Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE Order Imbalances, 1554-1559 [2015-00213]

Download as PDF 1554 Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES actual number of orders and transaction reports that exist in the marketplace. With respect to NYSE Arca BBO and NYSE Arca Trades, competitors offer close substitute products.30 Because market data users can 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 data information for its own. Those competitive pressures imposed by available alternatives are evident in the Exchange’s proposed pricing. 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 Trading and Direct Edge. As noted above, BATS launched as an ATS in 2006 and became an exchange in 2008, while Direct Edge began operations in 2007 and obtained exchange status in 2010. As noted above, LavaFlow ECN provides market data to its subscribers at no charge.31 In setting 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 numerous 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 the attendant fees are not justified by the returns that any particular vendor or data recipient 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) 32 of the Act and subparagraph (f)(2) of Rule 19b–4 33 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) 34 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–2014–148 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEARCA–2014–148. 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 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(2). 34 15 U.S.C. 78s(b)(2)(B). 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–2014–148 and should be submitted on or before February 2, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.35 Brent J. Fields, Secretary. [FR Doc. 2015–00217 Filed 1–9–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73994; File No. SR–NYSE– 2014–77] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE Order Imbalances January 6, 2015. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 23, 2014, the New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the fees for NYSE Order Imbalances to: (1) 32 15 supra note 17. 31 See supra note 299. VerDate Sep<11>2014 17:35 Jan 09, 2015 Jkt 235001 35 17 33 17 30 See 1 15 PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices Establish eligibility requirements for redistribution on a managed nondisplay basis and an access fee for managed non-display data recipients, and (2) make a non-substantive correction to the NYSE Proprietary Market Data Fee Schedule (‘‘Fee Schedule’’), operative on January 1, 2015. 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. tkelley on DSK3SPTVN1PROD with NOTICES A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to (1) amend the fees for NYSE Order Imbalances to establish eligibility requirements for redistribution on a managed nondisplay basis and to establish an access fee for managed non-display data recipients of NYSE Order Imbalances, and (2) make a non-substantive correction to the Fee Schedule, operative on January 1, 2015. Non-Display Use of NYSE market data means accessing, processing, or consuming NYSE market data delivered via direct and/or Redistributor 3 data feeds for a purpose other than in support of a data recipient’s display or further internal or external redistribution. A Redistributor approved for Managed Non-Display Services manages and controls the access to NYSE Order Imbalances and does not allow for further internal distribution or external redistribution of NYSE Order Imbalances by the data recipients. Managed Non-Display Services Fees apply when a data recipient’s non3 ‘‘Redistributor’’ means a vendor or any other person that provides an NYSE data product to a data recipient or to any system that a data recipient uses, irrespective of the means of transmission or access. VerDate Sep<11>2014 17:35 Jan 09, 2015 Jkt 235001 display applications are hosted by a Redistributor that has been approved for Managed Non-Display Services. A Redistributor approved for Managed Non-Display Services is required to report to the Exchange on a monthly basis the data recipients that are receiving NYSE Order Imbalances through the Redistributor’s Managed Non-Display Service. A data recipient receiving NYSE Order Imbalances through a Redistributor’s Managed NonDisplay Service does not have any reporting requirements. Currently, to be approved for Managed Non-Display Services, a Redistributor of the Managed NonDisplay Services must be approved under the Exchange’s Unit-of-Count policy.4 The Exchange is proposing to retire the Unit-of-Count Policy,5 and as a result, eligibility for Managed NonDisplay Services of NYSE Order Imbalances would no longer be based on eligibility under the Unit-of-Count Policy. The Exchange proposes instead to establish eligibility requirements specifically for the redistribution of market data for Managed Non-Display Services. The Exchange also proposes to add an access fee that would apply to a data recipient that receives NYSE Order Imbalances from an approved Redistributor of Managed Non-Display Services. The proposed eligibility requirements for the provision of Managed NonDisplay Services would be similar to the eligibility requirements for the Unit-ofCount Policy in that they would require the Redistributor to manage and control the access to NYSE Order Imbalances for data recipients’ non-display applications and not allow for further internal distribution or external redistribution of the information by data recipients. In addition, to be eligible to provide Managed Non-Display Services, 4 See Securities Exchange Act Release Nos. 59544 (Mar. 9, 2009), 74 FR 11162 (Mar. 16, 2009) (SR– NYSE–2008–131) and 62038 (May 5, 2010), 75 FR 26825 (May 12, 2010) (SR–NYSE–2010–22) (‘‘Unitof-Count Policy filings’’). See also Securities Exchange Act Release No. 2014–43 (Aug. 26, 2014), 79 FR 52079 (Sept. 2, 2014) (NYSE 2014–43) (establishing fees for non-display use of NYSE Order Imbalances). The Unit-of-Count Policy currently applies to NYSE OpenBook, NYSE Trades and NYSE BBO as a method for counting Users. For NYSE Order Imbalances, the Policy sets the criteria for eligibility for Managed Non-Display Services. 5 The Exchange has separately proposed to retire the Unit-of-Count Policy and modify the eligibility requirements for Managed Non-Display Services for all of its proprietary market data products, including NYSE Order Imbalances, and thereby harmonize the eligibility requirements for all NYSE data products that have Managed Non-Display fees. See SR–NYSE–2014–76 (amending fees for NYSE OpenBook) and SR–NYSE–2014–75 (amending fees for NYSE BBO and Trades) (collectively, ‘‘NYSE 2014 Filings’’). PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 1555 the Redistributor would be required to (a) host the data recipients’ non-display applications in equipment located in the Redistributor’s data center and/or hosted space/cage and (b) offer NYSE Order Imbalances in the Redistributor’s own messaging formats (rather than using raw NYSE message formats) by reformatting and/or altering NYSE Order Imbalances prior to retransmission without affecting the integrity of NYSE Order Imbalances and without rendering NYSE Order Imbalances inaccurate, unfair, uninformative, fictitious, misleading or discriminatory. The proposed eligibility requirements are similar to data distribution models currently in use and align the Exchange with other markets.6 The reporting requirements associated with the Managed Non-Display Service would not change. A Redistributor approved for Managed Non-Display Service would be required to report to NYSE on a monthly basis the data recipients that are receiving NYSE Order Imbalances through the Redistributor’s Managed Non-Display Service. A data recipient receiving NYSE Order Imbalances through a Redistributor’s Managed Non-Display Service would continue not to have any reporting requirements. In addition, the Exchange proposes to adopt an Access Fee of $250/month applicable only to data recipients that receive NYSE Order Imbalances from an approved Redistributor of Managed Non-Display Services, operative January 1, 2015. Currently, all data recipients, including recipients of Managed NonDisplay Services, are required to pay an Access Fee of $500/month to receive NYSE Order Imbalances. Because the purpose of an access fee is to charge data recipients for access to the Exchange’s proprietary market data, the Exchange believes it is appropriate to charge an access fee to all data recipients.7 In recognition that data 6 See Securities Exchange Act Release Nos. 70748 (Oct. 23, 2013), 70748 (Oct. 23, 2013), 78 FR 64569 (Oct. 29, 2013) (SR–Phlx–2013–105) (notice of filing and immediate effectiveness of proposed rule change to establish non-display Managed Data Solution for NASDAQ OMX PHLX (‘‘Phlx’’)); 70269 (Aug. 27, 2013), 78 FR 54336 (Sept. 3, 2013) (SR– NASDAQ–2013–106) (notice of filing and immediate effectiveness of proposed rule change to establish non-display Managed Data Solution for the NASDAQ Stock Market (‘‘NASDAQ’’)); and 69182 (Mar. 19, 2013), 78 FR 18378 (Mar. 26, 2013) (SR–Phlx–2013–28) (notice of filing and immediate effectiveness of proposed rule change to establish non-display Managed Data Solution for Phlx equities market PSX). 7 In order to harmonize its approach to fees for its market data products, the Exchange is proposing to establish access fees for Managed Non-Display Services for NYSE OpenBook, NYSE BBO, and NYSE Trades that is also half of the existing access E:\FR\FM\12JAN1.SGM Continued 12JAN1 1556 Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices recipients of Managed Non-Display Services receive NYSE Order Imbalances in a controlled format, the Exchange proposes to reduce the Access Fee by half for those data recipients that only receive Managed Non-Display Services for NYSE Order Imbalances. In connection with this change, the Exchange also proposes to amend the Fee Schedule to specify that the current Access Fee of $500/month is charged to data recipients other than those receiving data through Managed NonDisplay Services. The proposed Managed Non-Display Access Fee would be in addition to the current Managed Non-Display Services Fee of $200/month by each data recipient. The Exchange also proposes to make a non-substantive amendment to the Fee Schedule to add the word ‘‘month’’ to the Category 3 Non-Display Fee, consistent with the other fees in the Fee Schedule. tkelley on DSK3SPTVN1PROD with NOTICES 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,8 in general, and Sections 6(b)(4) and 6(b)(5) of the Act,9 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 Exchange believes that revising the eligibility requirements for Managed Non-Display Services so that the requirements are more closely aligned with the nature of the services being provided is reasonable. The proposed additional requirements for hosting in the Redistributor’s data center and for reformatting and/or altering the market data prior to retransmission are also consistent with similar requirements of other markets for the provision of managed data.10 The Exchange believes that the proposed Access Fee for Managed NonDisplay Services is reasonable, because the data is of value to recipients, and it is reasonable to charge them a lower access fee because they are receiving the data through a Redistributor in a controlled form rather than from the Exchange in raw form. The Exchange believes that the proposed fee directly and appropriately reflects the significant value of using non-display data in a wide range of computer-automated fee for each respective data feed. See NYSE 2014 Filings, supra note 5. 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(4), (5). 10 See supra note 6. VerDate Sep<11>2014 17:35 Jan 09, 2015 Jkt 235001 functions relating to both trading and non-trading activities and that the number and range of these functions continue to grow through innovation and technology developments. The NASDAQ and Phlx also both offer managed non-display data solutions and charge access fees for such services.11 The fee is also equitable and not unfairly discriminatory because it would apply to all data recipients that choose to subscribe to Managed NonDisplay Services for NYSE Order Imbalances. The fees are also equitable and not unfairly discriminatory because they will apply to all data recipients that choose to subscribe to the feeds. The Exchange notes that NYSE Order Imbalances is entirely optional. The Exchange is not required to make NYSE Order Imbalances available or to offer any specific pricing alternatives to any customers, nor is any firm required to purchase NYSE Order Imbalances. Firms that do purchase NYSE Order Imbalances do so for the primary goals of using it to increase revenues, reduce expenses, and in some instances compete directly with the Exchange (including for order flow); those firms are able to determine for themselves whether NYSE Order Imbalances or any other similar products are attractively priced or not. The Exchange notes that brokerdealers are not required to purchase proprietary market data to comply with their best execution obligations.12 Similarly, there is no requirement in Regulation NMS or any other rule that proprietary data be utilized for order routing decisions, and some brokerdealers and alternative trading systems (‘‘ATSs’’) have chosen not to do so.13 11 See supra note 6. NASDAQ offers a Managed Data Solution that assesses a monthly Managed Data Solution Administration fee of $1,500 and monthly Subscriber fees of $60 for nonprofessionals to $300 for professionals. See NASDAQ Rule 7026(b). Phlx charges a monthly Managed Data Solution Administration fee of $2,000 and a monthly Subscriber fee of $500. The monthly License fee is in addition to the monthly Distributor fee of $3,500 (for external usage), and the $500 monthly Subscriber fee is assessed for each Subscriber of a Managed Data Solution. See Securities Exchange Act Release No. 70748 (Oct. 23, 2013), 78 FR 64569 (Oct. 29, 2013) (SR–Phlx–2013– 105). 12 See In the Matter of the Application of Securities Industry And Financial Markets Association For Review of Actions Taken by SelfRegulatory Organizations, Release Nos. 34–72182; AP–3–15350; AP–3–15351 (May 16, 2014). 13 For example, Goldman Sachs Execution and Clearing, L.P. has disclosed that it does not use proprietary market data in connection with Sigma X, its ATS. See response to Question E3, available at https://www.goldmansachs.com/media-relations/ in-the-news/current/pdf-media/gsec-orderhandling-practices-ats-specific.pdf. By way of comparison, IEX has disclosed that it uses PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 Firms that do not wish to purchase NYSE Order Imbalances at the new price can choose similar alternative products 14 or can choose to conduct their business operations in ways that do not use NYSE Order Imbalances data. 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 Securities and Exchange Commission (‘‘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.’ ’’ 15 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 established in this filing are the product of competition and therefore satisfy the relevant statutory standards. As the NetCoalition decision noted, the Commission is not required to undertake a cost-of-service or ratemaking approach. 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 or offer any significant benefits.16 proprietary market data feeds from all registered stock exchanges and the LavaFlow ECN. See https://www.iextrading.com/about/. 14 See NASDAQ Rule 7023 (Nasdaq Totalview and OpenView). 15 NetCoalition, 615 F.3d at 535. 16 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 E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices 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 proprietary market data feed products is constrained by actual competition for the sale of proprietary market data products, the joint product nature of exchange platforms, and the existence of alternatives to the Exchange’s proprietary data. The Existence of Actual Competition tkelley on DSK3SPTVN1PROD with NOTICES The market for proprietary data products is currently competitive and inherently contestable because there is fierce competition for the inputs necessary for the creation of proprietary data and strict pricing discipline for the proprietary products themselves. Numerous exchanges compete with one another for listings and order flow and sales of market data itself, providing ample 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. Indeed, the U.S. Department of Justice (‘‘DOJ’’) (the primary antitrust regulator) has expressly acknowledged the aggressive actual competition among exchanges, including for the sale of proprietary market data. In 2011, the DOJ 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 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. VerDate Sep<11>2014 17:35 Jan 09, 2015 Jkt 235001 information on each equity trade, including the last sale.’’ 17 Moreover, 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. Broker-dealers send their order flow and transaction reports to multiple venues, rather than providing them all to a single venue, which in turn reinforces this competitive constraint. 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.’’ 18 More recently, SEC Chair Mary Jo White has noted that competition for order flow in exchangelisted equities is ‘‘intense’’ and divided among many trading venues, including exchanges, more than 40 alternative trading systems, and more than 250 broker-dealers.19 If an exchange succeeds in its competition for quotations, order flow, and trade executions, then it earns trading revenues and increases the value of its proprietary market data products because they will contain greater quote and trade information. Conversely, if an exchange is less successful in attracting quotes, order flow, and trade 17 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; see also Complaint in U.S. v. Deutsche Borse AG and NYSE Euronext, Case No. 11–cv–2280 (D.C. Dist.) ¶ 24 (‘‘NYSE and Direct Edge compete head-to-head . . . in the provision of real-time proprietary equity data products.’’). 18 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). This Concept Release included data from the third quarter of 2009 showing that no market center traded more than 20% of the volume of listed stocks, further evidencing the dispersal of and competition for trading activity. Id. at 3598. Data available on ArcaVision show that from June 30, 2013 to June 30, 2014, no exchange traded more than 12% of the volume of listed stocks by either trade or dollar volume, further evidencing the continued dispersal of and fierce competition for trading activity. See https://www.arcavision.com/ Arcavision/arcalogin.jsp. 19 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. PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 1557 executions, then its market data products may be less desirable to customers using them in support of order routing and trading decisions in light of the diminished content; data products offered by competing venues may become correspondingly more attractive. Thus, competition for quotations, order flow, and trade executions puts significant pressure on an exchange to maintain both execution and data fees at reasonable levels. In addition, in the case of products that are distributed through market data vendors, such as Bloomberg and Thompson Reuters, the 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. For example, vendors that assess a surcharge on data they sell are able to refuse to offer proprietary products that their end users do not or will not purchase in sufficient numbers. Vendors will not elect to make available NYSE Order Imbalances unless their customers request it, and customers will not elect to pay the proposed fees unless NYSE Order Imbalances can provide value by sufficiently increasing revenues or reducing costs in the customer’s business in a manner that will offset the fees. All of these factors 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, proprietary market data and trade executions are a paradigmatic example of joint products with joint costs. The decision of 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 availability and quality, and price and distribution of their data products. Without a platform to post quotations, receive orders, and execute trades, exchange data products 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 platform for posting quotes, accepting orders, and executing transactions 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 E:\FR\FM\12JAN1.SGM 12JAN1 1558 Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES revenues it receives from both products and the joint costs it incurs. Moreover, an exchange’s brokerdealer customers generally view the costs of transaction executions and market data as a unified cost of doing business with the exchange. A brokerdealer will only choose to direct orders to an exchange if the revenue from the transaction exceeds its cost, including the cost of any market data that the broker-dealer chooses to buy in support of its order routing and trading decisions. If the costs of the transaction are not offset by its value, then the broker-dealer may choose instead not to purchase the product and trade away from that exchange. There is substantial evidence of the strong correlation between order flow and market data purchases. For example, in November 2014 more than 80% of the transaction volume on each of NYSE, and the NYSE’s affiliates, NYSE Arca, Inc. (‘‘NYSE Arca’’) and NYSE MKT LLC (‘‘NYSE MKT’’), was executed by market participants that purchased one or more proprietary market data products (the 20 firms were not the same for each market). A supra-competitive increase in the fees for either executions or market data would create a risk of reducing an exchange’s revenues from both products. Other market participants have noted that proprietary market data and trade executions are joint products of a joint platform and have common costs.20 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.21 20 See Securities Exchange Act Release No. 72153 (May 12, 2014), 79 FR 28575, 28578 n.15 (May 16, 2014) (SR–NASDAQ–2014–045) (‘‘[A]ll 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 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). 21 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. . . . VerDate Sep<11>2014 17:35 Jan 09, 2015 Jkt 235001 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 because it is impossible to obtain the data inputs to create market data products without a fast, technologically robust, and wellregulated execution system, and system 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. As noted above, the level of competition and contestability in the market is evident in the numerous alternative venues that compete for order flow, including 12 equities selfregulatory organization (‘‘SRO’’) markets, as well as various forms of ATSs, including dark pools and electronic communication networks (‘‘ECNs’’), and internalizing brokerdealers. SRO markets compete to attract order flow and produce transaction reports via trade executions, and two FINRA-regulated Trade Reporting Facilities compete to attract transaction reports from the non-SRO venues.22 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 trading 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 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.’’). 22 FINRA’s Alternative Display Facility also receives over-the-counter trade reports that it sends to CTA. PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 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, and setting relatively low prices for accessing posted liquidity. For example, BATS and Direct Edge, which previously operated as ATSs and obtained exchange status in 2008 and 2010, respectively, have provided 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.23 Similarly, LavaFlow ECN provides market data to its subscribers at no charge.24 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, ATSs, and internalizing broker-dealers that currently produce proprietary data or are currently capable of producing it provides further pricing discipline for proprietary data products. Each SRO, ATS, and broker-dealer is currently permitted to produce and sell proprietary data products, and many currently do or have announced plans to do so, including but not limited to the Exchange, NYSE MKT, NYSE Arca, NASDAQ OMX, BATS, and Direct Edge. The fact that proprietary data from ATSs, internalizing broker-dealers, 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. By way of example, BATS and NYSE Arca both published proprietary data on the Internet before registering as exchanges. 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. With respect to NYSE Order Imbalances, similar products are available from competitors.25 Because market data 23 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. 24 See ‘‘LavaFlow—ADF Migration,’’ available at https://www.lavatrading.com/news/pdf/LavaFlow_ ADF_Migration.pdf. 25 See supra note 14. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices tkelley on DSK3SPTVN1PROD with NOTICES users can 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 data information for its own. Those competitive pressures imposed by available alternatives are evident in the Exchange’s proposed pricing, and indeed in the fact that the changes here have the effect of lowering the price for NYSE Order Imbalances. 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 Trading and Direct Edge. As noted above, BATS launched as an ATS in 2006 and became an exchange in 2008, while Direct Edge began operations in 2007 and obtained exchange status in 2010. As noted above, LavaFlow ECN provides market data to its subscribers at no charge.26 In setting 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 numerous 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 the attendant fees are not justified by the returns that any particular vendor or data recipient 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 has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 27 and paragraph (f)(2) of Rule 19b–4 thereunder.28 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 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– NYSE–2014–77 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–NYSE–2014–77. 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 the 27 15 26 See supra note 24. VerDate Sep<11>2014 17:35 Jan 09, 2015 28 17 Jkt 235001 PO 00000 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). Frm 00067 Fmt 4703 Sfmt 4703 1559 filing also will be available for inspection and copying at the principal office of NYSE. 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–NYSE– 2014–77 and should be submitted on or before February 2, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Brent J. Fields, Secretary. [FR Doc. 2015–00213 Filed 1–9–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73999; File No. SR–ISE– 2014–52] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Granting Approval of Proposed Rule Change Regarding the Short Term Option Series Program January 6, 2015. I. Introduction On November 6, 2014, the International Securities Exchange, LLC (the ‘‘Exchange’’ or the ‘‘ISE’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’),2 and Rule 19b–4 thereunder,3 a proposed rule change to extend the current $0.50 strike price intervals in non-index options to short term options with strike prices less than $100. The proposed rule change was published for comment in the Federal Register on November 24, 2014.4 The Commission received no comment letters on the proposal. This order approves the proposed rule change. II. Description of the Proposed Rule Change On any Thursday or Friday that is a business day, the Exchange currently may list short term option series in designated option classes that expire at the close of business on each of the next five Fridays that are business days and 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 4 See Securities Exchange Act Release No. 73633 (November 18, 2014), 79 FR 69974 (‘‘Notice’’). 1 15 E:\FR\FM\12JAN1.SGM 12JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 7 (Monday, January 12, 2015)]
[Notices]
[Pages 1554-1559]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-00213]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73994; File No. SR-NYSE-2014-77]

Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Amending the Fees for NYSE Order Imbalances

January 6, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on December 23, 2014, the New York Stock Exchange LLC (``NYSE'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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 Order Imbalances
to: (1)

[[Page 1555]]

Establish eligibility requirements for redistribution on a managed non-
display basis and an access fee for managed non-display data
recipients, and (2) make a non-substantive correction to the NYSE
Proprietary Market Data Fee Schedule (``Fee Schedule''), operative on
January 1, 2015. 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 (1) amend the fees for NYSE Order
Imbalances to establish eligibility requirements for redistribution on
a managed non-display basis and to establish an access fee for managed
non-display data recipients of NYSE Order Imbalances, and (2) make a
non-substantive correction to the Fee Schedule, operative on January 1,
2015.
Non-Display Use of NYSE market data means accessing, processing, or
consuming NYSE market data delivered via direct and/or Redistributor
\3\ data feeds for a purpose other than in support of a data
recipient's display or further internal or external redistribution. A
Redistributor approved for Managed Non-Display Services manages and
controls the access to NYSE Order Imbalances and does not allow for
further internal distribution or external redistribution of NYSE Order
Imbalances by the data recipients. Managed Non-Display Services Fees
apply when a data recipient's non-display applications are hosted by a
Redistributor that has been approved for Managed Non-Display Services.
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\3\ ``Redistributor'' means a vendor or any other person that
provides an NYSE data product to a data recipient or to any system
that a data recipient uses, irrespective of the means of
transmission or access.
---------------------------------------------------------------------------

A Redistributor approved for Managed Non-Display Services is
required to report to the Exchange on a monthly basis the data
recipients that are receiving NYSE Order Imbalances through the
Redistributor's Managed Non-Display Service. A data recipient receiving
NYSE Order Imbalances through a Redistributor's Managed Non-Display
Service does not have any reporting requirements.
Currently, to be approved for Managed Non-Display Services, a
Redistributor of the Managed Non-Display Services must be approved
under the Exchange's Unit-of-Count policy.\4\ The Exchange is proposing
to retire the Unit-of-Count Policy,\5\ and as a result, eligibility for
Managed Non-Display Services of NYSE Order Imbalances would no longer
be based on eligibility under the Unit-of-Count Policy. The Exchange
proposes instead to establish eligibility requirements specifically for
the redistribution of market data for Managed Non-Display Services. The
Exchange also proposes to add an access fee that would apply to a data
recipient that receives NYSE Order Imbalances from an approved
Redistributor of Managed Non-Display Services.
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\4\ See Securities Exchange Act Release Nos. 59544 (Mar. 9,
2009), 74 FR 11162 (Mar. 16, 2009) (SR-NYSE-2008-131) and 62038 (May
5, 2010), 75 FR 26825 (May 12, 2010) (SR-NYSE-2010-22) (``Unit-of-
Count Policy filings''). See also Securities Exchange Act Release
No. 2014-43 (Aug. 26, 2014), 79 FR 52079 (Sept. 2, 2014) (NYSE 2014-
43) (establishing fees for non-display use of NYSE Order
Imbalances). The Unit-of-Count Policy currently applies to NYSE
OpenBook, NYSE Trades and NYSE BBO as a method for counting Users.
For NYSE Order Imbalances, the Policy sets the criteria for
eligibility for Managed Non-Display Services.
\5\ The Exchange has separately proposed to retire the Unit-of-
Count Policy and modify the eligibility requirements for Managed
Non-Display Services for all of its proprietary market data
products, including NYSE Order Imbalances, and thereby harmonize the
eligibility requirements for all NYSE data products that have
Managed Non-Display fees. See SR-NYSE-2014-76 (amending fees for
NYSE OpenBook) and SR-NYSE-2014-75 (amending fees for NYSE BBO and
Trades) (collectively, ``NYSE 2014 Filings'').
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The proposed eligibility requirements for the provision of Managed
Non-Display Services would be similar to the eligibility requirements
for the Unit-of-Count Policy in that they would require the
Redistributor to manage and control the access to NYSE Order Imbalances
for data recipients' non-display applications and not allow for further
internal distribution or external redistribution of the information by
data recipients. In addition, to be eligible to provide Managed Non-
Display Services, the Redistributor would be required to (a) host the
data recipients' non-display applications in equipment located in the
Redistributor's data center and/or hosted space/cage and (b) offer NYSE
Order Imbalances in the Redistributor's own messaging formats (rather
than using raw NYSE message formats) by reformatting and/or altering
NYSE Order Imbalances prior to retransmission without affecting the
integrity of NYSE Order Imbalances and without rendering NYSE Order
Imbalances inaccurate, unfair, uninformative, fictitious, misleading or
discriminatory. The proposed eligibility requirements are similar to
data distribution models currently in use and align the Exchange with
other markets.\6\
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\6\ See Securities Exchange Act Release Nos. 70748 (Oct. 23,
2013), 70748 (Oct. 23, 2013), 78 FR 64569 (Oct. 29, 2013) (SR-Phlx-
2013-105) (notice of filing and immediate effectiveness of proposed
rule change to establish non-display Managed Data Solution for
NASDAQ OMX PHLX (``Phlx'')); 70269 (Aug. 27, 2013), 78 FR 54336
(Sept. 3, 2013) (SR-NASDAQ-2013-106) (notice of filing and immediate
effectiveness of proposed rule change to establish non-display
Managed Data Solution for the NASDAQ Stock Market (``NASDAQ'')); and
69182 (Mar. 19, 2013), 78 FR 18378 (Mar. 26, 2013) (SR-Phlx-2013-28)
(notice of filing and immediate effectiveness of proposed rule
change to establish non-display Managed Data Solution for Phlx
equities market PSX).
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The reporting requirements associated with the Managed Non-Display
Service would not change. A Redistributor approved for Managed Non-
Display Service would be required to report to NYSE on a monthly basis
the data recipients that are receiving NYSE Order Imbalances through
the Redistributor's Managed Non-Display Service. A data recipient
receiving NYSE Order Imbalances through a Redistributor's Managed Non-
Display Service would continue not to have any reporting requirements.
In addition, the Exchange proposes to adopt an Access Fee of $250/
month applicable only to data recipients that receive NYSE Order
Imbalances from an approved Redistributor of Managed Non-Display
Services, operative January 1, 2015. Currently, all data recipients,
including recipients of Managed Non-Display Services, are required to
pay an Access Fee of $500/month to receive NYSE Order Imbalances.
Because the purpose of an access fee is to charge data recipients for
access to the Exchange's proprietary market data, the Exchange believes
it is appropriate to charge an access fee to all data recipients.\7\ In
recognition that data

[[Page 1556]]

recipients of Managed Non-Display Services receive NYSE Order
Imbalances in a controlled format, the Exchange proposes to reduce the
Access Fee by half for those data recipients that only receive Managed
Non-Display Services for NYSE Order Imbalances. In connection with this
change, the Exchange also proposes to amend the Fee Schedule to specify
that the current Access Fee of $500/month is charged to data recipients
other than those receiving data through Managed Non-Display Services.
The proposed Managed Non-Display Access Fee would be in addition to the
current Managed Non-Display Services Fee of $200/month by each data
recipient.
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\7\ In order to harmonize its approach to fees for its market
data products, the Exchange is proposing to establish access fees
for Managed Non-Display Services for NYSE OpenBook, NYSE BBO, and
NYSE Trades that is also half of the existing access fee for each
respective data feed. See NYSE 2014 Filings, supra note 5.
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The Exchange also proposes to make a non-substantive amendment to
the Fee Schedule to add the word ``month'' to the Category 3 Non-
Display Fee, consistent with the other fees in the Fee Schedule.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\8\ in general, and
Sections 6(b)(4) and 6(b)(5) of the Act,\9\ 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.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(4), (5).
---------------------------------------------------------------------------

The Exchange believes that revising the eligibility requirements
for Managed Non-Display Services so that the requirements are more
closely aligned with the nature of the services being provided is
reasonable. The proposed additional requirements for hosting in the
Redistributor's data center and for reformatting and/or altering the
market data prior to retransmission are also consistent with similar
requirements of other markets for the provision of managed data.\10\
---------------------------------------------------------------------------

\10\ See supra note 6.
---------------------------------------------------------------------------

The Exchange believes that the proposed Access Fee for Managed Non-
Display Services is reasonable, because the data is of value to
recipients, and it is reasonable to charge them a lower access fee
because they are receiving the data through a Redistributor in a
controlled form rather than from the Exchange in raw form. The Exchange
believes that the proposed fee directly and appropriately reflects the
significant value of using non-display data in a wide range of
computer-automated functions relating to both trading and non-trading
activities and that the number and range of these functions continue to
grow through innovation and technology developments. The NASDAQ and
Phlx also both offer managed non-display data solutions and charge
access fees for such services.\11\ The fee is also equitable and not
unfairly discriminatory because it would apply to all data recipients
that choose to subscribe to Managed Non-Display Services for NYSE Order
Imbalances.
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\11\ See supra note 6. NASDAQ offers a Managed Data Solution
that assesses a monthly Managed Data Solution Administration fee of
$1,500 and monthly Subscriber fees of $60 for non-professionals to
$300 for professionals. See NASDAQ Rule 7026(b). Phlx charges a
monthly Managed Data Solution Administration fee of $2,000 and a
monthly Subscriber fee of $500. The monthly License fee is in
addition to the monthly Distributor fee of $3,500 (for external
usage), and the $500 monthly Subscriber fee is assessed for each
Subscriber of a Managed Data Solution. See Securities Exchange Act
Release No. 70748 (Oct. 23, 2013), 78 FR 64569 (Oct. 29, 2013) (SR-
Phlx-2013-105).
---------------------------------------------------------------------------

The fees are also equitable and not unfairly discriminatory because
they will apply to all data recipients that choose to subscribe to the
feeds.
The Exchange notes that NYSE Order Imbalances is entirely optional.
The Exchange is not required to make NYSE Order Imbalances available or
to offer any specific pricing alternatives to any customers, nor is any
firm required to purchase NYSE Order Imbalances. Firms that do purchase
NYSE Order Imbalances do so for the primary goals of using it to
increase revenues, reduce expenses, and in some instances compete
directly with the Exchange (including for order flow); those firms are
able to determine for themselves whether NYSE Order Imbalances or any
other similar products are attractively priced or not.
The Exchange notes that broker-dealers are not required to purchase
proprietary market data to comply with their best execution
obligations.\12\ Similarly, there is no requirement in Regulation NMS
or any other rule that proprietary data be utilized for order routing
decisions, and some broker-dealers and alternative trading systems
(``ATSs'') have chosen not to do so.\13\ Firms that do not wish to
purchase NYSE Order Imbalances at the new price can choose similar
alternative products \14\ or can choose to conduct their business
operations in ways that do not use NYSE Order Imbalances data.
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\12\ See In the Matter of the Application of Securities Industry
And Financial Markets Association For Review of Actions Taken by
Self-Regulatory Organizations, Release Nos. 34-72182; AP-3-15350;
AP-3-15351 (May 16, 2014).
\13\ For example, Goldman Sachs Execution and Clearing, L.P. has
disclosed that it does not use proprietary market data in connection
with Sigma X, its ATS. See response to Question E3, available at
https://www.goldmansachs.com/media-relations/in-the-news/current/pdf-media/gsec-order-handling-practices-ats-specific.pdf. By way of
comparison, IEX has disclosed that it uses proprietary market data
feeds from all registered stock exchanges and the LavaFlow ECN. See
https://www.iextrading.com/about/.
\14\ See NASDAQ Rule 7023 (Nasdaq Totalview and OpenView).
---------------------------------------------------------------------------

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 Securities and Exchange Commission
(``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.' '' \15\
---------------------------------------------------------------------------

\15\ 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
established in this filing are the product of competition and therefore
satisfy the relevant statutory standards.
As the NetCoalition decision noted, the Commission is not required
to undertake a cost-of-service or ratemaking approach. 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 or offer any significant
benefits.\16\
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\16\ 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 1557]]

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 proprietary market data feed products is constrained by
actual competition for the sale of proprietary market data products,
the joint product nature of exchange platforms, and the existence of
alternatives to the Exchange's 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 for the creation of proprietary data and strict
pricing discipline for the proprietary products themselves. Numerous
exchanges compete with one another for listings and order flow and
sales of market data itself, providing ample 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. Indeed,
the U.S. Department of Justice (``DOJ'') (the primary antitrust
regulator) has expressly acknowledged the aggressive actual competition
among exchanges, including for the sale of proprietary market data. In
2011, the DOJ 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.'' \17\
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\17\ 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; see
also Complaint in U.S. v. Deutsche Borse AG and NYSE Euronext, Case
No. 11-cv-2280 (D.C. Dist.) ] 24 (``NYSE and Direct Edge compete
head-to-head . . . in the provision of real-time proprietary equity
data products.'').
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Moreover, 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. Broker-dealers send their order
flow and transaction reports to multiple venues, rather than providing
them all to a single venue, which in turn reinforces this competitive
constraint. 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.'' \18\ More recently, SEC Chair Mary Jo 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.\19\
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\18\ 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). This Concept Release included data from
the third quarter of 2009 showing that no market center traded more
than 20% of the volume of listed stocks, further evidencing the
dispersal of and competition for trading activity. Id. at 3598. Data
available on ArcaVision show that from June 30, 2013 to June 30,
2014, no exchange traded more than 12% of the volume of listed
stocks by either trade or dollar volume, further evidencing the
continued dispersal of and fierce competition for trading activity.
See https://www.arcavision.com/Arcavision/arcalogin.jsp.
\19\ 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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If an exchange succeeds in its competition for quotations, order
flow, and trade executions, then it earns trading revenues and
increases the value of its proprietary market data products because
they will contain greater quote and trade information. Conversely, if
an exchange is less successful in attracting quotes, order flow, and
trade executions, then its market data products may be less desirable
to customers using them in support of order routing and trading
decisions in light of the diminished content; data products offered by
competing venues may become correspondingly more attractive. Thus,
competition for quotations, order flow, and trade executions puts
significant pressure on an exchange to maintain both execution and data
fees at reasonable levels.
In addition, in the case of products that are distributed through
market data vendors, such as Bloomberg and Thompson Reuters, the
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. For example, vendors that assess a surcharge on
data they sell are able to refuse to offer proprietary products that
their end users do not or will not purchase in sufficient numbers.
Vendors will not elect to make available NYSE Order Imbalances unless
their customers request it, and customers will not elect to pay the
proposed fees unless NYSE Order Imbalances can provide value by
sufficiently increasing revenues or reducing costs in the customer's
business in a manner that will offset the fees. All of these factors
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, proprietary market data and trade
executions are a paradigmatic example of joint products with joint
costs. The decision of 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 availability and quality,
and price and distribution of their data products. Without a platform
to post quotations, receive orders, and execute trades, exchange data
products 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 platform for posting quotes,
accepting orders, and executing transactions 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

[[Page 1558]]

revenues it receives from both products and the joint costs it incurs.
Moreover, an exchange's broker-dealer customers generally view the
costs of transaction executions and market data as a unified cost of
doing business with the exchange. A broker-dealer will only choose to
direct orders to an exchange if the revenue from the transaction
exceeds its cost, including the cost of any market data that the
broker-dealer chooses to buy in support of its order routing and
trading decisions. If the costs of the transaction are not offset by
its value, then the broker-dealer may choose instead not to purchase
the product and trade away from that exchange. There is substantial
evidence of the strong correlation between order flow and market data
purchases. For example, in November 2014 more than 80% of the
transaction volume on each of NYSE, and the NYSE's affiliates, NYSE
Arca, Inc. (``NYSE Arca'') and NYSE MKT LLC (``NYSE MKT''), was
executed by market participants that purchased one or more proprietary
market data products (the 20 firms were not the same for each market).
A supra-competitive increase in the fees for either executions or
market data would create a risk of reducing an exchange's revenues from
both products.
Other market participants have noted that proprietary market data
and trade executions are joint products of a joint platform and have
common costs.\20\ 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.\21\
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\20\ See Securities Exchange Act Release No. 72153 (May 12,
2014), 79 FR 28575, 28578 n.15 (May 16, 2014) (SR-NASDAQ-2014-045)
(``[A]ll 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 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).
\21\ 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.'').
---------------------------------------------------------------------------

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 because it is
impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, and system 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.
As noted above, 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 various forms of ATSs, including dark
pools and electronic communication networks (``ECNs''), and
internalizing broker-dealers. SRO markets compete to attract order flow
and produce transaction reports via trade executions, and two FINRA-
regulated Trade Reporting Facilities compete to attract transaction
reports from the non-SRO venues.\22\
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\22\ FINRA's Alternative Display Facility also receives over-
the-counter trade reports that it sends to CTA.
---------------------------------------------------------------------------

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 trading 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, and setting relatively low prices for accessing posted
liquidity. For example, BATS and Direct Edge, which previously operated
as ATSs and obtained exchange status in 2008 and 2010, respectively,
have provided 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.\23\ Similarly, LavaFlow ECN provides market data to its
subscribers at no charge.\24\ 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.
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\23\ 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.
\24\ See ``LavaFlow--ADF Migration,'' available at https://www.lavatrading.com/news/pdf/LavaFlow_ADF_Migration.pdf.
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Existence of Alternatives
The large number of SROs, ATSs, and internalizing broker-dealers
that currently produce proprietary data or are currently capable of
producing it provides further pricing discipline for proprietary data
products. Each SRO, ATS, and broker-dealer is currently permitted to
produce and sell proprietary data products, and many currently do or
have announced plans to do so, including but not limited to the
Exchange, NYSE MKT, NYSE Arca, NASDAQ OMX, BATS, and Direct Edge.
The fact that proprietary data from ATSs, internalizing broker-
dealers, 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. By way of example, BATS and NYSE
Arca both published proprietary data on the Internet before registering
as exchanges. 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. With respect to NYSE Order Imbalances,
similar products are available from competitors.\25\ Because market
data

[[Page 1559]]

users can 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 data
information for its own.
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\25\ See supra note 14.
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Those competitive pressures imposed by available alternatives are
evident in the Exchange's proposed pricing, and indeed in the fact that
the changes here have the effect of lowering the price for NYSE Order
Imbalances.
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 Trading and Direct Edge. As noted
above, BATS launched as an ATS in 2006 and became an exchange in 2008,
while Direct Edge began operations in 2007 and obtained exchange status
in 2010. As noted above, LavaFlow ECN provides market data to its
subscribers at no charge.\26\
---------------------------------------------------------------------------

\26\ See supra note 24.
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In setting 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 numerous 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 the attendant fees are not justified by the returns
that any particular vendor or data recipient 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 has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \27\ and paragraph (f)(2) of Rule 19b-4
thereunder.\28\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
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\27\ 15 U.S.C. 78s(b)(3)(A)(ii).
\28\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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-NYSE-2014-77 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-NYSE-2014-77. 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 the filing also will be available
for inspection and copying at the principal office of NYSE. 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-NYSE-2014-77 and should be
submitted on or before February 2, 2015.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-00213 Filed 1-9-15; 8:45 am]
BILLING CODE 8011-01-P

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