Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Fees for Managed Data Solutions, 551-554 [2015-33206]

Download as PDF 551 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76799; File No. SR–Phlx– 2015–112] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify the Fees for Managed Data Solutions and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Phlx. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. amendments be operative on January 1, 2016. The text of the proposed rule change is below. Proposed new language is italicized; proposed deletions are bracketed. NASDAQ OMX PHLX Rules NASDAQ OMX PHLX LLC Pricing Schedule December 30, 2105. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 18, 2015, The NASDAQ OMX PHLX LLC (‘‘Phlx’’) filed with the Securities I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change Phlx proposes to modify the charges to be paid for Managed Data Solutions (‘‘MDS’’). While the changes proposed herein are effective upon filing, the Exchange has designated that the PSX Managed Data Solutions Fees. VIII. NASDAQ OMX PSX Fees * * * * * (a) Distributors and Subscribers of Managed Data Solutions products containing PSX TotalView data (non-display use only) shall pay the following fees: Fee schedule for managed data Solutions Price Managed Data Solutions Administration Fee (for the right to offer Managed Data Solutions to client organizations). PSX Depth Data Professional Managed Data Solutions Subscriber Fee (Internal Use Only and includes PSX TotalView) .................................... PSX Depth Data Managed Data Solutions Non-Professional Subscriber Fee. (Internal Use Only and includes PSX TotalView) .................................... $[750]1,500/mo Per Distributor. $1[0]50/mo Per Subscriber. $20/mo Per Subscriber. Fees are per month for all or any portion of the month in which the MDS products are accessed. (b) No change. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, Phlx included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Phlx has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose The purpose of the proposed rule change is to increase the charges to be paid by distributors and subscribers of Managed Data Solutions products containing PSX TotalView data (nondisplay use only). Specifically, the Exchange proposes to increase the fee charged to distributors for the right to offer Managed Data Solutions to client organizations to $1,500 per month per 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 17:32 Jan 05, 2016 distributor (‘‘MDS Administration Fee’’), and the fee charged to professional subscribers to $150 per month per subscriber (‘‘MDS Subscriber Fee’’). This proposed rule change will not affect the pricing for nonprofessional subscribers. MDS is a data delivery option available to distributors of PSX TotalView. Under the MDS fee structure, distributors may provide data feeds, Application Programming Interfaces (APIs) or similar automated delivery solutions to client organizations with only limited entitlement controls. Through this program, Phlx offers a much simpler administration process for MDS distributors and subscribers, reducing the burden and cost of administration. Subscribers of MDS may use the information for internal purposes only and may not distribute the information outside of their organization. MDS presents opportunities for small and mid-size firms to achieve significant cost savings over the cost of data feeds. Both the MDS Administration Fee and MDS Subscriber Fee have not changed since their introduction in 2013. Nevertheless, both distributors and subscribers reap the benefits of Phlx’s constant focus on the performance and enhancements to these offerings. As such, Phlx recently completed a 3 15 4 15 Jkt 238001 PO 00000 technology refresh to ensure that its data feeds continue to achieve a high level of performance and resiliency. The Exchange has also upgraded and refreshed its disaster recovery capabilities, adding to the increased focus on redundancy and resiliency. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,3 in general, and with Sections 6(b)(4) and 6(b)(5) of the Act,4 in particular, in that it provides an equitable allocation of reasonable fees among Subscribers and recipients of Phlx data and is not designed to permit unfair discrimination between them. Phlx’s proposal to increase the MDS Administration Fee and MDS Subscriber Fee is also consistent with the Act in that it reflects an equitable allocation of reasonable fees. The Commission has long recognized the fair and equitable and not unreasonably discriminatory nature of assessing different fees for distributors and professional and nonprofessional users of the same data. Phlx also believes it is equitable to assess a higher fee per professional user than to an ordinary non-professional user due to the enhanced flexibility, lower U.S.C. 78f. U.S.C. 78f(b)(4) and (5). Frm 00093 Fmt 4703 Sfmt 4703 E:\FR\FM\06JAN1.SGM 06JAN1 552 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Notices overall costs and value that it offers distributors. In adopting Regulation NMS, the Commission granted self-regulatory organizations and broker-dealers increased authority and flexibility to offer new and unique market data to the public. The Commission concluded that Regulation NMS—by deregulating the market in proprietary data—would itself further the Act’s goals of facilitating efficiency and competition: mstockstill on DSK4VPTVN1PROD with NOTICES [E]fficiency is promoted when brokerdealers who do not need the data beyond the prices, sizes, market center identifications of the NBBO and consolidated last sale information are not required to receive (and pay for) such data. The Commission also believes that efficiency is promoted when broker-dealers may choose to receive (and pay for) additional market data based on their own internal analysis of the need for such data.5 By removing ‘‘unnecessary regulatory restrictions’’ on the ability of exchanges to sell their own data, Regulation NMS advanced the goals of the Act and the principles reflected in its legislative history. If the free market should determine whether proprietary data is sold to broker-dealers at all, it follows that the price at which such data is sold should be set by the market as well. PSX TotalView is precisely the sort of market data product that the Commission envisioned when it adopted Regulation NMS. 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) (‘‘NetCoalition I’’), upheld the Commission’s reliance upon competitive markets to set reasonable and equitably allocated fees for market data. ‘‘In fact, the legislative history indicates that the Congress intended that the market system ‘evolve through the interplay of competitive forces as unnecessary regulatory restrictions are removed’ and that the SEC wield its regulatory power ‘in those situations where competition may not be sufficient,’ such as in the creation of a ‘consolidated transactional reporting system.’ NetCoalition I, at 535 (quoting H.R. Rep. No. 94–229, at 92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323). The court agreed with the Commission’s conclusion that ‘‘Congress intended that ‘competitive forces should dictate the services and practices that constitute the U.S. national market system for trading equity securities.’ ’’ 6 5 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). 6 NetCoalition I, at 535. VerDate Sep<11>2014 17:32 Jan 05, 2016 Jkt 238001 The Court in NetCoalition I, while upholding the Commission’s conclusion that competitive forces may be relied upon to establish the fairness of prices, nevertheless concluded that the record in that case did not adequately support the Commission’s conclusions as to the competitive nature of the market for NYSE Arca’s data product at issue in that case. As explained below in Phlx’s Statement on Burden on Competition, however, Phlx believes that there is substantial evidence of competition in the marketplace for data that was not in the record in the NetCoalition I case, and that the Commission is entitled to rely upon such evidence in concluding fees are the product of competition, and therefore in accordance with the relevant statutory standards.7 Accordingly, any findings of the court with respect to that product may not be relevant to the product at issue in this filing. Phlx believes that the allocation of the proposed fee is fair and equitable in accordance with Section 6(b)(4) of the Act, and not unreasonably discriminatory in accordance with Section 6(b)(5) of the Act. As described above, the proposed fee is based on pricing conventions and distinctions that exist in Phlx’s current fee schedule. These distinctions are each based on principles of fairness and equity that have helped for many years to maintain fair, equitable, and not unreasonably discriminatory fees, and that apply with equal or greater force to the current proposal. As described in greater detail below, if Phlx has calculated improperly and the market deems the proposed fees to be unfair, inequitable, or unreasonably discriminatory, firms can discontinue the use of their data because the proposed product is entirely optional to all parties. Firms are not required to purchase data and Phlx is not required to make data available or to offer specific pricing alternatives for potential purchases. Phlx can discontinue offering a pricing alternative (as it has in the past) and firms can discontinue their use at any time and for any reason (as they often do), including due to their assessment of the reasonableness of fees charged. Phlx continues to establish and revise pricing policies aimed at 7 It should also be noted that Section 916 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’) has amended paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3), to make it clear that all exchange fees, including fees for market data, may be filed by exchanges on an immediately effective basis. See also NetCoalition v. SEC, 715 F.3d 342 (D.C. Cir. 2013) (‘‘NetCoalition II’’) (finding no jurisdiction to review Commission’s nonsuspension of immediately effective fee changes). PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 increasing fairness and equitable allocation of fees among Subscribers. Phlx believes that periodically it must adjust the Subscriber fees to reflect market forces. Phlx believes it is an appropriate time to adjust this fee to more accurately reflect the investments made to enhance this product through capacity upgrades. This also reflects that the market for this information is highly competitive and continually evolves as products develop and change. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. Notwithstanding its determination that the Commission may rely upon competition to establish fair and equitably allocated fees for market data, the NetCoalition court found that the Commission had not, in that case, compiled a record that adequately supported its conclusion that the market for the data at issue in the case was competitive. Phlx believes that a record may readily be established to demonstrate the competitive nature of the market in question. There is intense competition between trading platforms that provide transaction execution and routing services and proprietary data products. Transaction execution and proprietary data products are complementary in that market data is both an input and a byproduct of the execution service. In fact, market data and trade execution are a paradigmatic example of joint products with joint costs. Data products are valuable to many end Subscribers only insofar as they provide information that end Subscribers expect will assist them or their customers in making trading decisions. The costs of producing market data include not only the costs of the data distribution infrastructure, but also the costs of designing, maintaining, and operating the exchange’s transaction execution platform and the cost of regulating the exchange to ensure its fair operation and maintain investor confidence. The total return that a trading platform earns reflects the revenues it receives from both products and the joint costs it incurs. Moreover, an exchange’s customers view the costs of transaction executions and of data as a unified cost of doing business with the exchange. A broker-dealer (‘‘BD’’) will direct orders to a particular exchange only if the expected revenues from executing trades on the exchange exceed net transaction execution costs and the E:\FR\FM\06JAN1.SGM 06JAN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Notices cost of data that the BD chooses to buy to support its trading decisions (or those of its customers). The choice of data products is, in turn, a product of the value of the products in making profitable trading decisions. If the cost of the product exceeds its expected value, the BD will choose not to buy it. Moreover, as a BD chooses to direct fewer orders to a particular exchange, the value of the product to that BD decreases, for two reasons. First, the product will contain less information, because executions of the BD’s orders will not be reflected in it. Second, and perhaps more important, the product will be less valuable to that BD because it does not provide information about the venue to which it is directing its orders. Data from the competing venue to which the BD is directing orders will become correspondingly more valuable. Thus, an increase in the fees charged for either transactions or data has the potential to impair revenues from both products. ‘‘No one disputes that competition for order flow is ‘fierce’.’’ NetCoalition at 24. However, the existence of fierce competition for order flow implies a high degree of price sensitivity on the part of BDs with order flow, since they may readily reduce costs by directing orders toward the lowest-cost trading venues. A BD that shifted its order flow from one platform to another in response to order execution price differentials would both reduce the value of that platform’s market data and reduce its own need to consume data from the disfavored platform. Similarly, if a platform increases its market data fees, the change will affect the overall cost of doing business with the platform, and affected BDs will assess whether they can lower their trading costs by directing orders elsewhere and thereby lessening the need for the more expensive data. Analyzing the cost of market data distribution in isolation from the cost of all of the inputs supporting the creation of market data will inevitably underestimate the cost of the data. Thus, because it is impossible to create data without a fast, technologically robust, and well-regulated execution system, system costs and regulatory costs affect the price of market data. It would be equally misleading, however, to attribute all of the exchange’s costs to the market data portion of an exchange’s joint product. Rather, all of the exchange’s costs are incurred for the unified purposes of attracting order flow, executing and/or routing orders, and generating and selling data about market activity. The total return that an exchange earns reflects the revenues it VerDate Sep<11>2014 17:32 Jan 05, 2016 Jkt 238001 receives from the joint products and the total costs of the joint products. Competition among trading platforms can be expected to constrain the aggregate return each platform earns from the sale of its joint products, but different platforms may choose from a range of possible, and equally reasonable, pricing strategies as the means of recovering total costs. Phlx pays rebates to attract orders, charges relatively low prices for market information and charges relatively high prices for accessing posted liquidity. Other platforms may choose a strategy of paying lower liquidity rebates to attract orders, setting relatively low prices for accessing posted liquidity, and setting relatively high prices for market information. Still others may provide most data free of charge and rely exclusively on transaction fees to recover their costs. Finally, some platforms may incentivize use by providing opportunities for equity ownership, which may allow them to charge lower direct fees for executions and data. 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. Such regulation is unnecessary because an ‘‘excessive’’ price for one of the joint products will ultimately have to be reflected in lower prices for other products sold by the firm, or otherwise the firm will experience a loss in the volume of its sales that will be adverse to its overall profitability. In other words, an increase in the price of data will ultimately have to be accompanied by a decrease in the cost of executions, or the volume of both data and executions will fall. The level of competition and contestability in the market is evident in the numerous alternative venues that compete for order flow, including eleven SRO markets, as well as internalizing BDs and various forms of alternative trading systems (‘‘ATSs’’), including dark pools and electronic communication networks (‘‘ECNs’’). Each SRO market competes to produce transaction reports via trade executions, and two FINRA-regulated TRFs compete to attract internalized transaction reports. It is common for BDs to further and exploit this competition by sending their order flow and transaction reports to multiple markets, rather than providing them all to a single market. Competitive markets for order flow, executions, and transaction reports provide pricing discipline for the inputs of proprietary data products. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 553 The large number of SROs, TRFs, 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, TRF, ATS, and BD is currently permitted to produce proprietary data products, and many currently do or have announced plans to do so, including Phlx, NYSE, NYSE MKT, NYSE Arca, and BATS/Direct Edge. Any ATS or BD can combine with any other ATS, BD, or multiple ATSs or BDs to produce joint proprietary data products. Additionally, order routers and market data vendors can facilitate single or multiple BDs’ production of proprietary data products. The potential sources of proprietary products are virtually limitless. Notably, the potential sources of data include the BDs that submit trade reports to TRFs and that have the ability to consolidate and distribute their data without the involvement of FINRA or an exchangeoperated TRF. The fact that proprietary data from ATSs, BDs, and vendors can by-pass SROs is significant in two respects. First, non-SROs can compete directly with SROs for the production and sale of proprietary data products, as BATS and NYSE Arca did before registering as exchanges by publishing proprietary book data on the internet. Second, because a single order or transaction report can appear in a core data product, an SRO proprietary product, and/or a non-SRO proprietary product, the data available in proprietary products is exponentially greater than the actual number of orders and transaction reports that exist in the marketplace. In addition to the competition and price discipline described above, the market for proprietary data products is also highly contestable because market entry is rapid, inexpensive, and profitable. The history of electronic trading is replete with examples of entrants that swiftly grew into some of the largest electronic trading platforms and proprietary data producers: Archipelago, Bloomberg Tradebook, Island, RediBook, Attain, TracECN, BATS Trading and BATS/Direct Edge. A proliferation of dark pools and other ATSs operate profitably with fragmentary shares of consolidated market volume. Regulation NMS, by deregulating the market for proprietary data, has increased the contestability of that market. While BDs have previously published their proprietary data individually, Regulation NMS encourages market data vendors and BDs to produce proprietary products E:\FR\FM\06JAN1.SGM 06JAN1 554 Federal Register / Vol. 81, No. 3 / Wednesday, January 6, 2016 / Notices cooperatively in a manner never before possible. Multiple market data vendors already have the capability to aggregate data and disseminate it on a profitable scale, including Bloomberg and Thomson Reuters. In Europe, Cinnober aggregates and disseminates data from over 40 brokers and multilateral trading facilities.8 In this environment, a supercompetitive increase in the fees charged for either transactions or data has the potential to impair revenues from both products. ‘‘No one disputes that competition for order flow is ‘fierce’.’’ NetCoalition I at 539. The existence of fierce competition for order flow implies a high degree of price sensitivity on the part of BDs with order flow, since they may readily reduce costs by directing orders toward the lowest-cost trading venues. A BD that shifted its order flow from one platform to another in response to order execution price differentials would both reduce the value of that platform’s market data and reduce its own need to consume data from the disfavored platform. If a platform increases its market data fees, the change will affect the overall cost of doing business with the platform, and affected BDs will assess whether they can lower their trading costs by directing orders elsewhere and thereby lessening the need for the more expensive data. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. mstockstill on DSK4VPTVN1PROD with NOTICES 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.9 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– Phlx–2015–112 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–Phlx–2015–112. 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 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–Phlx– 2015–112, and should be submitted on or before January 27, 2016. 8 See https://www.cinnober.com/boat-tradereporting. 9 15 U.S.C. 78s(b)(3)(a)(ii). VerDate Sep<11>2014 17:32 Jan 05, 2016 Jkt 238001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Jill M. Peterson, Assistant Secretary. [FR Doc. 2015–33206 Filed 1–5–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Submission for OMB Review; Comment Request Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 20549–2736. Extension: Rule 3a–4 OMB Control No. 3235–0459, SEC File No. 270–401. Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501–3520), the Securities and Exchange Commission (the ‘‘Commission’’) has submitted to the Office of Management and Budget a request for extension of the previously approved collection of information discussed below. Rule 3a–4 (17 CFR 270.3a–4) under the Investment Company Act of 1940 (15 U.S.C. 80a) (‘‘Investment Company Act’’ or ‘‘Act’’) provides a nonexclusive safe harbor from the definition of investment company under the Act for certain investment advisory programs. These programs, which include ‘‘wrap fee’’ programs, generally are designed to provide professional portfolio management services on a discretionary basis to clients who are investing less than the minimum investments for individual accounts usually required by the investment adviser but more than the minimum account size of most mutual funds. Under wrap fee and similar programs, a client’s account is typically managed on a discretionary basis according to pre-selected investment objectives. Clients with similar investment objectives often receive the same investment advice and may hold the same or substantially similar securities in their accounts. Because of this similarity of management, some of these investment advisory programs may meet the definition of investment company under the Act. In 1997, the Commission adopted rule 3a–4, which clarifies that programs organized and operated in accordance with the rule are not required to register under the Investment Company Act or 10 17 PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 E:\FR\FM\06JAN1.SGM CFR 200.30–3(a)(12). 06JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 3 (Wednesday, January 6, 2016)]
[Notices]
[Pages 551-554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-33206]

[[Page 551]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76799; File No. SR-Phlx-2015-112]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Modify
the Fees for Managed Data Solutions

December 30, 2105.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 18, 2015, The NASDAQ OMX PHLX LLC (``Phlx'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by Phlx. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change

Phlx proposes to modify the charges to be paid for Managed Data
Solutions (``MDS''). While the changes proposed herein are effective
upon filing, the Exchange has designated that the amendments be
operative on January 1, 2016.
The text of the proposed rule change is below. Proposed new
language is italicized; proposed deletions are bracketed.

NASDAQ OMX PHLX Rules

NASDAQ OMX PHLX LLC Pricing Schedule

VIII. NASDAQ OMX PSX Fees

* * * * *

PSX Managed Data Solutions Fees.

(a) Distributors and Subscribers of Managed Data Solutions
products containing PSX TotalView data (non-display use only) shall
pay the following fees:

------------------------------------------------------------------------
Fee schedule for managed data Solutions Price
------------------------------------------------------------------------
Managed Data Solutions Administration $[750]1,500/mo Per Distributor.
Fee (for the right to offer Managed
Data Solutions to client
organizations).
PSX Depth Data Professional Managed $1[0]50/mo Per Subscriber.
Data Solutions Subscriber Fee.
(Internal Use Only and includes PSX
TotalView).
PSX Depth Data Managed Data Solutions $20/mo Per Subscriber.
Non-Professional Subscriber Fee.
(Internal Use Only and includes PSX
TotalView).
Fees are per month for all or
any portion of the month in
which the MDS products are
accessed.
------------------------------------------------------------------------

(b) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, Phlx included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Phlx has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The purpose of the proposed rule change is to increase the charges
to be paid by distributors and subscribers of Managed Data Solutions
products containing PSX TotalView data (non-display use only).
Specifically, the Exchange proposes to increase the fee charged to
distributors for the right to offer Managed Data Solutions to client
organizations to $1,500 per month per distributor (``MDS Administration
Fee''), and the fee charged to professional subscribers to $150 per
month per subscriber (``MDS Subscriber Fee''). This proposed rule
change will not affect the pricing for non-professional subscribers.
MDS is a data delivery option available to distributors of PSX
TotalView. Under the MDS fee structure, distributors may provide data
feeds, Application Programming Interfaces (APIs) or similar automated
delivery solutions to client organizations with only limited
entitlement controls. Through this program, Phlx offers a much simpler
administration process for MDS distributors and subscribers, reducing
the burden and cost of administration.
Subscribers of MDS may use the information for internal purposes
only and may not distribute the information outside of their
organization. MDS presents opportunities for small and mid-size firms
to achieve significant cost savings over the cost of data feeds.
Both the MDS Administration Fee and MDS Subscriber Fee have not
changed since their introduction in 2013. Nevertheless, both
distributors and subscribers reap the benefits of Phlx's constant focus
on the performance and enhancements to these offerings. As such, Phlx
recently completed a technology refresh to ensure that its data feeds
continue to achieve a high level of performance and resiliency. The
Exchange has also upgraded and refreshed its disaster recovery
capabilities, adding to the increased focus on redundancy and
resiliency.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\3\ in general, and with
Sections 6(b)(4) and 6(b)(5) of the Act,\4\ in particular, in that it
provides an equitable allocation of reasonable fees among Subscribers
and recipients of Phlx data and is not designed to permit unfair
discrimination between them. Phlx's proposal to increase the MDS
Administration Fee and MDS Subscriber Fee is also consistent with the
Act in that it reflects an equitable allocation of reasonable fees. The
Commission has long recognized the fair and equitable and not
unreasonably discriminatory nature of assessing different fees for
distributors and professional and non-professional users of the same
data. Phlx also believes it is equitable to assess a higher fee per
professional user than to an ordinary non-professional user due to the
enhanced flexibility, lower

[[Page 552]]

overall costs and value that it offers distributors.
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\3\ 15 U.S.C. 78f.
\4\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

In adopting Regulation NMS, the Commission granted self-regulatory
organizations and broker-dealers increased authority and flexibility to
offer new and unique market data to the public.
The Commission concluded that Regulation NMS--by deregulating the
market in proprietary data--would itself further the Act's goals of
facilitating efficiency and competition:

[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\5\

\5\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------

By removing ``unnecessary regulatory restrictions'' on the ability of
exchanges to sell their own data, Regulation NMS advanced the goals of
the Act and the principles reflected in its legislative history. If the
free market should determine whether proprietary data is sold to
broker-dealers at all, it follows that the price at which such data is
sold should be set by the market as well. PSX TotalView is precisely
the sort of market data product that the Commission envisioned when it
adopted Regulation NMS.
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) (``NetCoalition I''), upheld the Commission's reliance upon
competitive markets to set reasonable and equitably allocated fees for
market data. ``In fact, the legislative history indicates that the
Congress intended that the market system `evolve through the interplay
of competitive forces as unnecessary regulatory restrictions are
removed' and that the SEC wield its regulatory power `in those
situations where competition may not be sufficient,' such as in the
creation of a `consolidated transactional reporting system.'
NetCoalition I, at 535 (quoting H.R. Rep. No. 94-229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court agreed with the
Commission's conclusion that ``Congress intended that `competitive
forces should dictate the services and practices that constitute the
U.S. national market system for trading equity securities.' '' \6\
---------------------------------------------------------------------------

\6\ NetCoalition I, at 535.
---------------------------------------------------------------------------

The Court in NetCoalition I, while upholding the Commission's
conclusion that competitive forces may be relied upon to establish the
fairness of prices, nevertheless concluded that the record in that case
did not adequately support the Commission's conclusions as to the
competitive nature of the market for NYSE Arca's data product at issue
in that case. As explained below in Phlx's Statement on Burden on
Competition, however, Phlx believes that there is substantial evidence
of competition in the marketplace for data that was not in the record
in the NetCoalition I case, and that the Commission is entitled to rely
upon such evidence in concluding fees are the product of competition,
and therefore in accordance with the relevant statutory standards.\7\
Accordingly, any findings of the court with respect to that product may
not be relevant to the product at issue in this filing.
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\7\ It should also be noted that Section 916 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including
fees for market data, may be filed by exchanges on an immediately
effective basis. See also NetCoalition v. SEC, 715 F.3d 342 (D.C.
Cir. 2013) (``NetCoalition II'') (finding no jurisdiction to review
Commission's non-suspension of immediately effective fee changes).
---------------------------------------------------------------------------

Phlx believes that the allocation of the proposed fee is fair and
equitable in accordance with Section 6(b)(4) of the Act, and not
unreasonably discriminatory in accordance with Section 6(b)(5) of the
Act. As described above, the proposed fee is based on pricing
conventions and distinctions that exist in Phlx's current fee schedule.
These distinctions are each based on principles of fairness and equity
that have helped for many years to maintain fair, equitable, and not
unreasonably discriminatory fees, and that apply with equal or greater
force to the current proposal.
As described in greater detail below, if Phlx has calculated
improperly and the market deems the proposed fees to be unfair,
inequitable, or unreasonably discriminatory, firms can discontinue the
use of their data because the proposed product is entirely optional to
all parties. Firms are not required to purchase data and Phlx is not
required to make data available or to offer specific pricing
alternatives for potential purchases. Phlx can discontinue offering a
pricing alternative (as it has in the past) and firms can discontinue
their use at any time and for any reason (as they often do), including
due to their assessment of the reasonableness of fees charged. Phlx
continues to establish and revise pricing policies aimed at increasing
fairness and equitable allocation of fees among Subscribers.
Phlx believes that periodically it must adjust the Subscriber fees
to reflect market forces. Phlx believes it is an appropriate time to
adjust this fee to more accurately reflect the investments made to
enhance this product through capacity upgrades. This also reflects that
the market for this information is highly competitive and continually
evolves as products develop and change.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
Notwithstanding its determination that the Commission may rely upon
competition to establish fair and equitably allocated fees for market
data, the NetCoalition court found that the Commission had not, in that
case, compiled a record that adequately supported its conclusion that
the market for the data at issue in the case was competitive. Phlx
believes that a record may readily be established to demonstrate the
competitive nature of the market in question.
There is intense competition between trading platforms that provide
transaction execution and routing services and proprietary data
products. Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. Data products
are valuable to many end Subscribers only insofar as they provide
information that end Subscribers expect will assist them or their
customers in making trading decisions.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's
customers view the costs of transaction executions and of data as a
unified cost of doing business with the exchange. A broker-dealer
(``BD'') will direct orders to a particular exchange only if the
expected revenues from executing trades on the exchange exceed net
transaction execution costs and the

[[Page 553]]

cost of data that the BD chooses to buy to support its trading
decisions (or those of its customers). The choice of data products is,
in turn, a product of the value of the products in making profitable
trading decisions. If the cost of the product exceeds its expected
value, the BD will choose not to buy it. Moreover, as a BD chooses to
direct fewer orders to a particular exchange, the value of the product
to that BD decreases, for two reasons. First, the product will contain
less information, because executions of the BD's orders will not be
reflected in it. Second, and perhaps more important, the product will
be less valuable to that BD because it does not provide information
about the venue to which it is directing its orders. Data from the
competing venue to which the BD is directing orders will become
correspondingly more valuable.
Thus, an increase in the fees charged for either transactions or
data has the potential to impair revenues from both products. ``No one
disputes that competition for order flow is `fierce'.'' NetCoalition at
24. However, the existence of fierce competition for order flow implies
a high degree of price sensitivity on the part of BDs with order flow,
since they may readily reduce costs by directing orders toward the
lowest-cost trading venues. A BD that shifted its order flow from one
platform to another in response to order execution price differentials
would both reduce the value of that platform's market data and reduce
its own need to consume data from the disfavored platform. Similarly,
if a platform increases its market data fees, the change will affect
the overall cost of doing business with the platform, and affected BDs
will assess whether they can lower their trading costs by directing
orders elsewhere and thereby lessening the need for the more expensive
data.
Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's joint product. Rather, all of the exchange's
costs are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data about
market activity. The total return that an exchange earns reflects the
revenues it receives from the joint products and the total costs of the
joint products.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. Phlx pays rebates to attract orders, charges relatively
low prices for market information and charges relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower liquidity rebates to attract orders, setting relatively
low prices for accessing posted liquidity, and setting relatively high
prices for market information. Still others may provide most data free
of charge and rely exclusively on transaction fees to recover their
costs. Finally, some platforms may incentivize use by providing
opportunities for equity ownership, which may allow them to charge
lower direct fees for executions and data.
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. Such regulation is unnecessary because an ``excessive'' price
for one of the joint products will ultimately have to be reflected in
lower prices for other products sold by the firm, or otherwise the firm
will experience a loss in the volume of its sales that will be adverse
to its overall profitability. In other words, an increase in the price
of data will ultimately have to be accompanied by a decrease in the
cost of executions, or the volume of both data and executions will
fall.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including eleven SRO markets, as well as internalizing BDs and various
forms of alternative trading systems (``ATSs''), including dark pools
and electronic communication networks (``ECNs''). Each SRO market
competes to produce transaction reports via trade executions, and two
FINRA-regulated TRFs compete to attract internalized transaction
reports. It is common for BDs to further and exploit this competition
by sending their order flow and transaction reports to multiple
markets, rather than providing them all to a single market. Competitive
markets for order flow, executions, and transaction reports provide
pricing discipline for the inputs of proprietary data products.
The large number of SROs, TRFs, 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, TRF, ATS, and BD is currently permitted to produce proprietary
data products, and many currently do or have announced plans to do so,
including Phlx, NYSE, NYSE MKT, NYSE Arca, and BATS/Direct Edge.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple BDs'
production of proprietary data products. The potential sources of
proprietary products are virtually limitless. Notably, the potential
sources of data include the BDs that submit trade reports to TRFs and
that have the ability to consolidate and distribute their data without
the involvement of FINRA or an exchange-operated TRF.
The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products, as BATS and NYSE Arca did before registering as exchanges by
publishing proprietary book data on the internet. Second, because a
single order or transaction report can appear in a core data product,
an SRO proprietary product, and/or a non-SRO proprietary product, the
data available in proprietary products is exponentially greater than
the actual number of orders and transaction reports that exist in the
marketplace.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with examples of entrants
that swiftly grew into some of the largest electronic trading platforms
and proprietary data producers: Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN, BATS Trading and BATS/Direct Edge. A
proliferation of dark pools and other ATSs operate profitably with
fragmentary shares of consolidated market volume.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While BDs have
previously published their proprietary data individually, Regulation
NMS encourages market data vendors and BDs to produce proprietary
products

[[Page 554]]

cooperatively in a manner never before possible. Multiple market data
vendors already have the capability to aggregate data and disseminate
it on a profitable scale, including Bloomberg and Thomson Reuters. In
Europe, Cinnober aggregates and disseminates data from over 40 brokers
and multilateral trading facilities.\8\
---------------------------------------------------------------------------

\8\ See https://www.cinnober.com/boat-trade-reporting.
---------------------------------------------------------------------------

In this environment, a super-competitive increase in the fees
charged for either transactions or data has the potential to impair
revenues from both products. ``No one disputes that competition for
order flow is `fierce'.'' NetCoalition I at 539. The existence of
fierce competition for order flow implies a high degree of price
sensitivity on the part of BDs with order flow, since they may readily
reduce costs by directing orders toward the lowest-cost trading venues.
A BD that shifted its order flow from one platform to another in
response to order execution price differentials would both reduce the
value of that platform's market data and reduce its own need to consume
data from the disfavored platform. If a platform increases its market
data fees, the change will affect the overall cost of doing business
with the platform, and affected BDs will assess whether they can lower
their trading costs by directing orders elsewhere and thereby lessening
the need for the more expensive data.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\9\ At any time within 60 days of the filing
of the proposed rule change, the Commission summarily may temporarily
suspend such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act. If the Commission takes such action, the Commission shall
institute proceedings to determine whether the proposed rule should be
approved or disapproved.
---------------------------------------------------------------------------

\9\ 15 U.S.C. 78s(b)(3)(a)(ii).
---------------------------------------------------------------------------

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-Phlx-2015-112 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-Phlx-2015-112. 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 on official business
days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for inspection and copying at the
principal offices of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2015-112, and should be submitted on or before
January 27, 2016.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

\10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-33206 Filed 1-5-16; 8:45 am]
BILLING CODE 8011-01-P

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