Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Fee Schedule at Chapter IX, 2839-2843 [2018-00852]

Download as PDF Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices 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 website 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 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– 2018–02 and should be submitted on or before February 9, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–00856 Filed 1–18–18; 8:45 am] 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 Exchange’s fee schedule at Chapter IX (Proprietary Data Feed Fees) to change the Internal Distributor fee for Top of PHLX Options Plus Orders to reflect substantial enhancements to the product since the current Distributor fees were set in 2010, as described further below. The text of the proposed rule change is available on the Exchange’s website at https://nasdaqphlx.cchwallstreet.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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. BILLING CODE 8011–01–P A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82495; File No. SR–Phlx– 2018–08] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange’s Fee Schedule at Chapter IX daltland on DSKBBV9HB2PROD with NOTICES January 12, 2018. 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 January 9, 2018, Nasdaq PHLX LLC (‘‘PHLX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 17:05 Jan 18, 2018 Jkt 244001 1. Purpose The purpose of the proposed rule change is to amend the Exchange’s fee schedule at Chapter IX (Proprietary Data Feed Fees) to change the Internal Distributor fee for TOPO Plus Orders (‘‘TOPO Plus’’) to reflect substantial enhancements to the product since the current Distributor fees were set in 2010. TOPO Plus is a direct, low-latency market data product that allows subscribers to connect to both the Top of PHLX Options (‘‘TOPO’’) data feed and the PHLX Orders data feed. TOPO provides subscribers a direct data feed that includes the Exchange’s best bid and offer position, with aggregate size, based on displayable order and quoting interest on the Exchange. TOPO also provides last sale information from PHLX. PHLX Orders includes the full limit order book and contains a real-time status of simple and complex orders on the PHLX order book for all PHLX-listed PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 2839 options. This includes new orders and changes to orders resting on the PHLX book. The PHLX Orders feed includes opening imbalance data, Price Improvement XL (PIXL) data and Complex Order Live Auction (COLA) information, in addition to the full limit order book data for both simple and complex orders. The fee for TOPO Plus varies, depending on whether the subscriber is an Internal Distributor, an External Distributor, a Non-Professional Subscriber, or a Professional Subscriber.3 Currently, the monthly fee for an Internal Distributor is $4,000, the monthly fee for an External Distributor is $5,000, the monthly fee for a NonProfessional Subscriber is $1, and the monthly fee for a Professional Subscriber is $40. The Exchange is now proposing to increase the monthly fee for an Internal Distributor to $4,500. Since its inception in 2010, the Exchange has not raised the Internal or External Distributor fee and yet has made substantial improvements to the product as illustrated below.4 While the Exchange has not raised the fees for TOPO Plus since its inception, the Exchange has added a number of functional enhancements to both TOPO and PHLX Orders in particular, and to Exchange systems in general, that enhance the value of the TOPO Plus data product. Specifically: • In July 2011, the Exchange began disseminating timestamp messages for 3 Chapter IX of the Pricing Schedule defines a distributor as ‘‘any entity that receives a feed or data file of data directly from Nasdaq PHLX or indirectly through another entity and then distributes it either internally (within that entity) or externally (outside that entity).’’ Chapter IX of the Pricing Schedule defines a NonProfessional Subscriber as ‘‘a natural person who is neither: (i) Registered or qualified in any capacity with the Commission, the Commodities Futures Trading Commission, any state securities agency, any securities exchange or association, or any commodities or futures contract market or association; (ii) engaged as an ‘investment adviser’ as that term is defined in Section 201(11) of the Investment Advisors Act of 1940 (whether or not registered or qualified under that Act); nor (iii) employed by a bank or other organization exempt from registration under federal or state securities laws to perform functions that would require registration or qualification if such functions were performed for an organization not so exempt. A Non-Professional Subscriber may only use the data provided for personal purposes and not for any commercial purpose.’’ Chapter IX of the Pricing Schedule defines a Professional Subscriber as ‘‘any Subscriber that is not a Non-Professional Subscriber. If the Nasdaq Subscriber agreement is signed in the name of a business or commercial entity, such entity would be considered a Professional Subscriber.’’ 4 See Securities Exchange Act Release No. 62194 (May 28, 2010) 75 FR 31830 (SR–Phlx–2010–48) (approving TOPO Plus fees) (‘‘TOPO Plus approval order’’). E:\FR\FM\19JAN1.SGM 19JAN1 2840 Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES TOPO and TOPO Plus Orders in nanoseconds instead of milliseconds to provide additional granularity to the order book data contained in those products.5 • In December 2012, the Exchange enhanced TOPO Plus to include an updated Auction Notification Message with an Order Exposure Auction Type, which notifies participants when there is an aggressively priced order available for execution that may be routed away.6 This change helps customers understand the types of auction messages coming into the system.7 • In September 2013, the Exchange updated the Complex Auction Notification Message in PHLX Orders to unmask the Price, Side and Debit or Credit fields, which had been previously marked with an asterisk, leading to more transparency on the complex auction message.8 • In November 2014, the Exchange added Implied Orders to the Simple Order Message of PHLX Orders.9 These orders serve to attract interest to trade with the resting Complex Order for which they represent.10 • In September 2015, the Exchange automated the expiration process relating to World Currency Options (‘‘WCO’’), and updated the TOPO and PHLX Orders market data specifications to accommodate a new value of ‘‘W’’ to represent the 12:00 p.m. ET closure of expiring WCO options in the Options Directory message and System Event messages.11 • In February 2016, the Exchange expanded the period pursuant to which the TOPO Plus product, among other products, will be made available at the beginning of the trading day. The 5 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2011-016. 6 See Securities Exchange Act Release No. 68517 (December 21, 2012), 77 FR 77134 (December 31, 2012) (SR–Phlx–2012–136). 7 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2012-31. The Order Exposure auction message is sent when there is an exposed buy (or sell) order available for execution at the National Best Offer (or National Best Bid). The exposed order volume may be routed away. 8 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2013-40. 9 See Securities Exchange Act Release No. 73545 (November 6, 2014), 79 FR 67498 (November 13, 2014) (SR–Phlx–2014–54) (approval order). 10 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2014-35. Implied Orders are limit orders generated by the Exchange on behalf of Complex Orders which represent one leg of a two-legged Complex Order. Implied Orders are automatically generated on behalf of Complex Orders resting on the top of the Complex Order Book so that they are represented at the best bid and/or offer on the Exchange for the individual legs. 11 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2015-19. VerDate Sep<11>2014 17:05 Jan 18, 2018 Jkt 244001 Exchange moved up the dissemination times of the Start of Message process by two hours, to 4:00 a.m., ET., to provide members with additional time for connectivity testing and to better align with the opening times of the equity markets.12 On December 18, 2017, the Exchange further expanded the period for which TOPO Plus will be made available at the beginning of the trading day, to 2 a.m.13 • In August 2015, the Exchange launched its new Disaster Recovery (‘‘DR’’) facility in Chicago, Illinois. In addition to offering expanded geographic diversity, this new location enables firms to easily connect to numerous multi-asset engines, both to receive market data and to send orders, currently housed in or near this facility, potentially reducing overall networking costs. With this DR facility upgrade, new equipment was installed that improved performance and resilience as well.14 • In January 2017, the Exchange introduced additional multicast IP addresses for proprietary equity and options feeds, known as ‘‘B’’ feeds, for the feeds from its DR facility in Chicago. The purpose of this change was to promote resiliency and provide additional recovery options to market participants within the same facility.15 Given these specific enhancements to TOPO and PHLX Orders, and to the Exchange’s system generally, and given the fact that the Exchange has not increased the Distributor fees for TOPO Plus since its inception, the Exchange believes that the proposed fee increase is appropriate. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,16 in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,17 in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility, and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Commission and the courts have repeatedly expressed their preference for competition over regulatory 12 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2015-29. 13 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2017-34. 14 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2015-17. 15 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2017-02. 16 15 U.S.C. 78f(b). 17 15 U.S.C. 78f(b)(4) and (5). PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 intervention in determining prices, products, and services in the securities markets. In Regulation NMS, while adopting a series of steps to improve the current market model, the Commission highlighted the importance of market forces in determining prices and selfregulatory organization (‘‘SRO’’) revenues and, also, recognized that current regulation of the market system ‘‘has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.’’ 18 Likewise, in NetCoalition v. Securities and Exchange Commission 19 (‘‘NetCoalition’’) the DC Circuit upheld the Commission’s use of a market-based approach in evaluating the fairness of market data fees against a challenge claiming that Congress mandated a costbased approach.20 As the court emphasized, the Commission ‘‘intended in Regulation NMS that ‘market forces, rather than regulatory requirements’ play a role in determining the market data . . . to be made available to investors and at what cost.’’ 21 Further, ‘‘[n]o one disputes that competition for order flow is ‘fierce.’ . . . As the SEC explained, ‘[i]n the U.S. national market system, buyers and sellers of securities, and the brokerdealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution’; [and] ‘no exchange can afford to take its market share percentages for granted’ because ‘no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers’. . . .’’ 22 Although the court and the SEC were discussing the cash equities markets, the Exchange believes that these views apply with equal force to the options markets. The Exchange believes that the proposed fee increase for Internal Distributors is reasonable. While the Exchange has not increased the Distributor fees for TOPO Plus since its inception, the Exchange has added a number of functional enhancements since that time to TOPO and PHLX Orders in particular, and to Exchange systems in general. These enhancements, which are described in greater detail above, correspondingly 18 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 19 NetCoalition v. SEC, 615 F.3d 525 (DC Cir. 2010). 20 See NetCoalition, at 534–535. 21 Id. at 537. 22 Id. at 539 (quoting Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770, 74782–83 (December 9, 2008) (SR– NYSEArca–2006–21)). E:\FR\FM\19JAN1.SGM 19JAN1 Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES enhance the value of the TOPO Plus data product. The proposed fee increase is therefore reflective of, and closely aligned to, these enhancements and the corresponding increased value of the TOPO Plus data product. The Exchange also believes that the amount of the fee increase is reasonable when comparing the amount of the proposed Internal Distributor fee to the amount of the current Internal Distributor fee and factoring in time and inflation.23 The Exchange also notes that the proposed Internal Distributor fee for TOPO Plus is still less than if an Internal Distributor purchased TOPO and PHLX Orders separately ($2,000 monthly for TOPO + $3,000 monthly for PHLX Orders). The Exchange also believes that the proposed fee increase is equitably allocated, and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Exchange makes all services and products subject to this fee available on a non-discriminatory basis to similarlysituated recipients, and the proposed fee increase here will apply equally to all entities that meet the definition of an Internal Distributor. The Exchange notes that it is only proposing to increase the fee for Internal Distributors, not for External Distributors, Non-Professional Subscribers, or Professional Subscribers. As noted above, the Exchange has made a number of product and system enhancements since the inception of TOPO Plus that have increased the value of that data product. While External Distributors have also received the benefit of these enhancements, the Exchange is not increasing the External Distributor fee at this time. The Exchange believes that this is equitable and not unfairly discriminatory for several reasons. First, a fee differential for external, as opposed to internal, distribution is well-recognized in the financial services industry as a reasonable distinction, and has been repeatedly accepted by the Commission as an equitable allocation of reasonable dues, fees and other charges.24 External Distributors already pay, and will continue to pay, a higher monthly fee than Internal Distributors. Second, the Exchange believes that External Distributors of TOPO Plus, in 23 As noted above, TOPO Plus was launched in 2010. A $4,000 monthly fee with an interest rate increase of 2.85%, compounded annually for 8 years, would result in a fee of $5,000 monthly. 24 See, e.g., Nasdaq Rules 7019 (Market Data Distributor Fees); 7022(c) (Short Interest Report); 7023(c) (Enterprise License Fees for Depth-of-Book Data); and 7052(c) (Distributor Fees for Nasdaq Daily Short Volume and Monthly Short Sale Transaction Files). VerDate Sep<11>2014 17:05 Jan 18, 2018 Jkt 244001 comparison to Internal Distributors, may confer an additional benefit on market participants generally and the Exchange in particular. As the Exchange noted when it filed a proposed rule change to establish the fees for TOPO Plus, the higher fee for External Distributors in comparison to Internal Distributors reflected the fact that External Distributors had fewer limitations on their scope of distribution of TOPO Plus than Internal Distributors, and the reasonable expectation that External Distributors would distribute TOPO Plus to a higher number of subscribers than Internal Distributors; specifically, to Professional Subscribers who would use the data for commercial purposes.25 The Exchange believes that the value of external distribution of TOPO Plus extends beyond External Distributors to other market participants and to the Exchange as well. In distributing TOPO Plus externally, External Distributors provide market participants that purchase this product (and who may be unwilling or unable to purchase TOPO Plus as an Internal Distributor) with a greater awareness of order activity on the Exchange. This, in turn, may result in those market participants directing more order flow to the Exchange, benefitting both the Exchange and market participants that desire to transact on the Exchange. Currently, the majority of Distributors for TOPO Plus are Internal Distributors, with relatively few External Distributors. Given the increased benefits that may accompany the external distribution of TOPO Plus, and the Exchange’s corresponding desire to retain External Distributor interest in TOPO Plus, the Exchange believes that it is equitable and not unfairly discriminatory to not impose a similar fee increase on External Distributors. The Exchange also believes that it is equitable and not unfairly discriminatory to not assess a fee increase on Professional and NonProfessional Subscribers. By definition, Subscribers (either Professional or NonProfessional) are categorically different than Distributors (either Internal or External). The Exchange believes that it is equitable and not unfairly discriminatory to implement a fee increase for one category of market participants (Distributors) and not for another category of market participants (Subscribers), because these two categories are not similarly situated, both in terms of the fees that they pay, and the permissible ways in which they 25 See Securities Exchange Act Release No. 61878 (April 8, 2010), 75 FR 20023 (April 16, 2010) (SR– Phlx–2010–48) (notice of filing). PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 2841 may use the data. Additionally, there is already a significant difference between the current amount paid by NonProfessional and Professional Subscribers ($1 and $40 monthly, respectively), and Internal and External distributors ($4,000 and $5,000, respectively). Finally, the Exchange notes that the Act does not prohibit all distinctions among customers, but rather discrimination that is unfair. As the Commission has recognized, ‘‘[i]f competitive forces are operative, the self-interest of the exchanges themselves will work powerfully to constrain unreasonable or unfair behavior.’’ 26 Accordingly, ‘‘the existence of significant competition provides a substantial basis for finding that the terms of an exchange’s fee proposal are equitable, fair, reasonable, and not unreasonably or unfairly discriminatory.’’ 27 The proposed fee, like all market data fees, is constrained by the Exchange’s need to compete for order flow as discussed below, and is subject to competition from other exchanges. If the Exchange is incorrect in its assessment of price, it will lose market share as a result. 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 not necessary or appropriate in furtherance of the purposes of the Act. The proposed fee structure is designed to ensure a fair and reasonable use of Exchange resources by allowing the Exchange to recoup costs while continuing to offer its data products at competitive rates to firms. The Exchange does not believe that the proposed fee increase will impose any burden on intra-market competition that is not necessary or appropriate. As discussed above, the proposed increase to the Internal Distributor fee will apply equally to all market participants that qualify as Internal Distributors. While the Exchange is only proposing to increase the fee for Internal Distributors, the Exchange does not believe that this will impose a burden on intra-market competition, including on External Distributors that is not necessary or appropriate. The Exchange’s rules set forth different standards for the use of Internal Distributor data versus External Distributor data, and this proposal does not alter those terms of use. As such, the 26 Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008) (SR–NYSEArca–2006–21). 27 Id. E:\FR\FM\19JAN1.SGM 19JAN1 daltland on DSKBBV9HB2PROD with NOTICES 2842 Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices Exchange does not believe that the proposal will impact the current competitive dynamic between Internal Distributors and External Distributors, to the extent such a dynamic exists. Moreover, the Exchange notes the majority of TOPO Plus subscribers are Internal Distributors; in not assessing a similar fee increase on External Distributors in order to encourage market participants to remain External Distributors, the Exchange is attempting to promote a more diverse ecosystem of market data Distributors. Finally, the Exchange notes that Distributors may always elect to not distribute TOPO Plus at all if they deem the distribution fee to be excessive. For the same reasons, the Exchange believes that the proposed fee increase does not impose a burden on Professional and Non-Professional Subscribers that is not necessary or appropriate. As discussed above, Professional and Non-Professional Subscribers are categorically different than Distributors, and have significantly different terms of usage for TOPO Plus than Distributors. As with Distributors, those terms of use remain unchanged by this proposal. Therefore, the Exchange does not believe that the proposal will impact that any competitive dynamic that may exist between Distributors and Subscribers. With respect to inter-market competition, the Exchange notes that the market for data products is extremely competitive and firms may freely choose alternative venues and data vendors based on the aggregate fees assessed, the data offered, and the value provided. This rule proposal does not burden competition, since other SROs and data vendors continue to offer alternative data products and, like the Exchange, set fees, but rather reflects the competition between data feed vendors and will further enhance such competition. TOPO Plus competes directly with existing similar products. The product is part of the existing market for proprietary last sale data products that is currently competitive and inherently contestable because there is fierce competition for the inputs necessary to the creation of proprietary data and strict pricing discipline for the proprietary products themselves. Numerous exchanges compete with each other for listings, trades, and market data itself, providing virtually limitless opportunities for entrepreneurs who wish to produce and distribute their own market data. This proprietary data is produced by each individual exchange, as well as other entities, in a vigorously competitive market. VerDate Sep<11>2014 17:05 Jan 18, 2018 Jkt 244001 Transaction execution and proprietary data products are complementary in that market data is both an input and a byproduct of the execution service. In fact, market data and trade execution are a paradigmatic example of joint products with joint costs. The decision whether and on which platform to post an order will depend on the attributes of the platform where the order can be posted, including the execution fees, data quality and price, and distribution of its data products. Without trade executions, exchange data products cannot exist. Moreover, data products are valuable to many end users only insofar as they provide information that end users expect will assist them or their customers in making trading decisions. 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, the operation of the exchange is characterized by high fixed costs and low marginal costs. This cost structure is common in content and content distribution industries such as software, where developing new software typically requires a large initial investment (and continuing large investments to upgrade the software), but once the software is developed, the incremental cost of providing that software to an additional user is typically small, or even zero (e.g., if the software can be downloaded over the internet after being purchased). In the Exchange’s case, it is costly to build and maintain a trading platform, but the incremental cost of trading each additional share on an existing platform, or distributing an additional instance of data, is very low. Market information and executions are each produced jointly (in the sense that the activities of trading and placing orders are the source of the information that is distributed) and are each subject to significant scale economies. In such cases, marginal cost pricing is not feasible because if all sales were priced at the margin, the Exchange would be unable to defray its platform costs of providing the joint products. An exchange’s broker-dealer customers view the costs of transaction executions and of data as a unified cost of doing business with the exchange. A broker-dealer will disfavor a particular PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 exchange if the expected revenues from executing trades on the exchange do not exceed net transaction execution costs and the cost of data that the brokerdealer chooses to buy to support its trading decisions (or those of its customers). The choice of data products is, in turn, a product of the value of the products in making profitable trading decisions. If the cost of the product exceeds its expected value, the brokerdealer will choose not to buy it. Moreover, as a broker-dealer chooses to direct fewer orders to a particular exchange, the value of the product to that broker-dealer decreases, for two reasons. First, the product will contain less information, because executions of the broker-dealer’s trading activity will not be reflected in it. Second, and perhaps more important, the product will be less valuable to that brokerdealer because it does not provide information about the venue to which it is directing its orders. Data from the competing venue to which the brokerdealer is directing more orders will become correspondingly more valuable. Similarly, in the case of products such as TOPO Plus that may be distributed through market data vendors, the vendors provide price discipline for proprietary data products because they control the primary means of access to end users. Vendors impose price restraints based upon their business models. For example, vendors such as Bloomberg and Reuters that assess a surcharge on data they sell may refuse to offer proprietary products that end users will not purchase in sufficient numbers. Internet portals, such as Google, impose a discipline by providing only data that will enable them to attract ‘‘eyeballs’’ that contribute to their advertising revenue. Retail broker-dealers, such as Schwab and Fidelity, offer their retail customers proprietary data only if it promotes trading and generates sufficient commission revenue. Although the business models may differ, these vendors’ pricing discipline is the same: They can simply refuse to purchase any proprietary data product that fails to provide sufficient value. Exchanges and other producers of proprietary data products must understand and respond to these varying business models and pricing disciplines in order to market proprietary data products successfully. Moreover, the Exchange believes that products such as TOPO Plus can enhance order flow to the Exchange by providing more widespread distribution of information about transactions in real time, thereby encouraging wider participation in the market by investors E:\FR\FM\19JAN1.SGM 19JAN1 daltland on DSKBBV9HB2PROD with NOTICES Federal Register / Vol. 83, No. 13 / Friday, January 19, 2018 / Notices with access to the internet or television. Conversely, the value of such products to Distributors and investors decreases if order flow falls, because the products contain less content. 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. The Exchange 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. Indeed, in approving the fees for TOPO Plus in 2010, the Commission noted that the Exchange was subject to competitive pressures in setting its fees for TOPO Plus. First, the Commission noted that the Exchange had a ‘‘compelling need’’ to attract order flow, which imposed ‘‘significant pressure’’ on the Exchange to act reasonably in setting its fees for PHLX market data, particularly given that ‘‘the market participants that will pay such fees often will be the same market participants from whom Phlx must attract order flow.’’ 28 The Commission also found that there were a number of alternative sources of information that imposed significant competitive pressures on the Exchange in setting the terms for distributing TOPO Plus. The Commission found that the availability of those alternatives, as well as the Exchange’s compelling need to attract order flow, imposed ‘‘significant competitive pressure on Phlx to act equitably, fairly, and reasonably in setting the terms of its proposal.’’ 29 The Exchange believes that the same analysis and conclusions apply here. In sum, the proposed fee structure is designed to ensure a fair and reasonable use of Exchange resources by allowing the Exchange to recoup costs while continuing to offer its data products at competitive rates to firms 3. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or 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.30 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: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) 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 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–2018–08 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–2018–08. 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 website (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 website 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 the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–Phlx–2018–08, and should be submitted on or before February 9, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.31 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–00852 Filed 1–18–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82501; File No. SR–OCC– 2017–808] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice, as Modified by Amendment No. 1, Concerning the Adoption of a New Minimum Cash Requirement for the Clearing Fund January 12, 2018. The Options Clearing Corporation (‘‘OCC’’) filed on November 14, 2017 29 Id. 28 See TOPO Plus approval order, 75 FR at 31833. VerDate Sep<11>2014 17:05 Jan 18, 2018 Jkt 244001 30 15 PO 00000 U.S.C. 78s(b)(3)(A)(ii). Frm 00077 Fmt 4703 Sfmt 4703 2843 31 17 E:\FR\FM\19JAN1.SGM CFR 200.30–3(a)(12). 19JAN1

Agencies

[Federal Register Volume 83, Number 13 (Friday, January 19, 2018)]
[Notices]
[Pages 2839-2843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00852]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82495; File No. SR-Phlx-2018-08]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Fee Schedule at Chapter IX

January 12, 2018.
    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 January 9, 2018, Nasdaq PHLX LLC (``PHLX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend the Exchange's fee schedule at 
Chapter IX (Proprietary Data Feed Fees) to change the Internal 
Distributor fee for Top of PHLX Options Plus Orders to reflect 
substantial enhancements to the product since the current Distributor 
fees were set in 2010, as described further below.
    The text of the proposed rule change is available on the Exchange's 
website at https://nasdaqphlx.cchwallstreet.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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to amend the Exchange's 
fee schedule at Chapter IX (Proprietary Data Feed Fees) to change the 
Internal Distributor fee for TOPO Plus Orders (``TOPO Plus'') to 
reflect substantial enhancements to the product since the current 
Distributor fees were set in 2010.
    TOPO Plus is a direct, low-latency market data product that allows 
subscribers to connect to both the Top of PHLX Options (``TOPO'') data 
feed and the PHLX Orders data feed. TOPO provides subscribers a direct 
data feed that includes the Exchange's best bid and offer position, 
with aggregate size, based on displayable order and quoting interest on 
the Exchange. TOPO also provides last sale information from PHLX.
    PHLX Orders includes the full limit order book and contains a real-
time status of simple and complex orders on the PHLX order book for all 
PHLX-listed options. This includes new orders and changes to orders 
resting on the PHLX book. The PHLX Orders feed includes opening 
imbalance data, Price Improvement XL (PIXL) data and Complex Order Live 
Auction (COLA) information, in addition to the full limit order book 
data for both simple and complex orders.
    The fee for TOPO Plus varies, depending on whether the subscriber 
is an Internal Distributor, an External Distributor, a Non-Professional 
Subscriber, or a Professional Subscriber.\3\
---------------------------------------------------------------------------

    \3\ Chapter IX of the Pricing Schedule defines a distributor as 
``any entity that receives a feed or data file of data directly from 
Nasdaq PHLX or indirectly through another entity and then 
distributes it either internally (within that entity) or externally 
(outside that entity).''
    Chapter IX of the Pricing Schedule defines a Non-Professional 
Subscriber as ``a natural person who is neither: (i) Registered or 
qualified in any capacity with the Commission, the Commodities 
Futures Trading Commission, any state securities agency, any 
securities exchange or association, or any commodities or futures 
contract market or association; (ii) engaged as an `investment 
adviser' as that term is defined in Section 201(11) of the 
Investment Advisors Act of 1940 (whether or not registered or 
qualified under that Act); nor (iii) employed by a bank or other 
organization exempt from registration under federal or state 
securities laws to perform functions that would require registration 
or qualification if such functions were performed for an 
organization not so exempt. A Non-Professional Subscriber may only 
use the data provided for personal purposes and not for any 
commercial purpose.''
    Chapter IX of the Pricing Schedule defines a Professional 
Subscriber as ``any Subscriber that is not a Non-Professional 
Subscriber. If the Nasdaq Subscriber agreement is signed in the name 
of a business or commercial entity, such entity would be considered 
a Professional Subscriber.''
---------------------------------------------------------------------------

    Currently, the monthly fee for an Internal Distributor is $4,000, 
the monthly fee for an External Distributor is $5,000, the monthly fee 
for a Non-Professional Subscriber is $1, and the monthly fee for a 
Professional Subscriber is $40. The Exchange is now proposing to 
increase the monthly fee for an Internal Distributor to $4,500. Since 
its inception in 2010, the Exchange has not raised the Internal or 
External Distributor fee and yet has made substantial improvements to 
the product as illustrated below.\4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 62194 (May 28, 2010) 
75 FR 31830 (SR-Phlx-2010-48) (approving TOPO Plus fees) (``TOPO 
Plus approval order'').
---------------------------------------------------------------------------

    While the Exchange has not raised the fees for TOPO Plus since its 
inception, the Exchange has added a number of functional enhancements 
to both TOPO and PHLX Orders in particular, and to Exchange systems in 
general, that enhance the value of the TOPO Plus data product. 
Specifically:
     In July 2011, the Exchange began disseminating timestamp 
messages for

[[Page 2840]]

TOPO and TOPO Plus Orders in nanoseconds instead of milliseconds to 
provide additional granularity to the order book data contained in 
those products.\5\
---------------------------------------------------------------------------

    \5\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2011-016.
---------------------------------------------------------------------------

     In December 2012, the Exchange enhanced TOPO Plus to 
include an updated Auction Notification Message with an Order Exposure 
Auction Type, which notifies participants when there is an aggressively 
priced order available for execution that may be routed away.\6\ This 
change helps customers understand the types of auction messages coming 
into the system.\7\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 68517 (December 21, 
2012), 77 FR 77134 (December 31, 2012) (SR-Phlx-2012-136).
    \7\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2012-31.
    The Order Exposure auction message is sent when there is an 
exposed buy (or sell) order available for execution at the National 
Best Offer (or National Best Bid). The exposed order volume may be 
routed away.
---------------------------------------------------------------------------

     In September 2013, the Exchange updated the Complex 
Auction Notification Message in PHLX Orders to unmask the Price, Side 
and Debit or Credit fields, which had been previously marked with an 
asterisk, leading to more transparency on the complex auction 
message.\8\
---------------------------------------------------------------------------

    \8\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2013-40.
---------------------------------------------------------------------------

     In November 2014, the Exchange added Implied Orders to the 
Simple Order Message of PHLX Orders.\9\ These orders serve to attract 
interest to trade with the resting Complex Order for which they 
represent.\10\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 73545 (November 6, 
2014), 79 FR 67498 (November 13, 2014) (SR-Phlx-2014-54) (approval 
order).
    \10\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2014-35.
    Implied Orders are limit orders generated by the Exchange on 
behalf of Complex Orders which represent one leg of a two-legged 
Complex Order. Implied Orders are automatically generated on behalf 
of Complex Orders resting on the top of the Complex Order Book so 
that they are represented at the best bid and/or offer on the 
Exchange for the individual legs.
---------------------------------------------------------------------------

     In September 2015, the Exchange automated the expiration 
process relating to World Currency Options (``WCO''), and updated the 
TOPO and PHLX Orders market data specifications to accommodate a new 
value of ``W'' to represent the 12:00 p.m. ET closure of expiring WCO 
options in the Options Directory message and System Event messages.\11\
---------------------------------------------------------------------------

    \11\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2015-19.
---------------------------------------------------------------------------

     In February 2016, the Exchange expanded the period 
pursuant to which the TOPO Plus product, among other products, will be 
made available at the beginning of the trading day. The Exchange moved 
up the dissemination times of the Start of Message process by two 
hours, to 4:00 a.m., ET., to provide members with additional time for 
connectivity testing and to better align with the opening times of the 
equity markets.\12\ On December 18, 2017, the Exchange further expanded 
the period for which TOPO Plus will be made available at the beginning 
of the trading day, to 2 a.m.\13\
---------------------------------------------------------------------------

    \12\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2015-29.
    \13\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2017-34.
---------------------------------------------------------------------------

     In August 2015, the Exchange launched its new Disaster 
Recovery (``DR'') facility in Chicago, Illinois. In addition to 
offering expanded geographic diversity, this new location enables firms 
to easily connect to numerous multi-asset engines, both to receive 
market data and to send orders, currently housed in or near this 
facility, potentially reducing overall networking costs. With this DR 
facility upgrade, new equipment was installed that improved performance 
and resilience as well.\14\
---------------------------------------------------------------------------

    \14\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2015-17.
---------------------------------------------------------------------------

     In January 2017, the Exchange introduced additional 
multicast IP addresses for proprietary equity and options feeds, known 
as ``B'' feeds, for the feeds from its DR facility in Chicago. The 
purpose of this change was to promote resiliency and provide additional 
recovery options to market participants within the same facility.\15\
---------------------------------------------------------------------------

    \15\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2017-02.
---------------------------------------------------------------------------

    Given these specific enhancements to TOPO and PHLX Orders, and to 
the Exchange's system generally, and given the fact that the Exchange 
has not increased the Distributor fees for TOPO Plus since its 
inception, the Exchange believes that the proposed fee increase is 
appropriate.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\17\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and self-regulatory organization (``SRO'') revenues 
and, also, recognized that current regulation of the market system 
``has been remarkably successful in promoting market competition in its 
broader forms that are most important to investors and listed 
companies.'' \18\
---------------------------------------------------------------------------

    \18\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Likewise, in NetCoalition v. Securities and Exchange Commission 
\19\ (``NetCoalition'') the DC Circuit upheld the Commission's use of a 
market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\20\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \21\
---------------------------------------------------------------------------

    \19\ NetCoalition v. SEC, 615 F.3d 525 (DC Cir. 2010).
    \20\ See NetCoalition, at 534-535.
    \21\ Id. at 537.
---------------------------------------------------------------------------

    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \22\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
---------------------------------------------------------------------------

    \22\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    The Exchange believes that the proposed fee increase for Internal 
Distributors is reasonable. While the Exchange has not increased the 
Distributor fees for TOPO Plus since its inception, the Exchange has 
added a number of functional enhancements since that time to TOPO and 
PHLX Orders in particular, and to Exchange systems in general. These 
enhancements, which are described in greater detail above, 
correspondingly

[[Page 2841]]

enhance the value of the TOPO Plus data product. The proposed fee 
increase is therefore reflective of, and closely aligned to, these 
enhancements and the corresponding increased value of the TOPO Plus 
data product. The Exchange also believes that the amount of the fee 
increase is reasonable when comparing the amount of the proposed 
Internal Distributor fee to the amount of the current Internal 
Distributor fee and factoring in time and inflation.\23\ The Exchange 
also notes that the proposed Internal Distributor fee for TOPO Plus is 
still less than if an Internal Distributor purchased TOPO and PHLX 
Orders separately ($2,000 monthly for TOPO + $3,000 monthly for PHLX 
Orders).
---------------------------------------------------------------------------

    \23\ As noted above, TOPO Plus was launched in 2010. A $4,000 
monthly fee with an interest rate increase of 2.85%, compounded 
annually for 8 years, would result in a fee of $5,000 monthly.
---------------------------------------------------------------------------

    The Exchange also believes that the proposed fee increase is 
equitably allocated, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. The 
Exchange makes all services and products subject to this fee available 
on a non-discriminatory basis to similarly-situated recipients, and the 
proposed fee increase here will apply equally to all entities that meet 
the definition of an Internal Distributor.
    The Exchange notes that it is only proposing to increase the fee 
for Internal Distributors, not for External Distributors, Non-
Professional Subscribers, or Professional Subscribers. As noted above, 
the Exchange has made a number of product and system enhancements since 
the inception of TOPO Plus that have increased the value of that data 
product. While External Distributors have also received the benefit of 
these enhancements, the Exchange is not increasing the External 
Distributor fee at this time. The Exchange believes that this is 
equitable and not unfairly discriminatory for several reasons. First, a 
fee differential for external, as opposed to internal, distribution is 
well-recognized in the financial services industry as a reasonable 
distinction, and has been repeatedly accepted by the Commission as an 
equitable allocation of reasonable dues, fees and other charges.\24\ 
External Distributors already pay, and will continue to pay, a higher 
monthly fee than Internal Distributors.
---------------------------------------------------------------------------

    \24\ See, e.g., Nasdaq Rules 7019 (Market Data Distributor 
Fees); 7022(c) (Short Interest Report); 7023(c) (Enterprise License 
Fees for Depth-of-Book Data); and 7052(c) (Distributor Fees for 
Nasdaq Daily Short Volume and Monthly Short Sale Transaction Files).
---------------------------------------------------------------------------

    Second, the Exchange believes that External Distributors of TOPO 
Plus, in comparison to Internal Distributors, may confer an additional 
benefit on market participants generally and the Exchange in 
particular. As the Exchange noted when it filed a proposed rule change 
to establish the fees for TOPO Plus, the higher fee for External 
Distributors in comparison to Internal Distributors reflected the fact 
that External Distributors had fewer limitations on their scope of 
distribution of TOPO Plus than Internal Distributors, and the 
reasonable expectation that External Distributors would distribute TOPO 
Plus to a higher number of subscribers than Internal Distributors; 
specifically, to Professional Subscribers who would use the data for 
commercial purposes.\25\ The Exchange believes that the value of 
external distribution of TOPO Plus extends beyond External Distributors 
to other market participants and to the Exchange as well. In 
distributing TOPO Plus externally, External Distributors provide market 
participants that purchase this product (and who may be unwilling or 
unable to purchase TOPO Plus as an Internal Distributor) with a greater 
awareness of order activity on the Exchange. This, in turn, may result 
in those market participants directing more order flow to the Exchange, 
benefitting both the Exchange and market participants that desire to 
transact on the Exchange. Currently, the majority of Distributors for 
TOPO Plus are Internal Distributors, with relatively few External 
Distributors. Given the increased benefits that may accompany the 
external distribution of TOPO Plus, and the Exchange's corresponding 
desire to retain External Distributor interest in TOPO Plus, the 
Exchange believes that it is equitable and not unfairly discriminatory 
to not impose a similar fee increase on External Distributors.
---------------------------------------------------------------------------

    \25\ See Securities Exchange Act Release No. 61878 (April 8, 
2010), 75 FR 20023 (April 16, 2010) (SR-Phlx-2010-48) (notice of 
filing).
---------------------------------------------------------------------------

    The Exchange also believes that it is equitable and not unfairly 
discriminatory to not assess a fee increase on Professional and Non-
Professional Subscribers. By definition, Subscribers (either 
Professional or Non-Professional) are categorically different than 
Distributors (either Internal or External). The Exchange believes that 
it is equitable and not unfairly discriminatory to implement a fee 
increase for one category of market participants (Distributors) and not 
for another category of market participants (Subscribers), because 
these two categories are not similarly situated, both in terms of the 
fees that they pay, and the permissible ways in which they may use the 
data. Additionally, there is already a significant difference between 
the current amount paid by Non-Professional and Professional 
Subscribers ($1 and $40 monthly, respectively), and Internal and 
External distributors ($4,000 and $5,000, respectively).
    Finally, the Exchange notes that the Act does not prohibit all 
distinctions among customers, but rather discrimination that is unfair. 
As the Commission has recognized, ``[i]f competitive forces are 
operative, the self-interest of the exchanges themselves will work 
powerfully to constrain unreasonable or unfair behavior.'' \26\ 
Accordingly, ``the existence of significant competition provides a 
substantial basis for finding that the terms of an exchange's fee 
proposal are equitable, fair, reasonable, and not unreasonably or 
unfairly discriminatory.'' \27\ The proposed fee, like all market data 
fees, is constrained by the Exchange's need to compete for order flow 
as discussed below, and is subject to competition from other exchanges. 
If the Exchange is incorrect in its assessment of price, it will lose 
market share as a result.
---------------------------------------------------------------------------

    \26\ Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \27\ Id.
---------------------------------------------------------------------------

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 not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed fee structure is 
designed to ensure a fair and reasonable use of Exchange resources by 
allowing the Exchange to recoup costs while continuing to offer its 
data products at competitive rates to firms.
    The Exchange does not believe that the proposed fee increase will 
impose any burden on intra-market competition that is not necessary or 
appropriate. As discussed above, the proposed increase to the Internal 
Distributor fee will apply equally to all market participants that 
qualify as Internal Distributors. While the Exchange is only proposing 
to increase the fee for Internal Distributors, the Exchange does not 
believe that this will impose a burden on intra-market competition, 
including on External Distributors that is not necessary or 
appropriate. The Exchange's rules set forth different standards for the 
use of Internal Distributor data versus External Distributor data, and 
this proposal does not alter those terms of use. As such, the

[[Page 2842]]

Exchange does not believe that the proposal will impact the current 
competitive dynamic between Internal Distributors and External 
Distributors, to the extent such a dynamic exists. Moreover, the 
Exchange notes the majority of TOPO Plus subscribers are Internal 
Distributors; in not assessing a similar fee increase on External 
Distributors in order to encourage market participants to remain 
External Distributors, the Exchange is attempting to promote a more 
diverse ecosystem of market data Distributors. Finally, the Exchange 
notes that Distributors may always elect to not distribute TOPO Plus at 
all if they deem the distribution fee to be excessive.
    For the same reasons, the Exchange believes that the proposed fee 
increase does not impose a burden on Professional and Non-Professional 
Subscribers that is not necessary or appropriate. As discussed above, 
Professional and Non-Professional Subscribers are categorically 
different than Distributors, and have significantly different terms of 
usage for TOPO Plus than Distributors. As with Distributors, those 
terms of use remain unchanged by this proposal. Therefore, the Exchange 
does not believe that the proposal will impact that any competitive 
dynamic that may exist between Distributors and Subscribers.
    With respect to inter-market competition, the Exchange notes that 
the market for data products is extremely competitive and firms may 
freely choose alternative venues and data vendors based on the 
aggregate fees assessed, the data offered, and the value provided. This 
rule proposal does not burden competition, since other SROs and data 
vendors continue to offer alternative data products and, like the 
Exchange, set fees, but rather reflects the competition between data 
feed vendors and will further enhance such competition. TOPO Plus 
competes directly with existing similar products. The product is part 
of the existing market for proprietary last sale data products that is 
currently competitive and inherently contestable because there is 
fierce competition for the inputs necessary to the creation of 
proprietary data and strict pricing discipline for the proprietary 
products themselves. Numerous exchanges compete with each other for 
listings, trades, and market data itself, providing virtually limitless 
opportunities for entrepreneurs who wish to produce and distribute 
their own market data. This proprietary data is produced by each 
individual exchange, as well as other entities, in a vigorously 
competitive market.
    Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. The decision 
whether and on which platform to post an order will depend on the 
attributes of the platform where the order can be posted, including the 
execution fees, data quality and price, and distribution of its data 
products. Without trade executions, exchange data products cannot 
exist. Moreover, data products are valuable to many end users only 
insofar as they provide information that end users expect will assist 
them or their customers in making trading decisions.
    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, the operation of the 
exchange is characterized by high fixed costs and low marginal costs. 
This cost structure is common in content and content distribution 
industries such as software, where developing new software typically 
requires a large initial investment (and continuing large investments 
to upgrade the software), but once the software is developed, the 
incremental cost of providing that software to an additional user is 
typically small, or even zero (e.g., if the software can be downloaded 
over the internet after being purchased).
    In the Exchange's case, it is costly to build and maintain a 
trading platform, but the incremental cost of trading each additional 
share on an existing platform, or distributing an additional instance 
of data, is very low. Market information and executions are each 
produced jointly (in the sense that the activities of trading and 
placing orders are the source of the information that is distributed) 
and are each subject to significant scale economies. In such cases, 
marginal cost pricing is not feasible because if all sales were priced 
at the margin, the Exchange would be unable to defray its platform 
costs of providing the joint products.
    An exchange's broker-dealer customers view the costs of transaction 
executions and of data as a unified cost of doing business with the 
exchange. A broker-dealer will disfavor a particular exchange if the 
expected revenues from executing trades on the exchange do not exceed 
net transaction execution costs and the cost of data that the broker-
dealer chooses to buy to support its trading decisions (or those of its 
customers). The choice of data products is, in turn, a product of the 
value of the products in making profitable trading decisions. If the 
cost of the product exceeds its expected value, the broker-dealer will 
choose not to buy it. Moreover, as a broker-dealer chooses to direct 
fewer orders to a particular exchange, the value of the product to that 
broker-dealer decreases, for two reasons. First, the product will 
contain less information, because executions of the broker-dealer's 
trading activity will not be reflected in it. Second, and perhaps more 
important, the product will be less valuable to that broker-dealer 
because it does not provide information about the venue to which it is 
directing its orders. Data from the competing venue to which the 
broker-dealer is directing more orders will become correspondingly more 
valuable.
    Similarly, in the case of products such as TOPO Plus that may be 
distributed through market data vendors, the vendors provide price 
discipline for proprietary data products because they control the 
primary means of access to end users. Vendors impose price restraints 
based upon their business models. For example, vendors such as 
Bloomberg and Reuters that assess a surcharge on data they sell may 
refuse to offer proprietary products that end users will not purchase 
in sufficient numbers. Internet portals, such as Google, impose a 
discipline by providing only data that will enable them to attract 
``eyeballs'' that contribute to their advertising revenue. Retail 
broker-dealers, such as Schwab and Fidelity, offer their retail 
customers proprietary data only if it promotes trading and generates 
sufficient commission revenue. Although the business models may differ, 
these vendors' pricing discipline is the same: They can simply refuse 
to purchase any proprietary data product that fails to provide 
sufficient value. Exchanges and other producers of proprietary data 
products must understand and respond to these varying business models 
and pricing disciplines in order to market proprietary data products 
successfully. Moreover, the Exchange believes that products such as 
TOPO Plus can enhance order flow to the Exchange by providing more 
widespread distribution of information about transactions in real time, 
thereby encouraging wider participation in the market by investors

[[Page 2843]]

with access to the internet or television. Conversely, the value of 
such products to Distributors and investors decreases if order flow 
falls, because the products contain less content.
    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. The Exchange 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.
    Indeed, in approving the fees for TOPO Plus in 2010, the Commission 
noted that the Exchange was subject to competitive pressures in setting 
its fees for TOPO Plus. First, the Commission noted that the Exchange 
had a ``compelling need'' to attract order flow, which imposed 
``significant pressure'' on the Exchange to act reasonably in setting 
its fees for PHLX market data, particularly given that ``the market 
participants that will pay such fees often will be the same market 
participants from whom Phlx must attract order flow.'' \28\ The 
Commission also found that there were a number of alternative sources 
of information that imposed significant competitive pressures on the 
Exchange in setting the terms for distributing TOPO Plus. The 
Commission found that the availability of those alternatives, as well 
as the Exchange's compelling need to attract order flow, imposed 
``significant competitive pressure on Phlx to act equitably, fairly, 
and reasonably in setting the terms of its proposal.'' \29\ The 
Exchange believes that the same analysis and conclusions apply here.
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    \28\ See TOPO Plus approval order, 75 FR at 31833.
    \29\ Id.
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    In sum, the proposed fee structure is designed to ensure a fair and 
reasonable use of Exchange resources by allowing the Exchange to recoup 
costs while continuing to offer its data products at competitive rates 
to firms
3. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others
    No written comments were either solicited or 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.\30\
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    \30\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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 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 [email protected]. Please include 
File Number SR-Phlx-2018-08 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-2018-08. 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 website (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 website 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 the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-Phlx-2018-08, and should be submitted on 
or before February 9, 2018.
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    \31\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00852 Filed 1-18-18; 8:45 am]
 BILLING CODE 8011-01-P
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