Self-Regulatory Organizations; MIAX Sapphire, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Establish Fees for Purge Ports

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 August 21, 2024, MIAX Sapphire, LLC (“MIAX Sapphire” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) a 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 a proposal to amend the MIAX Sapphire Fee Schedule (the “Fee Schedule”) to adopt certain non-transaction fees for Purge Ports as described below.

The text of the proposed rule change is available on the Exchange's website at https://www.miaxglobal.com/markets/us-options/miax-sapphire/rule-filings, at the Exchange's principal office, and at the Commission's Public Reference Room.

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

On July 15, 2024, the U.S. Securities and Exchange Commission (“Commission”) approved the Exchange's Form 1 application to register as a national securities exchange under Section 6 of the Exchange Act, and the Exchange began operations on August 12, 2024. The Exchange initially filed this proposal on August 9, 2024 (SR-SAPPHIRE-2024-15) to establish fees for Purge Ports, which is functionality that enables Marker Makers to cancel all open orders or a subset of open orders through a single cancel message. The Exchange withdrew SR-SAPPHIRE-2024-15 on August 21, 2024, and submitted this proposal.

Despite proposing to adopt fees herein, the Exchange also proposes to waive the proposed Purge Port fees for an Initial Waiver Period, which began on the date the Exchange began operations and which is the same date that the Fee Schedule became effective. However, even though the Exchange proposes to fully waive Purge Port fees for the Initial Waiver Period, the Exchange believes that it is appropriate to provide market participants with the overall structure of Purge Port fees by outlining the structure and amounts in the Fee Schedule, so that there is general awareness that the Exchange intends to assess such fees upon the expiration of the defined period of the Initial Waiver Period. Additionally, the Exchange notes that the proposed fees for Purge Ports on MIAX Sapphire are identical to Purge Port fees assessed by the Exchange's affiliated options exchange, MIAX PEARL, LLC (“MIAX Pearl Options”).

Purge Ports

The Exchange proposes to amend Section 5) d) iii), which was reserved for use by an earlier proposal, to adopt Purge Port Fees to provide that a MIAX Sapphire Market Maker may request and be allocated two (2) Purge Ports per Matching Engine to which it connects and will be charged a monthly fee of $600 per Matching Engine. The Exchange believes that the proposed fee provides Market Makers with flexibility to control their Purge Port costs based on the number of Matching Engines each Marker Maker elects to connect to based on each Market Maker's business needs.

A logical port represents a port established by the Exchange within the Exchange's System for trading and billing purposes. Each logical port grants a Member the ability to accomplish a specific function, such as order entry, order cancellation, access to execution reports, and other administrative information.

Purge Ports are designed to assist Market Makers in the management of, and risk control over, their orders, particularly if the firm is dealing with a large number of securities. For example, if a Market Maker detects market indications that may influence the execution potential of their orders, the Market Maker may use Purge Ports to reduce uncertainty and to manage risk by purging all orders in a number of securities. This allows Market Makers to seamlessly avoid unintended executions, while continuing to evaluate the market, their positions, and their risk levels. Purge Ports are used by Market Makers that conduct business activity that exposes them to a large amount of risk across a number of securities. Purge Ports enable Market Makers to cancel all open orders, or a subset of open orders through a single cancel message. The Exchange notes that Purge Ports increase efficiency of already existing functionality enabling the cancellation of orders.

The Exchange will operate a highly performant system with significant throughput and determinism which should allow participants to enter, update and cancel orders at high rates. Market Makers will have the ability to cancel individual orders through the existing functionality, such as through the use of a mass cancel message by which a Market Maker may request that the Exchange remove all or a subset of its quotations and block all or a subset of its new inbound quotations. Other than Purge Ports being a dedicated line for cancelling quotations, Purge Ports operate in the same manner as a mass cancel message being sent over a different type of port. For example, like Purge Ports, mass cancellations sent over a logical port may be done at either the firm or MPID level. As a result, Market Makers can currently cancel orders in rapid succession across their existing logical ports or through a single cancel message, all open orders or a subset of open orders.

Similarly, Members may also use cancel-on-disconnect control when they experience a disruption in connection to the Exchange to automatically cancel all orders, as configured or instructed by the Member or Market Maker. In addition, the Exchange already provides similar ability to mass cancel orders through the Exchange's risk controls, which are offered at no charge and enables Market Makers to establish pre-determined levels of risk exposure, and can be used to cancel all open orders. Accordingly, the Exchange believes that the Purge Ports provide an efficient option as an alternative to available services and enhance a Market Maker's ability to manage their risk.

The Exchange believes that market participants benefit from a dedicated purge mechanism for specific Members and to the market as a whole. Market Makers will have the benefit of efficient risk management and purge tools. The market will benefit from potential increased quoting and liquidity as Market Makers may use Purge Ports to manage their risk more robustly. Only Market Makers that request Purge Ports would be subject to the proposed fees, and other Market Makers can operate without dedicated Purge Ports, but with the additional purging capabilities described above. Further, the Exchange notes that this functionality is similar to functionality on the Exchange's affiliate, MIAX Pearl Options.

Implementation

The proposed fee change is immediately effective.

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5) of the Act, in particular, in that it is not designed to permit unfair discrimination among customers, brokers, or dealers. The Exchange also believes that its proposed fee is consistent with Section 6(b)(4) of the Act because it represents an equitable allocation of reasonable dues, fees and other charges among market participants.

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.

In proposing to charge fees for port services, the Exchange is especially diligent in assessing those fees in a transparent way against its own aggregate costs of providing the related service, and in 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 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 exchanges 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. The Exchange reiterates that the legacy exchanges with whom the Exchange will vigorously compete for order flow and market share, were not subject to any such diligence or transparency in setting their baseline non-transaction fees, most of which were put in place before the Staff Guidance.

As detailed below, the Exchange recently calculated its aggregate annual costs for providing Purge Ports to be $426,238 (or approximately $35,518 per month, rounded to the nearest dollar when dividing the annual cost by 12 months). To recoup the costs of providing Purge Ports to its Market Makers going forward, as described below, the Exchange proposes to amend its Fee Schedule to charge a fee of $600 per Matching Engine for Purge Ports. The Exchange notes that the projected revenue will not be greater than the costs to the Exchange to provide Purge Ports, however the Exchange believes that it is necessary to accept this condition in order to successfully launch MIAX Sapphire.

The Exchange's affiliates previously completed a study of their aggregate costs to produce market data and provide connectivity and port services, defined above as its Cost Analysis. Personnel began to plan for and develop the Exchange beginning in early 2023, and costs included in this Cost Analysis are related to the development and buildout of the Exchange since that time. During the Exchange's development and buildout that occurred throughout 2023 and continues to today, the Exchange routinely studied its aggregate costs to develop and implement the Exchange. The Cost Analysis required a detailed analysis of the Exchange's aggregate baseline costs, including a determination and allocation of costs for core services provided by the Exchange—transaction execution, market data, membership services, physical connectivity, and port access (which provide order entry, cancellation and modification functionality, risk functionality, the ability to receive drop copies, and other functionality). The Exchange 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”).

As an initial step, the Exchange determined the total cost for the Exchange and its affiliated markets for each cost driver as part of the Exchange's 2024 budget review process. The 2024 budget review is a company-wide process that occurs over the course of many months, includes meetings among senior management, department heads, and the Finance Team. Each department head is required to send a “bottom up” budget to the Finance Team allocating costs at the profit and loss account and vendor levels for the Exchange and its affiliated markets based on a number of factors, including server counts, additional hardware and software utilization, current or anticipated functional or non-functional development projects, capacity needs, end-of-life or end-of-service intervals, number of members, market model ( e.g., price time or pro-rata, simple only or simple and complex markets, auction functionality, etc.), which may impact message traffic, individual system architectures that impact platform size, storage needs, dedicated infrastructure versus shared infrastructure allocated per platform based on the resources required to support each platform, number of available connections, and employees allocated time. All of these factors result in different allocation percentages among the Exchange and its affiliated markets, i.e., the different percentages of the overall cost driver allocated to the Exchange and its affiliated markets will cause the dollar amount of the overall cost allocated among the Exchange and its affiliated markets to also differ. Because the Exchange's parent company currently owns and operates five (including MIAX Sapphire) separate and distinct marketplaces, the Exchange must determine the costs associated with each actual market—as opposed to the Exchange's parent company simply concluding that all cost drivers are the same at each individual marketplace and dividing total cost by five (5) (evenly for each marketplace). Rather, the Exchange's parent company determines an accurate cost for each marketplace, which results in different allocations and amounts across exchanges for the same cost drivers, due to the unique factors of each marketplace as described above. This allocation methodology also ensures that no cost would be allocated twice or double-counted between the Exchange and its affiliated markets. The Finance Team then consolidates the budget and sends it to senior management, including the Chief Financial Officer and Chief Executive Officer, for review and approval. Next, the budget is presented to the Board of Directors and the Finance and Audit Committees for each exchange for their approval. The above steps encompass the first step of the cost allocation process.

The next step involves determining what portion of the cost allocated to the Exchange pursuant to the above methodology is to be allocated to each core service, e.g., market data, connectivity, ports, and transaction services. The Exchange and its affiliated markets adopted an allocation methodology with thoughtful and consistently applied principles to guide how much of a particular cost amount allocated to the Exchange should be allocated within the Exchange to each core service. This is the final step in the cost allocation process and is applied to each of the cost drivers set forth below.

This next level of the allocation methodology at the individual exchange level also took into account factors similar to those set forth under the first step of the allocation methodology process described above, to determine the appropriate allocation to connectivity or market data versus allocations for other services. This allocation methodology was developed through an assessment of costs with senior management intimately familiar with each area of the Exchange's operations. After adopting this allocation methodology, the Exchange then applied an allocation of each cost driver to each core service, resulting in the cost allocations described below. Each of the below cost allocations is unique to the Exchange and represents a percentage of overall cost that was allocated to the Exchange pursuant to the initial allocation described above.

By allocating segmented costs to each core service, the Exchange was able to estimate by core service the potential margin it might earn based on different fee models. The Exchange notes that it has five primary sources of revenue that it can potentially use to fund its operations: transaction fees, connectivity and port service fees, membership fees, regulatory fees, and market data fees. Accordingly, the Exchange must cover its expenses from these five primary sources of revenue. The Exchange also notes that as a general matter each of these sources of revenue is based on services that are interdependent. For instance, the Exchange's system for executing transactions is dependent on physical hardware and connectivity; only Members and parties that they sponsor to participate directly on the Exchange may submit orders to the Exchange; some Members (but not all) consume market data from the Exchange in order to trade on the Exchange; and, the Exchange consumes market data from external sources in order to comply with regulatory obligations. Accordingly, given this interdependence, the allocation of costs to each service or revenue source required judgment of the Exchange and was weighted based on estimates of the Exchange that the Exchange believes are reasonable, as set forth below. While there is no standardized and generally accepted methodology for the allocation of an exchange's costs, the Exchange's methodology is the result of an extensive review and analysis and will be consistently applied going forward for any other cost-justified potential fee proposals. In the absence of the Commission attempting to specify a methodology for the allocation of exchanges' interdependent costs, the Exchange will continue to be left with its best efforts to attempt to conduct such an allocation in a thoughtful and reasonable manner.

Through the Exchange's extensive updated Cost Analysis, which was again recently further refined, the Exchange analyzed every expense item in the Exchange's general expense ledger to determine whether each such expense relates to the provision of connectivity and port services, and, if such expense did so relate, what portion (or percentage) of such expense actually supports the provision of Purge Port services, and thus bears a relationship that is, “in nature and closeness,” directly related to Purge Port services. In turn, the Exchange allocated certain costs more to physical connectivity and others to ports, while certain costs were only allocated to such services at a very low percentage or not at all, using consistent allocation methodologies as described above. Based on this analysis, the Exchange estimates that the aggregate monthly cost to provide Purge Port services is $35,518, as further detailed below.

Costs Related to Offering Purge Ports

The following chart details the individual line-item costs considered by the Exchange to be related to offering Purge Ports as well as the percentage of the Exchange's overall costs that such costs represent for each cost driver ( e.g., as set forth below, the Exchange allocated approximately 3.5% of its overall Human Resources cost to offering Purge Ports).