Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE ArcaBook, 40801-40805 [2014-16368]
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Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
and Markets, pursuant to delegated
authority.18
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–16369 Filed 7–11–14; 8:45 am]
1. Purpose
BILLING CODE 8011–01–P
The Exchange proposes to amend the
fees for NYSE ArcaBook, which will be
operative on July 1, 2014.
NYSE ArcaBook is a real-time market
data product that is a compilation of all
limit orders resident in the NYSE Arca
limit order book. The Exchange charges
the following monthly display fees for
NYSE ArcaBook: 4
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72560; File No. SR–
NYSEARCA–2014–72]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending the Fees for
NYSE ArcaBook
Access Fee ................
Redistribution Fee ...
Subscriber Fees ........
July 8, 2014.
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 June 24,
2014, 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.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
fees for NYSE ArcaBook, which will be
operative on July 1, 2014. 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.
18 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
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$2,000.
$1,500.
Professional: $40.
Non-professional:
$10.
Non-professional Fee
Cap: $20,000.
The cap applies to any broker-dealer
for non-professional subscribers that
maintain brokerage accounts with the
broker-dealer.5 The Exchange proposes
to establish tiered non-professional user
fees, which would remain at the current
rate of $10 per user for up to 1,500 nonprofessional users, and then decrease to
$6 per user for the next 1,500 nonprofessional users and then decrease to
$3 per user for all non-professional
users above that level, with the nonprofessional fee cap for broker-dealers
set at $40,000. Most vendors with nonprofessional users will pay the same
fees as they do today, while a small
number of vendors with larger numbers
of non-professional users will pay more
than they do today.
The Exchange believes that the
proposed rule change is consistent with
the market-based approach of the
Securities and Exchange Commission
(‘‘Commission’’). The decision of the
United States Court of Appeals for the
District of Columbia Circuit in
NetCoalition v. SEC, 615 F.3d 525 (D.C.
Cir. 2010), upheld reliance by the
Commission 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
4 See Securities Exchange Act Release No. 71483
(February 5, 2014), 79 FR 8217 (February 11, 2014)
(SR–NYSEArca–2014–12).
5 See Securities Exchange Act Release No. 54597
(October 12, 2006), 71 FR 62029 (October 20, 2006)
(SR–NYSEArca–2006–21).
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in the creation of a ‘consolidated
transactional reporting system.’
Id. at 535 (quoting H.R. Rep. No. 94–
229 at 92 (1975), as reprinted in 1975
U.S.C.C.A.N. 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.’ ’’ 6
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 proprietary market
data and that the Commission can rely
upon such evidence in concluding that
the fees proposed in this filing are the
product of competition and therefore
satisfy the relevant statutory standards.7
In addition, the existence of alternatives
to NYSE ArcaBook, including real-time
consolidated data, free delayed
consolidated data, and proprietary data
from other sources, as described below,
further ensures that the Exchange
cannot set unreasonable fees, or fees
that are unreasonably discriminatory,
when vendors and subscribers can elect
such alternatives.
As the NetCoalition decision noted,
the Commission is not required to
undertake a cost-of-service or
ratemaking approach.8 The Exchange
believes that, even if it were possible as
a matter of economic theory, cost-based
pricing for non-core market data would
be so complicated that it could not be
done practically.9
6 NetCoalition,
615 F.3d at 535.
916 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the
‘‘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.
8 NetCoalition, 615 F.3d at 536.
9 The Exchange believes that cost-based pricing
would be impractical because it would create
enormous administrative burdens for all parties,
including the Commission, to cost-regulate a large
number of participants and standardize and analyze
extraordinary amounts of information, accounts,
and reports. In addition, and as described below, it
is impossible to regulate market data prices in
isolation from prices charged by markets for other
services that are joint products. Cost-based rate
regulation would also lead to litigation and may
distort incentives, including those to minimize
costs and to innovate, leading to further waste.
Under cost-based pricing, the Commission would
be burdened with determining a fair rate of return,
and the industry could experience frequent rate
increases based on escalating expense levels. Even
in industries historically subject to utility
regulation, cost-based ratemaking has been
discredited. As such, the Exchange believes that
cost-based ratemaking would be inappropriate for
proprietary market data and inconsistent with
Congress’s direction that the Commission use its
authority to foster the development of the national
7 Section
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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 Act,10
in general, and Sections 6(b)(4) and
6(b)(5) of the Act,11 in particular, in that
it provides an equitable allocation of
reasonable fees among its members,
issuers, and other persons using its
facilities and is not designed to permit
unfair discrimination among customers,
issuers, brokers, or dealers. The
Exchange also believes that the
proposed rule change is consistent with
Section 11(A) of the Act 12 in that it is
consistent with (i) fair competition
among brokers and dealers, among
exchange markets, and between
exchange markets and markets other
than exchange markets; and (ii) the
availability to brokers, dealers, and
investors of information with respect to
quotations for and transactions in
securities. Furthermore, the proposed
rule change is consistent with Rule 603
of Regulation NMS,13 which provides
that any national securities exchange
that distributes information with respect
to quotations for or transactions in an
NMS stock do so on terms that are not
unreasonably discriminatory.
The Exchange believes that the
increase in the non-professional fee cap
is reasonable because until this year, the
Exchange had not raised NYSE
ArcaBook fees since they were proposed
more than seven years ago in 2006, and
the total non-professional user fee for all
issues has remained the same since that
time.14 The Exchange has enhanced
NYSE ArcaBook through delivery
upgrades, and the message traffic has
increased threefold. The Exchange
believes that the new fees are fair and
reasonable in light of increased quote
message traffic and the Exchange’s
ongoing effort to improve the delivery
technology for market data.
In addition, the Exchange believes
that the proposed fees and cap are
reasonable because they are less than
the fees applicable to similar products
offered by The NASDAQ Stock Market
(‘‘NASDAQ’’). Under NASDAQ Rule
7023, NASDAQ offers (i) Level 2, which
is the best-priced displayed orders or
market system, and that market forces will continue
to provide appropriate pricing discipline. See
Appendix C to NYSE’s comments to the
Commission’s 2000 Concept Release on the
Regulation of Market Information Fees and
Revenues, which can be found on the Commission’s
Web site at https://www.sec.gov/rules/concept/
s72899/buck1.htm.
10 15 U.S.C. 78f(b).
11 15 U.S.C. 78f(b)(4), (5).
12 15 U.S.C. 78k–1.
13 See 17 CFR 242.603.
14 See supra notes 4 and 5.
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quotes from each NASDAQ member for
NASDAQ-listed issues, for $9 per month
per non-professional user; (ii)
TotalView, which covers all displayed
orders and quotes from all NASDAQ
members for NASDAQ-listed issues for
$14 per month per non-professional
user (which includes Level 2); and (iii)
OpenView, which covers all displayed
orders and quotes from all NASDAQ
members for issues listed on other
exchanges for $1 per month per nonprofessional user. Together these fees
total $15 per month per nonprofessional subscriber to cover all
issues. NASDAQ’s monthly fee cap for
broker-dealers to provide NASDAQ
products to their non-professional
customers is $25,000, but it does not
apply to Level 2 fees. In comparison,
NYSE ArcaBook covers securities listed
on NYSE Arca as well as other
exchanges in a single product for $10 or
less per month per non-professional
subscriber and no fees are excluded
from the proposed cap; as such, the
Exchange’s proposed fees will be less
than NASDAQ’s fees for its three
products.
The Exchange further believes that the
proposed subscriber fees are equitable
and not unfairly discriminatory because
the fee structure of differentiated
professional and non-professional fees
has long been used by the Exchange for
other products, by other exchanges for
their products, and by the CTA and CQ
Plans in order to make data more
broadly available to retail customers.15
Continuing to offer NYSE ArcaBook to
non-professional users with the same
data available to professional users
results in greater equity among data
recipients.
The tiered structure with decreasing
fees as the number of non-professional
subscribers increases is equitable and
not unfairly discriminatory because it is
similar to the four-tier structure used for
professional subscribers by the CTA and
CQ for Network A data.16 Most of the
broker-dealers that purchase NYSE
ArcaBook have fewer than 1,500 nonprofessional users and would be
unaffected by the change in fees, and
only a small number of broker-dealers
that have a large number of nonprofessional users will pay more as a
result of the proposed cap.
15 See, e.g., Securities Exchange Act Release No.
20002, File No. S7–433 (July 22, 1983) (establishing
non-professional fees for CTA data); NASDAQ
Rules 7023(b), 7047.
16 Those monthly fees are $50 for 1–2 devices,
$30 for 3–999 devices, $25 for 1,000–9,999 devices,
and $20 for 10,000 or more devices. See CTA
Network A Rate Schedule, available at https://
www.nyxdata.com/nysedata/
default.aspx?tabid=518.
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The Exchange notes that it recently
increased its access and professional
fees for NYSE ArcaBook, which also had
been unchanged since 2006,17 and that
it is equitable to apply an increase to the
cap for non-professional users as well
because they also benefit from the
Exchange’s ongoing effort to improve
the delivery technology for market data.
The Exchange believes that maintaining
the cap at the increased level is
equitable and not unfairly
discriminatory because broker-dealers
will continue to get the benefit of an
enterprise cap and can continue to
receive a substantial discount to what
the cost would be without a cap. The
Exchange believes that it has structured
the proposed change in a manner that
minimizes its impact on most brokerdealers; those that would pay more
would have the largest number of
customers over which to spread the
cost. The Exchange believes that its
proposal will continue to encourage the
availability of the data to a broad
spectrum of non-professional users.
The Exchange also notes that the use
of NYSE ArcaBook is entirely optional.
Firms have alternative market data
products from which to choose.
Moreover, the Exchange is not required
to make these proprietary data products
available or to offer any specific pricing
alternatives to any customers.
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
In accordance with Section 6(b)(8) of
the Act,18 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
proprietary data feed products is
constrained by (1) the inherent
contestability of the market for
proprietary data and actual competition
for the sale of such data, (2) the joint
product nature of exchange platforms,
and (3) the existence of alternatives to
proprietary data.
The Existence of Actual Competition.
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 exchanges compete with
17 See
18 15
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supra note 5.
U.S.C. 78f(b)(8).
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each other for listings and order flow
and sales of market data itself, providing
virtually limitless opportunities for
entrepreneurs who wish to compete in
any or all of those areas, including
producing and distributing their own
market data. Proprietary data products
are produced and distributed by each
individual exchange, as well as other
entities, in a vigorously competitive
market.
Competitive markets for listings, 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 also has
acknowledged the aggressive
competition among exchanges,
including for the sale of proprietary
market data itself. In 2011, 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.’’ 19
It is common for broker-dealers to
further exploit this recognized
competitive constraint by sending their
order flow and transaction reports to
multiple markets, rather than providing
them all to a single market. As a 2010
Commission Concept Release noted, the
‘‘current market structure can be
described as dispersed and complex’’
with ‘‘trading volume . . . dispersed
among many highly automated trading
centers that compete for order flow in
the same stocks’’ and ‘‘trading centers
offer[ing] a wide range of services that
are designed to attract different types of
market participants with varying trading
needs.’’ 20 More recently, SEC Chair
White has noted that competition for
order flow in exchange-listed equities is
‘‘intense’’ and divided among many
trading venues, including exchanges,
more than 40 alternative trading
systems, and more than 250 brokerdealers.21
19 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.
20 Concept Release on Equity Market Structure,
Securities Exchange Act Release No. 61358 (Jan. 14,
2010), 75 FR 3594 (Jan. 21, 2010) (File No. S7–02–
10).
21 Mary Jo White, Enhancing Our Equity Market
Structure, Sandler O’Neill & Partners, L.P. Global
Exchange and Brokerage Conference, (June 5, 2014)
(available on the Commission Web site), citing
Tuttle, Laura, 2014, ‘‘OTC Trading: Description of
Non-ATS OTC Trading in National Market System
Stocks,’’ at 7–8.
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In addition, in the case of products
that are distributed through market data
vendors, the market data vendors
themselves provide additional price
discipline for proprietary data products
because they control the primary means
of access to certain end users. These
vendors impose price discipline based
upon their business models. The
Exchange believes that broker-dealers
will not elect to make NYSE ArcaBook
available to their non-professional
customers unless the broker-dealers
believe that such an offering will help
them attract or retain customers. All of
these operate as constraints on pricing
proprietary data products.
Joint Product Nature of Exchange
Platform. 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 executions 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
platforms where the order can be
posted, including the execution fees,
data quality, and price and distribution
of their data products. Without a
platform for posting quotations and
executing transactions, market data
would not exist.
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. 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 market data as a unified cost of
doing business with the exchange.
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.22 The Exchange also
22 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), 75 FR 57321, 57324 (Sept.
20, 2010) (SR–NASDAQ–2010–111) (‘‘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
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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.23
Analyzing the cost of market data
product production and distribution in
isolation from the cost of all of the
inputs supporting the creation of market
data and market data products will
inevitably underestimate the cost of the
data and data products. Thus, because it
is impossible to obtain the data inputs
to create market data products without
a fast, technologically robust, and wellregulated execution system, system
costs and regulatory costs affect the
price of both obtaining the market data
itself and creating and distributing
market data products. It would be
equally misleading, however, to
attribute all of an exchange’s costs to the
market data portion of an exchange’s
joint products. 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.
The level of competition and
contestability in the market is evident in
the numerous alternative venues that
compete for order flow, including 12
equities self-regulatory organization
(‘‘SRO’’) markets, as well as
internalizing broker-dealers (‘‘BDs’’) and
various forms of alternative trading
from the joint products and the total costs of the
joint products.’’); see also Securities Exchange Act
Release Nos. 71217 (Dec. 31, 2013), 79 FR 875, 877
(Jan. 7, 2014) (SR–NASDAQ–2013–162) and 70945
(Nov. 26, 2013), 78 FR 72740, 72741 (Dec. 3, 2013)
(SR–NASDAQ–2013–142) (‘‘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.’’).
23 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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systems (‘‘ATSs’’), including dark pools
and electronic communication networks
(‘‘ECNs’’). 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 data
products (or provide market data
products 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
data products, or 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.
Existence of Alternatives. 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 but not limited
to the Exchange, NYSE, NYSE MKT,
NASDAQ OMX, BATS, and Direct Edge.
The fact that proprietary data from
ATSs, BDs, and vendors can bypass
SROs is significant in two respects.
First, non-SROs can compete directly
with SROs for the production and sale
of proprietary data products. Second,
because a single order or transaction
report can appear in an SRO proprietary
product, a non-SRO proprietary
product, or both, the amount of data
available via proprietary products is
greater in size than the actual number of
orders and transaction reports that exist
in the marketplace. Because market data
users can thus find suitable substitutes
for most proprietary market data
products, such as the NASDAQ
products described herein, a market that
overprices its market data products
stands a high risk that users may
substitute another source of market data
information for its own.
Those competitive pressures imposed
by available alternatives are evident in
the Exchange’s proposed pricing. As
noted above, the proposed fees for
NYSE ArcaBook are less than the fees
charged by NASDAQ for non-
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professional use of its depth-of-book
products.
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 and inexpensive. 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, and Direct Edge.
Today, BATS and Direct Edge provide
certain market data at no charge on their
Web sites in order to attract more order
flow, and use revenue rebates from
resulting additional executions to
maintain low execution charges for their
users.24
Further, data products are valuable to
certain end users only insofar as they
provide information that end users
expect will assist them or their
customers. The Exchange believes that
only broker-dealers that expect to derive
a reasonable benefit from offering NYSE
ArcaBook to their non-professional
customers will choose to pay the
attendant monthly fees.
In establishing the proposed fees, the
Exchange considered the
competitiveness of the market for
proprietary 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 alternatives to
the Exchange’s products, including
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 or choose not to purchase a
specific proprietary data product if its
cost to purchase is not justified by the
returns any particular vendor or
subscriber would achieve through the
purchase.
24 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.
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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) 25 of the Act and
subparagraph (f)(2) of Rule 19b–4 26
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
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. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 27 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• 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–2014–72 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEARCA–2014–72. 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
25 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
27 15 U.S.C. 78s(b)(2)(B).
26 17
E:\FR\FM\14JYN1.SGM
14JYN1
Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices
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 the
filing will also be available for
inspection and copying at the NYSE’s
principal office and on its Internet Web
site at www.nyse.com. 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–2014–72 and should be
submitted on or before August 4, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–16368 Filed 7–11–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72551; File No. SR–ICEEU–
2014–06]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Order Approving
Proposed Rule Change Regarding
Investment Losses and Non-Default
Losses
mstockstill on DSK4VPTVN1PROD with NOTICES
July 8, 2014.
I. Introduction
On May 30, 2014, ICE Clear Europe
Limited (‘‘ICE Clear Europe’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–ICEEU–2014–
06 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
The proposed rule change was
published for comment in the Federal
28 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
19:25 Jul 11, 2014
Jkt 232001
Register on June 6, 2014.3 The
Commission received no comment
letters regarding the proposed change.
For the reasons discussed below, the
Commission is granting approval of the
proposed rule change.
II. Description
ICE Clear Europe is proposing to
update its Rules to address certain
investment losses on margin and
guaranty fund contributions provided
by clearing members (as defined more
fully below, ‘‘Investment Losses’’) as
well as other losses to the clearing
house arising other than from a clearing
member default (as defined more fully
below, ‘‘Non-Default Losses’’), including
losses from general business risk and
operational risk. According to ICE Clear
Europe, the change to its Rules would
(i) require ICE Clear Europe to apply a
specified amount of its own assets to
cover non-default losses and investment
losses (‘‘Loss Assets’’) and (ii) require
clearing members in all product
categories to make contributions
(referred to as ‘‘Collateral Offset
Obligations’’) to cover Investment
Losses (but not other Non-Default
Losses) that exceed the available
clearing house Loss Assets. ICE Clear
Europe has also stated that the proposed
change would also limit its liability for
losses arising from a failure of a bank or
similar custodian.
United Kingdom law requires ICE
Clear Europe to have rules addressing
the allocation of non-default losses that
threaten the clearing house’s solvency
and to have plans to maintain
continuity of services if such continuity
is threatened as a result of such losses.
Plans to address losses from general
business risk are also an element of the
CPSS–IOSCO Principles for Financial
Market Infrastructures.4
According to ICE Clear Europe, Part 1
of its Rules has been provisionally
revised to include new definitions for
‘‘Investment Losses’’ and ‘‘Non-Default
Losses,’’ which form the basis of the
new loss allocation provisions. ICE
Clear Europe has proposed creating a
new definition of ‘‘Investment Losses’’
to mean losses incurred or suffered by
3 Securities Exchange Act Release No. 34–72297
(June 2, 2014), 79 FR 32792 (June 6, 2014) (SR–
ICEEU–2014–06).
4 ICE Clear Europe has also noted that the
Commodity Futures Trading Commission has
adopted a similar requirement for systemically
important derivatives clearing organizations and
‘‘subpart C’’ derivatives clearing organizations in
CFTC Rule 39.33(b)(2), and that the Commission
has proposed a similar requirement for certain
‘‘covered clearing agencies’’ in proposed Rule
17Ad–22(e)(15). See Standards for Covered Clearing
Agencies, Proposed rule, Securities Exchange Act
Release No. 34–71699 (Mar. 12, 2014), 79 FR 29507
(May 22, 2014).
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
40805
the clearing house arising in connection
with the default of the issuer of any
instrument and/or counterparty to any
repurchase or reverse repurchase
contract or similar transaction in respect
of investment or reinvestment by the
clearing house of margin (other than
variation margin) or guaranty fund
contributions other than a loss resulting
from the clearing house’s failure to
follow its own investment policies or a
loss resulting from custodial losses. ICE
Clear Europe has stated that Investment
Losses will be allocated separately from
losses arising from a default. ICE Clear
Europe has also stated that an
investment loss relating to margin or
guaranty fund contributions provided
by a defaulting clearing member will be
included in the calculation of
Investment Losses, and that the amount
of Investment Losses will thus not be
reduced by any amounts ICE Clear
Europe may use from its default
resources under Parts 9 and 11 of its
Rules (including guaranty fund
contributions or assessments) to address
losses from a default.
ICE Clear Europe has also proposed to
add a definition of ‘‘Non-Default
Losses’’ to mean losses suffered by the
clearing house (other than Investment
Losses) arising in connection with any
event other than an event of default and
which threaten the solvency of the
clearing house. In addition, ICE Clear
Europe has proposed a new definition
for ‘‘Collateral Offset Obligations,’’
which refers to obligations of a clearing
member arising pursuant to new Rule
919, as discussed below, to make
payments to the clearing house in
respect of Investment Losses, which
offset obligations of the clearing house
to pay the clearing member or return
assets in respect of margin provided to
the clearing house by the clearing
member. ICE Clear Europe has stated
that it has also proposed to add new
definitions for ‘‘Custodian’’ (which is
used in new Rule 919), and ‘‘Loss
Assets,’’ meaning assets of the clearing
house itself that are intended to be
applied to Investment Losses and NonDefault Losses under Rule 919 as
described below.
ICE Clear Europe also proposes
changes in Rules 111 and 905 to
conform and clarify the description of
various types of losses or liabilities that
may be borne by the clearing house,
through addition of references to
‘‘claims’’ and ‘‘shortfalls,’’ in order to
provide for consistent use of language
throughout its Rules where other
references are made to losses.
ICE Clear Europe has stated that the
proposed change would also adopt new
Rule 919, which includes the allocation
E:\FR\FM\14JYN1.SGM
14JYN1
]]>Agencies
[Federal Register Volume 79, Number 134 (Monday, July 14, 2014)]
[Notices]
[Pages 40801-40805]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16368]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72560; File No. SR-NYSEARCA-2014-72]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending the Fees
for NYSE ArcaBook
July 8, 2014.
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 June 24, 2014, 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 Substance
of the Proposed Rule Change
The Exchange proposes to amend the fees for NYSE ArcaBook, which
will be operative on July 1, 2014. 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the fees for NYSE ArcaBook, which
will be operative on July 1, 2014.
NYSE ArcaBook is a real-time market data product that is a
compilation of all limit orders resident in the NYSE Arca limit order
book. The Exchange charges the following monthly display fees for NYSE
ArcaBook: \4\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 71483 (February 5,
2014), 79 FR 8217 (February 11, 2014) (SR-NYSEArca-2014-12).
------------------------------------------------------------------------
------------------------------------------------------------------------
Access Fee................................ $2,000.
Redistribution Fee........................ $1,500.
Subscriber Fees........................... Professional: $40.
Non-professional: $10.
Non-professional Fee Cap:
$20,000.
------------------------------------------------------------------------
The cap applies to any broker-dealer for non-professional
subscribers that maintain brokerage accounts with the broker-dealer.\5\
The Exchange proposes to establish tiered non-professional user fees,
which would remain at the current rate of $10 per user for up to 1,500
non-professional users, and then decrease to $6 per user for the next
1,500 non-professional users and then decrease to $3 per user for all
non-professional users above that level, with the non-professional fee
cap for broker-dealers set at $40,000. Most vendors with non-
professional users will pay the same fees as they do today, while a
small number of vendors with larger numbers of non-professional users
will pay more than they do today.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 54597 (October 12,
2006), 71 FR 62029 (October 20, 2006) (SR-NYSEArca-2006-21).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is consistent
with the market-based approach of the Securities and Exchange
Commission (``Commission''). The decision of the United States Court of
Appeals for the District of Columbia Circuit in NetCoalition v. SEC,
615 F.3d 525 (D.C. Cir. 2010), upheld reliance by the Commission 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.'
Id. at 535 (quoting H.R. Rep. No. 94-229 at 92 (1975), as reprinted
in 1975 U.S.C.C.A.N. 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.' '' \6\
---------------------------------------------------------------------------
\6\ NetCoalition, 615 F.3d at 535.
---------------------------------------------------------------------------
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 proprietary market data and that
the Commission can rely upon such evidence in concluding that the fees
proposed in this filing are the product of competition and therefore
satisfy the relevant statutory standards.\7\ In addition, the existence
of alternatives to NYSE ArcaBook, including real-time consolidated
data, free delayed consolidated data, and proprietary data from other
sources, as described below, further ensures that the Exchange cannot
set unreasonable fees, or fees that are unreasonably discriminatory,
when vendors and subscribers can elect such alternatives.
---------------------------------------------------------------------------
\7\ Section 916 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the ``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.
---------------------------------------------------------------------------
As the NetCoalition decision noted, the Commission is not required
to undertake a cost-of-service or ratemaking approach.\8\ The Exchange
believes that, even if it were possible as a matter of economic theory,
cost-based pricing for non-core market data would be so complicated
that it could not be done practically.\9\
---------------------------------------------------------------------------
\8\ NetCoalition, 615 F.3d at 536.
\9\ The Exchange believes that cost-based pricing would be
impractical because it would create enormous administrative burdens
for all parties, including the Commission, to cost-regulate a large
number of participants and standardize and analyze extraordinary
amounts of information, accounts, and reports. In addition, and as
described below, it is impossible to regulate market data prices in
isolation from prices charged by markets for other services that are
joint products. Cost-based rate regulation would also lead to
litigation and may distort incentives, including those to minimize
costs and to innovate, leading to further waste. Under cost-based
pricing, the Commission would be burdened with determining a fair
rate of return, and the industry could experience frequent rate
increases based on escalating expense levels. Even in industries
historically subject to utility regulation, cost-based ratemaking
has been discredited. As such, the Exchange believes that cost-based
ratemaking would be inappropriate for proprietary market data and
inconsistent with Congress's direction that the Commission use its
authority to foster the development of the national market system,
and that market forces will continue to provide appropriate pricing
discipline. See Appendix C to NYSE's comments to the Commission's
2000 Concept Release on the Regulation of Market Information Fees
and Revenues, which can be found on the Commission's Web site at
https://www.sec.gov/rules/concept/s72899/buck1.htm.
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[[Page 40802]]
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\10\ in general, and
Sections 6(b)(4) and 6(b)(5) of the Act,\11\ in particular, in that it
provides an equitable allocation of reasonable fees among its members,
issuers, and other persons using its facilities and is not designed to
permit unfair discrimination among customers, issuers, brokers, or
dealers. The Exchange also believes that the proposed rule change is
consistent with Section 11(A) of the Act \12\ in that it is consistent
with (i) fair competition among brokers and dealers, among exchange
markets, and between exchange markets and markets other than exchange
markets; and (ii) the availability to brokers, dealers, and investors
of information with respect to quotations for and transactions in
securities. Furthermore, the proposed rule change is consistent with
Rule 603 of Regulation NMS,\13\ which provides that any national
securities exchange that distributes information with respect to
quotations for or transactions in an NMS stock do so on terms that are
not unreasonably discriminatory.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(4), (5).
\12\ 15 U.S.C. 78k-1.
\13\ See 17 CFR 242.603.
---------------------------------------------------------------------------
The Exchange believes that the increase in the non-professional fee
cap is reasonable because until this year, the Exchange had not raised
NYSE ArcaBook fees since they were proposed more than seven years ago
in 2006, and the total non-professional user fee for all issues has
remained the same since that time.\14\ The Exchange has enhanced NYSE
ArcaBook through delivery upgrades, and the message traffic has
increased threefold. The Exchange believes that the new fees are fair
and reasonable in light of increased quote message traffic and the
Exchange's ongoing effort to improve the delivery technology for market
data.
---------------------------------------------------------------------------
\14\ See supra notes 4 and 5.
---------------------------------------------------------------------------
In addition, the Exchange believes that the proposed fees and cap
are reasonable because they are less than the fees applicable to
similar products offered by The NASDAQ Stock Market (``NASDAQ''). Under
NASDAQ Rule 7023, NASDAQ offers (i) Level 2, which is the best-priced
displayed orders or quotes from each NASDAQ member for NASDAQ-listed
issues, for $9 per month per non-professional user; (ii) TotalView,
which covers all displayed orders and quotes from all NASDAQ members
for NASDAQ-listed issues for $14 per month per non-professional user
(which includes Level 2); and (iii) OpenView, which covers all
displayed orders and quotes from all NASDAQ members for issues listed
on other exchanges for $1 per month per non-professional user. Together
these fees total $15 per month per non-professional subscriber to cover
all issues. NASDAQ's monthly fee cap for broker-dealers to provide
NASDAQ products to their non-professional customers is $25,000, but it
does not apply to Level 2 fees. In comparison, NYSE ArcaBook covers
securities listed on NYSE Arca as well as other exchanges in a single
product for $10 or less per month per non-professional subscriber and
no fees are excluded from the proposed cap; as such, the Exchange's
proposed fees will be less than NASDAQ's fees for its three products.
The Exchange further believes that the proposed subscriber fees are
equitable and not unfairly discriminatory because the fee structure of
differentiated professional and non-professional fees has long been
used by the Exchange for other products, by other exchanges for their
products, and by the CTA and CQ Plans in order to make data more
broadly available to retail customers.\15\ Continuing to offer NYSE
ArcaBook to non-professional users with the same data available to
professional users results in greater equity among data recipients.
---------------------------------------------------------------------------
\15\ See, e.g., Securities Exchange Act Release No. 20002, File
No. S7-433 (July 22, 1983) (establishing non-professional fees for
CTA data); NASDAQ Rules 7023(b), 7047.
---------------------------------------------------------------------------
The tiered structure with decreasing fees as the number of non-
professional subscribers increases is equitable and not unfairly
discriminatory because it is similar to the four-tier structure used
for professional subscribers by the CTA and CQ for Network A data.\16\
Most of the broker-dealers that purchase NYSE ArcaBook have fewer than
1,500 non-professional users and would be unaffected by the change in
fees, and only a small number of broker-dealers that have a large
number of non-professional users will pay more as a result of the
proposed cap.
---------------------------------------------------------------------------
\16\ Those monthly fees are $50 for 1-2 devices, $30 for 3-999
devices, $25 for 1,000-9,999 devices, and $20 for 10,000 or more
devices. See CTA Network A Rate Schedule, available at https://www.nyxdata.com/nysedata/default.aspx?tabid=518.
---------------------------------------------------------------------------
The Exchange notes that it recently increased its access and
professional fees for NYSE ArcaBook, which also had been unchanged
since 2006,\17\ and that it is equitable to apply an increase to the
cap for non-professional users as well because they also benefit from
the Exchange's ongoing effort to improve the delivery technology for
market data. The Exchange believes that maintaining the cap at the
increased level is equitable and not unfairly discriminatory because
broker-dealers will continue to get the benefit of an enterprise cap
and can continue to receive a substantial discount to what the cost
would be without a cap. The Exchange believes that it has structured
the proposed change in a manner that minimizes its impact on most
broker-dealers; those that would pay more would have the largest number
of customers over which to spread the cost. The Exchange believes that
its proposal will continue to encourage the availability of the data to
a broad spectrum of non-professional users.
---------------------------------------------------------------------------
\17\ See supra note 5.
---------------------------------------------------------------------------
The Exchange also notes that the use of NYSE ArcaBook is entirely
optional. Firms have alternative market data products from which to
choose. Moreover, the Exchange is not required to make these
proprietary data products available or to offer any specific pricing
alternatives to any customers.
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
In accordance with Section 6(b)(8) of the Act,\18\ 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 proprietary
data feed products is constrained by (1) the inherent contestability of
the market for proprietary data and actual competition for the sale of
such data, (2) the joint product nature of exchange platforms, and (3)
the existence of alternatives to proprietary data.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Existence of Actual Competition. 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 exchanges compete with
[[Page 40803]]
each other for listings and order flow and sales of market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to compete in any or all of those areas, including producing and
distributing their own market data. Proprietary data products are
produced and distributed by each individual exchange, as well as other
entities, in a vigorously competitive market.
Competitive markets for listings, 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
also has acknowledged the aggressive competition among exchanges,
including for the sale of proprietary market data itself. In 2011,
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.'' \19\
---------------------------------------------------------------------------
\19\ 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.
---------------------------------------------------------------------------
It is common for broker-dealers to further exploit this recognized
competitive constraint by sending their order flow and transaction
reports to multiple markets, rather than providing them all to a single
market. As a 2010 Commission Concept Release noted, the ``current
market structure can be described as dispersed and complex'' with
``trading volume . . . dispersed among many highly automated trading
centers that compete for order flow in the same stocks'' and ``trading
centers offer[ing] a wide range of services that are designed to
attract different types of market participants with varying trading
needs.'' \20\ More recently, SEC Chair White has noted that competition
for order flow in exchange-listed equities is ``intense'' and divided
among many trading venues, including exchanges, more than 40
alternative trading systems, and more than 250 broker-dealers.\21\
---------------------------------------------------------------------------
\20\ Concept Release on Equity Market Structure, Securities
Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21,
2010) (File No. S7-02-10).
\21\ Mary Jo White, Enhancing Our Equity Market Structure,
Sandler O'Neill & Partners, L.P. Global Exchange and Brokerage
Conference, (June 5, 2014) (available on the Commission Web site),
citing Tuttle, Laura, 2014, ``OTC Trading: Description of Non-ATS
OTC Trading in National Market System Stocks,'' at 7-8.
---------------------------------------------------------------------------
In addition, in the case of products that are distributed through
market data vendors, the market data vendors themselves provide
additional price discipline for proprietary data products because they
control the primary means of access to certain end users. These vendors
impose price discipline based upon their business models. The Exchange
believes that broker-dealers will not elect to make NYSE ArcaBook
available to their non-professional customers unless the broker-dealers
believe that such an offering will help them attract or retain
customers. All of these operate as constraints on pricing proprietary
data products.
Joint Product Nature of Exchange Platform. 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 executions 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 platforms where the order
can be posted, including the execution fees, data quality, and price
and distribution of their data products. Without a platform for posting
quotations and executing transactions, market data would not exist.
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. 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 market
data as a unified cost of doing business with the exchange.
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.\22\
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.\23\
---------------------------------------------------------------------------
\22\ 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), 75 FR 57321, 57324
(Sept. 20, 2010) (SR-NASDAQ-2010-111) (``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 Securities Exchange
Act Release Nos. 71217 (Dec. 31, 2013), 79 FR 875, 877 (Jan. 7,
2014) (SR-NASDAQ-2013-162) and 70945 (Nov. 26, 2013), 78 FR 72740,
72741 (Dec. 3, 2013) (SR-NASDAQ-2013-142) (``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.'').
\23\ 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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Analyzing the cost of market data product production and
distribution in isolation from the cost of all of the inputs supporting
the creation of market data and market data products will inevitably
underestimate the cost of the data and data products. Thus, because it
is impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, system costs and regulatory costs affect the price of both
obtaining the market data itself and creating and distributing market
data products. It would be equally misleading, however, to attribute
all of an exchange's costs to the market data portion of an exchange's
joint products. 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.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including 12 equities self-regulatory organization (``SRO'') markets,
as well as internalizing broker-dealers (``BDs'') and various forms of
alternative trading
[[Page 40804]]
systems (``ATSs''), including dark pools and electronic communication
networks (``ECNs''). 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 data products (or provide market data products 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 data products, or 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.
Existence of Alternatives. 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 but not limited to the Exchange, NYSE, NYSE
MKT, NASDAQ OMX, BATS, and Direct Edge.
The fact that proprietary data from ATSs, BDs, and vendors can
bypass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products. Second, because a single order or transaction report can
appear in an SRO proprietary product, a non-SRO proprietary product, or
both, the amount of data available via proprietary products is greater
in size than the actual number of orders and transaction reports that
exist in the marketplace. Because market data users can thus find
suitable substitutes for most proprietary market data products, such as
the NASDAQ products described herein, a market that overprices its
market data products stands a high risk that users may substitute
another source of market data information for its own.
Those competitive pressures imposed by available alternatives are
evident in the Exchange's proposed pricing. As noted above, the
proposed fees for NYSE ArcaBook are less than the fees charged by
NASDAQ for non-professional use of its depth-of-book products.
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 and inexpensive. 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, and Direct Edge. Today, BATS and
Direct Edge provide certain market data at no charge on their Web sites
in order to attract more order flow, and use revenue rebates from
resulting additional executions to maintain low execution charges for
their users.\24\
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\24\ 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.
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Further, data products are valuable to certain end users only
insofar as they provide information that end users expect will assist
them or their customers. The Exchange believes that only broker-dealers
that expect to derive a reasonable benefit from offering NYSE ArcaBook
to their non-professional customers will choose to pay the attendant
monthly fees.
In establishing the proposed fees, the Exchange considered the
competitiveness of the market for proprietary 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 alternatives to the Exchange's products,
including 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 or choose not to purchase a specific proprietary data
product if its cost to purchase is not justified by the returns any
particular vendor or subscriber would achieve through the purchase.
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) \25\ of the Act and subparagraph (f)(2) of Rule
19b-4 \26\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ 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. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \27\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\27\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEARCA-2014-72 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEARCA-2014-72. 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
[[Page 40805]]
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 the filing will also be available for inspection
and copying at the NYSE's principal office and on its Internet Web site
at www.nyse.com. 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-2014-72 and should be submitted on or before August 4, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16368 Filed 7-11-14; 8:45 am]
BILLING CODE 8011-01-P
