Self-Regulatory Organizations; MEMX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Exchange's Fee Schedule Regarding Options Market Data Products

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on October 4, 2024, MEMX LLC (“MEMX” or the “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Exchange is filing with the Commission a proposed rule change to amend the Market Data section of its fee schedule applicable to its equity options platform (“MEMX Options”) to adopt fees for certain of its market data products, which are currently offered free of charge, pursuant to MEMX Rules 15.1(a) and (c). The Exchange proposes to implement the changes to the Fee Schedule pursuant to this proposal immediately. The text of the proposed rule change is provided in Exhibit 5.

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 purpose of the proposed rule change is to amend the Market Data section of the Exchange's fee schedule applicable to MEMX Options (“MEMX Options Fee Schedule”) to adopt fees for certain of its options market data products which are currently offered free of charge, namely MEMOIR Options Depth and MEMOIR Options Top (collectively, the “Options Data Feeds”). As set forth below, the Exchange believes that the proposed fees are fair and reasonable and has based its proposal on a detailed cost analysis, as well as other factors including a comparison to competitor pricing. The Exchange is proposing to implement the proposed fees immediately. The Exchange previously filed this proposal on March 28, 2024 (SR-MEMX-2024-11) (the “Initial Proposal”). On April 15, 2024, the Exchange withdrew the Initial Proposal and replaced it with SR-MEMX-2024-14 (the “Second Proposal”), on June 14, 2024, the Exchange withdrew the Second Proposal and replaced it with SR-MEMX-2024-25 (the “Third Proposal”), and on August 8, 2024, the Exchange withdrew the Third Proposal and replaced it with SR-MEMX-2024-31 (the “Fourth Proposal”). Now, the Exchange is withdrawing the Fourth Proposal and is replacing it with the current filing.

Before setting forth the additional details regarding the proposal as well as the cost analysis conducted by the Exchange, immediately below is a description of the proposed fees.

Proposed Market Data Pricing

MEMX Options offers two separate data feeds to subscribers—MEMOIR Options Depth and MEMOIR Options Top. The Exchange notes that there is no requirement that any subscribing entity (“Firm”) subscribe to a particular Options Data Feed or any Options Data Feed whatsoever, but instead, a Firm may choose to maintain subscriptions to those Options Data Feeds they deem appropriate based on their business model. The proposed fee will not apply differently based upon the size or type of Firm, but rather based upon the subscriptions a Firm has to Options Data Feeds. The proposed pricing for each of the Options Data Feeds is set forth below.

MEMOIR Options Depth

The MEMOIR Options Depth feed is a MEMX-only market data feed that contains depth of book quotations and execution information based on options orders entered in the System. For the receipt of access to the MEMOIR Options Depth feed, the Exchange proposes to charge $1,500 per month. This proposed access fee would be charged to any data recipient that receives a data feed of the MEMOIR Options Depth feed for purposes of internal distribution ( i.e., an “Internal Distributor”), for external redistribution ( i.e. an “External Distributor”), or both. The Exchange proposes to define an Internal Distributor as “a Distributor that receives an Exchange Data product and then distributes that data to one or more data recipients within the Distributor's own organization,” and an External Distributor as “a Distributor that receives an Exchange Data product and then distributes that data to a third party or one or more data recipients outside the Distributor's own organization.” The proposed access fee will be charged only once per month per Firm regardless of whether the Firm uses the MEMOIR Options Depth feed for internal distribution, external distribution, or both.

MEMOIR Options Top

The MEMOIR Options Top feed is a MEMX-only market data feed that contains top of book quotations and executions based on options orders entered into the System. For the receipt of access to the MEMOIR Options Top feed, the Exchange proposes to charge $750 per month. This proposed access fee would be charged to any data recipient that receives a data feed of the MEMOIR Options Top feed for purposes of internal distribution ( i.e., an Internal Distributor), external redistribution ( i.e. an External Distributor), or both. The proposed access fee for internal and external distribution will be charged only once per month per Firm regardless of whether the Firm uses the MEMOIR Options Top feed for internal distribution, external distribution, or both.

Billing Process

The Exchange proposes to bill for the Options Data Feeds in the same manner as it does for the market data products it provides for its equities Exchange, (the “Equities Data Feeds”), and to make this clear on the Fee Schedule. Specifically, the Fee Schedule would state that “[f]ees for Market Data products are assessed based on each active product at the close of business on the first day of each month,” and that “[i]f a product is cancelled by a subscriber's submission of a written request or via the MEMX User Portal prior to such fee being assessed, then the subscriber will not be obligated to pay the applicable product fee. MEMX does not return pro rated fees if a product is not used for an entire month.” The Exchange believes that this billing methodology has been efficient with respect to the Equities Data Feeds and is well understood by market participants.

Additional Discussion—Background

The Exchange launched MEMX Options on September 27, 2023. As a new entrant in the equity options trading space, MEMX did not begin charging fees for options market data until April 1, 2024. The objective of this approach was to eliminate any fee-based barriers for Members to join the Exchange, which the Exchange believes was helpful in its ability to attract order flow as a new options exchange. Further, the Exchange did not initially charge for options market data because MEMX believes that any exchange should first deliver meaningful value to Members and other market participants before charging fees for its products and services.

The Exchange also did not begin charging for the Equities Data Feeds until 2022, nearly two years after it launched as a national securities exchange in 2020. In connection with the adoption of fees for the Equities Data Feeds, the Exchange conducted an extensive cost analysis (the “2022 Cost Analysis”), and the Exchange's Initial and Second Proposal to adopt fees for Options Data Feeds stemmed from the same cost analysis, which it reviewed and updated for 2024 (the “2024 Cost Analysis”). The 2024 Cost Analysis combined costs for providing market data for both its equities and options trading platforms (the “Exchange Data Feeds”) due to the fact that in general, the Exchange did not add a significant amount of marginal costs for the provision of options market data, and as such, costs associated with the provision of Equities Data Feeds became shared costs for the provision of Options Data Feeds. For example, the Exchange did not hire additional staff specifically to sell or otherwise manage options market data, rather, the existing team absorbed the additional workload. Nevertheless, as discussed more fully below, the Exchange has revised its cost analysis in this proposal by focusing solely on the marginal costs associated with the addition of providing the Options Data Feeds, and allocating those costs according to the same principles utilized in the 2024 Cost Analysis (the “Options Market Data Cost Analysis”). Pursuant to the Options Market Data Analysis, the Exchange calculated the total marginal costs for providing the Options Data Feeds in 2024 at approximately $307,001. In order to establish fees that are designed to recover the marginal costs of providing the Options Data Feeds with a reasonable profit margin, the Exchange is proposing to modify its Fee Schedule, as described above. In addition to the Options Market Data Cost Analysis, described below, the Exchange believes that its proposed approach to market data fees is in line with that of its competitors.

Additional Discussion—Comparison With Other Exchanges

The proposed fee structure for the Options Data Feeds is not novel but is instead comparable to the fee structure currently in place for the options exchanges operated by MIAX, in particular, MIAX Pearl Options (“MIAX Pearl”), and the options exchanges operated by Nasdaq, in particular, Nasdaq BX Options (“BX Options”). The Exchange is proposing fees for its Options Data Feeds that are similar in structure to MIAX Pearl and BX Options and rates that are equal to, or lower than, than the rates data recipients pay for comparable data feeds from those exchanges, in a more simplified fashion. The Exchange notes that other competitors maintain fees applicable to options market data that are considerably higher than those proposed by the Exchange, including Cboe BZX Options (“BZX Options”), NYSE Arca Options and NYSE American Options. However, the Exchange has focused its comparison on MIAX Pearl and BX Options because their similar market data products are offered at prices lower than several other incumbent exchanges, which is a similar approach to that proposed by the Exchange.

The fees for the MIAX Pearl Liquidity Feed—which like the MEMOIR Options Depth feed, includes top of book, depth of book, trades, and administrative messages—consist of an internal distributor access fee of $1,250 per month and an external distributor access fee of $1,500 per month. As such, the Exchange's proposed rate for all uses of $1,500 per month is equal to what MIAX Pearl charges for external distribution, and $250 higher than what it charges for internal distribution only.

The fees for the MIAX Pearl Top of Market Feed—which is the comparable product to MEMOIR Options Top, consist of an internal distributor access fee of $500 per month and an external distributor access fee of $750. Again, the Exchange's proposed rate for all uses of $750 per month is identical to what MIAX Pearl charges for external distribution, and $250 higher than what it charges for internal distribution.

While the Exchange's proposed fee is slightly higher than what MIAX Pearl charges for internal distribution of its similar products, the Exchange believes that the simplicity of a single fee is preferable, specifically by reducing audit risk and simplifying reporting, both for the Exchange and its customers. Further, to the extent MIAX Pearl assesses both fees for both uses, it would cost more overall to receive and provide both internal and external distribution of MIAX Pearl's comparable options data feeds than it does to receive and provide both internal and external distribution of the Exchange's Options Data Feeds.

As an additional cost comparison, the fees for both Nasdaq BX Options Depth of Market Feed (“BX Depth”) and Top of Market Feed (“BX Top”) are $1,500 per month for internal distribution and $2,000 for external distribution, with an added $2,500 fee for a non-Display Enterprise License. While one distributor fee allows access to both BX Top and BX Depth, (for example, $1,500 per month would allow a BX Options customer internal distribution of both BX Top and BX Depth) if a BX Options Customer wanted the same access provided under the Exchange's proposed fees, ( i.e. for all uses) it would need to pay an additional $2,000 for external distribution and $2,500 per month for a non-display enterprise license fee. In addition, BX Options charges monthly per subscriber fees for professional or non-professional use which the Exchange will not charge for its similar market data products.

Additional Discussion—Options Market Data Cost Analysis

In general, the Exchange believes that exchanges, in setting fees of all types, should meet very high standards of transparency to demonstrate why each new fee or fee increase meets the Exchange Act requirements that fees be reasonable, equitably allocated, not unfairly discriminatory, and not create an undue burden on competition among members and markets. In particular, the Exchange believes that each exchange should take extra care to be able to demonstrate that these fees are based on its costs and reasonable business needs. Accordingly, in proposing to charge fees for Options Data Feeds, 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 service, 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 does not believe it needs to otherwise address questions about market competition in the context of this filing because the proposed fees are so clearly consistent with the Act based on its Options Market Data Cost Analysis. The Exchange also believes that this level of 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 this section are designed to clearly and comprehensively show how they are met.

As noted above, MEMX recently conducted a study of its aggregate costs to produce the Exchange Data Feeds—the 2024 Cost Analysis, and it used the 2024 Cost Analysis as the foundation of the Options Market Data Cost Analysis, which ultimately went a step further in separately assessing the marginal costs associated with the provision of the Options Data Feeds as a subset of the total aggregate costs originally allocated towards the provision of the Exchange Data Feeds ( i.e. both the Equities and Options Data Feeds) and allocating those marginal costs towards the provision of the Options Data Feeds.

Prior to discussing how the Exchange allocated applicable costs under the Options Market Data Cost Analysis, the Exchange believes it is first necessary to set forth its process in conducting the 2024 Cost Analysis. The 2024 Cost Analysis required a detailed analysis of MEMX's aggregate baseline costs, including a determination and allocation of costs for core services provided by the Exchange—transaction execution, market data, membership services and trading permits, regulatory services, physical connectivity, and application sessions (which provide order entry, cancellation and modification functionality, risk functionality, ability to receive drop copies, and other functionality). MEMX separately divided its costs between those costs necessary to deliver each of these core services, including infrastructure, software, human resources ( i.e., personnel), and certain general and administrative expenses (“cost drivers”). Next, MEMX adopted an allocation methodology with various principles to guide how much of a particular cost should be allocated to each core service. For instance, fixed costs that are not driven by client activity ( e.g., message rates), such as data center costs, were allocated more heavily to the provision of physical connectivity (80%), with smaller allocations to logical ports (11%), and the remainder to the provision of transaction execution, regulatory services, and market data services (9%). The allocation methodology was decided through conversations with senior management familiar with each area of the Exchange's operations. After adopting this allocation methodology, the Exchange then applied an estimated allocation of each cost driver to each core service, resulting in the cost allocations described below.

By allocating segmented costs to each core service, MEMX was able to estimate by core service the potential margin it might earn based on different fee models. The Exchange notes that as a non-listing venue it has four primary sources of revenue that it can potentially use to fund its operations: transaction fees, fees for connectivity services, membership and regulatory fees, and market data fees. Accordingly, the Exchange generally must cover its expenses from these four primary sources of revenue.

Through the Exchange's extensive 2024 Cost Analysis, the Exchange analyzed every expense item in the Exchange's general expense ledger to determine whether each such expense relates to the provision of the Exchange Data Feeds, and, if such expense did so relate, what portion (or percentage) of such expense actually supports the provision of the Exchange Data Feeds, and thus bears a relationship that is, “in nature and closeness,” directly related to the Exchange Data Feeds. Based on its analysis, MEMX calculated its aggregate annual costs for providing the Exchange Data Feeds at $3,683,375.

The following chart details the individual line-item (annual) costs considered by MEMX to be related to offering the Exchange Data Feeds to its Members and other customers as well as a percentage of the Exchange's overall costs that such costs represent for such area ( e.g., as set forth below, the Exchange allocated approximately 8% of its overall Human Resources cost to offering Exchange Data Feeds).