Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NYSE Arca, Inc. Relating to Fees for NYSE Arca Depth-of-Book Data, 70311-70319 [2010-28893]
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Federal Register / Vol. 75, No. 221 / Wednesday, November 17, 2010 / Notices
of quotes/orders posted on the BX book
(i.e., quotes/orders that provide
liquidity), while providing a rebate to
orders that access liquidity. Currently,
the charge to provide liquidity is
$0.0003 per share executed, while the
rebate for accessing liquidity is $0.0001
per share executed. Effective November
1, 2010, BX will increase the rebate for
accessing liquidity to $0.0002 per share
executed. In addition, BX will introduce
a tiered pricing structure for the fee to
add liquidity, under which members
adding a daily average of more than 50
million shares of liquidity during a
month will be charged $0.00025 per
share executed, while members adding
a daily average of 50 million or fewer
shares during the month will be charged
$0.0004 per share executed. Thus, while
the fee change will result in a small fee
increase for members providing low
volumes of liquidity on BX, it will
reduce fees charged to members
providing higher volumes of liquidity
and members accessing liquidity. The
fee changes are reflective of the ongoing
intense level of competition for order
flow in the cash equities markets.3
2. Statutory Basis
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BX believes that the proposed rule
change is consistent with the provisions
of Section 6 of the Act,4 in general, and
with Section 6(b)(4) of the Act,5 in
particular, in that it provides for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
facility or system which BX operates or
controls. The impact of the price
changes upon the net fees paid by a
particular market participant will
depend upon a number of variables,
including the relative availability of
liquidity on BX and other venues, the
prices of the market participant’s quotes
and orders relative to the national best
bid and offer (i.e., its propensity to add
or remove liquidity), and the volume of
liquidity provided by the member.
BX notes that it operates in a highly
competitive market in which market
participants can readily direct order
flow to competing venues if they deem
fee levels at a particular venue to be
excessive. Accordingly, if particular
market participants object to the
proposed fee changes, they can avoid
3 See, e.g., Securities Exchange Act Release No.
63053 (October 6, 2010), 75 FR 63237 (October 14,
2010) (SR–EDGA–2010–14); Securities Exchange
Act Release No. 63054 (October 6, 2010), 75 FR
63227 (October 14, 2010) (SR–EDGX–2010–13);
Securities Exchange Act Release No. 63149 (October
21, 2010), 75 FR 66180 (October 27, 2010) (SR–
BYX–2010–004).
4 15 U.S.C. 78f.
5 15 U.S.C. 78f(b)(4).
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paying the fees by directing orders to
other venues. BX believes that its fees
continue to be reasonable and equitably
allocated to members on the basis of
whether they opt to direct orders to BX.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
BX does not believe that the proposed
rule change will result in any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act, as amended.
Because the market for order execution
and routing is extremely competitive,
members may readily direct orders to
BX’s competitors if they object to the
proposed rule change.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.6 At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
70311
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–BX–2010–074. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing will
also be available for inspection and
copying at the principal office of the
self-regulatory organization. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–BX–2010–074 and should
be submitted on or before December 8,
2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–28892 Filed 11–16–10; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–BX–2010–074 on the
subject line.
[Release No. 34–63291; File No. SR–
NYSEArca–2010–97]
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
November 9, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
6 15
PO 00000
U.S.C. 78s(b)(3)(a)(ii).
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Self-Regulatory Organizations; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change by NYSE
Arca, Inc. Relating to Fees for NYSE
Arca Depth-of-Book Data
7 17
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CFR 200.30–3(a)(12).
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‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
1, 2010, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) 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 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, through its wholly
owned subsidiary, NYSE Arca Equities,
Inc. (‘‘NYSE Arca Equities’’), is filing a
proposed rule change to authorize
market data fees for the receipt and use
of depth-of-book market data that the
Exchange makes available. The text of
the proposed rule change is available at
the Exchange, the Commission’s Public
Reference Room, and the Exchange’s
Web site at https://www.nyse.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filings with the Commission, the
self-regulatory organization 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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[i.] The Services and Fees
A. Description
Through NYSE Arca Equities, the
Exchange’s equities trading facility, the
Exchange makes ArcaBook SM, a
compilation of all limit orders resident
in the NYSE Arca limit order book,
available on a real-time basis.3 In
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Exchange notes that it makes available to
vendors the best bids and offers that are included
in ArcaBook data no earlier than it makes those best
bids and offers available to the processors under the
CQ Plan and the ‘‘Reporting Plan for Nasdaq/
National Market System Securities Traded on an
2 17
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addition, the Exchange makes available
real-time information relating to
transactions and limit orders in debt
securities that are traded through the
Exchange’s facilities.
The Exchange makes ArcaBook and
the bond trade and limit order
information (collectively, ‘‘NYSE Arca
Data’’) available to market data vendors,
broker-dealers, private network
providers and other entities by means of
data feeds. By making the data it
includes available, ArcaBook enhances
market transparency, fosters
competition among orders and markets,
and enables buyers and sellers to obtain
better prices.
B. Procedural Background
The fees for which the Exchange is
filing this proposed rule change have a
procedural history, including the
following:
• On May 23, 2006, NYSE Arca
submitted the 2006 Rule Change to
establish fees for the receipt and use of
ArcaBook data.
• On October 12, 2006, the
Commission issued an order, by
delegated authority, approving the 2006
Rule Change (the ‘‘Delegated Order’’).4
• On November 15, 2006,
NetCoalition submitted a petition (the
‘‘Petition’’) requesting that the
Commission review and set aside the
Delegated Order.5
• On December 27, 2006, the
Commission issued an order granting
NetCoalition’s request for the
Commission to review the Delegated
Order.6
• On June 4, 2008, the Commission
published notice of a proposed order
(the ‘‘Draft Order’’) approving the NYSE
Arca proposed fees to give the public an
additional opportunity to comment.7
• On December 8, 2008, the
Commission set aside the Delegated
Order and approved the 2006 Rule
Change directly (the ‘‘Direct Order’’).8
• On or about January 1, 2009, the
Exchange began charging the fees set
forth in the 2006 Rule Change.
• On January 30, 2009, NetCoalition
and SIFMA petitioned the United States
Court of Appeals for the DC Circuit (the
Exchange on an Unlisted or Listed Basis’’ (the ‘‘UTP
Plan’’).
4 Securities Exchange Act Release No. 54597
(October 12, 2006) 71 FR 62029 (October 20, 2006).
5 Petition for Commission Review submitted by
Petitioner, dated November 14, 2006.
6 Securities Exchange Act Release No. 55011
(December 27, 2006).
7 Securities Exchange Act Release No. 57917
(June 4, 2008), 73 FR 32751 (June 10, 2008).
8 Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74770 (December 9
2008).
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‘‘DC Circuit’’) for review of the Direct
Order.
• On July 21, 2010, the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (the ‘‘Dodd-Frank Act’’)
was signed into law.
• On August 6, 2010, the DC Circuit
issued a decision on the petitions for
review (the ‘‘NetCoalition Decision’’).
• On September 17, 2010, the
Exchange filed a petition for panel
rehearing asking the DC Circuit to
remand rather than vacate the Direct
Order.
• On September 24, 2010, the DC
Circuit ordered NetCoalition, SIFMA,
and the Commission to respond to the
Exchange’s petition for panel rehearing.
• On October 12, 2010, NetCoalition,
SIFMA, and the Commission filed
responses to the Exchange’s petition for
panel rehearing.
• On October 25, 2010, the DC Circuit
denied the petition for panel rehearing.
In this filing, the Exchange proposes
to continue to assess the same fees that
have been in effect since the Direct
Order.
C. Fees
This filing will enable the Exchange
to continue to assess the Market Data
Fee Schedule set forth in Exhibit 5
hereto for the receipt and use of NYSE
Arca Data. As the Market Data Fee
Schedule details, this proposed rule
change allows the Exchange to continue
to assess access fees and professional
and nonprofessional subscriber device
fees. These are categories of fees that are
consistent with the fees that the New
York Stock Exchange (‘‘NYSE’’) and the
Nasdaq Stock Market (‘‘Nasdaq’’), and
the Participants in the CTA, CQ, UTP
and OPRA Plans, charge for the receipt
and use of their market data. They are
the same fees that NYSE Arca has
charged since it received approval of
those fees pursuant to the Direct Order.
1. Access Fees
The Exchange will continue to charge
a monthly $750 fee for a data recipient
to gain direct access to the datafeeds
through which the Exchange makes
NYSE Arca Data available. This fee
entitles the datafeed recipient to gain
access to NYSE Arca Data for a set of up
to four ‘‘Logons.’’ A ‘‘Logon’’ is activation
of a means of direct access to any of the
NYSE Arca datafeeds. For instance, if a
datafeed recipient gains access to NYSE
Arca Data one or more times during a
month using an Exchange-provided and
approved logon that provides access to
the ArcaBook datafeed, that would
constitute a ‘‘Logon.’’ It would constitute
a second ‘‘Logon’’ if, during that month,
the datafeed recipient uses a different
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logon name that allows access to the
ArcaBook datafeed.
The Exchange will continue to charge
a monthly $750 fee for a data recipient
to gain indirect access to the datafeeds
through which the Exchange makes
NYSE Arca Data available for any
number of Logons. ‘‘Indirect access’’
refers to access to a NYSE Arca datafeed
indirectly through one or more
intermediaries, rather than by means of
a direct connection or linkage with the
Exchange’s facilities.
2. Device Fees
The Exchange will continue to charge
device fees for professional and
nonprofessional subscribers for the
display of ArcaBook. In differentiating
between professional and
nonprofessional subscribers, the
Exchange applies the same criteria for
qualification as a nonprofessional
subscriber as the CTA and CQ Plan
Participants use, as more fully set forth
in Exhibit 5.
a. For Professional Subscribers
For professional subscribers, the
Exchange will continue to charge (i) a
monthly fee of $15 per device for the
receipt of ArcaBook data relating to
Exchange-Traded Funds and those
equity securities for which reporting is
governed by the CTA Plan (‘‘CTA Plan
and ETF Securities’’) and (ii) a monthly
fee of $15 per device for the receipt of
ArcaBook data relating to those equity
securities for which reporting is
governed by the UTP Plan (excluding
Exchange-Traded Funds; ‘‘UTP Plan
Securities’’).
The combined monthly professional
subscriber device fee of $30 (i.e., for
receipt of NYSE ArcaBook data relating
to CTA Plan and ETF Securities and to
UTP Plan Securities) compares
favorably with fees charged by other
exchanges for similar products. For
instance, for professional subscribers,
Nasdaq charges $76 for its combined
TotalView 9 and OpenView 10 products
and NYSE charges $60 for NYSE
OpenBook.11
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b. For Nonprofessional Subscribers
For nonprofessional subscribers, the
Exchange will continue to charge
9 Through TotalView, Nasdaq provides
information relating to the displayed quotes and
orders of Nasdaq participants in UTP Plan
Securities. TotalView displays quotes and orders at
multiple prices and is similar to ArcaBook.
10 Through OpenView, Nasdaq provides
information relating to the displayed quotes and
orders of Nasdaq participants in CTA Plan
Securities. OpenView displays quotes and orders at
multiple prices and is similar to ArcaBook.
11 Through NYSE OpenBook, NYSE provides
information relating to limit orders.
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monthly fees of $5 per device for the
receipt of ArcaBook data relating to CTA
Plan and ETF Securities and $5 per
device for the receipt of ArcaBook data
relating to UTP Plan Securities (i.e., a
combined fee of $10 for both CTA Plan
and ETF Securities and UTP Plan
Securities).
The Exchange will continue to limit
for any one month the maximum
amount of device fees payable by any
broker-dealers in respect of
nonprofessional subscribers that
maintain brokerage accounts with the
broker-dealer. Professional subscribers
may be included in the calculation of
the monthly maximum amount, so long
as:
(i) Nonprofessional Subscribers
comprise no less than 90 percent of the
pool of subscribers that are included in
the calculation;
(ii) Each professional subscriber that
is included in the calculation is not
affiliated with the broker-dealer or any
of its affiliates (either as an officer,
partner or employee or otherwise); and
(iii) Each such professional subscriber
maintains a brokerage account directly
with the broker-dealer (that is, with the
broker-dealer rather than with a
correspondent firm of the broker dealer).
When the Exchange first established
the maximum amount in 2006, it set the
maximum amount for any calendar
month at $20,000. It provided that, for
the months falling in a subsequent
calendar year, the maximum monthly
payment shall increase (but not
decrease) by the percentage increase (if
any) in the annual composite share
volume 12 for the calendar year
preceding that subsequent calendar
year, subject to a maximum annual
increase of five percent.13 For example,
if the annual composite share volume
for a calendar year increases by three
percent over the annual composite share
volume for the prior calendar year, then
the monthly ‘‘Maximum Amount’’ for
months falling in the next subsequent
calendar year would increase by three
percent. Given that the ArcaBook fees
did not become effective until 2009 and
composite share volume did not rise in
2009, the Maximum Amount for 2010
remains at $20,000. The Exchange will
continue to apply the annual adjustment
described above.
The Maximum Amount compares
favorably with monthly maximums
12 ‘‘Composite share volume’’ for a calendar year
refers to the aggregate number of shares in all
securities that trade over NYSE Arca facilities for
that calendar year.
13 This is the same annual increase calculation
that the Commission approved for the CTA Monthly
Maximum (discussed below). See File No. SR–CTA/
CQ–99–01, Release No. 34–41977, October 5, 1999.
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70313
payable to Nasdaq and to the CTA Plan
Participants. Nasdaq set the maximum
at $25,000 per month for
nonprofessional subscribers’ receipt of
TotalView and OpenView. The CTA
Plan Participants currently set the
maximum at $660,000 per month for
internal distribution within a brokerdealer’s organization and for the brokerdealer’s distribution to nonprofessional
subscribers that maintain brokerage
accounts (the ‘‘CTA Monthly
Maximum’’).
D. Free Trial Period
As an incentive to prospective
subscribers, the Exchange will continue
to offer NYSE Arca Data free of charge
for the duration of the billable month in
which the subscriber first gains access
to the data. For example, if a subscriber
(whether professional or
nonprofessional) is billed on a calendarmonth basis and first gains access to
NYSE Arca Data on October 10, the
device fees set forth in this proposed
rule change will not apply during that
month of October. The Exchange has
maintained this incentive since the
Direct Order was issued.
ii. Justification of Fees
The market data fees that are the
subject of this filing, in conjunction
with fees for other services, provide for
an equitable allocation of NYSE Arca’s
overall costs among users of its services.
The market data fees are fair and
reasonable because they compare
favorably to fees that other markets
charge for similar products and because
competition provides an effective
constraint on the market data fees that
the Exchange has the ability and
incentive to charge.
A. Other Markets’ Fees
The combined monthly professional
subscriber device fee of $30 (i.e., for
receipt of NYSE Arca data relating to
CTA Plan and ETF Securities and to
UTP Plan Securities) compares
favorably with the $76 that Nasdaq
charges professional subscribers for its
combined TotalView and OpenView
products and the $60 that NYSE charges
professional subscribers for NYSE
OpenBook.
Nonprofessional subscriber monthly
fees of $5 per device for the receipt of
ArcaBook data relating to CTA Plan and
ETF Securities and $5 per device for the
receipt of ArcaBook data relating to UTP
Plan Securities (a combined $10)
compare favorably with the fees NYSE
and Nasdaq charge for limit order data
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services; 14 NYSE Arca proposes to
continue to assess these fees. For
nonprofessional subscribers, Nasdaq
charges a device fee of $14 per month
for its TotalView product and $1 per
month for its OpenView product. NYSE
charges nonprofessional subscribers a
monthly device fee of $15, with a
monthly maximum of $25,000.15 NYSE
Arca subjects its monthly maximum for
nonprofessional subscribers to the same
annual escalator as NYSE.
For direct access, NYSE Arca will
continue to charge $750 per month for
a set of up to four logons For indirect
access, NYSE Arca will continue to
charge $750 per month for any number
of logons. In contrast, NYSE charges
$5,000 per month for direct or indirect
access to OpenBook and Nasdaq charges
$2,500 per month for access to
TotalView and another $2,500 per
month for access to the OpenView
datafeed.
B. Dodd-Frank Act
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Some industry participants have
expressed the view that the Dodd-Frank
Act materially alters the scope of the
Commission’s review of fee filings for
proprietary market data products.16 In
the Dodd-Frank Act, Congress allowed
the Commission to rely upon the forces
of competition to ensure that fees for
market data are fair and reasonable. The
Dodd-Frank Act creates a presumption
that exchange fees, including market
data fees imposed upon non-members,
are to take effect immediately. It
provides that the Commission should
only take action to temporarily suspend
a fee change (which suspension would
then be followed by a proceeding to
determine whether the fee change
should be approved or disapproved) in
certain specified situations.17 There is
no basis to suspend the immediate
effectiveness of this filing.
14 The Exchange does not propose to impose
device fees for the display of limit order, quotation
and last sale price information relating to bonds
that are traded through the Exchange’s facilities.
15 Securities Exchange Act Release No. 34–59544
(March 9, 2009), 74 FR 11162 (March 16, 2006).
16 See Securities Exchange Act Release No. 34–
62887 (September 10, 2010); 75 FR 57092
(September 17, 2010); Securities Exchange Act
Release No. 34–62907 (September 14, 2010); 75 FR
57314 (September 20, 2010); and Securities
Exchange Act Release No. 34–62908 (September 14,
2010); 75 FR 57321 (September 20, 2010).
17 The NetCoalition Decision does not address the
statutory amendments encompassed by the DoddFrank Act in any way. No questions relating to the
operation or effect of those amendments were
before the D.C. Circuit in connection with the
petitions for review of the Direct Order. Nor did the
D.C. Circuit have any occasion to discuss those
amendments in connection with the NetCoalition
Decision.
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C. Competition
ArcaBook fees are fair and reasonable
because competition for order flow
provides an effective constraint on the
level of fees that the Exchange has the
ability and incentive to charge for its
market data products.
1. The Direct Order
In approving the fees in the Direct
Order, the Commission adopted a
‘‘market-based approach’’ to assess
whether non-core fees, such as the
ArcaBook fees, satisfy the statutory
requirements of fairness and
reasonableness. Under this two-part
approach, the Commission first
determines ‘‘whether the exchange was
subject to significant competitive forces
in setting the terms of its proposal for
non-core data, including the level of any
fees.’’ 18 If so, the Commission approves
the proposal ‘‘unless it determines that
there is a substantial countervailing
basis to find that the terms’’ violate the
Exchange Act or Commission rules.19
In the Direct Order, the Commission
approved the ArcaBook fees after
determining that the market-based
approach provided alternative
indicators of price fairness and
reasonableness that made Commission
consideration of costs unnecessary. It
cited the availability to market
participants of alternatives to
purchasing ArcaBook data. The Direct
Order also cited NYSE Arca’s
compelling need to attract order flow
from market participants and the
negative effect of higher market data
fees on order flow. The Commission
found no countervailing basis to find
that the terms of the Exchange’s
proposal violated the Exchange Act or
the Commission’s rules.20
2. The NetCoalition Decision
The D.C. Circuit held that the
Commission’s market-based approach
does not contravene the Exchange Act,
rejecting the Petitioners’ claims that
Congress intended for the Commission
to apply a cost-based approach in
determining whether market data fees
are fair and reasonable.21 However, the
Court found that the record did not
provide adequate support for the
Commission’s determinations that (i)
the availability of alternatives to
ArcaBook data and (ii) the adverse effect
of higher ArcaBook fees on order flow
and trading revenues provide effective
constraints on the market data fees that
18 Direct
20 See infra section 3(a)(ii)(C)(4)(c); Direct Order
at 74,782–74,784.
21 NetCoalition Decision at 14–15.
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3. The Competitive Market for Market
Data Products
Several features of the market data
business directly indicate that it is
subject to competition. Investors can
find suitable substitutes for most
proprietary market data products. A
market stands a high risk that investors
may substitute another source of market
information for its own because
securities and investment
methodologies are fungible.
A high correlation exists among the
fee levels that NYSE, NYSE Arca,
Nasdaq, and NASDAQ OMX BX charge
and among the characteristics of their
respective proprietary data products.
That itself is consistent with the
presence of competition in general, and
of competition among those participants
in particular. Similarly, the history and
continued schedule of product
innovation are consistent with the
presence of competition. Examples
include the advent of multicast feeds,
format improvements, new execution
messages, improvements in message
efficiency, enterprise licensing, unified
pricing for multiple categories of data,
free trials, nonprofessional subscriber
discounts, and new alternative
methodologies for counting usage.
These changes and innovations, and the
fact that other markets adopted similar
changes, provide strong evidence of
competition in the market for depth-ofbook data products among exchanges.
4. Availability of Alternatives to
ArcaBook
One reason that ArcaBook fees are fair
and reasonable is that market
participants have alternatives to
purchasing ArcaBook data. For example,
market participants can use depth-ofbook data from BATS, NYSE, and/or
Nasdaq to gauge liquidity and place
orders at NYSE Arca and/or at other
markets. Indeed, NYSE Arca’s data
indicates that ten of the top 30 users of
intermarket sweep orders (‘‘ISOs’’) 23 on
NYSE Arca do not subscribe to
ArcaBook. They believe they have
adequate sources of data to submit ISOs
without purchasing ArcaBook data.
To illustrate how the availability of
alternatives constrains fees for depth-ofbook data, suppose there were a
hypothetical increase in the fee for a
22 Id.
at 25–27.
intermarket sweep order is a limit order
designated for automatic execution in a specific
market center even when another market center is
publishing a better quotation; they are typically
used by institutional algorithmic investors, not
retail investors.
23 An
Order at 74,781.
19 Id.
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the Exchange has the ability and
incentive to charge.22
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market’s depth-of-book data from $10 to
$15, where $10 is the fair and
reasonable level. Suppose that at $10
the depth-of-book data would have
1,000 subscribers, and thus total
revenue of $10,000. Suppose that an
increase in the fee to $15 would cause
400 users to cancel their subscriptions
in favor of available alternatives (which
might include not purchasing depth-ofbook data at all), leaving 600 subscribers
and total revenue of $9,000. Assuming
there are no variable costs that depend
on the number of subscribers, the
hypothetical fee increase would reduce
net revenue by $1,000, and hence the
Exchange would not have an incentive
to raise the price from $10 to $15.
NYSE Arca’s experience also
demonstrates that its proprietary market
data customers are sensitive to the price
charged for access to ArcaBook, and that
the elasticity of demand for access to
ArcaBook would deter the Exchange
from requesting a fee unconstrained by
competitive forces. The Commission
issued the Direct Order in December
2008, and NYSE Arca started charging
for ArcaBook soon after. As Table 8 24
shows, there was an immediate and
significant reduction in the number of
accounts with at least one subscription
for ArcaBook after the Exchange started
charging for ArcaBook.25 One can infer
that any unreasonable increase in the
fee would cause a loss in subscribers,
and therefore a loss of the fee revenue
that NYSE Arca would earn from these
subscribers.
Another way to examine this issue is
to examine the nature of the market for
depth-of-book data. The D.C. Circuit
noted that depth-of-book data might be
of more use for certain types of market
participants than others, and NYSE Arca
agrees. One important category of users
of depth-of-book data are those who use
ISOs. The primary type of ISO on NYSE
Arca is the ‘‘PNP ISO’’ order type. In July
2010, 30 firms generated approximately
99% of the PNP ISO orders on NYSE
Arca (by both trade and order
volume).26 There are several important
pieces of information that go with that
statistic: First, ten of the firms
(approximately 33.3% of the firms,
representing approximately 7.4% of the
PNP ISO orders) did not subscribe to
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24 Copies
of all charts and tables referenced
herein are included in Exhibit 3 B.
25 It should also be noted that before NYSE Arca
began charging for ArcaBook, many users were not
required to report their ArcaBook usage to the
Exchange. Table 8’s pre-2009 figures thus likely
understate both the number of users before the
Exchange began to charge and the magnitude of the
decline in users after NYSE Arca began to charge.
26 Together, these 30 firms accounted for
approximately 56% of NYSE Arca’s Tape A and
Tape B volume for June 2010.
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ArcaBook in June 2010, indicating that
they believed they had viable alternative
sources of the data necessary to submit
large ISOs on NYSE Arca).
Second, the top 20 firms that used
ISOs on NYSE Arca and did subscribe
to ArcaBook accounted for 54.72% of
NYSE Arca’s Tape A and Tape B
volume for June 2010.27
This confirms that users of depth-ofbook data account for significant trading
volume, even though they only amount
to a small percentage of all traders.28
In assessing the competitive
landscape for depth-of-book data, one
must determine whether the availability
of alternative depth-of-book products
would make this subset of market
participants sensitive to one market’s
unreasonable depth-of-book product
pricing. We believe that it is self-evident
that it does. All of the investors within
this subset make rapid decisions
regarding what market data to purchase
and where to direct their orders. They
base those decisions on all their costs to
trade (including the costs of market data
they choose to purchase). They invest
significant amounts of capital based on
those decisions.
In contrast, the primary objectors to
the 2006 Rule Change were data vendors
(as opposed to market participants)
whose business interests lie firmly
rooted in reselling the exchanges’
market data at significant mark-ups (or
in attracting ‘‘eyeballs’’ to their sites to
generate advertising revenue). For acting
as middlemen in distributing the
exchanges’ market data to investors,
traditional market data vendors, such as
several that are SIFMA members,
receive from investors a large multiple
of the amounts that those vendors pay
the exchanges for the right to distribute
the data. No statutory standard
constrains the amounts that those
vendors may charge investors.
Obviously, protesting the exchanges’
fees is in their business interests
because, if successful, it would increase
their profit margins.
5. Competition for Orders and Trades
In addition, ArcaBook fees are fair
and reasonable because competition for
order flow and trade executions
provides an effective constraint on the
27 These
statistics likely understate the
comparative contributions of sophisticated users of
depth-of-book data. Because of the way market
participants submit, execute, and report trades, the
data the Exchange used to derive these statistics
does not include all trades that are attributable to
these firms. (For example, ‘‘Firm A’’ may purchases
ArcaBook data under the name ‘‘Firm A’’ but submit
trades under many different names. This data
would not capture trades by entities other than
‘‘Firm A’’.)
28 See NetCoalition Decision at 26 n.14.
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level of fees that the Exchange has the
ability and incentive to charge for its
market data products. NYSE Arca
competes for orders, which represent
liquidity, by offering liquidity rebates
and by advertising those orders through
dissemination of depth-of-book data.
NYSE Arca competes for trades by
offering liquidity, competitive trading
fees, and high quality, efficient trading
services.
a. Hypothetical
The hypothetical discussed above can
be adapted to demonstrate how (i) the
availability of alternatives to an
exchange’s depth-of-book data,
combined with (ii) the adverse effect of
a higher fee for depth-of-book data on
net revenue from execution of trades,
together constrain the fee for depth-ofbook data to a fair and reasonable level.
As before, suppose there were a
hypothetical increase in the fee for
depth-of-book data from $10 to $15,
where $10 is the fair and reasonable
level. Suppose that at $10, the depth-ofbook data product would have 1,000
subscribers, and thus total revenue of
$10,000. Suppose that an increase in the
fee to $15 would cause 200 users (rather
than 400, as in the preceding
hypothetical) to cancel their
subscriptions, leaving 800 subscribers
and total revenue of $12,000. Assuming
no variable costs that depend on
number of subscribers, the hypothetical
fee increase would increase net revenue
by $2,000, and hence the exchange
would have an incentive to raise the
price from $10 to $15. However,
suppose that the increase in the price of
depth-of-book data caused a reduction
in order flow and net trading revenue
(above variable costs) from $25,000 to
$21,000. In that case, the sum of net
revenues from the depth-of-book data
and execution of trades would decline
from $35,000 to $33,000 as a result of
the increase in the fee for depth of book
data, and the exchange would not have
an incentive to raise the fee. This
hypothetical is consistent with the
record evidence regarding the linkage
between market data and order flow.
b. The Record Regarding Order Flow
Competition
Considerable evidence exists to
support the conclusion that competition
for order flow and the availability of
suitable alternatives constrain fees for
non-core market data to levels that are
fair and reasonable, both within the
existing record and as supplemented
herein.
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i. Hendershott & Jones
Prior studies provide evidence that
order flow on a market depends directly
and substantially on the availability of
depth-of-book data for that market. Of
particular importance is an empirical
study by Terrence Hendershott &
Charles M. Jones, Island Goes Dark:
Transparence, Fragmentation, and
Regulation (‘‘Hendershott & Jones’’).29
Hendershott & Jones is an independent,
exhaustive, refereed, published, and
publicly available study, based on
substantial empirical data and economic
and statistical analysis, of the effects of
one market’s decision to stop displaying
depth-of-book data entirely for certain
products (because it did not wish to
comply with the then-current version of
Regulation ATS). The Commission
previously relied on this study in
concluding that order flow competition
constrains market data fees 30 (although
the NetCoalition Decision did not refer
to it). Hendershott and Jones are wellrespected academics.
Hendershott and Jones studied the
impact of Island ECN ceasing to display
its limit order book in the three most
active ETFs for which it was the
dominant venue; this occurred in late
2002. Hendershott and Jones found that
Island’s share of trading activity in each
of these three ETFs fell when Island
ceased displaying its limit order book
for those ETFs. The following are among
the elements of this empirical study that
support the Commission’s conclusion in
the Direct Order that competition for
order flow provides an effective
constraint on the market data fees that
the Exchange has the ability and
incentive to charge:
• Hendershott & Jones examined ‘‘all
trades and quotes’’ for the three ETFs.
Their analysis of these data demonstrate
the direct and substantial relationship
between order flow and the availability
of market data. Island’s decision to
cease displaying depth-of-book and
other market data caused a 40% to 55%
decline in trading in each of these ETFs
on Island, and a comparable increase in
trading in these ETFs at other venues,
and those effects were immediate and
statistically significant at a high level.31
Hendershott & Jones make clear that
they found ‘‘order flow migration’’ to
other venues after Island ceased
displaying depth-of-book and other
market data.32 Indeed, they concluded
29 18 Review of Financial Studies 743 (2005). A
copy of Hendershott & Jones is attached hereto as
Exhibit 3 A.
30 Direct Order at 74,784 n. 218.
31 Id. at 755–58.
32 Id. at 764. See also id. at 765 (‘‘Given that
Island’s going dark is a change in transparency that
leads to order flow migration * * *.’’).
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that the date Island went dark
represented a ‘‘shift in regime’’ that not
only caused order flow to migrate
‘‘substantially’’ from Island to other
markets, but also from ETFs to E-mini
futures (a different product entirely).33
Hendershott & Jones also specifically
addressed the point that even nonprofessional traders are likely to direct
their order flow to venues in which
more information about the likely terms
of a trade is available.34
• Hendershott & Jones also analyzed
what happened to order flow when
Island eventually re-displayed depth-ofbook and other market data. When
Island did so, it regained some (but not
all) of the order flow it had lost.35
Hendershott & Jones thus provides
detailed and persuasive evidence that
availability of depth-of-book and other
data relating to one trading venue has a
substantial effect on the level of order
flow at that venue.36
Hendershott & Jones supports an
inference that an increase in the price of
depth-of-book data for a market will
cause a reduction in order flow at that
market. Therefore, it is clear that, if a
market were to consider charging a
higher price for its depth-of-book data,
it would need to weigh the increased
revenues it would receive from depthof-book customers that continue to
purchase the product against the
reduced revenues from (a) subscription
cancellations, and (b) fewer trade
executions. Thus, the effect of
availability of depth-of-book data on
order flow constrains the ability and
incentive of a market to charge a higher
price for its depth-of-book data.
ii. Pricing of Depth-of-Book Data by
Exchanges Other Than NYSE and
Nasdaq
Observations of past and current
behavior of markets support the
conclusion that because of order flow
competition markets do not have the
ability or incentive to set supracompetitive prices for non-core market
data. BATS (a recent entrant that has
experienced significant market share
growth) has publicly noted that part of
its strategy to gain order flow is to
provide its depth-of-book data for free,
because BATS believes that the widest
possible dissemination of these data is
essential to attract order flow at the
current stage of BATS’s development.
NYSE Arca notes that it used the same
33 Id.
at 769.
at 779.
35 Id. at 782–84.
36 In addition, Hendershott & Jones noted that the
introduction of NYSE’s OpenBook real-time limit
order book data feed was associated with increased
order flow to NYSE. Id. at 747.
34 Id.
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strategy initially to attract order flow. If
the price charged for depth-of-book data
did not have a significant effect on order
flow and revenue from the execution of
trades, it would not be rational for
BATS to provide its depth-of-book data
free of charge, and it would not have
been rational for NYSE Arca to have
done so initially.
iii. Effects of Competition on Shares of
Trading
In the Direct Order, the Commission
concluded that there is fierce
competition for order flow. More recent
data show that this conclusion was
correct and that competition has
intensified.
Table 1 shows the monthly trading
volume of U.S. equities on NYSE Arca
from 2001 through July 2010. After
initially climbing, volume on NYSE
Arca has been volatile, and, indeed,
since October 2008 has fallen
significantly. Table 2 shows NYSE
Arca’s percentage share of U.S. equities
trading. Together, Tables 1 and 2 show
that market participants are not wedded
to NYSE Arca’s platform and that NYSE
Arca must continually compete to sell
its trading services.37
The volatility and trends in the shares
of total trading volume on each of the
various markets demonstrate that
competition among these markets in the
sale of trading services is intense. Tables
3, 4, 5, and 6 provide graphical
decompositions of shares from 2001
through July 2010 for NYSE Arca,
NYSE, Nasdaq, the trade reporting
facilities (‘‘TRFs’’), BATS, and other
markets.38 Table 3 shows shares for all
U.S. equities trading. It demonstrates
that NYSE, NYSE Arca, and Nasdaq’s
shares of trading have fallen, while the
TRFs and BATS have taken a larger
share of trading. This shows not only
that the market for trading equities is
competitive but also that entry has been
easy.39 Table 4 shows similar results for
37 This volatility evidences the speed and
frequency with which market participants change
their order routing determinations.
38 The TRF data includes non-exchange trades
through NYSE, Nasdaq, BSE, NSX, and FINRA.
39 Ease of entry into this market is further
evidenced by the recent entry of Direct Edge, which
began operating two exchanges in July 2010. For the
month of July 2010, the Direct Edge exchanges,
EDGA and EDGX, accounted for 1.69% and 2.57%,
respectively, of all tape-reported trade volume. For
the month of August, those numbers increased to
3.79% and 4.75%. This rapid increase in trading
volume evidences both the ease of entry into this
market and the speed with which market
participants change the venues to which they route
orders. Direct Edge’s rapid market share growth is
not unique, NYSE Arca experienced a similarly
rapid increase in market share when it commenced
operations in 2004, and, as shown in Tables 4, 5,
and 6, BATS’s trading volume grew quickly, further
evidencing ease of entry.
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Tape A, and in particular shows that the
TRFs have captured a significant share
of trading from other markets. Table 5
shows shares for Tape B. Interestingly,
Table 5 shows NYSE Arca coming into
the market and quickly capturing a
share of other exchanges’ trading
activity. It goes on to show the TRFs
then coming in and doing the same
(including capturing a share of NYSE
Arca’s trading activity), eventually
achieving a share of nearly 30%. Table
6 shows a similar result for Tape C.
Table 7 shows data on the same shares
for the period January 2010–July 2010.
Moreover, this data provides
additional support for the platform
competition concept discussed below
and further demonstrates that
individual market depth-of-book
products are substitutable to the extent
market participants might not wish to
purchase all such products. For
example, large market participants place
orders on many markets simultaneously,
so they may not need all markets’ depthof-book products or may choose to
purchase some but not others based on
price and/or other features. Table 7
shows that Nasdaq had approximately
the same share in Tape A and B
securities that NYSE Arca did during
the January–July 2010 period, meaning
that a market participant placing orders
in both markets could choose one
depth-of-book product rather than the
other based on price and/or other
features.
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iv. Effects of Competition on Trading
Revenues
Since July 2007 NYSE Arca’s per
share net revenue capture has fallen and
market share has declined, although its
trading volume has increased somewhat
due to growth in industry volumes. This
is the result of fierce competition for
order flow and is not consistent with
NYSE Arca being able to set prices for
its proprietary market data (such as
ArcaBook) at its whim; it is also further
support for the platform competition
discussion below. As the Commission is
aware, transaction fees have generally
fallen across markets. The competition
between those markets is passed
through to traders in the form of lower
net prices for trading services.
D. Pricing for Joint Products
Other market participants have noted
that the liquidity provided by the order
book, trade execution, core market data,
and non-core market data are joint
products of a joint platform and have
common costs.40 The Exchange agrees
40 See Securities Exchange Act Release No. 34–
62887 (September 10, 2010); 75 FR 57092
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with and adopts those discussions and
the arguments therein. The Exchange
also notes that the economics literature
confirms that there is no way to allocate
common costs between joint products
that would shed any light on
competitive or efficient pricing.41
That large market participants,
including internalizers handling retail
order flow, use proprietary exchange
feeds (rather than CTS and CQS feeds)
to make trade and routing decisions
further demonstrates the joint nature of
market data and order flow.42 So does
the fact that some exchanges use certain
market data quote revenue as a form of
direct market maker liquidity provider
rebate to drive more liquidity to their
books in less active stocks. This
highlights that market data and trade
executions are joint products that are
linked on a platform basis. Charts 3–7
provide additional support for the
existence of this type of platform
competition.
E. Pricing Non-Core Data Based on Cost
Is Impractical
The Exchange believes that, even if it
were possible as a matter of economic
theory, cost-based pricing for non-core
market data would be so complicated
that it could not be done practically.43
(September 17, 2010); Securities Exchange Act
Release No. 34–62907 (September 14, 2010); 75 FR
57314 (September 20, 2010); and Securities
Exchange Act Release No. 34–62908 (September 14,
2010); 75 FR 57321 (September 20, 2010); see also
attachment to August 1, 2008 Comment Letter of
Jeffrey S. Davis, Vice President and Deputy General
Counsel, NASDAQ OMX Group, Inc. (Statement of
Janusz Ordover and Gustavo Bamberger) (a copy of
which is attached hereto as Exhibit 3 C.).
41 See generally Mark Hirschey, Fundamentals of
Managerial Economics at 600 (2009) (‘‘It is
important to note, however, that although it is
possible to determine the separate marginal costs of
goods produced in variable proportions, it is
impossible to determine their individual average
costs. This is because common costs are expenses
necessary for manufacture of a joint product.
Common costs of production—raw material and
equipment costs, management expenses, and other
overhead—cannot be allocated to each individual
by-product on any economically sound basis. * * *
Any allocation of common costs is wrong and
arbitrary.’’). This is not new economic theory. See,
e.g., F.W. Taussig, ‘‘A Contribution to the Theory of
Railway Rates,’’ Quarterly Journal of Economics
V(4) 438, 465 (July 1891) (‘‘Yet, surely, the division
is purely arbitrary. These items of cost, in fact, are
jointly incurred for both sorts of traffic; and I cannot
share the hope entertained by the statistician of the
Commission, Professor Henry C. Adams, that we
shall ever reach a mode of apportionment that will
lead to trustworthy results.’’).
42 See Report of the Staffs of the CFTC and SEC
to the Joint Advisory Committee on Emerging
Regulatory Issues—Findings Regarding the Market
Events of May 6, 2010 at 76–79 (Sept. 30, 2010).
That report again recognized that most retail order
flow is handled by internalizers. See id. at 77.
43 In addition, the evidence of competitive
constraints on market data pricing (both directly
and in the context of joint platforms) is so strong
that it makes devoting the resources that would be
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The record relating to the 2006 Rule
Change includes several documents
attesting to the difficulty of cost-based
pricing in this area. In addition to those,
we respectfully direct the Commission’s
attention to two reports issued by PHB
Hagler Bailly, Inc. (‘‘PHB’’).44 The New
York Stock Exchange retained PHB to
assist it in connection with its response
to the Commission’s 2000 Concept
Release on the Regulation of Market
Information Fees and Revenues (the
‘‘2000 Concept Release’’). The PHB
reports conclude that cost-based pricing
would inevitably stifle competition and
innovation and entangle both the
industry and the Commission in timeconsuming, expensive, and ultimately
fruitless proceedings and data analysis.
Their conclusions include the
following:
• Enormous Administrative Burdens.
The administrative burdens that costbased pricing would place on all parties,
in particular the Commission, would be
‘‘enormous.’’ The Commission would
have to cost-regulate a large number of
participants. Extraordinary amounts of
information, accounts, and reports
would have to be standardized and
analyzed to make determinations that
would stand the scrutiny and challenges
to which rate-making decisions are often
subject. This is the source of the
Exchange’s belief that cost-based rate
regulation is infeasible.45
• Joint Products. It is impossible to
regulate market data prices in isolation
from prices charged by markets for other
services that are joint products. Market
data and transaction execution are ‘‘joint
products,’’ linked in a way that pricing
of one inevitably affects pricing of the
other. If rate regulation were to reduce
the revenues that could be realized from
necessary to try to incorporate a cost-based pricing
model unnecessary. Because of the level of
competition that already exists and the compelling
need to devote regulatory resources to other issues,
the Exchange does not believe there is any need for
the Commission and markets to become embroiled
in what would almost certainly become prolonged
rate-making proceedings. Indeed, the amendment of
Section 19 effected by the Dodd-Frank Act is further
evidence that Congress intended market data fees to
be governed by the development of competition in
the markets rather than cost-based ratemaking.
44 See ‘‘Issues Surrounding Cost-Based Regulation
of Market Data Prices,’’ which provides a view of
cost-based pricing from a historical regulatory
perspective, and ‘‘The Economic Perspective on
Regulation of Market Data,’’ which provides an
economic assessment of cost-based pricing. The two
reports constitute Appendix C to NYSE’s comments
to the 2000 Concept Release (‘‘NYSE Comments’’)
and can be found on the Commission’s Web site at
https://www.sec.gov/rules/concept/s72899/
buck1.htm. They are attached hereto as Exhibits 2
D. and E. for the Commission’s convenience.
45 Footnote 11 to the NYSE Comments describes
the significant nature of the burdens associated
with cost-based pricing and the Exchange
incorporates that discussion here by reference.
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market data fees, then other fees—
transaction fees or, in the case of the
primary markets, listing fees—would
have to be increased to maintain the
total revenue infrastructure and the
same level of services. However,
because the three types of fees fall
differently on broker-dealers following
different business models and
differently on broker-dealers, investors,
and listed companies, the result would
be a reallocation of market costs based
not on competition and constituent
governance but rather as a side-effect of
governmental intervention.
• Litigation. Under cost-based rate
regulation, litigation is inevitable, if
only to delay rate decisions deemed
unfavorable by one party or another.
• Waste and Negative Incentives.
Consistently across industries where it
has been used, cost-based regulation of
pricing has been found to distort
incentives, including incentives to
minimize costs and to innovate, and to
lead to considerable waste. Making
arbitrary cost allocations provides
disincentives for markets to invest in
more resilient systems and to make their
data services more widely available. It
encourages padding and crosssubsidization of costs, yet provides no
incentive to reduce costs through
operating or administrative efficiencies.
It would create incentives to use
accounting practices to shift the
recovery of costs to market data fees and
away from transaction and listing fees.
• Fee Increases. In contrast to the
dramatic decline in market data costs
over the past quarter century, under
cost-based regulation of prices, it is
quite possible the industry would
experience over time frequent rate
increases based on escalating expense
levels. Without the demonstration of a
strong need to move to this form of
regulation, such a result cannot be
justified.
• Rate of Return. Rate regulation is
never aimed solely at minimizing rates
to consumers, since very low rates may
affect the attractiveness of the business
to competitors and potential
competitors, or the level of service
provided. The regulator must determine
what rate of return is ‘‘fair’’ and provide
a suitable incentive for service providers
while protecting consumers as well. No
one has demonstrated why the
Commission needs to be the arbiter of
this issue to enforce its responsibilities
under Section 19 of the Exchange Act.
• Market Forces. Rate regulation
implies a belief that an industry cannot
rely upon market forces. We believe that
constituent boards and customer control
have in fact provided the pricing
discipline that any government would
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expect and desire in the area of market
data services and fees. Indeed, the
discussion above demonstrates that the
competitive constraints that apply to
market data pricing are formidable.
• Trends. In contrast to cost-based
pricing, the Commission’s market-based
approach to approving market data fees
is currently the goal of many other
regulatory bodies in other industries.
Even in industries historically subject to
utility regulation, cost-based rate
making has been discredited and other
regulated industries are moving away
from cost-based rate-making. Proprietary
market data dissemination is far from an
ordinary utility function, and cost-based
regulation is particularly inappropriate
in the proprietary market data arena.
Such results would not be in the best
interests of market participants and
would be inconsistent with Congress’s
direction that the Commission use its
authority to foster the development of
the national market system.
F. Impact on Retail Investors
Pricing for non-core data products
generally does not impact retail
investors. As the Commission and the
Commodities Futures Trading
Commission recently noted, most retail
equities transactions are internalized by
a broker-dealer.46
That makes depth-of-book data of
little relevance to retail investors. And
retail broker-dealers are not required to
purchase depth-of-book data to fulfill
their duties of best execution.47
iii. Contracts
As before, the Exchange will require
or continue to require each recipient of
a datafeed containing NYSE Arca Data
to enter into the form of ‘‘vendor’’
agreement into which the CTA and CQ
Plans require recipients of the Network
A datafeeds to enter. That agreement
will authorize the datafeed recipient to
provide NYSE Arca Data services to its
customers or to distribute the data
internally.
In addition, the Exchange will require
or continue to require each professional
end-user that receives NYSE Arca Data
displays from a vendor or broker-dealer
to enter into the form of professional
subscriber agreement into which the
CTA and CQ Plans require end users of
Network A data to enter. It will also
require or continue to require vendors
and broker-dealers to subject
nonprofessional subscribers to the same
46 See Report of the Staffs of the CFTC and SEC
to the Joint Advisory Committee on Emerging
Regulatory Issues—Findings Regarding the Market
Events of May 6, 2010 at 77 (Sept. 30, 2010).
47 See NetCoalition Decision at 6 n.6; Direct Order
at 74,788 & nn. 259–266.
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
contract requirements as the CTA and
CQ Plan Participants require of Network
A nonprofessional subscribers.
The Network A Participants drafted
the vendor and Network A professional
subscriber agreements as one-size-fitsall forms to capture most categories of
market data dissemination. They are
sufficiently generic to accommodate or
continue to accommodate NYSE Arca
Data. The Participants in the CTA and
CQ Plans have submitted the vendor
form and the professional subscriber
form to the Commission on Form 19b–
4 on multiple occasions. (See Release
Nos. 34–22851 (January 31, 1986), 34–
28407 (September 10, 1990), and 34–
49185 (February 4, 2004).
2. Statutory Basis
For the foregoing reasons, NYSE Arca
believes that the proposed rule change
is consistent with the provisions of
Section 6 of the Act, in general, and
with Section 6(b)(4) 48 of the Act, in
particular, in that it provides for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using the
facilities of NYSE Arca. In this regard,
the market data fees that are the subject
of this filing, in conjunction with fees
for other services, provide for an
equitable allocation of NYSE Arca’s
overall costs among users of its services.
The market data fees are fair and
reasonable because they compare
favorably to fees that other markets
charge for similar products and because
competition provides an effective
constraint on the market data fees that
the Exchange has the ability and
incentive to charge.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
For the reasons described above, the
Exchange believes that the re-proposed
fees will not impose any burden on
competition that is not necessary or
appropriate in the furtherance of the
purposes of the Exchange Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments
regarding the proposed rule change or
re-authorization. Subsequent to the
NetCoaliton Decision, the Exchange has
not received any unsolicited written
comments from Exchange participants
or other interested parties.
48 15
E:\FR\FM\17NON1.SGM
U.S.C. 78f(b)(4).
17NON1
Federal Register / Vol. 75, No. 221 / Wednesday, November 17, 2010 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective upon filing pursuant to Section
19(b)(3)(A)(ii) of the Act 49 and
subparagraph (f)(2) of Rule 19b–4
thereunder 50 because it establishes a
due, fee, or other charge imposed by the
Exchange. At any time within 60 days
of the filing of the proposed rule change,
the Commission summarily may
suspend such rule change if it appears
to the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
mstockstill on DSKH9S0YB1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSEArca–2010–97 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2010–97. This
file number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission,51 all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
49 15
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
51 The text of the proposed rule change is
available on the Commission’s Web site at https://
www.sec.gov/rules/sro.shtml.
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, on official business
days between the hours of 10 a.m. and
3 p.m. Copies of the filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2010–97 and
should be submitted on or before
December 8, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–28893 Filed 11–16–10; 8:45 am]
BILLING CODE 8011–01–P
16:21 Nov 16, 2010
Jkt 223001
NYSE Arca Equities Rule 8.600:
WisdomTree Managed Futures Strategy
Fund (‘‘Fund’’). The shares of the Fund
are collectively referred to herein as the
‘‘Shares.’’ 3 The text of the proposed rule
change is available at the Exchange, the
Commission’s Public Reference Room,
and https://www.nyse.com.
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 those
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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–63292; File No. SR–
NYSEArca-2010–98]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change Relating to the Listing
and Trading of the WisdomTree
Managed Futures Strategy Fund
November 9, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that,
on November 1, 2010, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’ or
‘‘Corporation’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
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 proposes to list and
trade the shares of the following fund of
the WisdomTree Trust (‘‘Trust’’) under
50 17
VerDate Mar<15>2010
70319
52 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
The Exchange proposes to list and
trade the Shares of the Fund under
NYSE Arca Equities Rule 8.600,4 which
governs the listing and trading of
‘‘Managed Fund Shares’’ on the
Exchange.5
3 See Form 19b–4 Information of the proposed
rule change at 3.
4 NYSE Arca Equities Rule 8.600(c)(1) provides
that, among other criteria, a Managed Fund Share
is a security that represents an interest in an
investment company registered under the
Investment Company Act of 1940 (15 U.S.C. 80a)
(‘‘1940 Act’’) organized as an open-end investment
company or similar entity that invests in a portfolio
of securities selected by its investment adviser
consistent with its investment objectives and
policies. In contrast, an open-end investment
company that issues Investment Company Units,
listed and traded on the Exchange under NYSE
Arca Equities Rule 5.2(j)(3), seeks to provide
investment results that correspond generally to the
price and yield performance of a specific foreign or
domestic stock index, fixed income securities index
or combination thereof.
5 The Commission approved NYSE Arca Equities
Rule 8.600 and the listing and trading of certain
shares of the PowerShares Actively Managed Funds
Trust on the Exchange pursuant to Rule 8.600 in
Securities Exchange Act Release No. 57619 (April
4, 2008), 73 FR 19544 (April 10, 2008) (SR–
NYSEArca–2008–25). The Commission also
previously approved listing and trading on the
Exchange of Managed Fund Shares under Rule
8.600. See, e.g., Securities Exchange Act Release
Nos. 57801 (May 8, 2008), 73 FR 27878 (May 14,
2008) (SR–NYSEArca–2008–31) (order approving
Exchange listing and trading of twelve activelymanaged funds of the WisdomTree Trust); 60981
(November 10, 2009), 74 FR 59594 (November 18,
2009) (SR–NYSEArca–2009–79) (order approving
listing of five fixed income funds of the PIMCO ETF
Continued
E:\FR\FM\17NON1.SGM
17NON1
]]>Agencies
[Federal Register Volume 75, Number 221 (Wednesday, November 17, 2010)]
[Notices]
[Pages 70311-70319]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28893]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63291; File No. SR-NYSEArca-2010-97]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by NYSE Arca, Inc. Relating to
Fees for NYSE Arca Depth-of-Book Data
November 9, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the
[[Page 70312]]
``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 1, 2010, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE
Arca'') 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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, through its wholly owned subsidiary, NYSE Arca
Equities, Inc. (``NYSE Arca Equities''), is filing a proposed rule
change to authorize market data fees for the receipt and use of depth-
of-book market data that the Exchange makes available. The text of the
proposed rule change is available at the Exchange, the Commission's
Public Reference Room, and the Exchange's Web site at https://www.nyse.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filings with the Commission, the self-regulatory
organization 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
[i.] The Services and Fees
A. Description
Through NYSE Arca Equities, the Exchange's equities trading
facility, the Exchange makes ArcaBook \SM\, a compilation of all limit
orders resident in the NYSE Arca limit order book, available on a real-
time basis.\3\ In addition, the Exchange makes available real-time
information relating to transactions and limit orders in debt
securities that are traded through the Exchange's facilities.
---------------------------------------------------------------------------
\3\ The Exchange notes that it makes available to vendors the
best bids and offers that are included in ArcaBook data no earlier
than it makes those best bids and offers available to the processors
under the CQ Plan and the ``Reporting Plan for Nasdaq/National
Market System Securities Traded on an Exchange on an Unlisted or
Listed Basis'' (the ``UTP Plan'').
---------------------------------------------------------------------------
The Exchange makes ArcaBook and the bond trade and limit order
information (collectively, ``NYSE Arca Data'') available to market data
vendors, broker-dealers, private network providers and other entities
by means of data feeds. By making the data it includes available,
ArcaBook enhances market transparency, fosters competition among orders
and markets, and enables buyers and sellers to obtain better prices.
B. Procedural Background
The fees for which the Exchange is filing this proposed rule change
have a procedural history, including the following:
On May 23, 2006, NYSE Arca submitted the 2006 Rule Change
to establish fees for the receipt and use of ArcaBook data.
On October 12, 2006, the Commission issued an order, by
delegated authority, approving the 2006 Rule Change (the ``Delegated
Order'').\4\
---------------------------------------------------------------------------
\4\ Securities Exchange Act Release No. 54597 (October 12, 2006)
71 FR 62029 (October 20, 2006).
---------------------------------------------------------------------------
On November 15, 2006, NetCoalition submitted a petition
(the ``Petition'') requesting that the Commission review and set aside
the Delegated Order.\5\
---------------------------------------------------------------------------
\5\ Petition for Commission Review submitted by Petitioner,
dated November 14, 2006.
---------------------------------------------------------------------------
On December 27, 2006, the Commission issued an order
granting NetCoalition's request for the Commission to review the
Delegated Order.\6\
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 55011 (December 27,
2006).
---------------------------------------------------------------------------
On June 4, 2008, the Commission published notice of a
proposed order (the ``Draft Order'') approving the NYSE Arca proposed
fees to give the public an additional opportunity to comment.\7\
---------------------------------------------------------------------------
\7\ Securities Exchange Act Release No. 57917 (June 4, 2008), 73
FR 32751 (June 10, 2008).
---------------------------------------------------------------------------
On December 8, 2008, the Commission set aside the
Delegated Order and approved the 2006 Rule Change directly (the
``Direct Order'').\8\
---------------------------------------------------------------------------
\8\ Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770 (December 9 2008).
---------------------------------------------------------------------------
On or about January 1, 2009, the Exchange began charging
the fees set forth in the 2006 Rule Change.
On January 30, 2009, NetCoalition and SIFMA petitioned the
United States Court of Appeals for the DC Circuit (the ``DC Circuit'')
for review of the Direct Order.
On July 21, 2010, the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ``Dodd-Frank Act'') was signed into law.
On August 6, 2010, the DC Circuit issued a decision on the
petitions for review (the ``NetCoalition Decision'').
On September 17, 2010, the Exchange filed a petition for
panel rehearing asking the DC Circuit to remand rather than vacate the
Direct Order.
On September 24, 2010, the DC Circuit ordered
NetCoalition, SIFMA, and the Commission to respond to the Exchange's
petition for panel rehearing.
On October 12, 2010, NetCoalition, SIFMA, and the
Commission filed responses to the Exchange's petition for panel
rehearing.
On October 25, 2010, the DC Circuit denied the petition
for panel rehearing.
In this filing, the Exchange proposes to continue to assess the
same fees that have been in effect since the Direct Order.
C. Fees
This filing will enable the Exchange to continue to assess the
Market Data Fee Schedule set forth in Exhibit 5 hereto for the receipt
and use of NYSE Arca Data. As the Market Data Fee Schedule details,
this proposed rule change allows the Exchange to continue to assess
access fees and professional and nonprofessional subscriber device
fees. These are categories of fees that are consistent with the fees
that the New York Stock Exchange (``NYSE'') and the Nasdaq Stock Market
(``Nasdaq''), and the Participants in the CTA, CQ, UTP and OPRA Plans,
charge for the receipt and use of their market data. They are the same
fees that NYSE Arca has charged since it received approval of those
fees pursuant to the Direct Order.
1. Access Fees
The Exchange will continue to charge a monthly $750 fee for a data
recipient to gain direct access to the datafeeds through which the
Exchange makes NYSE Arca Data available. This fee entitles the datafeed
recipient to gain access to NYSE Arca Data for a set of up to four
``Logons.'' A ``Logon'' is activation of a means of direct access to
any of the NYSE Arca datafeeds. For instance, if a datafeed recipient
gains access to NYSE Arca Data one or more times during a month using
an Exchange-provided and approved logon that provides access to the
ArcaBook datafeed, that would constitute a ``Logon.'' It would
constitute a second ``Logon'' if, during that month, the datafeed
recipient uses a different
[[Page 70313]]
logon name that allows access to the ArcaBook datafeed.
The Exchange will continue to charge a monthly $750 fee for a data
recipient to gain indirect access to the datafeeds through which the
Exchange makes NYSE Arca Data available for any number of Logons.
``Indirect access'' refers to access to a NYSE Arca datafeed indirectly
through one or more intermediaries, rather than by means of a direct
connection or linkage with the Exchange's facilities.
2. Device Fees
The Exchange will continue to charge device fees for professional
and nonprofessional subscribers for the display of ArcaBook. In
differentiating between professional and nonprofessional subscribers,
the Exchange applies the same criteria for qualification as a
nonprofessional subscriber as the CTA and CQ Plan Participants use, as
more fully set forth in Exhibit 5.
a. For Professional Subscribers
For professional subscribers, the Exchange will continue to charge
(i) a monthly fee of $15 per device for the receipt of ArcaBook data
relating to Exchange-Traded Funds and those equity securities for which
reporting is governed by the CTA Plan (``CTA Plan and ETF Securities'')
and (ii) a monthly fee of $15 per device for the receipt of ArcaBook
data relating to those equity securities for which reporting is
governed by the UTP Plan (excluding Exchange-Traded Funds; ``UTP Plan
Securities'').
The combined monthly professional subscriber device fee of $30
(i.e., for receipt of NYSE ArcaBook data relating to CTA Plan and ETF
Securities and to UTP Plan Securities) compares favorably with fees
charged by other exchanges for similar products. For instance, for
professional subscribers, Nasdaq charges $76 for its combined TotalView
\9\ and OpenView \10\ products and NYSE charges $60 for NYSE
OpenBook.\11\
---------------------------------------------------------------------------
\9\ Through TotalView, Nasdaq provides information relating to
the displayed quotes and orders of Nasdaq participants in UTP Plan
Securities. TotalView displays quotes and orders at multiple prices
and is similar to ArcaBook.
\10\ Through OpenView, Nasdaq provides information relating to
the displayed quotes and orders of Nasdaq participants in CTA Plan
Securities. OpenView displays quotes and orders at multiple prices
and is similar to ArcaBook.
\11\ Through NYSE OpenBook, NYSE provides information relating
to limit orders.
---------------------------------------------------------------------------
b. For Nonprofessional Subscribers
For nonprofessional subscribers, the Exchange will continue to
charge monthly fees of $5 per device for the receipt of ArcaBook data
relating to CTA Plan and ETF Securities and $5 per device for the
receipt of ArcaBook data relating to UTP Plan Securities (i.e., a
combined fee of $10 for both CTA Plan and ETF Securities and UTP Plan
Securities).
The Exchange will continue to limit for any one month the maximum
amount of device fees payable by any broker-dealers in respect of
nonprofessional subscribers that maintain brokerage accounts with the
broker-dealer. Professional subscribers may be included in the
calculation of the monthly maximum amount, so long as:
(i) Nonprofessional Subscribers comprise no less than 90 percent of
the pool of subscribers that are included in the calculation;
(ii) Each professional subscriber that is included in the
calculation is not affiliated with the broker-dealer or any of its
affiliates (either as an officer, partner or employee or otherwise);
and
(iii) Each such professional subscriber maintains a brokerage
account directly with the broker-dealer (that is, with the broker-
dealer rather than with a correspondent firm of the broker dealer).
When the Exchange first established the maximum amount in 2006, it
set the maximum amount for any calendar month at $20,000. It provided
that, for the months falling in a subsequent calendar year, the maximum
monthly payment shall increase (but not decrease) by the percentage
increase (if any) in the annual composite share volume \12\ for the
calendar year preceding that subsequent calendar year, subject to a
maximum annual increase of five percent.\13\ For example, if the annual
composite share volume for a calendar year increases by three percent
over the annual composite share volume for the prior calendar year,
then the monthly ``Maximum Amount'' for months falling in the next
subsequent calendar year would increase by three percent. Given that
the ArcaBook fees did not become effective until 2009 and composite
share volume did not rise in 2009, the Maximum Amount for 2010 remains
at $20,000. The Exchange will continue to apply the annual adjustment
described above.
---------------------------------------------------------------------------
\12\ ``Composite share volume'' for a calendar year refers to
the aggregate number of shares in all securities that trade over
NYSE Arca facilities for that calendar year.
\13\ This is the same annual increase calculation that the
Commission approved for the CTA Monthly Maximum (discussed below).
See File No. SR-CTA/CQ-99-01, Release No. 34-41977, October 5, 1999.
---------------------------------------------------------------------------
The Maximum Amount compares favorably with monthly maximums payable
to Nasdaq and to the CTA Plan Participants. Nasdaq set the maximum at
$25,000 per month for nonprofessional subscribers' receipt of TotalView
and OpenView. The CTA Plan Participants currently set the maximum at
$660,000 per month for internal distribution within a broker-dealer's
organization and for the broker-dealer's distribution to
nonprofessional subscribers that maintain brokerage accounts (the ``CTA
Monthly Maximum'').
D. Free Trial Period
As an incentive to prospective subscribers, the Exchange will
continue to offer NYSE Arca Data free of charge for the duration of the
billable month in which the subscriber first gains access to the data.
For example, if a subscriber (whether professional or nonprofessional)
is billed on a calendar-month basis and first gains access to NYSE Arca
Data on October 10, the device fees set forth in this proposed rule
change will not apply during that month of October. The Exchange has
maintained this incentive since the Direct Order was issued.
ii. Justification of Fees
The market data fees that are the subject of this filing, in
conjunction with fees for other services, provide for an equitable
allocation of NYSE Arca's overall costs among users of its services.
The market data fees are fair and reasonable because they compare
favorably to fees that other markets charge for similar products and
because competition provides an effective constraint on the market data
fees that the Exchange has the ability and incentive to charge.
A. Other Markets' Fees
The combined monthly professional subscriber device fee of $30
(i.e., for receipt of NYSE Arca data relating to CTA Plan and ETF
Securities and to UTP Plan Securities) compares favorably with the $76
that Nasdaq charges professional subscribers for its combined TotalView
and OpenView products and the $60 that NYSE charges professional
subscribers for NYSE OpenBook.
Nonprofessional subscriber monthly fees of $5 per device for the
receipt of ArcaBook data relating to CTA Plan and ETF Securities and $5
per device for the receipt of ArcaBook data relating to UTP Plan
Securities (a combined $10) compare favorably with the fees NYSE and
Nasdaq charge for limit order data
[[Page 70314]]
services; \14\ NYSE Arca proposes to continue to assess these fees. For
nonprofessional subscribers, Nasdaq charges a device fee of $14 per
month for its TotalView product and $1 per month for its OpenView
product. NYSE charges nonprofessional subscribers a monthly device fee
of $15, with a monthly maximum of $25,000.\15\ NYSE Arca subjects its
monthly maximum for nonprofessional subscribers to the same annual
escalator as NYSE.
---------------------------------------------------------------------------
\14\ The Exchange does not propose to impose device fees for the
display of limit order, quotation and last sale price information
relating to bonds that are traded through the Exchange's facilities.
\15\ Securities Exchange Act Release No. 34-59544 (March 9,
2009), 74 FR 11162 (March 16, 2006).
---------------------------------------------------------------------------
For direct access, NYSE Arca will continue to charge $750 per month
for a set of up to four logons For indirect access, NYSE Arca will
continue to charge $750 per month for any number of logons. In
contrast, NYSE charges $5,000 per month for direct or indirect access
to OpenBook and Nasdaq charges $2,500 per month for access to TotalView
and another $2,500 per month for access to the OpenView datafeed.
B. Dodd-Frank Act
Some industry participants have expressed the view that the Dodd-
Frank Act materially alters the scope of the Commission's review of fee
filings for proprietary market data products.\16\ In the Dodd-Frank
Act, Congress allowed the Commission to rely upon the forces of
competition to ensure that fees for market data are fair and
reasonable. The Dodd-Frank Act creates a presumption that exchange
fees, including market data fees imposed upon non-members, are to take
effect immediately. It provides that the Commission should only take
action to temporarily suspend a fee change (which suspension would then
be followed by a proceeding to determine whether the fee change should
be approved or disapproved) in certain specified situations.\17\ There
is no basis to suspend the immediate effectiveness of this filing.
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 34-62887 (September
10, 2010); 75 FR 57092 (September 17, 2010); Securities Exchange Act
Release No. 34-62907 (September 14, 2010); 75 FR 57314 (September
20, 2010); and Securities Exchange Act Release No. 34-62908
(September 14, 2010); 75 FR 57321 (September 20, 2010).
\17\ The NetCoalition Decision does not address the statutory
amendments encompassed by the Dodd-Frank Act in any way. No
questions relating to the operation or effect of those amendments
were before the D.C. Circuit in connection with the petitions for
review of the Direct Order. Nor did the D.C. Circuit have any
occasion to discuss those amendments in connection with the
NetCoalition Decision.
---------------------------------------------------------------------------
C. Competition
ArcaBook fees are fair and reasonable because competition for order
flow provides an effective constraint on the level of fees that the
Exchange has the ability and incentive to charge for its market data
products.
1. The Direct Order
In approving the fees in the Direct Order, the Commission adopted a
``market-based approach'' to assess whether non-core fees, such as the
ArcaBook fees, satisfy the statutory requirements of fairness and
reasonableness. Under this two-part approach, the Commission first
determines ``whether the exchange was subject to significant
competitive forces in setting the terms of its proposal for non-core
data, including the level of any fees.'' \18\ If so, the Commission
approves the proposal ``unless it determines that there is a
substantial countervailing basis to find that the terms'' violate the
Exchange Act or Commission rules.\19\
---------------------------------------------------------------------------
\18\ Direct Order at 74,781.
\19\ Id.
---------------------------------------------------------------------------
In the Direct Order, the Commission approved the ArcaBook fees
after determining that the market-based approach provided alternative
indicators of price fairness and reasonableness that made Commission
consideration of costs unnecessary. It cited the availability to market
participants of alternatives to purchasing ArcaBook data. The Direct
Order also cited NYSE Arca's compelling need to attract order flow from
market participants and the negative effect of higher market data fees
on order flow. The Commission found no countervailing basis to find
that the terms of the Exchange's proposal violated the Exchange Act or
the Commission's rules.\20\
---------------------------------------------------------------------------
\20\ See infra section 3(a)(ii)(C)(4)(c); Direct Order at
74,782-74,784.
---------------------------------------------------------------------------
2. The NetCoalition Decision
The D.C. Circuit held that the Commission's market-based approach
does not contravene the Exchange Act, rejecting the Petitioners' claims
that Congress intended for the Commission to apply a cost-based
approach in determining whether market data fees are fair and
reasonable.\21\ However, the Court found that the record did not
provide adequate support for the Commission's determinations that (i)
the availability of alternatives to ArcaBook data and (ii) the adverse
effect of higher ArcaBook fees on order flow and trading revenues
provide effective constraints on the market data fees that the Exchange
has the ability and incentive to charge.\22\
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\21\ NetCoalition Decision at 14-15.
\22\ Id. at 25-27.
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3. The Competitive Market for Market Data Products
Several features of the market data business directly indicate that
it is subject to competition. Investors can find suitable substitutes
for most proprietary market data products. A market stands a high risk
that investors may substitute another source of market information for
its own because securities and investment methodologies are fungible.
A high correlation exists among the fee levels that NYSE, NYSE
Arca, Nasdaq, and NASDAQ OMX BX charge and among the characteristics of
their respective proprietary data products. That itself is consistent
with the presence of competition in general, and of competition among
those participants in particular. Similarly, the history and continued
schedule of product innovation are consistent with the presence of
competition. Examples include the advent of multicast feeds, format
improvements, new execution messages, improvements in message
efficiency, enterprise licensing, unified pricing for multiple
categories of data, free trials, nonprofessional subscriber discounts,
and new alternative methodologies for counting usage. These changes and
innovations, and the fact that other markets adopted similar changes,
provide strong evidence of competition in the market for depth-of-book
data products among exchanges.
4. Availability of Alternatives to ArcaBook
One reason that ArcaBook fees are fair and reasonable is that
market participants have alternatives to purchasing ArcaBook data. For
example, market participants can use depth-of-book data from BATS,
NYSE, and/or Nasdaq to gauge liquidity and place orders at NYSE Arca
and/or at other markets. Indeed, NYSE Arca's data indicates that ten of
the top 30 users of intermarket sweep orders (``ISOs'') \23\ on NYSE
Arca do not subscribe to ArcaBook. They believe they have adequate
sources of data to submit ISOs without purchasing ArcaBook data.
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\23\ An intermarket sweep order is a limit order designated for
automatic execution in a specific market center even when another
market center is publishing a better quotation; they are typically
used by institutional algorithmic investors, not retail investors.
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To illustrate how the availability of alternatives constrains fees
for depth-of-book data, suppose there were a hypothetical increase in
the fee for a
[[Page 70315]]
market's depth-of-book data from $10 to $15, where $10 is the fair and
reasonable level. Suppose that at $10 the depth-of-book data would have
1,000 subscribers, and thus total revenue of $10,000. Suppose that an
increase in the fee to $15 would cause 400 users to cancel their
subscriptions in favor of available alternatives (which might include
not purchasing depth-of-book data at all), leaving 600 subscribers and
total revenue of $9,000. Assuming there are no variable costs that
depend on the number of subscribers, the hypothetical fee increase
would reduce net revenue by $1,000, and hence the Exchange would not
have an incentive to raise the price from $10 to $15.
NYSE Arca's experience also demonstrates that its proprietary
market data customers are sensitive to the price charged for access to
ArcaBook, and that the elasticity of demand for access to ArcaBook
would deter the Exchange from requesting a fee unconstrained by
competitive forces. The Commission issued the Direct Order in December
2008, and NYSE Arca started charging for ArcaBook soon after. As Table
8 \24\ shows, there was an immediate and significant reduction in the
number of accounts with at least one subscription for ArcaBook after
the Exchange started charging for ArcaBook.\25\ One can infer that any
unreasonable increase in the fee would cause a loss in subscribers, and
therefore a loss of the fee revenue that NYSE Arca would earn from
these subscribers.
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\24\ Copies of all charts and tables referenced herein are
included in Exhibit 3 B.
\25\ It should also be noted that before NYSE Arca began
charging for ArcaBook, many users were not required to report their
ArcaBook usage to the Exchange. Table 8's pre-2009 figures thus
likely understate both the number of users before the Exchange began
to charge and the magnitude of the decline in users after NYSE Arca
began to charge.
---------------------------------------------------------------------------
Another way to examine this issue is to examine the nature of the
market for depth-of-book data. The D.C. Circuit noted that depth-of-
book data might be of more use for certain types of market participants
than others, and NYSE Arca agrees. One important category of users of
depth-of-book data are those who use ISOs. The primary type of ISO on
NYSE Arca is the ``PNP ISO'' order type. In July 2010, 30 firms
generated approximately 99% of the PNP ISO orders on NYSE Arca (by both
trade and order volume).\26\ There are several important pieces of
information that go with that statistic: First, ten of the firms
(approximately 33.3% of the firms, representing approximately 7.4% of
the PNP ISO orders) did not subscribe to ArcaBook in June 2010,
indicating that they believed they had viable alternative sources of
the data necessary to submit large ISOs on NYSE Arca).
---------------------------------------------------------------------------
\26\ Together, these 30 firms accounted for approximately 56% of
NYSE Arca's Tape A and Tape B volume for June 2010.
---------------------------------------------------------------------------
Second, the top 20 firms that used ISOs on NYSE Arca and did
subscribe to ArcaBook accounted for 54.72% of NYSE Arca's Tape A and
Tape B volume for June 2010.\27\
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\27\ These statistics likely understate the comparative
contributions of sophisticated users of depth-of-book data. Because
of the way market participants submit, execute, and report trades,
the data the Exchange used to derive these statistics does not
include all trades that are attributable to these firms. (For
example, ``Firm A'' may purchases ArcaBook data under the name
``Firm A'' but submit trades under many different names. This data
would not capture trades by entities other than ``Firm A''.)
---------------------------------------------------------------------------
This confirms that users of depth-of-book data account for
significant trading volume, even though they only amount to a small
percentage of all traders.\28\
---------------------------------------------------------------------------
\28\ See NetCoalition Decision at 26 n.14.
---------------------------------------------------------------------------
In assessing the competitive landscape for depth-of-book data, one
must determine whether the availability of alternative depth-of-book
products would make this subset of market participants sensitive to one
market's unreasonable depth-of-book product pricing. We believe that it
is self-evident that it does. All of the investors within this subset
make rapid decisions regarding what market data to purchase and where
to direct their orders. They base those decisions on all their costs to
trade (including the costs of market data they choose to purchase).
They invest significant amounts of capital based on those decisions.
In contrast, the primary objectors to the 2006 Rule Change were
data vendors (as opposed to market participants) whose business
interests lie firmly rooted in reselling the exchanges' market data at
significant mark-ups (or in attracting ``eyeballs'' to their sites to
generate advertising revenue). For acting as middlemen in distributing
the exchanges' market data to investors, traditional market data
vendors, such as several that are SIFMA members, receive from investors
a large multiple of the amounts that those vendors pay the exchanges
for the right to distribute the data. No statutory standard constrains
the amounts that those vendors may charge investors. Obviously,
protesting the exchanges' fees is in their business interests because,
if successful, it would increase their profit margins.
5. Competition for Orders and Trades
In addition, ArcaBook fees are fair and reasonable because
competition for order flow and trade executions provides an effective
constraint on the level of fees that the Exchange has the ability and
incentive to charge for its market data products. NYSE Arca competes
for orders, which represent liquidity, by offering liquidity rebates
and by advertising those orders through dissemination of depth-of-book
data. NYSE Arca competes for trades by offering liquidity, competitive
trading fees, and high quality, efficient trading services.
a. Hypothetical
The hypothetical discussed above can be adapted to demonstrate how
(i) the availability of alternatives to an exchange's depth-of-book
data, combined with (ii) the adverse effect of a higher fee for depth-
of-book data on net revenue from execution of trades, together
constrain the fee for depth-of-book data to a fair and reasonable
level. As before, suppose there were a hypothetical increase in the fee
for depth-of-book data from $10 to $15, where $10 is the fair and
reasonable level. Suppose that at $10, the depth-of-book data product
would have 1,000 subscribers, and thus total revenue of $10,000.
Suppose that an increase in the fee to $15 would cause 200 users
(rather than 400, as in the preceding hypothetical) to cancel their
subscriptions, leaving 800 subscribers and total revenue of $12,000.
Assuming no variable costs that depend on number of subscribers, the
hypothetical fee increase would increase net revenue by $2,000, and
hence the exchange would have an incentive to raise the price from $10
to $15. However, suppose that the increase in the price of depth-of-
book data caused a reduction in order flow and net trading revenue
(above variable costs) from $25,000 to $21,000. In that case, the sum
of net revenues from the depth-of-book data and execution of trades
would decline from $35,000 to $33,000 as a result of the increase in
the fee for depth of book data, and the exchange would not have an
incentive to raise the fee. This hypothetical is consistent with the
record evidence regarding the linkage between market data and order
flow.
b. The Record Regarding Order Flow Competition
Considerable evidence exists to support the conclusion that
competition for order flow and the availability of suitable
alternatives constrain fees for non-core market data to levels that are
fair and reasonable, both within the existing record and as
supplemented herein.
[[Page 70316]]
i. Hendershott & Jones
Prior studies provide evidence that order flow on a market depends
directly and substantially on the availability of depth-of-book data
for that market. Of particular importance is an empirical study by
Terrence Hendershott & Charles M. Jones, Island Goes Dark:
Transparence, Fragmentation, and Regulation (``Hendershott &
Jones'').\29\ Hendershott & Jones is an independent, exhaustive,
refereed, published, and publicly available study, based on substantial
empirical data and economic and statistical analysis, of the effects of
one market's decision to stop displaying depth-of-book data entirely
for certain products (because it did not wish to comply with the then-
current version of Regulation ATS). The Commission previously relied on
this study in concluding that order flow competition constrains market
data fees \30\ (although the NetCoalition Decision did not refer to
it). Hendershott and Jones are well-respected academics.
---------------------------------------------------------------------------
\29\ 18 Review of Financial Studies 743 (2005). A copy of
Hendershott & Jones is attached hereto as Exhibit 3 A.
\30\ Direct Order at 74,784 n. 218.
---------------------------------------------------------------------------
Hendershott and Jones studied the impact of Island ECN ceasing to
display its limit order book in the three most active ETFs for which it
was the dominant venue; this occurred in late 2002. Hendershott and
Jones found that Island's share of trading activity in each of these
three ETFs fell when Island ceased displaying its limit order book for
those ETFs. The following are among the elements of this empirical
study that support the Commission's conclusion in the Direct Order that
competition for order flow provides an effective constraint on the
market data fees that the Exchange has the ability and incentive to
charge:
Hendershott & Jones examined ``all trades and quotes'' for
the three ETFs. Their analysis of these data demonstrate the direct and
substantial relationship between order flow and the availability of
market data. Island's decision to cease displaying depth-of-book and
other market data caused a 40% to 55% decline in trading in each of
these ETFs on Island, and a comparable increase in trading in these
ETFs at other venues, and those effects were immediate and
statistically significant at a high level.\31\ Hendershott & Jones make
clear that they found ``order flow migration'' to other venues after
Island ceased displaying depth-of-book and other market data.\32\
Indeed, they concluded that the date Island went dark represented a
``shift in regime'' that not only caused order flow to migrate
``substantially'' from Island to other markets, but also from ETFs to
E-mini futures (a different product entirely).\33\ Hendershott & Jones
also specifically addressed the point that even non-professional
traders are likely to direct their order flow to venues in which more
information about the likely terms of a trade is available.\34\
---------------------------------------------------------------------------
\31\ Id. at 755-58.
\32\ Id. at 764. See also id. at 765 (``Given that Island's
going dark is a change in transparency that leads to order flow
migration * * *.'').
\33\ Id. at 769.
\34\ Id. at 779.
---------------------------------------------------------------------------
Hendershott & Jones also analyzed what happened to order
flow when Island eventually re-displayed depth-of-book and other market
data. When Island did so, it regained some (but not all) of the order
flow it had lost.\35\
---------------------------------------------------------------------------
\35\ Id. at 782-84.
---------------------------------------------------------------------------
Hendershott & Jones thus provides detailed and persuasive evidence
that availability of depth-of-book and other data relating to one
trading venue has a substantial effect on the level of order flow at
that venue.\36\
---------------------------------------------------------------------------
\36\ In addition, Hendershott & Jones noted that the
introduction of NYSE's OpenBook real-time limit order book data feed
was associated with increased order flow to NYSE. Id. at 747.
---------------------------------------------------------------------------
Hendershott & Jones supports an inference that an increase in the
price of depth-of-book data for a market will cause a reduction in
order flow at that market. Therefore, it is clear that, if a market
were to consider charging a higher price for its depth-of-book data, it
would need to weigh the increased revenues it would receive from depth-
of-book customers that continue to purchase the product against the
reduced revenues from (a) subscription cancellations, and (b) fewer
trade executions. Thus, the effect of availability of depth-of-book
data on order flow constrains the ability and incentive of a market to
charge a higher price for its depth-of-book data.
ii. Pricing of Depth-of-Book Data by Exchanges Other Than NYSE and
Nasdaq
Observations of past and current behavior of markets support the
conclusion that because of order flow competition markets do not have
the ability or incentive to set supra-competitive prices for non-core
market data. BATS (a recent entrant that has experienced significant
market share growth) has publicly noted that part of its strategy to
gain order flow is to provide its depth-of-book data for free, because
BATS believes that the widest possible dissemination of these data is
essential to attract order flow at the current stage of BATS's
development. NYSE Arca notes that it used the same strategy initially
to attract order flow. If the price charged for depth-of-book data did
not have a significant effect on order flow and revenue from the
execution of trades, it would not be rational for BATS to provide its
depth-of-book data free of charge, and it would not have been rational
for NYSE Arca to have done so initially.
iii. Effects of Competition on Shares of Trading
In the Direct Order, the Commission concluded that there is fierce
competition for order flow. More recent data show that this conclusion
was correct and that competition has intensified.
Table 1 shows the monthly trading volume of U.S. equities on NYSE
Arca from 2001 through July 2010. After initially climbing, volume on
NYSE Arca has been volatile, and, indeed, since October 2008 has fallen
significantly. Table 2 shows NYSE Arca's percentage share of U.S.
equities trading. Together, Tables 1 and 2 show that market
participants are not wedded to NYSE Arca's platform and that NYSE Arca
must continually compete to sell its trading services.\37\
---------------------------------------------------------------------------
\37\ This volatility evidences the speed and frequency with
which market participants change their order routing determinations.
---------------------------------------------------------------------------
The volatility and trends in the shares of total trading volume on
each of the various markets demonstrate that competition among these
markets in the sale of trading services is intense. Tables 3, 4, 5, and
6 provide graphical decompositions of shares from 2001 through July
2010 for NYSE Arca, NYSE, Nasdaq, the trade reporting facilities
(``TRFs''), BATS, and other markets.\38\ Table 3 shows shares for all
U.S. equities trading. It demonstrates that NYSE, NYSE Arca, and
Nasdaq's shares of trading have fallen, while the TRFs and BATS have
taken a larger share of trading. This shows not only that the market
for trading equities is competitive but also that entry has been
easy.\39\ Table 4 shows similar results for
[[Page 70317]]
Tape A, and in particular shows that the TRFs have captured a
significant share of trading from other markets. Table 5 shows shares
for Tape B. Interestingly, Table 5 shows NYSE Arca coming into the
market and quickly capturing a share of other exchanges' trading
activity. It goes on to show the TRFs then coming in and doing the same
(including capturing a share of NYSE Arca's trading activity),
eventually achieving a share of nearly 30%. Table 6 shows a similar
result for Tape C. Table 7 shows data on the same shares for the period
January 2010-July 2010.
---------------------------------------------------------------------------
\38\ The TRF data includes non-exchange trades through NYSE,
Nasdaq, BSE, NSX, and FINRA.
\39\ Ease of entry into this market is further evidenced by the
recent entry of Direct Edge, which began operating two exchanges in
July 2010. For the month of July 2010, the Direct Edge exchanges,
EDGA and EDGX, accounted for 1.69% and 2.57%, respectively, of all
tape-reported trade volume. For the month of August, those numbers
increased to 3.79% and 4.75%. This rapid increase in trading volume
evidences both the ease of entry into this market and the speed with
which market participants change the venues to which they route
orders. Direct Edge's rapid market share growth is not unique, NYSE
Arca experienced a similarly rapid increase in market share when it
commenced operations in 2004, and, as shown in Tables 4, 5, and 6,
BATS's trading volume grew quickly, further evidencing ease of
entry.
---------------------------------------------------------------------------
Moreover, this data provides additional support for the platform
competition concept discussed below and further demonstrates that
individual market depth-of-book products are substitutable to the
extent market participants might not wish to purchase all such
products. For example, large market participants place orders on many
markets simultaneously, so they may not need all markets' depth-of-book
products or may choose to purchase some but not others based on price
and/or other features. Table 7 shows that Nasdaq had approximately the
same share in Tape A and B securities that NYSE Arca did during the
January-July 2010 period, meaning that a market participant placing
orders in both markets could choose one depth-of-book product rather
than the other based on price and/or other features.
iv. Effects of Competition on Trading Revenues
Since July 2007 NYSE Arca's per share net revenue capture has
fallen and market share has declined, although its trading volume has
increased somewhat due to growth in industry volumes. This is the
result of fierce competition for order flow and is not consistent with
NYSE Arca being able to set prices for its proprietary market data
(such as ArcaBook) at its whim; it is also further support for the
platform competition discussion below. As the Commission is aware,
transaction fees have generally fallen across markets. The competition
between those markets is passed through to traders in the form of lower
net prices for trading services.
D. Pricing for Joint Products
Other market participants have noted that the liquidity provided by
the order book, trade execution, core market data, and non-core market
data are joint products of a joint platform and have common costs.\40\
The Exchange agrees with and adopts those discussions and the arguments
therein. The Exchange also notes that the economics literature confirms
that there is no way to allocate common costs between joint products
that would shed any light on competitive or efficient pricing.\41\
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\40\ See Securities Exchange Act Release No. 34-62887 (September
10, 2010); 75 FR 57092 (September 17, 2010); Securities Exchange Act
Release No. 34-62907 (September 14, 2010); 75 FR 57314 (September
20, 2010); and Securities Exchange Act Release No. 34-62908
(September 14, 2010); 75 FR 57321 (September 20, 2010); see also
attachment to August 1, 2008 Comment Letter of Jeffrey S. Davis,
Vice President and Deputy General Counsel, NASDAQ OMX Group, Inc.
(Statement of Janusz Ordover and Gustavo Bamberger) (a copy of which
is attached hereto as Exhibit 3 C.).
\41\ See generally Mark Hirschey, Fundamentals of Managerial
Economics at 600 (2009) (``It is important to note, however, that
although it is possible to determine the separate marginal costs of
goods produced in variable proportions, it is impossible to
determine their individual average costs. This is because common
costs are expenses necessary for manufacture of a joint product.
Common costs of production--raw material and equipment costs,
management expenses, and other overhead--cannot be allocated to each
individual by-product on any economically sound basis. * * * Any
allocation of common costs is wrong and arbitrary.''). This is not
new economic theory. See, e.g., F.W. Taussig, ``A Contribution to
the Theory of Railway Rates,'' Quarterly Journal of Economics V(4)
438, 465 (July 1891) (``Yet, surely, the division is purely
arbitrary. These items of cost, in fact, are jointly incurred for
both sorts of traffic; and I cannot share the hope entertained by
the statistician of the Commission, Professor Henry C. Adams, that
we shall ever reach a mode of apportionment that will lead to
trustworthy results.'').
---------------------------------------------------------------------------
That large market participants, including internalizers handling
retail order flow, use proprietary exchange feeds (rather than CTS and
CQS feeds) to make trade and routing decisions further demonstrates the
joint nature of market data and order flow.\42\ So does the fact that
some exchanges use certain market data quote revenue as a form of
direct market maker liquidity provider rebate to drive more liquidity
to their books in less active stocks. This highlights that market data
and trade executions are joint products that are linked on a platform
basis. Charts 3-7 provide additional support for the existence of this
type of platform competition.
---------------------------------------------------------------------------
\42\ See Report of the Staffs of the CFTC and SEC to the Joint
Advisory Committee on Emerging Regulatory Issues--Findings Regarding
the Market Events of May 6, 2010 at 76-79 (Sept. 30, 2010). That
report again recognized that most retail order flow is handled by
internalizers. See id. at 77.
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E. Pricing Non-Core Data Based on Cost Is Impractical
The Exchange believes that, even if it were possible as a matter of
economic theory, cost-based pricing for non-core market data would be
so complicated that it could not be done practically.\43\ The record
relating to the 2006 Rule Change includes several documents attesting
to the difficulty of cost-based pricing in this area. In addition to
those, we respectfully direct the Commission's attention to two reports
issued by PHB Hagler Bailly, Inc. (``PHB'').\44\ The New York Stock
Exchange retained PHB to assist it in connection with its response to
the Commission's 2000 Concept Release on the Regulation of Market
Information Fees and Revenues (the ``2000 Concept Release''). The PHB
reports conclude that cost-based pricing would inevitably stifle
competition and innovation and entangle both the industry and the
Commission in time-consuming, expensive, and ultimately fruitless
proceedings and data analysis. Their conclusions include the following:
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\43\ In addition, the evidence of competitive constraints on
market data pricing (both directly and in the context of joint
platforms) is so strong that it makes devoting the resources that
would be necessary to try to incorporate a cost-based pricing model
unnecessary. Because of the level of competition that already exists
and the compelling need to devote regulatory resources to other
issues, the Exchange does not believe there is any need for the
Commission and markets to become embroiled in what would almost
certainly become prolonged rate-making proceedings. Indeed, the
amendment of Section 19 effected by the Dodd-Frank Act is further
evidence that Congress intended market data fees to be governed by
the development of competition in the markets rather than cost-based
ratemaking.
\44\ See ``Issues Surrounding Cost-Based Regulation of Market
Data Prices,'' which provides a view of cost-based pricing from a
historical regulatory perspective, and ``The Economic Perspective on
Regulation of Market Data,'' which provides an economic assessment
of cost-based pricing. The two reports constitute Appendix C to
NYSE's comments to the 2000 Concept Release (``NYSE Comments'') and
can be found on the Commission's Web site at https://www.sec.gov/rules/concept/s72899/buck1.htm. They are attached hereto as Exhibits
2 D. and E. for the Commission's convenience.
---------------------------------------------------------------------------
Enormous Administrative Burdens. The administrative
burdens that cost-based pricing would place on all parties, in
particular the Commission, would be ``enormous.'' The Commission would
have to cost-regulate a large number of participants. Extraordinary
amounts of information, accounts, and reports would have to be
standardized and analyzed to make determinations that would stand the
scrutiny and challenges to which rate-making decisions are often
subject. This is the source of the Exchange's belief that cost-based
rate regulation is infeasible.\45\
---------------------------------------------------------------------------
\45\ Footnote 11 to the NYSE Comments describes the significant
nature of the burdens associated with cost-based pricing and the
Exchange incorporates that discussion here by reference.
---------------------------------------------------------------------------
Joint Products. It is impossible to regulate market data
prices in isolation from prices charged by markets for other services
that are joint products. Market data and transaction execution are
``joint products,'' linked in a way that pricing of one inevitably
affects pricing of the other. If rate regulation were to reduce the
revenues that could be realized from
[[Page 70318]]
market data fees, then other fees--transaction fees or, in the case of
the primary markets, listing fees--would have to be increased to
maintain the total revenue infrastructure and the same level of
services. However, because the three types of fees fall differently on
broker-dealers following different business models and differently on
broker-dealers, investors, and listed companies, the result would be a
reallocation of market costs based not on competition and constituent
governance but rather as a side-effect of governmental intervention.
Litigation. Under cost-based rate regulation, litigation
is inevitable, if only to delay rate decisions deemed unfavorable by
one party or another.
Waste and Negative Incentives. Consistently across
industries where it has been used, cost-based regulation of pricing has
been found to distort incentives, including incentives to minimize
costs and to innovate, and to lead to considerable waste. Making
arbitrary cost allocations provides disincentives for markets to invest
in more resilient systems and to make their data services more widely
available. It encourages padding and cross-subsidization of costs, yet
provides no incentive to reduce costs through operating or
administrative efficiencies. It would create incentives to use
accounting practices to shift the recovery of costs to market data fees
and away from transaction and listing fees.
Fee Increases. In contrast to the dramatic decline in
market data costs over the past quarter century, under cost-based
regulation of prices, it is quite possible the industry would
experience over time frequent rate increases based on escalating
expense levels. Without the demonstration of a strong need to move to
this form of regulation, such a result cannot be justified.
Rate of Return. Rate regulation is never aimed solely at
minimizing rates to consumers, since very low rates may affect the
attractiveness of the business to competitors and potential
competitors, or the level of service provided. The regulator must
determine what rate of return is ``fair'' and provide a suitable
incentive for service providers while protecting consumers as well. No
one has demonstrated why the Commission needs to be the arbiter of this
issue to enforce its responsibilities under Section 19 of the Exchange
Act.
Market Forces. Rate regulation implies a belief that an
industry cannot rely upon market forces. We believe that constituent
boards and customer control have in fact provided the pricing
discipline that any government would expect and desire in the area of
market data services and fees. Indeed, the discussion above
demonstrates that the competitive constraints that apply to market data
pricing are formidable.
Trends. In contrast to cost-based pricing, the
Commission's market-based approach to approving market data fees is
currently the goal of many other regulatory bodies in other industries.
Even in industries historically subject to utility regulation, cost-
based rate making has been discredited and other regulated industries
are moving away from cost-based rate-making. Proprietary market data
dissemination is far from an ordinary utility function, and cost-based
regulation is particularly inappropriate in the proprietary market data
arena.
Such results would not be in the best interests of market
participants and would be inconsistent with Congress's direction that
the Commission use its authority to foster the development of the
national market system.
F. Impact on Retail Investors
Pricing for non-core data products generally does not impact retail
investors. As the Commission and the Commodities Futures Trading
Commission recently noted, most retail equities transactions are
internalized by a broker-dealer.\46\
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\46\ See Report of the Staffs of the CFTC and SEC to the Joint
Advisory Committee on Emerging Regulatory Issues--Findings Regarding
the Market Events of May 6, 2010 at 77 (Sept. 30, 2010).
---------------------------------------------------------------------------
That makes depth-of-book data of little relevance to retail
investors. And retail broker-dealers are not required to purchase
depth-of-book data to fulfill their duties of best execution.\47\
---------------------------------------------------------------------------
\47\ See NetCoalition Decision at 6 n.6; Direct Order at 74,788
& nn. 259-266.
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iii. Contracts
As before, the Exchange will require or continue to require each
recipient of a datafeed containing NYSE Arca Data to enter into the
form of ``vendor'' agreement into which the CTA and CQ Plans require
recipients of the Network A datafeeds to enter. That agreement will
authorize the datafeed recipient to provide NYSE Arca Data services to
its customers or to distribute the data internally.
In addition, the Exchange will require or continue to require each
professional end-user that receives NYSE Arca Data displays from a
vendor or broker-dealer to enter into the form of professional
subscriber agreement into which the CTA and CQ Plans require end users
of Network A data to enter. It will also require or continue to require
vendors and broker-dealers to subject nonprofessional subscribers to
the same contract requirements as the CTA and CQ Plan Participants
require of Network A nonprofessional subscribers.
The Network A Participants drafted the vendor and Network A
professional subscriber agreements as one-size-fits-all forms to
capture most categories of market data dissemination. They are
sufficiently generic to accommodate or continue to accommodate NYSE
Arca Data. The Participants in the CTA and CQ Plans have submitted the
vendor form and the professional subscriber form to the Commission on
Form 19b-4 on multiple occasions. (See Release Nos. 34-22851 (January
31, 1986), 34-28407 (September 10, 1990), and 34-49185 (February 4,
2004).
2. Statutory Basis
For the foregoing reasons, NYSE Arca believes that the proposed
rule change is consistent with the provisions of Section 6 of the Act,
in general, and with Section 6(b)(4) \48\ of the Act, in particular, in
that it provides for the equitable allocation of reasonable dues, fees
and other charges among members and issuers and other persons using the
facilities of NYSE Arca. In this regard, the market data fees that are
the subject of this filing, in conjunction with fees for other
services, provide for an equitable allocation of NYSE Arca's overall
costs among users of its services. The market data fees are fair and
reasonable because they compare favorably to fees that other markets
charge for similar products and because competition provides an
effective constraint on the market data fees that the Exchange has the
ability and incentive to charge.
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\48\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition
For the reasons described above, the Exchange believes that the re-
proposed fees will not impose any burden on competition that is not
necessary or appropriate in the furtherance of the purposes of the
Exchange Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments regarding the proposed rule change or re-authorization.
Subsequent to the NetCoaliton Decision, the Exchange has not received
any unsolicited written comments from Exchange participants or other
interested parties.
[[Page 70319]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective upon filing pursuant
to Section 19(b)(3)(A)(ii) of the Act \49\ and subparagraph (f)(2) of
Rule 19b-4 thereunder \50\ because it establishes a due, fee, or other
charge imposed by the Exchange. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
suspend such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act. If the Commission takes such action, the Commission shall
institute proceedings to determine whether the proposed rule should be
approved or disapproved.
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\49\ 15 U.S.C. 78s(b)(3)(A)(ii).
\50\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2010-97 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2010-97. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission,\51\ all subsequent
amendments, all written statements with respect to the proposed rule
change that are filed with the Commission, and all written
communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for Web site viewing and printing in the Commission's Public
Reference Room, on official business days between the hours of 10 a.m.
and 3 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2010-97 and should
be submitted on or before December 8, 2010.
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\51\ The text of the proposed rule change is available on the
Commission's Web site at https://www.sec.gov/rules/sro.shtml.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
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\52\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28893 Filed 11-16-10; 8:45 am]
BILLING CODE 8011-01-P
