in the trading of securities.

Significant Issues and Concerns

One notable issue with this proposal is the potential financial burden it places on smaller market participants. The increased costs might deter smaller firms from using these high-speed connections, thereby possibly disadvantaging them compared to larger firms that can more easily absorb the additional expense. As a result, this could lead to reduced competition, as fewer entities are able to compete effectively due to the higher costs of access.

Another point of concern is the complexity of cost allocation as described in the document. Although MIAX PEARL has conducted a detailed analysis of their expenses related to providing these connections and argues that the fees are justified, the methods used for expense allocation may not be fully transparent. This lack of transparency might make it challenging for stakeholders to assess whether the fee increases are indeed fair and justified.

Additionally, the extensive technical and financial jargon used throughout the document could make it difficult for the general public to understand the necessity for these fee increases. This barrier could prevent meaningful participation from the public in the commenting process requested by the SEC.

Further complicating the matter, the document does not clearly articulate why certain third-party costs, such as those from the Secure Financial Transaction Infrastructure (SFTI), are not subject to the same regulatory oversight as MIAX PEARL's own fees despite their significance in providing critical infrastructure services.

Impact on the Public and Specific Stakeholders

Public Impact:

For the general public, this proposal may not have a direct impact. However, indirectly, any increase in costs for trading participants could eventually influence the costs of financial services for average consumers. For example, if firms pass on increased operational costs to clients, this could result in higher fees for brokerage services or decreased investor participation due to a less competitive marketplace.

Specific Stakeholder Impact:

For smaller market participants, the proposed fee increase could be particularly challenging, potentially diminishing their ability to compete on equal footing with larger firms. This could lead to reduced opportunities for smaller players to engage in trading activities that require high-speed data transmission.

On the other hand, for larger trading firms that can easily accommodate the fee increase, the impact might be minimal. These enterprises typically have more resources and can benefit from the increased competition barriers against smaller participants.

In summary, while MIAX PEARL's rationale aims to justify the necessary fees as a means of covering operational costs, it also underscores the importance of ensuring equity and transparency in such proposals. The broader impact suggests careful consideration is needed to balance the interests of various stakeholders within the financial trading environment.

In reviewing the document from the Federal Register, the focus is on the proposed changes to the MIAX PEARL Options Fee Schedule and the associated financial implications.

The proposed adjustments revolve around increasing the monthly connectivity fees specifically for the 10 gigabit ultra-low latency (10Gb ULL) connections. Currently, both Members and non-Members are charged $9,300 per connection. The new proposal suggests an increase to $10,000 per connection for these 10Gb ULL connections. This change represents a significant financial decision and is indicative of the Exchange's efforts to align connectivity fees with the costs incurred in maintaining a high-performance network infrastructure.

Financial Allocations and Projections

The document outlines that the total annual expense for providing network connectivity services is projected to be approximately $17.9 million. This expense is split between third-party expenses, which are projected at $4,079,910, and internal expenses, projected at $13,831,434. It is essential to note that third-party costs include fees paid to companies like Equinix for data center services and Zayo Group Holdings for connectivity services. These fees are integral to maintaining the operational standards of the Exchange's network infrastructure.

The Exchange projects the annualized revenue from these services to be around $19.4 million, with the specific revenue from 10Gb ULL connections estimated at $16.8 million annually. This leads to a projected profit margin of 8% on network connectivity services, equating to $1.5 million annually after considering the expenses.

Issues Related to Financial References

One of the significant concerns highlighted is the potential impact of increased 10Gb ULL connectivity fees on smaller market participants. While the revenue and expense projections serve to justify the fee adjustment, the increase poses a risk of creating financial barriers. For smaller firms or new entrants, this may exacerbate inequalities between them and larger firms that can more readily absorb the higher costs.

Another point of concern is the complexity of the cost allocation methodology. The detailed financial breakdown intends to provide transparency into the costs borne by the Exchange. However, the intricate details may be hard to decipher for stakeholders, raising concerns about the clarity in the distribution of these expenses.

Additionally, there is ambiguity regarding why certain third-party fees, such as those from Secure Financial Transaction Infrastructure (SFTI), are not subjected to rule-filing requirements despite their considerable influence on the Exchange's cost structure. The lack of clarity around these critical fees may warrant further inquiry to ensure that stakeholders have a comprehensive understanding of all financial obligations and their justification.

Conclusion

The proposed fee increase highlights the Exchange's need to recover costs associated with providing advanced connectivity solutions. However, the justification for these adjustments hinges on complex financial projections and cost analyses, which may not be easily accessible to all stakeholders. This complexity, combined with the potential for unequal impact on smaller market participants, underscores the necessity for ongoing dialogue and examination to ensure equitable and transparent financial practices within such regulatory frameworks.