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Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”), and Rule 19b-4 thereunder, notice is hereby given that on October 1, 2024, Long-Term Stock Exchange, Inc. (“LTSE” or the “Exchange”) filed with the Securities and Exchange Commission (the “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange is filing with the Securities and Exchange Commission (“Commission”) a proposed rule change to amend the LTSE Fee Schedule (the “Fee Schedule”) to adopt certain connectivity fees effective October 1, 2024. The text of the proposed rule change is available at the Exchange's website at https://longtermstockexchange.com/, at the principal office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement on 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 self-regulatory organization 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 proposing to establish a new section (C. Connectivity) in the Long-Term Stock Exchange Fee Schedule and adopt fees for Cross-Connect (Primary), Cross-Connect (Disaster Recovery), Cross-Connect (Test Environment) and Logical Connectivity (all Environments) that will apply to all market participants connecting to the Exchange.
As proposed, fees for connectivity services would be assessed based on each active connectivity service product at the close of business on the first day of each month. If a product is canceled prior to such fee being assessed, then the Member will not be obligated to pay the applicable product fee.
Cross-Connect Fees
The Exchange proposes to offer to both Members and non-Members the choice of a 10 Gigabit (“Gb”) ultra-low latency (“ULL”) fiber cross-connection to the Exchange's Primary and Disaster Recovery facilities, as well as a 10Gb cross-connection to the Test Environment facility. The Exchange proposes to establish a Cross-Connect fee of $5,500 per 10Gb physical interface per month that will be assessed to Members and non-Members for connecting to the Primary facility. The Exchange proposes to establish a Cross-Connect fee of $2,750 per 10Gb physical interface per month that will be assessed to Members and non-Members for connecting to both the Disaster Recovery facility or the Test Environment.
Monthly network connectivity fees for Members and non-Members for connectivity will be assessed in any month the Member or non-Member is credentialed to use any of the LTSE Application Programming Interfaces (“APIs”) in either the Primary, Disaster Recovery or test environments.
Port Fees
The Exchange proposes to establish a $450 fee for all Logical Connectivity sessions. These application sessions, commonly known as ports, are utilized to perform a particular function on the Exchange, such as order entry or order cancellation, receipt of drop copies, proprietary market data dissemination, or requesting data to be backfilled ( i.e., “gap ports”). All market participants (members and non-members) will be charged per session per month. The Exchange will waive the fees for three sessions per month per market participant.
In proposing to charge fees for connectivity to LTSE, the Exchange has sought to be especially diligent in assessing those fees in a transparent way against its own aggregate costs of providing the related services, and also carefully and transparently assessing the impact on Members—both generally and in relation to other Members, i.e., to assure the fee will not create a financial burden on any participant and will not have an undue impact in particular on smaller Members and competition among Members in general. The Exchange believes that this level diligence and transparency is called for by the requirements of Section 19(b)(1) under the Act, and Rule 19b-4 thereunder, with respect to the types of information self-regulatory organizations (“SROs”) should provide when filing fee changes, and Section 6(b) of the Act, which requires, among other things, that exchange fees be reasonable and equitably allocated, not designed to permit unfair discrimination, and that they not impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Act. This rule change proposal addresses those requirements, and the analysis and data in each of the sections that follow are designed to clearly and comprehensively show how they are met.
15 U.S.C. 78(b)(5).
In 2019, Commission staff published guidance suggesting the types of information that SROs may use to demonstrate that their fee filings comply with the standards of the Exchange Act (“Fee Guidance”). While LTSE understands that the Fee Guidance does not create new legal obligations on SROs, the Fee Guidance is consistent with LTSE's view about the type and level of transparency that exchanges should meet to demonstrate compliance with their existing obligations when they seek to charge new fees. See Staff Guidance on SRO Rule Filings Relating to Fees (May 21, 2019).
Cost Analysis
The Exchange notes it operates a unique model where the LTSE trading system and services are provided on an outsourced basis by MEMX Technologies LLC. As such, most of the Exchange's technology costs, including those related to Connectivity, are incorporated into the overall fees that the Exchange pays MEMX Technologies as part of its multi-year arrangement to provide a trading system and associated services. Because of this arrangement, the Exchange does not possess the same level of specificity for cost drivers related to Connectivity as other exchanges have detailed within their own similar filings. However, the Exchange recognizes that the costs associated with building out and maintaining a state-of-the-art network infrastructure for LTSE were extensive and in line with the costs that MEMX LLC, an exchange that also uses the trading system and associated services of MEMX Technologies, outlined in its own filing establishing connectivity fees for Members and Non-Members. These include costs associated with maintaining and expanding a team of highly-skilled network engineers, fees charged by the third-party data center operator, costs associated with projects and initiatives designed to improve overall network performance and stability, and costs associated with fully-supporting advances in infrastructure and expansion of network level services, including customer monitoring, alerting and reporting. There are also significant 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 the MEMX Technologies network technology. Because of this structure, the Exchange is unable to separate out its expense by connectivity alternative, as all connectivity alternatives are intricately combined in its DSLA with MEMX Technologies.
The Exchange and MEMX Technologies executed a Development, License and Services Agreement on January 23, 2024, with accompanying Schedules (collectively, the “DLSA”). MEMX Technologies, an affiliate of the MEMX Exchange, is in the business of developing technology systems for use in the financial industry. See SR-LTSE-2024-03.
See SR-MEMX-2022-26.
Further, while the Exchange has been operating since September 2020, it only entered the DLSA with MEMX Technologies LLC in January of this year and launched the new trading system in September 2024. Therefore, the Exchange's most recent publicly available financial statement (2023 Audited Unconsolidated Financial Statement) is not an accurate reflection of the total annual costs associated with the development and operation of Connectivity on LTSE. Accordingly, the Exchange believes it is more appropriate to justify its fees using cost figures that are isolated specifically for LTSE on an annualized basis, and utilizing a recent monthly billing cycle and extrapolated annualized costs on a going-forward basis.
LTSE recently calculated its aggregate monthly costs for providing Connectivity to the Exchange at $193,637 beginning October 1, 2024. Because LTSE offered all connectivity free of charge from its launch in September 2020 until October of this year, LTSE has borne 100% of all connectivity costs. Now, in order to cover some of the aggregate costs of providing connectivity to market participants (both Members and non-Members) the Exchange is proposing to modify its Fee Schedule and charge the Connectivity fees detailed above.
Types of market participants that obtain connectivity services from the Exchange but are not Members include service bureaus and extranets. Service bureaus offer technology-based services to other companies for a fee, including order entry services to Members, and thus, may access application sessions on behalf of one or more Members. Extranets offer physical connectivity services to Members and non-Members.
In order to determine the Exchange's costs for providing the services associated with the Connectivity Fees, the Exchange conducted an extensive 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 services associated with the Connectivity Fees, and, if such expense did so relate, what portion (or percentage) of such expense actually supports those services. The sum of all such portions of expenses represents the total cost of the Exchange to provide the services associated with the Connectivity Fees. For the avoidance of doubt, no expense amount was allocated twice. The Exchange is also providing detailed information regarding the Exchange's cost allocation methodology—namely, information that explains the Exchange's rationale for determining that it was reasonable to allocate certain expenses described in this filing towards the total cost to the Exchange to provide Connectivity.
The Exchange believes that the Connectivity Fees are fair and reasonable because they will not result in excessive pricing or supra-competitive profit, when comparing the total annual expense that the Exchange projects to incur in connection with providing the services associated with the proposed Connectivity Fees versus the total annual revenue of the Exchange projects to collect in connection with providing those services. For 2024, the total annual expense for providing the services associated with the Connectivity Fees is projected to be approximately $4.5 million. The $4.5 million in expense includes expenses associated with providing all ports and all connectivity alternatives.
Costs Related to Offering Connectivity
The following chart details the individual line-item costs considered by LTSE to be related to offering connectivity as well as the percentage of the Exchange's overall costs per year such costs represent for such area ( e.g., as set forth below, the Exchange allocated approximately 10% of its overall Human Resources cost to offering connectivity).
| Cost drivers | Yearly costs | % of all |
|---|---|---|
| Third-Party Expenses | $3,228,630 | 32 |
| Human Resources | 1,120,500 | 10 |
| Data Center | 158,040 | 30 |
| Total | 4,507,170 |