Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Establish Distributor Fees for Two Related Options Market Data Products, 40930-40935 [2012-16876]
Download as PDF
<![CDATA[
40930
Federal Register / Vol. 77, No. 133 / Wednesday, July 11, 2012 / Notices
or otherwise in furtherance of the
purposes of the Act.
be submitted on or before August 1,
2012.
IV. Solicitation of Comments
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.9
Elizabeth M. Murphy,
Secretary.
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 email to rulecomments@sec.gov. Please include File
Number SR–ICC–2012–10 on the subject
line.
srobinson on DSK4SPTVN1PROD with NOTICES
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–ICC–2012–10. This file
number should be included on the
subject line if email 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 such filings
also will be available for inspection and
copying at the principal office of ICC
and on ICC’s Web site at https://
www.theice.com/publicdocs/
regulatory_filings/
ICEClearCredit_061812.pdf. 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–ICC–2012–10 and should
VerDate Mar<15>2010
18:11 Jul 10, 2012
Jkt 226001
[FR Doc. 2012–16880 Filed 7–10–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67352; File No. SR–Phlx–
2012–83]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Establish
Distributor Fees for Two Related
Options Market Data Products
July 5, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1, and Rule 19b–4 2 thereunder,
notice is hereby given that, on June 22,
2012, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘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
Phlx proposes to establish distributor
fees for two related options market data
products, PHLX Depth of Market and
PHLX Orders. PHLX Depth of Market
includes full depth of quotes and orders,
imbalance information and last sale data
for options listed on PHLX, and PHLX
Orders provides pricing information for
options orders on the PHLX limit order
book.
The text of the proposed rule change
is available at https://
nasdaqomxphlx.cchwallstreet.com/
nasdaqomxphlx/phlx/, at Phlx’s
principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
PO 00000
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
Frm 00085
Fmt 4703
Sfmt 4703
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to establish distributor fees for
the PHLX Depth of Market (‘‘PHLX
Depth’’) and PHLX Orders options data
products. PHLX Depth is a data product
that provides: (i) Order and quotation
information for individual quotes and
orders on the PHLX book; (ii) last sale
information for trades executed on
PHLX; and (iii) an Imbalance Message as
described in prior rule filings.3 PHLX
Depth provides data that enhances the
ability to analyze market conditions,
and to create and test trading models
and analytical strategies. PHLX Depth of
Market is useful for gaining
comprehensive insight into the trading
activity in a particular option series on
the PHLX market.
PHLX Orders is a real-time full limit
order book data feed that provides
pricing information for orders on the
PHLX limit order book. PHLX Orders is
currently provided as part of the Top of
PHLX Options Plus Orders (‘‘TOPO Plus
Orders’’) data product; PHLX Orders
data is identical to the ‘‘Orders’’ portion
of the TOPO Plus Orders product. PHLX
Orders provides real-time information to
enable users to keep track of the single
order book(s), single and complex
orders,4 imbalance information, and
Complex Order Live Auction
(‘‘COLA’’) 5 for all symbols listed on
PHLX. It is a compilation of data for
limit orders residing on the Exchange’s
limit order book for options traded on
the Exchange that the Exchange
provides through a real-time data feed.
The Exchange updates the information
upon receipt of each displayed limit
3 See Securities Exchange Act Release No. 66967
(May 11, 2012); 77 FR 29440 (May 17, 2012).
4 A Complex Order is an order involving the
simultaneous purchase and/or sale of two or more
different options series in the same underlying
security, priced as a net debit or credit based on the
relative prices of the individual components, for the
same account, for the purpose of executing a
particular investment strategy. See Exchange Rule
1080 08(a)(i).
5 See Exchange Rule 1080 08(e).
E:\FR\FM\11JYN1.SGM
11JYN1
40931
Federal Register / Vol. 77, No. 133 / Wednesday, July 11, 2012 / Notices
order or change to any order resting on
the book.
Market data users should be free to
choose the data elements they use and
purchase. Some users seek to view the
full depth of market, others the orders
on the limit book, and still others just
the top of the market. The market
functions most effectively when it
includes numerous participants
employing varied trading strategies
requiring different use of market data
products. Thus, the PHLX Orders
product is designed for users that want
the order book information provided in
TOPO Plus Orders but don’t need the
entire TOPO Plus Orders data set. PHLX
Orders complements the Top of PHLX
Options or ‘‘TOPO’’ product that
contains the best priced quotes and
orders in the PHLX market. The Depth
Data product is designed for users that
want a full range of data available from
the PHLX options market, and that are
willing to pay for the extra technology,
telecommunications bandwidth, and
other requirements of processing such
data. The Exchange makes all data
products equally available to all market
participants.
PHLX is proposing to establish
distributor fees for the Depth Data and
Orders Data products. PHLX classifies
distributors as either ‘‘internal’’ or
‘‘external,’’ depending upon whether
the receiving entity transmits the data
only to Subscribers within its own
corporate organization or those outside
that organization.6 Currently, PHLX
assesses distributor fees for TOPO of
$2,000 per month for internal
distribution and $2,500 per month for
external distribution. PHLX assesses
distributor fees for TOPO Plus Orders of
$4,000 per month for internal
distribution and $5,000 per month for
external distribution. PHLX is hereby
proposing to assess fees for Depth Data
of $4,000 per month for internal
distribution and $4,500 per month for
external distribution. Additionally,
PHLX is proposing to assess fees for
PHLX Orders of $3,000 per month for
internal distribution and $3,500 per
month for external distribution. Offering
the PHLX Orders feed separately from
the TOPO feed allows customers to
access the specific data they need and
at a lower price. PHLX Orders
distributors will pay $1000 or $1500 per
month less than TOPO Plus Orders
distributors currently pay.
In addition, PHLX fees compare
favorably with fees assessed by other
exchanges for similar products:
DEPTH FEEDS
Exchange:
PHLX
ISE
CBOE
PHLX depth
ITTO
Depth of market
BBO data feed
No ..............................
Full depth ...................
No ..............................
Yes .............................
Yes .............................
No ..............................
$4,000 ........................
$4,500 ........................
Top of market .................................................
Depth of market .............................................
Depth of orders only ......................................
Trades ............................................................
Imbalance .......................................................
Complex orders ..............................................
Internal ...........................................................
External ..........................................................
NOM
No ..............................
Full depth ...................
No ..............................
Yes .............................
Yes .............................
No ..............................
$1,500 ........................
$2,000 ........................
Yes .............................
Top 5 levels ...............
No ..............................
No ..............................
No ..............................
No ..............................
$5,000 ........................
$5,000 ........................
Yes.
No.
No.
Yes.
No.
Yes.
$3,500.
$3,500.
ORDERS FEEDS
Exchange:
PHLX
ISE
BATS
CBOE
TOPO plus orders
Top of market .....................................
Depth of market .................................
Depth of orders only ..........................
Trades ................................................
Imbalance ...........................................
Complex orders ..................................
Internal Distributor Fee ......................
External Distributor Fee .....................
PHLX
PHLX orders
Spread book feed
Multicast PITCH
BBO data feed
Yes ......................
No ........................
Yes ......................
Yes ......................
Yes ......................
Yes ......................
$4,000 ..................
$5,000 ..................
No ........................
No ........................
Yes ......................
Yes ......................
Yes ......................
Yes ......................
$3,000 ..................
$3,500 ..................
No ........................
No ........................
No ........................
No ........................
No ........................
Yes .......................
$3,000 ..................
$3,000 ..................
No ...........................
No ...........................
Yes .........................
Yes .........................
No ...........................
No ...........................
0 ..............................
0 ..............................
As set forth in more detail below,
PHLX believes that the proposed fees
are consistent with the Act in that they
are fair and reasonable and provide for
an equitable allocation of fees among
PHLX members and other users of PHLX
products.
srobinson on DSK4SPTVN1PROD with NOTICES
2. Statutory Basis
PHLX believes that the proposed rule
change is consistent with the provisions
of Section 6 of the Act,7 in general, and
with Section 6(b)(4) of the Act,8 in
6 See PHLX Fee Schedule, Section IX. Multiple
exchanges use similar internal external
classifications, including the NASDAQ Options
VerDate Mar<15>2010
18:11 Jul 10, 2012
Jkt 226001
particular, in that it provides an
equitable allocation of reasonable fees
among Subscribers and recipients of
PHLX data. In adopting Regulation
NMS, the Commission granted selfregulatory organizations and brokerdealers increased authority and
flexibility to offer new and unique
market data to the public. It was
believed that this authority would
expand the amount of data available to
consumers, and also spur innovation
Market, the Chicago Board Options Exchange
(‘‘CBOE’’), and the International Securities
Exchange (‘‘ISE’’).
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
Yes.
No.
No.
Yes.
No.
Yes.
$3,500.
$3,500.
and competition for the provision of
market data.
The Commission concluded that
Regulation NMS—by deregulating the
market in proprietary data—would itself
further the Act’s goals of facilitating
efficiency and competition:
[E]fficiency is promoted when brokerdealers who do not need the data beyond the
prices, sizes, market center identifications of
the NBBO and consolidated last sale
information are not required to receive (and
pay for) such data. The Commission also
7 15
8 15
E:\FR\FM\11JYN1.SGM
U.S.C. 78f.
U.S.C. 78f(b)(4).
11JYN1
40932
Federal Register / Vol. 77, No. 133 / Wednesday, July 11, 2012 / Notices
srobinson on DSK4SPTVN1PROD with NOTICES
believes that efficiency is promoted when
broker-dealers may choose to receive (and
pay for) additional market data based on their
own internal analysis of the need for such
data.9
By removing ‘‘unnecessary regulatory
restrictions’’ on the ability of exchanges
to sell their own data, Regulation NMS
advanced the goals of the Act and the
principles reflected in its legislative
history. If the free market should
determine whether proprietary data is
sold to broker-dealers at all, it follows
that the price at which such data is sold
should be set by the market as well.
PHLX Depth Data and PHLX Orders are
precisely the sort of market data
products that the Commission
envisioned when it adopted Regulation
NMS.
On July 21, 2010, President Barack
Obama signed into law H.R. 4173, the
Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010
(‘‘Dodd-Frank Act’’), which amended
Section 19 of the Act. Among other
things, Section 916 of the Dodd-Frank
Act amended paragraph (A) of Section
19(b)(3) of the Act by inserting the
phrase ‘‘on any person, whether or not
the person is a member of the selfregulatory organization’’ after ‘‘due, fee
or other charge imposed by the selfregulatory organization.’’ As a result, all
SRO rule proposals establishing or
changing dues, fees, or other charges are
immediately effective upon filing
regardless of whether such dues, fees, or
other charges are imposed on members
of the SRO, non-members, or both.
Section 916 further amended paragraph
(C) of Section 19(b)(3) of the Act to read,
in pertinent part, ‘‘At any time within
the 60-day period beginning on the date
of filing of such a proposed rule change
in accordance with the provisions of
paragraph (1) [of Section 19(b)], the
Commission summarily may
temporarily suspend the change in the
rules of the self-regulatory organization
made thereby, 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 this title. If the Commission
takes such action, the Commission shall
institute proceedings under paragraph
(2)(B) [of Section 19(b)] to determine
whether the proposed rule should be
approved or disapproved.’’
The decision of the United States
Court of Appeals for the District of
Columbia Circuit in NetCoalition v.
SEC, No. 09–1042 (D.C. Cir. 2010),
although reviewing a Commission
9 Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
VerDate Mar<15>2010
18:11 Jul 10, 2012
Jkt 226001
decision made prior to the effective date
of the Dodd-Frank Act, upheld the
Commission’s reliance upon
competitive markets to set reasonable
and equitably allocated fees for market
data. ‘‘In fact, the legislative history
indicates that the Congress intended
that the market system ‘evolve through
the interplay of competitive forces as
unnecessary regulatory restrictions are
removed’ and that the SEC wield its
regulatory power ‘in those situations
where competition may not be
sufficient,’ such as in the creation of a
‘consolidated transactional reporting
system.’ ’’ NetCoalition, at 15 (quoting
H.R. Rep. No. 94–229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321,
323). The court’s conclusions about
Congressional intent are therefore
reinforced by the Dodd-Frank Act
amendments, which create a
presumption that exchange fees,
including market data fees, may take
effect immediately, without prior
Commission approval, and that the
Commission should take action to
suspend a fee change and institute a
proceeding to determine whether the fee
change should be approved or
disapproved only where the
Commission has concerns that the
change may not be consistent with the
Act.
For the reasons stated above, PHLX
believes that the proposed fees are fair
and equitable, and not unreasonably
discriminatory. As described above, the
proposed fees are based on pricing
conventions and distinctions that exist
in PHLX’s current fee schedule, and the
fee schedules of other exchanges. These
distinctions are each based on
principles of fairness and equity that
have helped for many years to maintain
fair, equitable, and not unreasonably
discriminatory fees, and that apply with
equal or greater force to the current
proposal.
As described in greater detail below,
if PHLX has calculated improperly and
the market deems the proposed fees to
be unfair, inequitable, or unreasonably
discriminatory, firms can diminish or
discontinue the use of their data
because the proposed fee is entirely
optional to all parties. Firms are not
required to purchase proprietary data or
to utilize any specific pricing alternative
if they do choose to purchase
proprietary data. PHLX is not required
to make Depth-of-Book or Orders data
available or to offer specific pricing
alternatives for potential purchases.
PHLX can discontinue offering a pricing
alternative (as it has in the past) and
firms can discontinue their use at any
time and for any reason (as they often
do), including due to their assessment of
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
the reasonableness of fees charged.
PHLX continues to establish and revise
pricing policies aimed at increasing
fairness and equitable allocation of fees
among Distributors and users.
PHLX believes that the Depth Data
and Orders Data product pricing
promotes increased transparency by
offering a pricing options resulting in
fees based upon distributors’ and users’
different levels of usage of data
elements. While PHLX may need to
periodically adjust the distributor fees
to reflect market forces, it continues to
view the fee cap as a way for firms to
make additional information available
to the firms’ clients, thereby increasing
transparency in the market.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
PHLX 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.
Notwithstanding its determination that
the Commission may rely upon
competition to establish fair and
equitably allocated fees for market data,
the NetCoalition court found that the
Commission had not, in that case,
compiled a record that adequately
supported its conclusion that the market
for the data at issue in the case was
competitive. PHLX believes that a
record may readily be established to
demonstrate the competitive nature of
the market in question.
There is intense competition between
trading platforms that provide
transaction execution and routing
services and proprietary data products.
Transaction execution and proprietary
data products are complementary in that
market data is both an input and a
byproduct of the execution service. In
fact, market data and trade execution are
a paradigmatic example of joint
products with joint costs. The decision
whether and on which platform to post
an order will depend on the attributes
of the platform where the order can be
posted, including the execution fees,
data quality and price and distribution
of it’s data products. Without the
prospect of a taking order seeing and
reacting to a posted order on a particular
platform, the posting of the order would
accomplish little. Without trade
executions, exchange data products
cannot exist. Data products are valuable
to many end Subscribers only insofar as
they provide information that end
Subscribers expect will assist them or
their customers in making trading
decisions.
The costs of producing market data
include not only the costs of the data
E:\FR\FM\11JYN1.SGM
11JYN1
srobinson on DSK4SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 133 / Wednesday, July 11, 2012 / Notices
distribution infrastructure, but also the
costs of designing, maintaining, and
operating the exchange’s transaction
execution platform and the cost of
regulating the exchange to ensure its fair
operation and maintain investor
confidence. The total return that a
trading platform earns reflects the
revenues it receives from both products
and the joint costs it incurs. Moreover,
an exchange’s customers view the costs
of transaction executions and of data as
a unified cost of doing business with the
exchange. A broker-dealer will direct
orders to a particular exchange only if
the expected revenues from executing
trades on the exchange exceed net
transaction execution costs and the cost
of data that the broker-dealer chooses to
buy to support its trading decisions (or
those of its customers). The choice of
data products is, in turn, a product of
the value of the products in making
profitable trading decisions. If the cost
of the product exceeds its expected
value, the broker-dealer will choose not
to buy it. Moreover, as a broker-dealer
chooses to direct fewer orders to a
particular exchange, the value of the
product to that broker-dealer decrease,
for two reasons. First, the product will
contain less information, because
executions of the broker-dealer’s orders
will not be reflected in it. Second, and
perhaps more important, the product
will be less valuable to that brokerdealer because it does not provide
information about the venue to which it
is directing its orders. Data from the
competing venue to which the brokerdealer is directing orders will become
correspondingly more valuable.
Thus, a super-competitive increase in
the fees charged for either transactions
or data has the potential to impair
revenues from both products. ‘‘No one
disputes that competition for order flow
is ‘fierce’.’’ NetCoalition at 24. However,
the existence of fierce competition for
order flow implies a high degree of price
sensitivity on the part of broker-dealers
with order flow, since they may readily
reduce costs by directing orders toward
the lowest-cost trading venues. A
broker-dealer that shifted its order flow
from one platform to another in
response to order execution price
differentials would both reduce the
value of that platform’s market data and
reduce its own need to consume data
from the disfavored platform. Similarly,
if a platform increases its market data
fees, the change will affect the overall
cost of doing business with the
platform, and affected broker-dealers
will assess whether they can lower their
trading costs by directing orders
VerDate Mar<15>2010
18:11 Jul 10, 2012
Jkt 226001
elsewhere and thereby lessening the
need for the more expensive data.
Analyzing the cost of market data
distribution in isolation from the cost of
all of the inputs supporting the creation
of market data will inevitably
underestimate the cost of the data. Thus,
because it is impossible to create data
without a fast, technologically robust
and well-regulated execution system,
system costs and regulatory costs affect
the price of market data. It would be
equally misleading, however, to
attribute all of the exchange’s costs to
the market data portion of an exchange’s
joint product. Rather, all of the
exchange’s costs are incurred for the
unified purposes of attracting order
flow, executing and/or routing orders,
and generating and selling data about
market activity. The total return that an
exchange earns reflects the revenues it
receives from the joint products and the
total costs of the joint products.
Competition among trading platforms
can be expected to constrain the
aggregate return each platform earns
from the sale of its joint products, but
different platforms may choose from a
range of possible, and equally
reasonable, pricing strategies as the
means of recovering total costs. For
example, some platforms may choose to
pay rebates to attract orders, charge
relatively low prices for market
information (or provide information free
of charge) and charge relatively high
prices for accessing posted liquidity.
Other platforms may choose a strategy
of paying lower rebates (or no rebates)
to attract orders, setting relatively high
prices for market information, and
setting relatively low prices for
accessing posted liquidity. In this
environment, there is no economic basis
for regulating maximum prices for one
of the joint products in an industry in
which suppliers face competitive
constraints with regard to the joint
offering. This would be akin to strictly
regulating the price that an automobile
manufacturer can charge for car sound
systems despite the existence of a highly
competitive market for cars and the
availability of after-market alternatives
to the manufacturer-supplied system.
The market for market data products
is competitive and inherently
contestable because there is fierce
competition for the inputs necessary to
the creation of proprietary data and
strict pricing discipline for the
proprietary products themselves.
Numerous exchanges compete with
each other for listings, trades, and
market data itself, providing virtually
limitless opportunities for entrepreneurs
who wish to produce and distribute
their own market data. This proprietary
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
40933
data is produced by each individual
exchange, as well as other entities, in a
vigorously competitive market.
Broker-dealers currently have
numerous alternative venues for their
order flow, including nine existing SRO
markets (plus two more expected this
year), as well as various forms of
alternative trading systems (‘‘ATSs’’).
Each SRO market competes to produce
transaction reports via trade executions.
Competitive markets for order flow,
executions, and transaction reports
provide pricing discipline for the inputs
of proprietary data products.
The large number of SROs, BDs, and
ATSs that currently produce proprietary
data or are currently capable of
producing it provides further pricing
discipline for proprietary data products.
Each SRO, ATS, and BD is currently
permitted to produce proprietary data
products, and many currently do or
have announced plans to do so,
including NASDAQ, CBOE, ISE, NYSE
Amex, and NYSEArca.
Any ATS or BD can combine with any
other ATS, BD, or multiple ATSs or BDs
to produce joint proprietary data
products. Additionally, order routers
and market data vendors can facilitate
single or multiple broker-dealers’
production of proprietary data products.
The potential sources of proprietary
products are virtually limitless.
Market data vendors provide another
form of price discipline for proprietary
data products because they control the
primary means of access to end
Subscribers. Vendors impose price
restraints based upon their business
models. For example, vendors such as
Bloomberg and Thomson Reuters that
assess a surcharge on data they sell may
refuse to offer proprietary products that
end Subscribers will not purchase in
sufficient numbers. Internet portals,
such as Google, impose a discipline by
providing only data that will enable
them to attract ‘‘eyeballs’’ that
contribute to their advertising revenue.
Retail broker-dealers, such as Schwab
and Fidelity, offer their customers
proprietary data only if it promotes
trading and generates sufficient
commission revenue. Although the
business models may differ, these
vendors’ pricing discipline is the same:
they can simply refuse to purchase any
proprietary data product that fails to
provide sufficient value. PHLX and
other producers of proprietary data
products must understand and respond
to these varying business models and
pricing disciplines in order to market
proprietary data products successfully.
In addition to the competition and
price discipline described above, the
market for proprietary data products is
E:\FR\FM\11JYN1.SGM
11JYN1
srobinson on DSK4SPTVN1PROD with NOTICES
40934
Federal Register / Vol. 77, No. 133 / Wednesday, July 11, 2012 / Notices
also highly contestable because market
entry is rapid, inexpensive, and
profitable. The history of electronic
trading is replete with examples of
entrants that swiftly grew into some of
the largest electronic trading platforms
and proprietary data producers:
Archipelago, BATS Trading and Direct
Edge.
Regulation NMS, by deregulating the
market for proprietary data, has
increased the contestability of that
market. While broker-dealers have
previously published their proprietary
data individually, Regulation NMS
encourages market data vendors and
broker-dealers to produce proprietary
products cooperatively in a manner
never before possible. Multiple market
data vendors already have the capability
to aggregate data and disseminate it on
a profitable scale, including Bloomberg
and Thomson Reuters.
The court in NetCoalition concluded
that the Commission had failed to
demonstrate that the market for market
data was competitive based on the
reasoning of the Commission’s
NetCoalition order because, in the
court’s view, the Commission had not
adequately demonstrated that the
proprietary data at issue in the case is
used to attract order flow. PHLX
believes, however, that evidence not
before the court clearly demonstrated
that availability of data attracts order
flow.
Competition among platforms has
driven PHLX continually to improve its
platform data offerings and to cater to
customers’ data needs. For example,
PHLX has developed and maintained
multiple delivery mechanisms (IP,
multi-cast, and compression) that enable
customers to receive data in the form
and manner they prefer and at the
lowest cost to them. PHLX has created
new products like Depth Data, TOPO
and TOPO Plus Orders, because offering
data in multiple formatting allows
PHLX to better fit customer needs.
PHLX offers data via multiple extranet
providers, thereby helping to reduce
network and total cost for its data
products. PHLX has developed an
online administrative system to provide
customers transparency into their data
feed requests and streamline data usage
reporting.
Despite these enhancements and a
dramatic increase in message traffic,
PHLX’s fees for market data have
remained flat. In fact, as a percent of
total Subscriber costs, PHLX data fees
have fallen relative to other data usage
costs—including bandwidth,
programming, and infrastructure—that
have risen. The same holds true for
execution services; despite numerous
VerDate Mar<15>2010
18:11 Jul 10, 2012
Jkt 226001
enhancements to PHLX’s trading
platform, absolute and relative trading
costs have declined. Platform
competition has intensified as new
entrants have emerged, constraining
prices for both executions and for data.
The vigor of competition for
proprietary information is significant
and the Exchange believes that this
proposal itself clearly evidences such
competition. PHLX is offering a new
pricing model in order to keep pace
with changes in the industry and
evolving customer needs. It is entirely
optional and is geared towards
attracting new customers, as well as
retaining existing customers.
The Exchange has witnessed
competitors creating new products and
innovative pricing in this space over the
course of the past year. PHLX continues
to see firms challenge its pricing on the
basis of the Exchange’s explicit fees
being higher than the zero-priced fees
from other competitors such as BATS.
In all cases, firms make decisions on
how much and what types of data to
consume on the basis of the total cost of
interacting with PHLX or other
exchanges. Of course, the explicit data
fees are but one factor in a total platform
analysis. Some competitors have lower
transactions fees and higher data fees,
and others are vice versa. The market for
this Depth-of-Book information is highly
competitive and continually evolves as
products develop and 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.10 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.
PO 00000
10 15
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 email to rulecomments@sec.gov. Please include File
Number SR–Phlx-2012–83 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–Phlx-2012–83. This file
number should be included on the
subject line if email 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 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–Phlx2012–83 and should be submitted on or
before August 1, 2012.
U.S.C. 78s(b)(3)(A)(ii).
Frm 00089
Fmt 4703
Sfmt 4703
E:\FR\FM\11JYN1.SGM
11JYN1
Federal Register / Vol. 77, No. 133 / Wednesday, July 11, 2012 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Elizabeth M. Murphy,
Secretary.
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.
[FR Doc. 2012–16876 Filed 7–10–12; 8:45 am]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67353; File No. SR–ISE–
2012–61]
Self-Regulatory Organizations; Notice
of Filing and Immediate Effectiveness
of Proposed Rule Change by
International Securities Exchange To
Amend ISE Rule 715 To Reflect a
Modification in the Functionality of the
Add Liquidity Order
July 5, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b-4 thereunder,2
notice is hereby given that on June 27,
2012, the International Securities
Exchange, LLC (the ‘‘Exchange’’ or the
‘‘ISE’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II and III below, which items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 715 (Types of Orders) to reflect a
modification in the functionality of the
Add Liquidity Order and to rename the
order type.
The text of the proposed rule change
is available on the Exchange’s Internet
Web site at https://www.ise.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
srobinson on DSK4SPTVN1PROD with NOTICES
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
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
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Mar<15>2010
18:11 Jul 10, 2012
Jkt 226001
1. Purpose
The purpose of this proposed rule
change is [sic] amend ISE Rule 715(n),
Add Liquidity Order (‘‘ALO’’), to add a
sentence describing a change to the
functionality.3
The ALO was adopted to
accommodate investors and market
participants who wish only to provide
liquidity in certain circumstances, such
as to receive a maker fee (rebate) upon
execution of an order. ALOs are limit
orders that will only be executed as a
‘‘maker’’ on the ISE. Members can
choose whether an ALO that is
executable on the ISE upon entry (or
that locks or crosses an away market
upon entry) will be cancelled or repriced to one minimum price variation
above the national best bid or below the
national best offer. For an ALO to be
accepted by the system the Member
must designate whether the order shall
be re-priced or cancelled; there is no
default option. An Add Liquidity Order
will only be re-priced once and will be
executed at the re-priced price.
The Exchange is now proposing
additional functionality, such that, if at
the time of entry, an ALO would lock
or cross one or more non-displayed
orders on the Exchange, the ALO will be
cancelled or re-priced to the minimum
price variation above the best nondisplayed bid price (for sell orders) or
below the best non-displayed offer price
(for buy orders).4 Currently, the only
type of non-displayed order available on
the Exchange is the all-or-none order
(‘‘AON’’). AONs are contingency orders
that have no priority on the book,5 are
not included in the ISE best bid or offer
and, as such, are not included in the
national best bid or offer (‘‘NBBO’’).
3 ALOs have not yet been implemented on the
Exchange. While the rule change adopting the ALO
became operative on April 6, 2012, the
implementation date for the order type was delayed
until such time as the technology incorporating this
functionality was released. See Securities Exchange
Act Release No. 66617 (March 19, 2012), 77 FR
17102 (March 23, 2012) (Notice of Filing and
Immediate Effectiveness of SR–ISE–2012–20).
4 For example, if the NBBO is 2.00 x 2.06 and
there is a non-displayed all-or-none (‘‘AON’’) order
(due to the size contingency, AON orders are not
displayed) on the book to sell 10 contracts at 2.05,
an incoming ALO to buy 10 contracts at 2.06 will
be re-priced to 2.04.
5 See Supplemental Material .02 to ISE Rule 713.
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
40935
AONs are considered to be ‘‘nondisplayed’’ because they are not
disseminated to OPRA to be included in
the NBBO. However, they are not truly
a ‘‘non-displayed’’ order as AONs are
disseminated via the ISE Order Feed
which Members can subscribe to for a
fee.6 Accordingly, Members entering
AONs do not have an expectation that
their order is ‘‘non-displayed’’ and
would not have concerns that the ALO
could disclose the existence of the AON
by re-pricing to one minimum price
variation above the AON bid price or
below the AON offer price as Members
have access to the existence of AONs via
the ISE Order Feed.
The Exchange believes that adding
this functionality is imperative to
ensure that ALOs are only executed
when providing liquidity. Without the
ability to re-price an ALO that locks or
crosses a non-displayed order, under
certain circumstances, an incoming
ALO could execute against a nondisplayed order resting on the ISE limit
order book, which would be in direct
contravention with the purpose of an
ALO—to provide liquidity, not take
liquidity.
Additionally, for branding and
marketing purposes, the Exchange
proposes to rename the ‘‘Add Liquidity
Order’’ to the ‘‘Add Liquidity Only’’
order.
As the implementation date for this
order is not certain, the Exchange will
announce the specific operative date via
an Information Circular.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,7
in general, and with Section 6(b)(5) of
the Act,8 in particular, in that the
proposal is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
Specifically, the ALO order is designed
to provide market participants with the
ability to provide liquidity and have
more control over their execution costs.
When an ALO would lock or cross a
non-displayed order on the ISE limit
6 See
ISE Schedule of Fees.
U.S.C. 78f.
8 15 U.S.C. 78f(b)(5).
7 15
E:\FR\FM\11JYN1.SGM
11JYN1
]]>Agencies
[Federal Register Volume 77, Number 133 (Wednesday, July 11, 2012)]
[Notices]
[Pages 40930-40935]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16876]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67352; File No. SR-Phlx-2012-83]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Establish
Distributor Fees for Two Related Options Market Data Products
July 5, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that, on June 22, 2012, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``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
Phlx proposes to establish distributor fees for two related options
market data products, PHLX Depth of Market and PHLX Orders. PHLX Depth
of Market includes full depth of quotes and orders, imbalance
information and last sale data for options listed on PHLX, and PHLX
Orders provides pricing information for options orders on the PHLX
limit order book.
The text of the proposed rule change is available at https://nasdaqomxphlx.cchwallstreet.com/nasdaqomxphlx/phlx/, at Phlx's
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to establish distributor
fees for the PHLX Depth of Market (``PHLX Depth'') and PHLX Orders
options data products. PHLX Depth is a data product that provides: (i)
Order and quotation information for individual quotes and orders on the
PHLX book; (ii) last sale information for trades executed on PHLX; and
(iii) an Imbalance Message as described in prior rule filings.\3\ PHLX
Depth provides data that enhances the ability to analyze market
conditions, and to create and test trading models and analytical
strategies. PHLX Depth of Market is useful for gaining comprehensive
insight into the trading activity in a particular option series on the
PHLX market.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 66967 (May 11,
2012); 77 FR 29440 (May 17, 2012).
---------------------------------------------------------------------------
PHLX Orders is a real-time full limit order book data feed that
provides pricing information for orders on the PHLX limit order book.
PHLX Orders is currently provided as part of the Top of PHLX Options
Plus Orders (``TOPO Plus Orders'') data product; PHLX Orders data is
identical to the ``Orders'' portion of the TOPO Plus Orders product.
PHLX Orders provides real-time information to enable users to keep
track of the single order book(s), single and complex orders,\4\
imbalance information, and Complex Order Live Auction (``COLA'') \5\
for all symbols listed on PHLX. It is a compilation of data for limit
orders residing on the Exchange's limit order book for options traded
on the Exchange that the Exchange provides through a real-time data
feed. The Exchange updates the information upon receipt of each
displayed limit
[[Page 40931]]
order or change to any order resting on the book.
---------------------------------------------------------------------------
\4\ A Complex Order is an order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, priced as a net debit or credit based on
the relative prices of the individual components, for the same
account, for the purpose of executing a particular investment
strategy. See Exchange Rule 1080 08(a)(i).
\5\ See Exchange Rule 1080 08(e).
---------------------------------------------------------------------------
Market data users should be free to choose the data elements they
use and purchase. Some users seek to view the full depth of market,
others the orders on the limit book, and still others just the top of
the market. The market functions most effectively when it includes
numerous participants employing varied trading strategies requiring
different use of market data products. Thus, the PHLX Orders product is
designed for users that want the order book information provided in
TOPO Plus Orders but don't need the entire TOPO Plus Orders data set.
PHLX Orders complements the Top of PHLX Options or ``TOPO'' product
that contains the best priced quotes and orders in the PHLX market. The
Depth Data product is designed for users that want a full range of data
available from the PHLX options market, and that are willing to pay for
the extra technology, telecommunications bandwidth, and other
requirements of processing such data. The Exchange makes all data
products equally available to all market participants.
PHLX is proposing to establish distributor fees for the Depth Data
and Orders Data products. PHLX classifies distributors as either
``internal'' or ``external,'' depending upon whether the receiving
entity transmits the data only to Subscribers within its own corporate
organization or those outside that organization.\6\ Currently, PHLX
assesses distributor fees for TOPO of $2,000 per month for internal
distribution and $2,500 per month for external distribution. PHLX
assesses distributor fees for TOPO Plus Orders of $4,000 per month for
internal distribution and $5,000 per month for external distribution.
PHLX is hereby proposing to assess fees for Depth Data of $4,000 per
month for internal distribution and $4,500 per month for external
distribution. Additionally, PHLX is proposing to assess fees for PHLX
Orders of $3,000 per month for internal distribution and $3,500 per
month for external distribution. Offering the PHLX Orders feed
separately from the TOPO feed allows customers to access the specific
data they need and at a lower price. PHLX Orders distributors will pay
$1000 or $1500 per month less than TOPO Plus Orders distributors
currently pay.
---------------------------------------------------------------------------
\6\ See PHLX Fee Schedule, Section IX. Multiple exchanges use
similar internal external classifications, including the NASDAQ
Options Market, the Chicago Board Options Exchange (``CBOE''), and
the International Securities Exchange (``ISE'').
---------------------------------------------------------------------------
In addition, PHLX fees compare favorably with fees assessed by
other exchanges for similar products:
Depth Feeds
----------------------------------------------------------------------------------------------------------------
Exchange: PHLX NOM ISE CBOE
----------------------------------------------------------------------------------------------------------------
PHLX depth ITTO Depth of market BBO data feed
----------------------------------------------------------------------------------------------------------------
Top of market................... No................ No................ Yes............... Yes.
Depth of market................. Full depth........ Full depth........ Top 5 levels...... No.
Depth of orders only............ No................ No................ No................ No.
Trades.......................... Yes............... Yes............... No................ Yes.
Imbalance....................... Yes............... Yes............... No................ No.
Complex orders.................. No................ No................ No................ Yes.
Internal........................ $4,000............ $1,500............ $5,000............ $3,500.
External........................ $4,500............ $2,000............ $5,000............ $3,500.
----------------------------------------------------------------------------------------------------------------
Orders Feeds
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exchange: PHLX PHLX ISE BATS CBOE
--------------------------------------------------------------------------------------------------------------------------------------------------------
TOPO plus orders PHLX orders Spread book feed Multicast PITCH BBO data feed
--------------------------------------------------------------------------------------------------------------------------------------------------------
Top of market...................... Yes................... No.................... No................... No................... Yes.
Depth of market.................... No.................... No.................... No................... No................... No.
Depth of orders only............... Yes................... Yes................... No................... Yes.................. No.
Trades............................. Yes................... Yes................... No................... Yes.................. Yes.
Imbalance.......................... Yes................... Yes................... No................... No................... No.
Complex orders..................... Yes................... Yes................... Yes.................. No................... Yes.
Internal Distributor Fee........... $4,000................ $3,000................ $3,000............... 0.................... $3,500.
External Distributor Fee........... $5,000................ $3,500................ $3,000............... 0.................... $3,500.
--------------------------------------------------------------------------------------------------------------------------------------------------------
As set forth in more detail below, PHLX believes that the proposed
fees are consistent with the Act in that they are fair and reasonable
and provide for an equitable allocation of fees among PHLX members and
other users of PHLX products.
2. Statutory Basis
PHLX believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\7\ in general, and with Section
6(b)(4) of the Act,\8\ in particular, in that it provides an equitable
allocation of reasonable fees among Subscribers and recipients of PHLX
data. In adopting Regulation NMS, the Commission granted self-
regulatory organizations and broker-dealers increased authority and
flexibility to offer new and unique market data to the public. It was
believed that this authority would expand the amount of data available
to consumers, and also spur innovation and competition for the
provision of market data.
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f.
\8\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
The Commission concluded that Regulation NMS--by deregulating the
market in proprietary data--would itself further the Act's goals of
facilitating efficiency and competition:
[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also
[[Page 40932]]
believes that efficiency is promoted when broker-dealers may choose
to receive (and pay for) additional market data based on their own
internal analysis of the need for such data.\9\
---------------------------------------------------------------------------
\9\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496 (June 29, 2005).
By removing ``unnecessary regulatory restrictions'' on the ability
of exchanges to sell their own data, Regulation NMS advanced the goals
of the Act and the principles reflected in its legislative history. If
the free market should determine whether proprietary data is sold to
broker-dealers at all, it follows that the price at which such data is
sold should be set by the market as well. PHLX Depth Data and PHLX
Orders are precisely the sort of market data products that the
Commission envisioned when it adopted Regulation NMS.
On July 21, 2010, President Barack Obama signed into law H.R. 4173,
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of
Section 19(b)(3) of the Act by inserting the phrase ``on any person,
whether or not the person is a member of the self-regulatory
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals
establishing or changing dues, fees, or other charges are immediately
effective upon filing regardless of whether such dues, fees, or other
charges are imposed on members of the SRO, non-members, or both.
Section 916 further amended paragraph (C) of Section 19(b)(3) of the
Act to read, in pertinent part, ``At any time within the 60-day period
beginning on the date of filing of such a proposed rule change in
accordance with the provisions of paragraph (1) [of Section 19(b)], the
Commission summarily may temporarily suspend the change in the rules of
the self-regulatory organization made thereby, 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 this title. If the Commission takes such action, the
Commission shall institute proceedings under paragraph (2)(B) [of
Section 19(b)] to determine whether the proposed rule should be
approved or disapproved.''
The decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoalition v. SEC, No. 09-1042 (D.C. Cir.
2010), although reviewing a Commission decision made prior to the
effective date of the Dodd-Frank Act, upheld the Commission's reliance
upon competitive markets to set reasonable and equitably allocated fees
for market data. ``In fact, the legislative history indicates that the
Congress intended that the market system `evolve through the interplay
of competitive forces as unnecessary regulatory restrictions are
removed' and that the SEC wield its regulatory power `in those
situations where competition may not be sufficient,' such as in the
creation of a `consolidated transactional reporting system.' ''
NetCoalition, at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court's conclusions about
Congressional intent are therefore reinforced by the Dodd-Frank Act
amendments, which create a presumption that exchange fees, including
market data fees, may take effect immediately, without prior Commission
approval, and that the Commission should take action to suspend a fee
change and institute a proceeding to determine whether the fee change
should be approved or disapproved only where the Commission has
concerns that the change may not be consistent with the Act.
For the reasons stated above, PHLX believes that the proposed fees
are fair and equitable, and not unreasonably discriminatory. As
described above, the proposed fees are based on pricing conventions and
distinctions that exist in PHLX's current fee schedule, and the fee
schedules of other exchanges. These distinctions are each based on
principles of fairness and equity that have helped for many years to
maintain fair, equitable, and not unreasonably discriminatory fees, and
that apply with equal or greater force to the current proposal.
As described in greater detail below, if PHLX has calculated
improperly and the market deems the proposed fees to be unfair,
inequitable, or unreasonably discriminatory, firms can diminish or
discontinue the use of their data because the proposed fee is entirely
optional to all parties. Firms are not required to purchase proprietary
data or to utilize any specific pricing alternative if they do choose
to purchase proprietary data. PHLX is not required to make Depth-of-
Book or Orders data available or to offer specific pricing alternatives
for potential purchases. PHLX can discontinue offering a pricing
alternative (as it has in the past) and firms can discontinue their use
at any time and for any reason (as they often do), including due to
their assessment of the reasonableness of fees charged. PHLX continues
to establish and revise pricing policies aimed at increasing fairness
and equitable allocation of fees among Distributors and users.
PHLX believes that the Depth Data and Orders Data product pricing
promotes increased transparency by offering a pricing options resulting
in fees based upon distributors' and users' different levels of usage
of data elements. While PHLX may need to periodically adjust the
distributor fees to reflect market forces, it continues to view the fee
cap as a way for firms to make additional information available to the
firms' clients, thereby increasing transparency in the market.
B. Self-Regulatory Organization's Statement on Burden on Competition
PHLX 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. Notwithstanding its
determination that the Commission may rely upon competition to
establish fair and equitably allocated fees for market data, the
NetCoalition court found that the Commission had not, in that case,
compiled a record that adequately supported its conclusion that the
market for the data at issue in the case was competitive. PHLX believes
that a record may readily be established to demonstrate the competitive
nature of the market in question.
There is intense competition between trading platforms that provide
transaction execution and routing services and proprietary data
products. Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platform where the order can be posted, including the
execution fees, data quality and price and distribution of it's data
products. Without the prospect of a taking order seeing and reacting to
a posted order on a particular platform, the posting of the order would
accomplish little. Without trade executions, exchange data products
cannot exist. Data products are valuable to many end Subscribers only
insofar as they provide information that end Subscribers expect will
assist them or their customers in making trading decisions.
The costs of producing market data include not only the costs of
the data
[[Page 40933]]
distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's
customers view the costs of transaction executions and of data as a
unified cost of doing business with the exchange. A broker-dealer will
direct orders to a particular exchange only if the expected revenues
from executing trades on the exchange exceed net transaction execution
costs and the cost of data that the broker-dealer chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected value, the broker-dealer will choose not to buy it.
Moreover, as a broker-dealer chooses to direct fewer orders to a
particular exchange, the value of the product to that broker-dealer
decrease, for two reasons. First, the product will contain less
information, because executions of the broker-dealer's orders will not
be reflected in it. Second, and perhaps more important, the product
will be less valuable to that broker-dealer because it does not provide
information about the venue to which it is directing its orders. Data
from the competing venue to which the broker-dealer is directing orders
will become correspondingly more valuable.
Thus, a super-competitive increase in the fees charged for either
transactions or data has the potential to impair revenues from both
products. ``No one disputes that competition for order flow is
`fierce'.'' NetCoalition at 24. However, the existence of fierce
competition for order flow implies a high degree of price sensitivity
on the part of broker-dealers with order flow, since they may readily
reduce costs by directing orders toward the lowest-cost trading venues.
A broker-dealer that shifted its order flow from one platform to
another in response to order execution price differentials would both
reduce the value of that platform's market data and reduce its own need
to consume data from the disfavored platform. Similarly, if a platform
increases its market data fees, the change will affect the overall cost
of doing business with the platform, and affected broker-dealers will
assess whether they can lower their trading costs by directing orders
elsewhere and thereby lessening the need for the more expensive data.
Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's joint product. Rather, all of the exchange's
costs are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data about
market activity. The total return that an exchange earns reflects the
revenues it receives from the joint products and the total costs of the
joint products.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. For example, some platforms may choose to pay rebates to
attract orders, charge relatively low prices for market information (or
provide information free of charge) and charge relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower rebates (or no rebates) to attract orders, setting
relatively high prices for market information, and setting relatively
low prices for accessing posted liquidity. In this environment, there
is no economic basis for regulating maximum prices for one of the joint
products in an industry in which suppliers face competitive constraints
with regard to the joint offering. This would be akin to strictly
regulating the price that an automobile manufacturer can charge for car
sound systems despite the existence of a highly competitive market for
cars and the availability of after-market alternatives to the
manufacturer-supplied system.
The market for market data products is competitive and inherently
contestable because there is fierce competition for the inputs
necessary to the creation of proprietary data and strict pricing
discipline for the proprietary products themselves. Numerous exchanges
compete with each other for listings, trades, and market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to produce and distribute their own market data. This proprietary data
is produced by each individual exchange, as well as other entities, in
a vigorously competitive market.
Broker-dealers currently have numerous alternative venues for their
order flow, including nine existing SRO markets (plus two more expected
this year), as well as various forms of alternative trading systems
(``ATSs''). Each SRO market competes to produce transaction reports via
trade executions. Competitive markets for order flow, executions, and
transaction reports provide pricing discipline for the inputs of
proprietary data products.
The large number of SROs, BDs, and ATSs that currently produce
proprietary data or are currently capable of producing it provides
further pricing discipline for proprietary data products. Each SRO,
ATS, and BD is currently permitted to produce proprietary data
products, and many currently do or have announced plans to do so,
including NASDAQ, CBOE, ISE, NYSE Amex, and NYSEArca.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple
broker-dealers' production of proprietary data products. The potential
sources of proprietary products are virtually limitless.
Market data vendors provide another form of price discipline for
proprietary data products because they control the primary means of
access to end Subscribers. Vendors impose price restraints based upon
their business models. For example, vendors such as Bloomberg and
Thomson Reuters that assess a surcharge on data they sell may refuse to
offer proprietary products that end Subscribers will not purchase in
sufficient numbers. Internet portals, such as Google, impose a
discipline by providing only data that will enable them to attract
``eyeballs'' that contribute to their advertising revenue. Retail
broker-dealers, such as Schwab and Fidelity, offer their customers
proprietary data only if it promotes trading and generates sufficient
commission revenue. Although the business models may differ, these
vendors' pricing discipline is the same: they can simply refuse to
purchase any proprietary data product that fails to provide sufficient
value. PHLX and other producers of proprietary data products must
understand and respond to these varying business models and pricing
disciplines in order to market proprietary data products successfully.
In addition to the competition and price discipline described
above, the market for proprietary data products is
[[Page 40934]]
also highly contestable because market entry is rapid, inexpensive, and
profitable. The history of electronic trading is replete with examples
of entrants that swiftly grew into some of the largest electronic
trading platforms and proprietary data producers: Archipelago, BATS
Trading and Direct Edge.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While broker-dealers
have previously published their proprietary data individually,
Regulation NMS encourages market data vendors and broker-dealers to
produce proprietary products cooperatively in a manner never before
possible. Multiple market data vendors already have the capability to
aggregate data and disseminate it on a profitable scale, including
Bloomberg and Thomson Reuters.
The court in NetCoalition concluded that the Commission had failed
to demonstrate that the market for market data was competitive based on
the reasoning of the Commission's NetCoalition order because, in the
court's view, the Commission had not adequately demonstrated that the
proprietary data at issue in the case is used to attract order flow.
PHLX believes, however, that evidence not before the court clearly
demonstrated that availability of data attracts order flow.
Competition among platforms has driven PHLX continually to improve
its platform data offerings and to cater to customers' data needs. For
example, PHLX has developed and maintained multiple delivery mechanisms
(IP, multi-cast, and compression) that enable customers to receive data
in the form and manner they prefer and at the lowest cost to them. PHLX
has created new products like Depth Data, TOPO and TOPO Plus Orders,
because offering data in multiple formatting allows PHLX to better fit
customer needs. PHLX offers data via multiple extranet providers,
thereby helping to reduce network and total cost for its data products.
PHLX has developed an online administrative system to provide customers
transparency into their data feed requests and streamline data usage
reporting.
Despite these enhancements and a dramatic increase in message
traffic, PHLX's fees for market data have remained flat. In fact, as a
percent of total Subscriber costs, PHLX data fees have fallen relative
to other data usage costs--including bandwidth, programming, and
infrastructure--that have risen. The same holds true for execution
services; despite numerous enhancements to PHLX's trading platform,
absolute and relative trading costs have declined. Platform competition
has intensified as new entrants have emerged, constraining prices for
both executions and for data.
The vigor of competition for proprietary information is significant
and the Exchange believes that this proposal itself clearly evidences
such competition. PHLX is offering a new pricing model in order to keep
pace with changes in the industry and evolving customer needs. It is
entirely optional and is geared towards attracting new customers, as
well as retaining existing customers.
The Exchange has witnessed competitors creating new products and
innovative pricing in this space over the course of the past year. PHLX
continues to see firms challenge its pricing on the basis of the
Exchange's explicit fees being higher than the zero-priced fees from
other competitors such as BATS. In all cases, firms make decisions on
how much and what types of data to consume on the basis of the total
cost of interacting with PHLX or other exchanges. Of course, the
explicit data fees are but one factor in a total platform analysis.
Some competitors have lower transactions fees and higher data fees, and
others are vice versa. The market for this Depth-of-Book information is
highly competitive and continually evolves as products develop and
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.\10\ 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.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------
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 email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2012-83 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-Phlx-2012-83. This file
number should be included on the subject line if email 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 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-Phlx-2012-83 and should be
submitted on or before August 1, 2012.
[[Page 40935]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
---------------------------------------------------------------------------
\11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-16876 Filed 7-10-12; 8:45 am]
BILLING CODE 8011-01-P
