Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Establishing Fees for Certain Proprietary Options Market Data Products, 63362-63367 [2012-25320]
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Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68005; File No. SR–
NYSEARCA–2012–106]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Establishing Fees for
Certain Proprietary Options Market
Data Products
October 9, 2012.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on
September 26, 2012, 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 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 the Substance
of the Proposed Rule Change
The Exchange proposes to establish
fees for certain proprietary options
market data products. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
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
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 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.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to establish
fees for certain proprietary options
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
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market data products. The products
covered by the fees are ArcaBook for
Arca Options—Trades, ArcaBook for
Arca Options—Top of Book, ArcaBook
for Arca Options—Depth of Book,
ArcaBook for Arca Options—Complex,
ArcaBook for Arca Options—Series
Status, and ArcaBook for Arca
Options—Order Imbalance (collectively,
the ‘‘Arca Options Products’’).4 The fees
set forth below, which will be
implemented on October 1, 2012, are for
all six of the Arca Options Products
collectively; at this time, the Exchange
is not establishing separate pricing for
each of the individual products.
Access and Redistribution Fees
The Exchange proposes to charge an
Access Fee of $3,000 per month and a
Redistribution Fee of $2,000 per month.
Professional End-User 5 Fee
For the receipt and use of the Arca
Options Products, the Exchange
proposes to charge Professional EndUsers $50 per month for each ‘‘User per
Source.’’ 6 A ‘‘Source’’ is a Professional
End-User-controlled source of data from
a Redistributor,7 such as a data feed; in
this case, it is the Arca Options
Products. Professional End-Users must
receive approval to report User per
Source by way of a license with the
Exchange; without such approval, the
Professional End-User must report each
access identifier (‘‘Access ID’’). An
Access ID is a unique identifier that a
Professional End-User has assigned to a
natural person, application, or device
(each, a ‘‘User’’),8 which identifier the
4 See Securities Exchange Act Release No. 67720
(Aug. 23, 2012); 77 FR 52769 (Aug. 30, 2012) (SR–
NYSEArca–2012–89).
5 A Professional End-User is a person or entity
that receives market data from the Exchange or a
Redistributor and uses that market data solely for
its own internal purposes. A Professional End-User
is not permitted to redistribute that market data to
any person or entity outside of its organization.
6 The Exchange notes that the User per Source
reporting policy differs from the unit-of-count
policy used for other Exchange market data
products, such as NYSE Arca Trades and NYSE
Arca BBO. See Securities Exchange Act Release No.
62188 (May 27, 2010), 75 FR 31484 (June 3, 2010)
(SR–NYSEArca–2010–23). Because the Arca
Options Products are new and the Exchange has not
charged for them before, the Exchange has
determined to utilize an updated methodology that
it believes may be easier for it and its customers to
administer. Based on its experience with these
products, the Exchange will consider adopting User
per Source reporting for other market data products
in the future.
7 A Redistributor is any entity that makes market
data available to any person other than the
Redistributor and its employees, directors, officers
and partners, irrespective of the means of
transmission or access.
8 An Access ID may be a User name, but is not
limited to a User name. For example, it could be
a host name, Internet protocol (‘‘IP’’) address, or a
MAC/network address. A User may have more than
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Professional End-User’s Entitlement
System uses to administer technical
controls over access to market data.9
Controlled Access
The unit-of-count for Redistributors of
controlled accesses to market data, such
as display devices and single-use
application program interfaces (‘‘APIs’’),
is each Access ID. Redistributors must
ensure, by way of their agreements with
clients, that Access IDs are not shared
among Users. If a Professional End-User
cannot or does not disclose in advance
its restrictions relating to Access ID
sharing, thereby enabling simultaneous
access by multiple Users, the maximum
number of potential accesses (i.e., the
greatest number of natural persons,
applications, and devices that can
access the market data) will be
chargeable.
Reporting Internal Use
Professional End-Users approved for
User per Source reporting may report
the total number of natural persons per
each Source rather than the number of
Access IDs per Source. For example, if
a natural person has two Access IDs
receiving data from a single
Redistributor’s data feed, the
Professional End-User may report a
count of one. If a natural person has one
Access ID receiving data from two
Redistributors’ data feeds, however, the
Professional End-User must report a
count of two. Likewise, if a natural
person has two Access IDs receiving
data feeds from two separate
Redistributors, the Professional EndUser must report a count of two.
In order to report User per Source, the
Professional End-User must identify the
User associated with each Access ID.
Possible methods to identify the User
include using human resources or other
one Access ID assigned to control access to market
data. Sharing of passwords and/or Access IDs
among Users is prohibited, as is simultaneous
access by multiple Users using the same Access ID.
Simultaneous access by an individual User is
allowed if the Professional End-User discloses in
advance the technical and/or process controls that
prohibit the sharing of Access IDs or other means
of accessing data.
9 The Exchange considers any mechanism that
controls access to market data to constitute an
Entitlement System. Examples of an Entitlement
System include a system that a Redistributor
provides for permissioning Users to receive and use
market data, a dedicated system that a Professional
End-User develops internally, a server-based market
data application that controls access to a limited
group of authorized Users, and a closed network in
which physical access to the network determines a
User’s ability to access market data. Each
Professional End-User must use an Entitlement
System to control all data distribution. Each
Entitlement System should control or track
simultaneous access, generate authentic entitlement
reports, control Access IDs and passwords, and
maintain an audit trail.
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corporate identifiers associated with a
User in an inventory system. Where an
Access ID cannot be associated to a
natural person User, the Professional
End-User must treat that Access ID as a
User per Source.
This aspect of User per Source
reporting applies only to a Professional
End-User’s controlled internal
distribution of data, and does not apply
to Redistributor-controlled access as
described above; therefore, a
Professional End-User may not net
internal Users against Access IDs for a
Redistributor’s controlled access, such
as a device or API, as described in the
preceding section.
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Application Usage
Some internal distribution networks
feature downstream applications that
control access to market data without
using a centralized Entitlement System.
The Access IDs of each such application
must be reported, and Professional EndUsers must ensure that audit trails are
maintained. Professional End-Users that
have been approved for User per Source
reporting may report each of the Users
of the application and not the Access
IDs of these systems; however,
Professional End-Users must ensure that
all Users are reported across all
Entitlement Systems and applications.
For example, a User that has an Access
ID from an Entitlement System and an
Access ID from a downstream
application each receiving data from a
single Redistributor source would be
reported once.
Counting Users in Closed Networks
In a Closed Network, a Professional
End-User has an environment whereby
market data is published on an intranet
or subnet with no other access control
such as an Entitlement System. In
environments such as this, all assigned
IP addresses on the network range are
considered a User per Source and are
therefore reportable. In the case of a
closed network in which physical
access to the network determines a
User’s ability to access market data, the
Professional End-User must report any
device that has physical access to the
network as a separate User per Source.
In closed networks that employ
virtual devices, the Professional EndUser must report all physical and virtual
devices. For example, if a server
provides five different market data
products through five different IP
addresses, each of which is capable of
accessing market data, the Professional
End-User must report all five IP
addresses for each of the five products.
That is, the Professional End-User must
report virtual devices (in the form of IP
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addresses) as well as physical devices,
and not just the physical server.10
Audit Trails
In order to remove an Access ID from
the reporting and fee obligations for the
Arca Options Products, the Professional
End-User must disable the ability of the
Access ID to receive such data entirely.
The Professional End-User must
maintain an audit trail to evidence the
disabling of an Access ID for any period.
In the absence of an adequate audit trail,
all Access IDs that connect to the server
remain fee liable. If the Professional
End-User cannot limit or track the
number of Access IDs, it must report all
Access IDs.
Same User Name for Multiple Uses
Frequently, Users are assigned the
same User name to log into multiple
services and applications that do not
share a common Entitlement System.
For example, a natural person might
elect to use the same User name to gain
access to Redistributor A’s services as it
uses to gain access to Redistributor B’s
services. Or, he or she may use the same
User name to access Redistributor A’s
Service X as he or she uses to gain
access to Redistributor A’s Service Y.
Or, he or she may use the same User
name to access Application A with
Redistributor A’s data as he or she may
use to access Application B with
Redistributor A’s data. Despite the use
of the same User name for multiple
purposes, each use of a User name by
a separate Entitlement System must be
treated as a separate Access ID.
Simultaneous Access and ContentionBased Entitlement Systems
Simultaneous Access is the capability
of a single Access ID to be used
concurrently on two or more devices
identified on a network by their host
name, IP address, or other system-level
identifier for network access.
Entitlement Systems must control and
track the number of simultaneous
accesses by a single Access ID.
Contention-Based Entitlement
Systems are not consistent with User
per Source reporting. Those are systems
for which a limited number of ‘‘tokens’’
or ‘‘accesses’’ that control the number of
simultaneous Users are shared among
Users. As is the case if a Professional
End-User cannot or does not disclose in
advance its restrictions relating to
Access ID sharing, thereby enabling
simultaneous access by multiple Users,
10 If a physical or virtual device (including an IP
address) is capable of receiving a market data
product, the Professional End-User must report the
device regardless of whether a User uses the device
to gain access to the market data product.
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the maximum number of potential
accesses (i.e., the greatest number of
natural persons, applications, and
devices that can access the market data)
will be chargeable.
Nonprofessional End-User Fees
The Exchange proposes to charge each
Redistributor $1.00 per month for each
Nonprofessional End-User to whom it
provides Arca Options Products. The
Exchange proposes to impose the charge
on the Redistributor, rather than on the
Nonprofessional End-User. In addition,
the Exchange proposes to cap the
Nonprofessional End-User Fee at $5,000
per month for each Redistributor. The
Exchange proposes to apply the same
criteria for qualification as a NonProfessional End-User as it does for nonprofessional subscribers to its other
products.11
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 12 in general and with Section
6(b)(4) and 6(b)(5) of the Act 13 in
particular in that it provides an
equitable allocation of reasonable fees
among users and recipients of the data
and is not designed to permit unfair
discrimination among customers,
issuers, and brokers. The proposed Arca
Options Products fees are reasonable,
equitable, and not unfairly
discriminatory because they will
provide additional data to the
marketplace and give investors greater
choices at prices that are comparable to
other similar products. For example, the
Chicago Board Options Exchange
(‘‘CBOE’’) offers CBOE Streaming
Markets, a streaming data feed that
includes best bids and offers (‘‘BBOs’’),
trades, customer vs. non-customer
breakdown of the BBOs, contingent
11 The Exchange defines a nonprofessional
subscriber as a natural person who receives market
data solely for his or her personal, non-business use
and who is not a ‘‘Securities Professional,’’ meaning
that the person is not (1) registered or qualified with
the Commission, the Commodities Futures Trading
Commission, any state securities agency, any
securities exchange or association, or any
commodities or futures contract market or
association; (2) engaged as an ‘‘investment adviser’’
as that term is defined in Section 202(a)(11) of the
Investment Advisors Act of 1940 (whether or not
registered or qualified under that statute); or (3)
employed by a bank or other organization that is
exempt from registration under federal and/or state
securities laws to perform functions that would
require him or her to be so registered or qualified
if he or she were to perform such function for an
organization not so exempt. The nonprofessional
subscriber policy is available at https://
www.nyxdata.com/Docs/Market-Data/Policies.
12 15 U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(4) and (5).
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prices (all-or-none orders) better than or
equal to the BBOs, and BBO data and
last sale data for complex strategies.14
CBOE charges a direct connect fee of
$3,500 per connection per month, a per
user fee of $25 per month per
Authorized User or Device, and $500
per month per data port for receipt of
this data.15 NASDAQ PHLX offers PHLX
Depth of Market, a data product that
provides order and quotation
information for individual quotes and
orders on the PHLX book, last sale
information for trades executed on
PHLX, and an imbalance message, for
which it charges $4,000 per month for
internal distribution and $4,500 per
month for external distribution.16 The
Exchange also notes that it offers an
integrated equities market data feed and
equity depth-of-book product that are
priced comparably to the proposed Arca
Options Products pricing.17 The
Exchange further believes that the
proposed Arca Options Products fees
are equitable and not unfairly
discriminatory because the general
categories of fees—Direct Access,
Redistributor, Professional End-User,
and Non-Professional End-User—are
comparable to the fee categories already
established by the Exchange as well as
other exchanges for market data
products and the fees will apply equally
to all persons in the respective
categories that choose to purchase the
Arca Options Product.
The Exchange believes that the
proposed User per Source reporting
methodology is reasonable, equitable,
and not unfairly discriminatory because
it will help to simplify market data
14 See Securities Exchange Act Release No. 66486
(Feb. 28, 2012), 77 FR 13166 (Mar. 5, 2012) (SR–
CBOE–2012–016).
15 Id.
16 See Securities Exchange Act Release No. 67466
(July 19, 2012), 77 FR 43629 (July 25, 2012) (SR–
Phlx–2012–93) (‘‘PHLX Filing’’).
17 The proposed Access Fee of $3,000 per month
is the same as the $3,000 Direct Access Fee for the
NYSE Arca Integrated Data Feed, an equities market
data product that includes NYSE Arca BBO, NYSE
Arca Trades, NYSE ArcaBook, and certain
additional market data. The proposed
Redistribution Fee of $2,000 per month is less than
the $3,000 Redistribution Fee for the NYSE Arca
Integrated Feed. The proposed Non-Professional
End-User Fee of $1.00 per month (capped at $5,000)
is less than the $10 per month Non-Professional
Subscriber Fee (capped at $20,000) charged by the
Exchange for NYSE ArcaBook. The Professional
End-User Fee of $50 per month per User per Source
is more than the NYSE ArcaBook $30 per month
Professional Subscriber Fee. See Securities
Exchange Act Release Nos. 66128 (Jan. 10, 2012),
77 FR 2331 (Jan. 17, 2012) (SR–NYSEArca–2011–
96), and 63291 (Nov. 9, 2010), 75 FR 70311 (Nov.
17, 2010) (SR–NYSEArca–2010–97). However, the
Exchange believes that the difference in the
Professional fees is reasonable and equitable
because the Arca Options Products offer more data
than the NYSE Arca Integrated Feed.
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administration. The Exchange
recognizes that each Redistributor and
Professional End-User may use Arca
Options Products differently, and the
reporting methodology takes into
account the various uses and provides a
means to avoid duplicative counting
that will allow data recipients to better
manage their costs. Moreover, the
reporting methodology does not
discriminate among data recipients and
users, as the reporting methodology
would apply equally to all Professional
End-Users that choose to utilize it.
The existence of alternatives to the
Arca Options Products, including realtime consolidated data, free delayed
consolidated data, and proprietary data
from other sources, ensures that the
Exchange cannot set unreasonable fees,
or fees that are unreasonably
discriminatory, when vendors and
subscribers can elect such alternatives.
The recent decision of the United States
Court of Appeals for the District of
Columbia Circuit in NetCoalition v.
SEC, No. 09–1042 (DC Cir. 2010),
upheld the Commission’s reliance upon
the existence of competitive market
mechanisms to set reasonable and
equitably allocated fees for proprietary
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
agreed with the Commission’s
conclusion that ‘‘Congress intended that
‘competitive forces should dictate the
services and practices that constitute the
U.S. national market system for trading
equity securities.’ ’’18
As explained below in the Exchange’s
Statement on Burden on Competition,
the Exchange believes that there is
substantial evidence of competition in
the marketplace for data and that the
Commission can rely upon such
evidence in concluding that the fees
established in this filing are the product
of competition and therefore satisfy the
relevant statutory standards.19
As the NetCoalition decision noted,
the Commission is not required to
at 16.
916 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010
(‘‘Dodd-Frank Act’’) amended paragraph (A) of
Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3), to
make clear that all exchange fees for market data
may be filed by exchanges on an immediately
effective basis.
undertake a cost-of-service or
ratemaking approach, and the Exchange
incorporates by reference into this
proposed rule change its analysis of this
topic in another recent rule filing.20
For these reasons, the Exchange
believes that the proposed fees are
reasonable, equitable, and not unfairly
discriminatory.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. An
exchange’s ability to price its data feed
products is constrained by (1)
competition among exchanges in a
variety of dimensions, (2) the existence
of inexpensive real-time consolidated
data and free delayed consolidated data,
and (3) the inherent contestability of the
market for proprietary data.
The market for proprietary data
products is currently 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 options exchanges compete
with each other for trades and market
data, 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 in a vigorously competitive
market.
It is common for broker-dealers to
further exploit this competition by
sending their order flow to multiple
markets, rather than providing it all to
a single market. The current options
market structure is dispersed and
complex with trading volume dispersed
among many highly automated trading
centers that compete for order flow in
the same options, with trading centers
offering a wide range of services that are
designed to attract different types of
market participants with varying trading
needs.21
Competitive markets for order flow,
executions, and transaction reports
provide pricing discipline for the inputs
of proprietary data products and
therefore constrain markets from
overpricing proprietary market data.
The U.S. Department of Justice recently
18 NetCoalition
19 Section
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20 See Securities Exchange Act Release No. 63291
(Nov. 9, 2010), 75 FR 70311 (Nov. 17, 2010) (SR–
NYSEArca–2010–97).
21 See, e.g., Securities Exchange Act Release No.
49175, Concept Release: Competitive Developments
in the Options Markets (Feb. 3, 2004), 69 FR 6124,
6125–6126 (Feb. 3, 2004) (S7–07–04).
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acknowledged the aggressive
competition among exchanges. In
announcing the abandoned bid for
NYSE Euronext by NASDAQ OMX
Group Inc. and
IntercontinentalExchange Inc., Assistant
Attorney General Christine Varney
stated that exchanges ‘‘compete head to
head to offer real-time equity data
products. These data products include
the best bid and offer of every exchange
and information on each equity trade,
including the last sale.’’22 Similarly, the
options markets vigorously compete
with respect to options data products.23
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 its data products. Without trade
executions, exchange data products
cannot exist. Further, data products are
valuable to many end-users only insofar
as they provide information that endusers expect will assist them or their
customers in making trading decisions.
In that respect, the Exchange believes
that the Arca Options Products will
offer options market data information
that is useful for both professionals and
non-professionals in making trading and
investment decisions.
The costs of producing market data
include not only the costs of the data
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.24 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 broker-dealer customers
view the costs of transaction executions
and of data as a unified cost of doing
22 Press Release, U.S. Department of Justice,
‘‘Assistant Attorney General Christine Varney Holds
Conference Call Regarding NASDAQ OMX Group
Inc. and IntercontinentalExchange Inc. Abandoning
Their Bid for NYSE Euronext’’ (May 16, 2011),
available at https://www.justice.gov/iso/opa/atr/
speeches/2011/at-speech-110516.html.
23 See PHLX Filing, supra note 16 [sic], which
describes a variety of options market data products
and their pricing.
24 Although the Exchange charges an Options
Regulatory Fee, it does not offset the full cost of the
Exchange’s regulatory program, e.g., non-customer
trading activity. See Securities Exchange Act
Release No. 64399 (May 4, 2011), 76 FR 27114 (May
10, 2011) (SR–NYSEArca–2011–20).
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business with the exchange. A brokerdealer 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 brokerdealer 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 proprietary
product exceeds its expected value, the
broker-dealer will choose not to buy it.
Moreover, if broker-dealers choose to
direct fewer orders to a particular
exchange, the value of that exchange’s
market data product to those brokerdealers decreases for two reasons. First,
the product will contain less
information because executions of fewer
orders will be reflected in it. Second,
and perhaps more importantly, the
product will be less valuable to brokerdealers that choose to direct their orders
to other venues because it does not
provide information about the venues to
which they are directing their orders.
Data from the competing venues to
which the broker-dealers are directing
orders would become correspondingly
more valuable.
Similarly, in the case of products that
are distributed through market data
vendors, the vendors provide price
discipline for proprietary data products
because they control the primary means
of access to certain end-users. 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-users 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.
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.25 The Exchange agrees
25 See Securities Exchange Act Release No. 62887
(Sept. 10, 2010), 75 FR 57092, 57095 (Sept. 17,
2010) (SR–Phlx–2010–121); Securities Exchange
Act Release No. 62907 (Sept. 14, 2010), 75 FR
57314, 57317 (Sept. 20, 2010) (SR–NASDAQ–2010–
110); and Securities Exchange Act Release No.
62908 (Sept. 14, 2010) (SR–NASDAQ–2010–111),
75 FR 57321, 57324 (Sept. 20, 2010) (‘‘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
PO 00000
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Fmt 4703
Sfmt 4703
63365
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.26
The Exchange believes that retail
broker-dealers, such as Schwab and
Fidelity, offer their customers
proprietary data only if it promotes
trading and generates what they believe
is sufficient commission revenue to
justify the cost of acquiring that data.
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 what they believe
is sufficient value. The Exchange 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.
Moreover, the Exchange believes that
products can enhance order flow to the
Exchange by providing more
widespread distribution of information
about transactions in real time, thereby
encouraging wider participation in the
market. Conversely, less order flow to a
venue decreases the value of that
venue’s market data products to
distributors and investors because the
products contain less content.
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
joint products.’’); see also 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 (‘‘because market data is both an input
to and a byproduct of executing trades on a
particular platform, market data and trade
execution services are an example of ‘joint
products’ with ‘joint costs.’ ’’), attachment at pg. 4,
available at www.sec.gov/comments/34–57917/
3457917–12.pdf.
26 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.’’).
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Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
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 an exchange’s costs to the
market data portion of an exchange’s
joint product. Rather, all of an
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 that 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.
The level of competition and
contestability in the market is evident in
the numerous alternative venues that
compete for order flow, including 10
self-regulatory organization (‘‘SRO’’)
options markets. Plans to launch two
new options exchanges have been
announced.27 Each SRO market
competes to produce transaction reports
via trade executions. The large number
of SROs that currently produce
proprietary data or are currently capable
of producing it provides further pricing
discipline for proprietary data products.
Each SRO is currently permitted to
produce proprietary data products, and
many currently do or have announced
plans to do so, including but not limited
to the Exchange, NYSE MKT, CBOE, C2,
27 Nina Mehta and Nikolaj Gammeltoft, ‘‘Miami
Options Exchange Moves Closer to Becoming 11th
U.S. Venue,’’ Bloomberg.com (Aug. 16, 2012),
available at https://www.bloomberg.com/news/2012–
08–16/miami-options-exchange-moves-closer-tobecoming-11th-u-s-venue.html.
VerDate Mar<15>2010
16:06 Oct 15, 2012
Jkt 229001
ISE, NASDAQ OMX, NASDAQ PHLX,
NASDAQ BX, and BATS. Because
market data users can thus find suitable
substitutes for most proprietary market
data products, a market that overprices
its market data products stands a high
risk that users may substitute another
source of market information for its
own.
In addition to the competition and
price discipline described above, the
market for proprietary data products is
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, Bloomberg Tradebook,
Island, RediBook, Attain, TrackECN,
BATS Trading and Direct Edge.28 As
noted above, two new options
exchanges recently have been
proposed.29
In this environment, a supercompetitive increase in the fees charged
for either transactions or data has the
potential to impair revenues from both
products. 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. If a
platform increases its market data fees,
the change may affect the overall cost of
doing business with the platform, and
affected market participants will assess
whether they can lower their trading
costs by directing orders elsewhere,
thereby lessening the need for the more
expensive data, or simply not purchase
the data.
In establishing the fees for the Arca
Options Products, the Exchange
considered the competitiveness of the
market for data and all of the
implications of that competition. The
Exchange believes that it has considered
all relevant factors and has not
considered irrelevant factors in order to
establish fair, reasonable, and not
unreasonably discriminatory fees and an
equitable allocation of fees among all
users. The existence of numerous
alternatives to the Exchange’s product,
28 Today, BATS provides data at no charge on its
Web site in order to attract more order flow, and
uses market data revenue rebates from resulting
additional executions to maintain low execution
charges for its users. This is simply a securities
market-specific example of the well-established
principle that in certain circumstances more sales
at lower margins can be more profitable than fewer
sales at higher margins; this example is additional
evidence that market data is an inherent part of a
market’s joint platform.
29 See supra note 28 [sic].
PO 00000
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Sfmt 4703
including real-time consolidated data,
free delayed consolidated data, and
proprietary data from other sources,
ensures that the Exchange cannot set
unreasonable fees, or fees that are
unreasonably discriminatory, when
vendors and subscribers can elect these
alternatives. Accordingly, the Exchange
believes that the acceptance of data feed
products in the marketplace
demonstrates the consistency of these
fees with applicable statutory standards.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 30 of the Act and
subparagraph (f)(2) of Rule 19b–4 31
thereunder, because it establishes a due,
fee, or other charge imposed by NYSE
Arca.
At any time within 60 days of the
filing of such 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.
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–NYSEARCA–2012–106 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.
30 15
31 17
E:\FR\FM\16OCN1.SGM
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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Federal Register / Vol. 77, No. 200 / Tuesday, October 16, 2012 / Notices
All submissions should refer to File
Number SR–NYSEARCA–2012–106.
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
10:00 a.m. and 3:00 p.m. Copies of such
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–2012–106 and should be
submitted on or before November 6,
2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–25320 Filed 10–15–12; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–68009; File No. SR–C2–
2012–035]
tkelley on DSK3SPTVN1PROD with NOTICES
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Relating To Order Routing
Rules
October 9, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
32 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
16:06 Oct 15, 2012
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
order routing rules. The text of the
proposed rule change is available on the
Exchange’s Web site (https://
www.c2exchange.com/Legal/), at the
Exchange’s Office of the Secretary, 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
VerDate Mar<15>2010
notice is hereby given that on October
4, 2012, C2 Options Exchange,
Incorporated (the ‘‘Exchange’’ or ‘‘C2’’)
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.
Jkt 229001
Rule 6.36 governs the Exchange’s
process for routing sweep orders to
other markets pursuant to intermarket
linkage rules and states that the
Exchange may contract with one or
more routing brokers that are not
affiliated with the Exchange to route
sweep orders to other exchanges. The
Rule imposes certain obligations on the
Exchange and routing brokers. In
particular, Rule 6.36(e) provides that the
Exchange will determine the logic that
provides when, how and where orders
are routed away to other exchanges.
Additionally, Rule 6.36(f) provides that
a routing broker cannot change the
terms of an order or the routing
instructions, nor does the routing broker
have any discretion about where to
route an order.
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63367
The proposed rule change adds
Interpretation and Policy .01 to Rule
6.36 to clarify that the Rule does not
prohibit a routing broker from
designating a preferred market-maker
(or equivalent market participant) at the
other exchange to which an outbound
sweep order is being routed. The
proposed rule change has no impact on
customer orders, which receive the
same level of order protection and trade
at the best market prices regardless of
whether the routing broker designates a
preferred market-maker recipient at the
destination exchange. The Exchange
still makes the sole determination as to
which exchange an order will be routed,
as well as when and how the order will
be routed. Additionally, routing brokers
are still prohibited from changing the
terms of an order or the Exchange’s
routing instructions and still have no
discretion about to which exchange an
order will be routed.
The proposed rule change merely
clarifies that a routing broker may
indicate which market-maker at the
away exchange may trade against the
routed order in accordance with the
order terms and the Exchange’s routing
instructions. In other words, if a routing
broker preferences a customer order that
is to be routed to another exchange, the
order is not handled any differently by
the routing broker than if the routing
broker did not preference the order.3
Further, the order is executed at the
same exchange and at the same price
and in accordance with the same order
terms as it would if the routing broker
did not preference the order. Therefore,
the proposed rule change does not
disadvantage customers in any way. The
Exchange believes that other exchanges
allow this practice and that its routing
brokers should be able to do the same.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.4 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 5 requirements that the rules of
an exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
acts, to remove impediments to and to
3 The Exchange notes that orders that may be
routed to other exchanges under Rule 6.36 are all
immediate-or-cancel orders. Therefore, routed
orders would not be subject to any automated price
improvement mechanisms that may exist under
other exchanges’ rules.
4 15 U.S.C. 78f(b).
5 15 U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 77, Number 200 (Tuesday, October 16, 2012)]
[Notices]
[Pages 63362-63367]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25320]
[[Page 63362]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68005; File No. SR-NYSEARCA-2012-106]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Establishing Fees
for Certain Proprietary Options Market Data Products
October 9, 2012.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on September 26, 2012, 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 self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to establish fees for certain proprietary
options market data products. The text of the proposed rule change is
available on the Exchange's Web site at www.nyse.com, at the principal
office of the Exchange, 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 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 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish fees for certain proprietary
options market data products. The products covered by the fees are
ArcaBook for Arca Options--Trades, ArcaBook for Arca Options--Top of
Book, ArcaBook for Arca Options--Depth of Book, ArcaBook for Arca
Options--Complex, ArcaBook for Arca Options--Series Status, and
ArcaBook for Arca Options--Order Imbalance (collectively, the ``Arca
Options Products'').\4\ The fees set forth below, which will be
implemented on October 1, 2012, are for all six of the Arca Options
Products collectively; at this time, the Exchange is not establishing
separate pricing for each of the individual products.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 67720 (Aug. 23,
2012); 77 FR 52769 (Aug. 30, 2012) (SR-NYSEArca-2012-89).
---------------------------------------------------------------------------
Access and Redistribution Fees
The Exchange proposes to charge an Access Fee of $3,000 per month
and a Redistribution Fee of $2,000 per month.
Professional End-User \5\ Fee
---------------------------------------------------------------------------
\5\ A Professional End-User is a person or entity that receives
market data from the Exchange or a Redistributor and uses that
market data solely for its own internal purposes. A Professional
End-User is not permitted to redistribute that market data to any
person or entity outside of its organization.
---------------------------------------------------------------------------
For the receipt and use of the Arca Options Products, the Exchange
proposes to charge Professional End-Users $50 per month for each ``User
per Source.'' \6\ A ``Source'' is a Professional End-User-controlled
source of data from a Redistributor,\7\ such as a data feed; in this
case, it is the Arca Options Products. Professional End-Users must
receive approval to report User per Source by way of a license with the
Exchange; without such approval, the Professional End-User must report
each access identifier (``Access ID''). An Access ID is a unique
identifier that a Professional End-User has assigned to a natural
person, application, or device (each, a ``User''),\8\ which identifier
the Professional End-User's Entitlement System uses to administer
technical controls over access to market data.\9\
---------------------------------------------------------------------------
\6\ The Exchange notes that the User per Source reporting policy
differs from the unit-of-count policy used for other Exchange market
data products, such as NYSE Arca Trades and NYSE Arca BBO. See
Securities Exchange Act Release No. 62188 (May 27, 2010), 75 FR
31484 (June 3, 2010) (SR-NYSEArca-2010-23). Because the Arca Options
Products are new and the Exchange has not charged for them before,
the Exchange has determined to utilize an updated methodology that
it believes may be easier for it and its customers to administer.
Based on its experience with these products, the Exchange will
consider adopting User per Source reporting for other market data
products in the future.
\7\ A Redistributor is any entity that makes market data
available to any person other than the Redistributor and its
employees, directors, officers and partners, irrespective of the
means of transmission or access.
\8\ An Access ID may be a User name, but is not limited to a
User name. For example, it could be a host name, Internet protocol
(``IP'') address, or a MAC/network address. A User may have more
than one Access ID assigned to control access to market data.
Sharing of passwords and/or Access IDs among Users is prohibited, as
is simultaneous access by multiple Users using the same Access ID.
Simultaneous access by an individual User is allowed if the
Professional End-User discloses in advance the technical and/or
process controls that prohibit the sharing of Access IDs or other
means of accessing data.
\9\ The Exchange considers any mechanism that controls access to
market data to constitute an Entitlement System. Examples of an
Entitlement System include a system that a Redistributor provides
for permissioning Users to receive and use market data, a dedicated
system that a Professional End-User develops internally, a server-
based market data application that controls access to a limited
group of authorized Users, and a closed network in which physical
access to the network determines a User's ability to access market
data. Each Professional End-User must use an Entitlement System to
control all data distribution. Each Entitlement System should
control or track simultaneous access, generate authentic entitlement
reports, control Access IDs and passwords, and maintain an audit
trail.
---------------------------------------------------------------------------
Controlled Access
The unit-of-count for Redistributors of controlled accesses to
market data, such as display devices and single-use application program
interfaces (``APIs''), is each Access ID. Redistributors must ensure,
by way of their agreements with clients, that Access IDs are not shared
among Users. If a Professional End-User cannot or does not disclose in
advance its restrictions relating to Access ID sharing, thereby
enabling simultaneous access by multiple Users, the maximum number of
potential accesses (i.e., the greatest number of natural persons,
applications, and devices that can access the market data) will be
chargeable.
Reporting Internal Use
Professional End-Users approved for User per Source reporting may
report the total number of natural persons per each Source rather than
the number of Access IDs per Source. For example, if a natural person
has two Access IDs receiving data from a single Redistributor's data
feed, the Professional End-User may report a count of one. If a natural
person has one Access ID receiving data from two Redistributors' data
feeds, however, the Professional End-User must report a count of two.
Likewise, if a natural person has two Access IDs receiving data feeds
from two separate Redistributors, the Professional End-User must report
a count of two.
In order to report User per Source, the Professional End-User must
identify the User associated with each Access ID. Possible methods to
identify the User include using human resources or other
[[Page 63363]]
corporate identifiers associated with a User in an inventory system.
Where an Access ID cannot be associated to a natural person User, the
Professional End-User must treat that Access ID as a User per Source.
This aspect of User per Source reporting applies only to a
Professional End-User's controlled internal distribution of data, and
does not apply to Redistributor-controlled access as described above;
therefore, a Professional End-User may not net internal Users against
Access IDs for a Redistributor's controlled access, such as a device or
API, as described in the preceding section.
Application Usage
Some internal distribution networks feature downstream applications
that control access to market data without using a centralized
Entitlement System. The Access IDs of each such application must be
reported, and Professional End-Users must ensure that audit trails are
maintained. Professional End-Users that have been approved for User per
Source reporting may report each of the Users of the application and
not the Access IDs of these systems; however, Professional End-Users
must ensure that all Users are reported across all Entitlement Systems
and applications. For example, a User that has an Access ID from an
Entitlement System and an Access ID from a downstream application each
receiving data from a single Redistributor source would be reported
once.
Counting Users in Closed Networks
In a Closed Network, a Professional End-User has an environment
whereby market data is published on an intranet or subnet with no other
access control such as an Entitlement System. In environments such as
this, all assigned IP addresses on the network range are considered a
User per Source and are therefore reportable. In the case of a closed
network in which physical access to the network determines a User's
ability to access market data, the Professional End-User must report
any device that has physical access to the network as a separate User
per Source.
In closed networks that employ virtual devices, the Professional
End-User must report all physical and virtual devices. For example, if
a server provides five different market data products through five
different IP addresses, each of which is capable of accessing market
data, the Professional End-User must report all five IP addresses for
each of the five products. That is, the Professional End-User must
report virtual devices (in the form of IP addresses) as well as
physical devices, and not just the physical server.\10\
---------------------------------------------------------------------------
\10\ If a physical or virtual device (including an IP address)
is capable of receiving a market data product, the Professional End-
User must report the device regardless of whether a User uses the
device to gain access to the market data product.
---------------------------------------------------------------------------
Audit Trails
In order to remove an Access ID from the reporting and fee
obligations for the Arca Options Products, the Professional End-User
must disable the ability of the Access ID to receive such data
entirely. The Professional End-User must maintain an audit trail to
evidence the disabling of an Access ID for any period. In the absence
of an adequate audit trail, all Access IDs that connect to the server
remain fee liable. If the Professional End-User cannot limit or track
the number of Access IDs, it must report all Access IDs.
Same User Name for Multiple Uses
Frequently, Users are assigned the same User name to log into
multiple services and applications that do not share a common
Entitlement System. For example, a natural person might elect to use
the same User name to gain access to Redistributor A's services as it
uses to gain access to Redistributor B's services. Or, he or she may
use the same User name to access Redistributor A's Service X as he or
she uses to gain access to Redistributor A's Service Y. Or, he or she
may use the same User name to access Application A with Redistributor
A's data as he or she may use to access Application B with
Redistributor A's data. Despite the use of the same User name for
multiple purposes, each use of a User name by a separate Entitlement
System must be treated as a separate Access ID.
Simultaneous Access and Contention-Based Entitlement Systems
Simultaneous Access is the capability of a single Access ID to be
used concurrently on two or more devices identified on a network by
their host name, IP address, or other system-level identifier for
network access. Entitlement Systems must control and track the number
of simultaneous accesses by a single Access ID.
Contention-Based Entitlement Systems are not consistent with User
per Source reporting. Those are systems for which a limited number of
``tokens'' or ``accesses'' that control the number of simultaneous
Users are shared among Users. As is the case if a Professional End-User
cannot or does not disclose in advance its restrictions relating to
Access ID sharing, thereby enabling simultaneous access by multiple
Users, the maximum number of potential accesses (i.e., the greatest
number of natural persons, applications, and devices that can access
the market data) will be chargeable.
Nonprofessional End-User Fees
The Exchange proposes to charge each Redistributor $1.00 per month
for each Nonprofessional End-User to whom it provides Arca Options
Products. The Exchange proposes to impose the charge on the
Redistributor, rather than on the Nonprofessional End-User. In
addition, the Exchange proposes to cap the Nonprofessional End-User Fee
at $5,000 per month for each Redistributor. The Exchange proposes to
apply the same criteria for qualification as a Non-Professional End-
User as it does for non-professional subscribers to its other
products.\11\
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\11\ The Exchange defines a nonprofessional subscriber as a
natural person who receives market data solely for his or her
personal, non-business use and who is not a ``Securities
Professional,'' meaning that the person is not (1) registered or
qualified with the Commission, the Commodities Futures Trading
Commission, any state securities agency, any securities exchange or
association, or any commodities or futures contract market or
association; (2) engaged as an ``investment adviser'' as that term
is defined in Section 202(a)(11) of the Investment Advisors Act of
1940 (whether or not registered or qualified under that statute); or
(3) employed by a bank or other organization that is exempt from
registration under federal and/or state securities laws to perform
functions that would require him or her to be so registered or
qualified if he or she were to perform such function for an
organization not so exempt. The nonprofessional subscriber policy is
available at https://www.nyxdata.com/Docs/Market-Data/Policies.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Securities Exchange Act of 1934
(the ``Act'') \12\ in general and with Section 6(b)(4) and 6(b)(5) of
the Act \13\ in particular in that it provides an equitable allocation
of reasonable fees among users and recipients of the data and is not
designed to permit unfair discrimination among customers, issuers, and
brokers. The proposed Arca Options Products fees are reasonable,
equitable, and not unfairly discriminatory because they will provide
additional data to the marketplace and give investors greater choices
at prices that are comparable to other similar products. For example,
the Chicago Board Options Exchange (``CBOE'') offers CBOE Streaming
Markets, a streaming data feed that includes best bids and offers
(``BBOs''), trades, customer vs. non-customer breakdown of the BBOs,
contingent
[[Page 63364]]
prices (all-or-none orders) better than or equal to the BBOs, and BBO
data and last sale data for complex strategies.\14\ CBOE charges a
direct connect fee of $3,500 per connection per month, a per user fee
of $25 per month per Authorized User or Device, and $500 per month per
data port for receipt of this data.\15\ NASDAQ PHLX offers PHLX Depth
of Market, a data product that provides order and quotation information
for individual quotes and orders on the PHLX book, last sale
information for trades executed on PHLX, and an imbalance message, for
which it charges $4,000 per month for internal distribution and $4,500
per month for external distribution.\16\ The Exchange also notes that
it offers an integrated equities market data feed and equity depth-of-
book product that are priced comparably to the proposed Arca Options
Products pricing.\17\ The Exchange further believes that the proposed
Arca Options Products fees are equitable and not unfairly
discriminatory because the general categories of fees--Direct Access,
Redistributor, Professional End-User, and Non-Professional End-User--
are comparable to the fee categories already established by the
Exchange as well as other exchanges for market data products and the
fees will apply equally to all persons in the respective categories
that choose to purchase the Arca Options Product.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(4) and (5).
\14\ See Securities Exchange Act Release No. 66486 (Feb. 28,
2012), 77 FR 13166 (Mar. 5, 2012) (SR-CBOE-2012-016).
\15\ Id.
\16\ See Securities Exchange Act Release No. 67466 (July 19,
2012), 77 FR 43629 (July 25, 2012) (SR-Phlx-2012-93) (``PHLX
Filing'').
\17\ The proposed Access Fee of $3,000 per month is the same as
the $3,000 Direct Access Fee for the NYSE Arca Integrated Data Feed,
an equities market data product that includes NYSE Arca BBO, NYSE
Arca Trades, NYSE ArcaBook, and certain additional market data. The
proposed Redistribution Fee of $2,000 per month is less than the
$3,000 Redistribution Fee for the NYSE Arca Integrated Feed. The
proposed Non-Professional End-User Fee of $1.00 per month (capped at
$5,000) is less than the $10 per month Non-Professional Subscriber
Fee (capped at $20,000) charged by the Exchange for NYSE ArcaBook.
The Professional End-User Fee of $50 per month per User per Source
is more than the NYSE ArcaBook $30 per month Professional Subscriber
Fee. See Securities Exchange Act Release Nos. 66128 (Jan. 10, 2012),
77 FR 2331 (Jan. 17, 2012) (SR-NYSEArca-2011-96), and 63291 (Nov. 9,
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97). However,
the Exchange believes that the difference in the Professional fees
is reasonable and equitable because the Arca Options Products offer
more data than the NYSE Arca Integrated Feed.
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The Exchange believes that the proposed User per Source reporting
methodology is reasonable, equitable, and not unfairly discriminatory
because it will help to simplify market data administration. The
Exchange recognizes that each Redistributor and Professional End-User
may use Arca Options Products differently, and the reporting
methodology takes into account the various uses and provides a means to
avoid duplicative counting that will allow data recipients to better
manage their costs. Moreover, the reporting methodology does not
discriminate among data recipients and users, as the reporting
methodology would apply equally to all Professional End-Users that
choose to utilize it.
The existence of alternatives to the Arca Options Products,
including real-time consolidated data, free delayed consolidated data,
and proprietary data from other sources, ensures that the Exchange
cannot set unreasonable fees, or fees that are unreasonably
discriminatory, when vendors and subscribers can elect such
alternatives. The recent decision of the United States Court of Appeals
for the District of Columbia Circuit in NetCoalition v. SEC, No. 09-
1042 (DC Cir. 2010), upheld the Commission's reliance upon the
existence of competitive market mechanisms to set reasonable and
equitably allocated fees for proprietary 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 agreed with the
Commission's conclusion that ``Congress intended that `competitive
forces should dictate the services and practices that constitute the
U.S. national market system for trading equity securities.' ''\18\
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\18\ NetCoalition at 16.
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As explained below in the Exchange's Statement on Burden on
Competition, the Exchange believes that there is substantial evidence
of competition in the marketplace for data and that the Commission can
rely upon such evidence in concluding that the fees established in this
filing are the product of competition and therefore satisfy the
relevant statutory standards.\19\
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\19\ Section 916 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (``Dodd-Frank Act'') amended
paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3),
to make clear that all exchange fees for market data may be filed by
exchanges on an immediately effective basis.
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As the NetCoalition decision noted, the Commission is not required
to undertake a cost-of-service or ratemaking approach, and the Exchange
incorporates by reference into this proposed rule change its analysis
of this topic in another recent rule filing.\20\
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\20\ See Securities Exchange Act Release No. 63291 (Nov. 9,
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97).
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For these reasons, the Exchange believes that the proposed fees are
reasonable, equitable, and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. An exchange's ability to
price its data feed products is constrained by (1) competition among
exchanges in a variety of dimensions, (2) the existence of inexpensive
real-time consolidated data and free delayed consolidated data, and (3)
the inherent contestability of the market for proprietary data.
The market for proprietary data products is currently 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 options
exchanges compete with each other for trades and market data, 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 in a vigorously competitive market.
It is common for broker-dealers to further exploit this competition
by sending their order flow to multiple markets, rather than providing
it all to a single market. The current options market structure is
dispersed and complex with trading volume dispersed among many highly
automated trading centers that compete for order flow in the same
options, with trading centers offering a wide range of services that
are designed to attract different types of market participants with
varying trading needs.\21\
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\21\ See, e.g., Securities Exchange Act Release No. 49175,
Concept Release: Competitive Developments in the Options Markets
(Feb. 3, 2004), 69 FR 6124, 6125-6126 (Feb. 3, 2004) (S7-07-04).
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Competitive markets for order flow, executions, and transaction
reports provide pricing discipline for the inputs of proprietary data
products and therefore constrain markets from overpricing proprietary
market data. The U.S. Department of Justice recently
[[Page 63365]]
acknowledged the aggressive competition among exchanges. In announcing
the abandoned bid for NYSE Euronext by NASDAQ OMX Group Inc. and
IntercontinentalExchange Inc., Assistant Attorney General Christine
Varney stated that exchanges ``compete head to head to offer real-time
equity data products. These data products include the best bid and
offer of every exchange and information on each equity trade, including
the last sale.''\22\ Similarly, the options markets vigorously compete
with respect to options data products.\23\
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\22\ Press Release, U.S. Department of Justice, ``Assistant
Attorney General Christine Varney Holds Conference Call Regarding
NASDAQ OMX Group Inc. and IntercontinentalExchange Inc. Abandoning
Their Bid for NYSE Euronext'' (May 16, 2011), available at https://www.justice.gov/iso/opa/atr/speeches/2011/at-speech-110516.html.
\23\ See PHLX Filing, supra note 16 [sic], which describes a
variety of options market data products and their pricing.
---------------------------------------------------------------------------
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 its data
products. Without trade executions, exchange data products cannot
exist. Further, data products are valuable to many end-users only
insofar as they provide information that end-users expect will assist
them or their customers in making trading decisions. In that respect,
the Exchange believes that the Arca Options Products will offer options
market data information that is useful for both professionals and non-
professionals in making trading and investment decisions.
The costs of producing market data include not only the costs of
the data 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.\24\ 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 broker-
dealer 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
proprietary product exceeds its expected value, the broker-dealer will
choose not to buy it.
---------------------------------------------------------------------------
\24\ Although the Exchange charges an Options Regulatory Fee, it
does not offset the full cost of the Exchange's regulatory program,
e.g., non-customer trading activity. See Securities Exchange Act
Release No. 64399 (May 4, 2011), 76 FR 27114 (May 10, 2011) (SR-
NYSEArca-2011-20).
---------------------------------------------------------------------------
Moreover, if broker-dealers choose to direct fewer orders to a
particular exchange, the value of that exchange's market data product
to those broker-dealers decreases for two reasons. First, the product
will contain less information because executions of fewer orders will
be reflected in it. Second, and perhaps more importantly, the product
will be less valuable to broker-dealers that choose to direct their
orders to other venues because it does not provide information about
the venues to which they are directing their orders. Data from the
competing venues to which the broker-dealers are directing orders would
become correspondingly more valuable.
Similarly, in the case of products that are distributed through
market data vendors, the vendors provide price discipline for
proprietary data products because they control the primary means of
access to certain end-users. 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-users 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.
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.\25\
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.\26\
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\25\ See Securities Exchange Act Release No. 62887 (Sept. 10,
2010), 75 FR 57092, 57095 (Sept. 17, 2010) (SR-Phlx-2010-121);
Securities Exchange Act Release No. 62907 (Sept. 14, 2010), 75 FR
57314, 57317 (Sept. 20, 2010) (SR-NASDAQ-2010-110); and Securities
Exchange Act Release No. 62908 (Sept. 14, 2010) (SR-NASDAQ-2010-
111), 75 FR 57321, 57324 (Sept. 20, 2010) (``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.''); see also 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 (``because market data is both an input to and
a byproduct of executing trades on a particular platform, market
data and trade execution services are an example of `joint products'
with `joint costs.' ''), attachment at pg. 4, available at
www.sec.gov/comments/34-57917/3457917-12.pdf.
\26\ 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.'').
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The Exchange believes that retail broker-dealers, such as Schwab
and Fidelity, offer their customers proprietary data only if it
promotes trading and generates what they believe is sufficient
commission revenue to justify the cost of acquiring that data. 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 what they believe is sufficient value.
The Exchange 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.
Moreover, the Exchange believes that products can enhance order flow to
the Exchange by providing more widespread distribution of information
about transactions in real time, thereby encouraging wider
participation in the market. Conversely, less order flow to a venue
decreases the value of that venue's market data products to
distributors and investors because the products contain less content.
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
[[Page 63366]]
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 an exchange's costs to the market data portion of an exchange's
joint product. Rather, all of an 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 that 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.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including 10 self-regulatory organization (``SRO'') options markets.
Plans to launch two new options exchanges have been announced.\27\ Each
SRO market competes to produce transaction reports via trade
executions. The large number of SROs that currently produce proprietary
data or are currently capable of producing it provides further pricing
discipline for proprietary data products. Each SRO is currently
permitted to produce proprietary data products, and many currently do
or have announced plans to do so, including but not limited to the
Exchange, NYSE MKT, CBOE, C2, ISE, NASDAQ OMX, NASDAQ PHLX, NASDAQ BX,
and BATS. Because market data users can thus find suitable substitutes
for most proprietary market data products, a market that overprices its
market data products stands a high risk that users may substitute
another source of market information for its own.
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\27\ Nina Mehta and Nikolaj Gammeltoft, ``Miami Options Exchange
Moves Closer to Becoming 11th U.S. Venue,'' Bloomberg.com (Aug. 16,
2012), available at https://www.bloomberg.com/news/2012-08-16/miami-options-exchange-moves-closer-to-becoming-11th-u-s-venue.html.
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In addition to the competition and price discipline described
above, the market for proprietary data products is 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, Bloomberg Tradebook,
Island, RediBook, Attain, TrackECN, BATS Trading and Direct Edge.\28\
As noted above, two new options exchanges recently have been
proposed.\29\
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\28\ Today, BATS provides data at no charge on its Web site in
order to attract more order flow, and uses market data revenue
rebates from resulting additional executions to maintain low
execution charges for its users. This is simply a securities market-
specific example of the well-established principle that in certain
circumstances more sales at lower margins can be more profitable
than fewer sales at higher margins; this example is additional
evidence that market data is an inherent part of a market's joint
platform.
\29\ See supra note 28 [sic].
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In this environment, a super-competitive increase in the fees
charged for either transactions or data has the potential to impair
revenues from both products. 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. If a platform increases its market data fees, the change may
affect the overall cost of doing business with the platform, and
affected market participants will assess whether they can lower their
trading costs by directing orders elsewhere, thereby lessening the need
for the more expensive data, or simply not purchase the data.
In establishing the fees for the Arca Options Products, the
Exchange considered the competitiveness of the market for data and all
of the implications of that competition. The Exchange believes that it
has considered all relevant factors and has not considered irrelevant
factors in order to establish fair, reasonable, and not unreasonably
discriminatory fees and an equitable allocation of fees among all
users. The existence of numerous alternatives to the Exchange's
product, including real-time consolidated data, free delayed
consolidated data, and proprietary data from other sources, ensures
that the Exchange cannot set unreasonable fees, or fees that are
unreasonably discriminatory, when vendors and subscribers can elect
these alternatives. Accordingly, the Exchange believes that the
acceptance of data feed products in the marketplace demonstrates the
consistency of these fees with applicable statutory standards.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \30\ of the Act and subparagraph (f)(2) of Rule
19b-4 \31\ thereunder, because it establishes a due, fee, or other
charge imposed by NYSE Arca.
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such 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.
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-NYSEARCA-2012-106 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.
[[Page 63367]]
All submissions should refer to File Number SR-NYSEARCA-2012-106. 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
10:00 a.m. and 3:00 p.m. Copies of such 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-2012-106 and should
be submitted on or before November 6, 2012.
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\32\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25320 Filed 10-15-12; 8:45 am]
BILLING CODE 8011-01-P
