FR 2024-29336

The Federal Register document details a proposal from the Long-Term Stock Exchange (LTSE) to introduce fees for connectivity services, something it had not charged for previously. These changes were filed with the Securities and Exchange Commission (SEC) and are set to take effect as of October 1, 2024. The LTSE justifies these fees based on the substantial costs associated with launching a new trading system. Key fees include charges for both physical connections and logical connectivity sessions. Notably, the document mentions discounts for connections to the exchange’s Disaster Recovery and Test Environment facilities.

General Summary

This proposal by the LTSE signifies a shift in their operational model. Previously, the LTSE did not impose fees for market connectivity, meaning traders and other market participants could access the exchange without incurring these specific costs. The introduction of fees aims to cover part of the substantial expenses that the LTSE has been shouldering since the launch of its new trading system. The document outlines various types of fees, including cross-connect fees for high-speed fiber connections and port fees for logical connectivity sessions. It also provides detailed justifications for the fee structure and offers comparisons to similar charges by other exchanges.

Significant Issues or Concerns

Several issues emerge from the document. Firstly, the move from no fees to introducing a structured fee schedule suggests previous inefficiencies in recouping connectivity costs from users. There is a potential perception that past operations may have been financially unsustainable or wasteful. Second, while the document asserts that LTSE's fees are generally lower than those charged by other exchanges, it lacks specific comparisons, making it hard to assess this claim's accuracy. Furthermore, the complicated details of the cost analysis and the technology provider arrangement with MEMX Technologies may confuse readers, especially those not well-versed in financial or data exchange operations.

Impact on the Public and Specific Stakeholders

For the general public, especially those not directly involved in securities trading, this document might not seem immediately impactful. However, the broader implications can affect market dynamics and, consequently, the entities that hold investments in affected securities. For specific stakeholders, including LTSE members and non-member participants, the proposed fees will have a direct monetary impact. Smaller market participants might find these fees challenging as they seek cost-efficient ways to engage with the LTSE. Conversely, larger participants might absorb these costs more easily, given their significant trade volumes.

Positive and Negative Implications

Positively, imposing fees could enhance LTSE's financial sustainability and enable further development of robust trading infrastructure. It can also lead to more efficient use of exchange resources as participants may seek to optimize their connectivity use. On the negative side, stakeholders with fewer resources may face financial burdens, potentially affecting their competitive standing. There is also a concern about the transparency and clarity of how these fees were determined, which might affect stakeholder confidence if they perceive these charges as arbitrary or inadequately justified.

Overall, the introduction of connectivity fees by the LTSE reflects a strategic shift likely motivated by a need to recover operational costs. While the proposal claims fairness in fee structuring, the potential impact on small versus large market players highlights an ongoing challenge in balancing accessibility, fairness, and sustainability in financial markets.

The document describes a recent change in the fee structure by the Long-Term Stock Exchange (LTSE), focusing on the introduction of connectivity fees for market participants. Prior to this adjustment, LTSE did not charge fees for connectivity services, which implies a significant shift from their previous operational model where connectivity costs were not recouped from the users.

Cross-Connect and Port Fees

The LTSE proposes to introduce a Cross-Connect fee of $5,500 per 10Gb physical interface per month for connections to its Primary facility. For connections to either the Disaster Recovery facility or the Test Environment, the fee is set at $2,750 per 10Gb physical interface per month. Additionally, the document outlines a $450 fee for all Logical Connectivity sessions per month. This structured fee plan intends to cover the costs associated with providing these services while ensuring members and non-members are not financially overburdened.

Despite these fees, the LTSE anticipates generating monthly revenues of only $192,000, which will still result in a financial loss for the Exchange. This outcome underscores a broader strategic objective to recover a portion of their operational costs rather than profiting from these fees.

Cost Analysis and Allocations

The LTSE estimates its monthly costs for connectivity services to be approximately $485,000, illustrating a considerable financial effort to maintain and provide these services. The document breaks down these costs into various categories, including human resources and third-party services. It mentions allocating about 10% of overall Human Resources costs to connectivity, equating to $538,400 per year.

However, with expected revenues of $192,000 per month from these new fees, the LTSE faces a discrepancy, not achieving full cost recovery and bringing the sustainability of the financial model into question. This projected deficit could imply that the fees are designed more to distribute the financial burden among users evenly rather than solving it conclusively.

Comparative and Strategic Implications

While the document extensively details cost structures and allocations, it does not thoroughly compare these fees with those charged by similar entities, though it claims they are generally lower. This lack of specificity leaves open questions about the competitive nature and justification of these fees compared to industry standards.

Moreover, the arrangement with MEMX Technologies involves both fixed and variable costs, complicating the transparency of whether these costs are competitive or strategically sound, especially given the substantial financial shortfall LTSE faces even after implementing these fees. Understanding how much of this expenditure is voluntary, mandated, or optimized for competitive advantage could provide more insight into whether or not the LTSE is making strategic financial choices that are beneficial in the long term.

Overall, the document highlights the challenges of recalibrating financial strategies while maintaining regulatory compliance and competitive positioning, all of which are crucial for LTSE in its future endeavors.