[Federal Register Volume 78, Number 95 (Thursday, May 16, 2013)]
[Notices]
[Pages 28926-28933]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11634]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69553; File No. SR-NYSEMKT-2013-40]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Establishing Non-
Display Usage Fees and Amending the Professional End-User Fees for NYSE
Amex Options Market Data
May 10, 2013.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on May 1, 2013, NYSE MKT LLC (the ``Exchange'' or ``NYSE
MKT'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to establish non-display usage fees and to
amend the Professional End-User fees for NYSE Amex Options market data,
operative on May 1, 2013. The text of the proposed rule change is
available on the Exchange's Web site at www.nyse.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
[[Page 28927]]
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish non-display usage fees and to
amend the Professional End-User fees for NYSE Amex Options market data,
operative on May 1, 2013. The subsections below describe (1) the
background on the current fees for these real-time products; (2) the
rationale for creating the new non-display usage fee structure; (3) the
proposed fee change for non-display usage by Professional End-Users;
(4) the proposed fee change for display usage by Professional End-
Users; and (5) an example comparing the current and proposed fees.
Background
On October 1, 2012, the Exchange began offering the following real-
time options market data products: ArcaBook for Amex Options--Trades,
ArcaBook for Amex Options--Top of Book, ArcaBook for Amex Options--
Depth of Book, ArcaBook for Amex Options--Complex, ArcaBook for Amex
Options--Series Status, and ArcaBook for Amex Options--Order Imbalance
(collectively, ``Amex Options Products'').\4\ Fees cover all six
products.\5\
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\4\ See Securities Exchange Act Release No. 67719 (Aug. 23,
2012), 77 FR 52767 (Aug. 30, 2012) (SR-NYSEMKT-2012-40).
\5\ See SR-NYSEMKT-2013-35 (establishing a fee schedule) and
Securities Exchange Act Release No. 68004 (Oct. 9, 2012), 77 FR
62582 (Oct. 15, 2012) (SR-NYSEMKT-2012-49) (establishing fees for
Amex Options Products). Amex Options Products are not offered with
separate fees for the individual underlying products.
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The Exchange charges an access fee of $3,000 per month and a
redistribution fee of $2,000 per month for the Amex Options Products.
The Exchange charges Professional End-Users $50 per month for each
``User per Source'' for the receipt and use of the Amex Options
Products.\6\ A Professional End-User is a person or entity that
receives market data from the Exchange or a Redistributor and uses that
market data solely for its own internal purposes; a Professional End-
User is not permitted to redistribute that market data to any person or
entity outside of its organization. A ``Source'' is a Professional End-
User-controlled source of data from a Redistributor,\7\ such as a data
feed; in this case, it is the Amex Options Products. An access
identifier (``Access ID'') is a unique identifier that a Professional
End-User has assigned to a natural person, application, or device
(each, a ``User''),\8\ which identifier the Professional End-User's
Entitlement System uses to administer technical controls over access to
market data.\9\ The term ``device'' includes display and non-display
devices.
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\6\ The Exchange notes that the User per Source reporting policy
differs from the unit-of-count policy used for other Exchange market
data products, such as NYSE MKT Trades and NYSE MKT BBO. See
Securities Exchange Act Release No. 62187 (May 27, 2010), 75 FR
31500 (June 3, 2010) (SR-NYSEAmex-2010-35).
\7\ Under the current User per Source policy, a Redistributor is
any entity that makes market data available to any person other than
the Redistributor and its employees, directors, officers and
partners, irrespective of the means of transmission or access. See
infra n.13.
\8\ An Access ID may be a User name, but is not limited to a
User name. For example, it could be a host name, an Internet
protocol (``IP'') address, or a MAC/network address. A User may have
more than one Access ID assigned to control access to market data.
Sharing of passwords and/or Access IDs among Users is prohibited, as
is simultaneous access by multiple Users using the same Access ID.
Simultaneous access by an individual User is allowed if the
Professional End-User discloses in advance the technical and/or
process controls that prohibit the sharing of Access IDs or other
means of accessing data.
\9\ The Exchange considers any mechanism that controls access to
market data to constitute an Entitlement System. See supra n.5.
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In order to remove an Access ID from the reporting and fee
obligations for the Amex Options Products, the Professional End-User
must disable the ability of the Access ID to receive such data
entirely. The Professional End-User must maintain an audit trail to
evidence the disabling of an Access ID for any period. In the absence
of an adequate audit trail, all Access IDs that connect to the server
remain fee liable. If the Professional End-User cannot limit or track
the number of Access IDs, it must report all Access IDs.
The following sections describe the unit-of-count for different
types of access to and usage of Amex Options Products.
Redistributor Controlled Access
The unit-of-count for Redistributors of controlled accesses to
market data, such as display devices and single-use application program
interfaces (``APIs''), is each Access ID. Redistributors must ensure,
by way of their agreements with clients, that Access IDs are not shared
among Users. If a Professional End-User cannot or does not disclose in
advance its restrictions relating to Access ID sharing, thereby
enabling simultaneous access by multiple Users, the maximum number of
potential accesses (i.e., the greatest number of natural persons,
applications, and devices that can access the market data) is charged.
Internal Use
Professional End-Users using User per Source reporting may report
the total number of natural persons per each Source rather than the
number of Access IDs per Source. For example, if a natural person has
two Access IDs receiving data from a single Redistributor's data feed,
the Professional End-User may report a count of one. If a natural
person has one Access ID receiving data from two Redistributors' data
feeds, however, the Professional End-User must report a count of two.
Likewise, if a natural person has two Access IDs receiving data feeds
from two separate Redistributors, the Professional End-User must report
a count of two.\10\
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\10\ The Professional End-User must identify the User associated
with each Access ID. Where an Access ID cannot be associated to a
natural person User (e.g., because it is associated with a non-
display device), the Professional End-User must treat that Access ID
as a User per Source.
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This aspect of User per Source reporting applies only to a
Professional End-User's controlled internal distribution of data, and
does not apply to Redistributor-controlled access as described above;
therefore, a Professional End-User may not net internal Users against
Access IDs for a Redistributor's controlled access, such as a device or
API, as described in the preceding section.
Application Usage
Some internal distribution networks feature downstream applications
that control access to market data without using a centralized
Entitlement System. The Access IDs of each such application must be
reported, and Professional End-Users must ensure that audit trails are
maintained. Professional End-Users may report each of the Users of the
application and not the Access IDs of these systems; however,
Professional End-Users must ensure that all Users are reported across
all Entitlement Systems and applications. For example, a User that has
an Access ID from an Entitlement System and an Access ID from a
downstream application, each receiving data from a single Redistributor
source, would be reported once.
Counting Users in Closed Networks
In a Closed Network, a Professional End-User has an environment
whereby market data is published on an intranet or subnet with no other
access control such as an Entitlement System. In environments such as
this, all assigned
[[Page 28928]]
IP addresses on the network range are considered a User per Source and
are therefore reportable. In the case of a closed network in which
physical access to the network determines a User's ability to access
market data, the Professional End-User must report any device that has
physical access to the network as a separate User per Source.
In closed networks that employ virtual devices, the Professional
End-User must report all physical and virtual devices. (A virtual
device can be either a display or non-display device.) For example, if
a server provides five different market data products through five
different IP addresses, each of which is capable of accessing market
data, the Professional End-User must report all five IP addresses for
each of the five products. That is, the Professional End-User must
report virtual devices (in the form of IP addresses) as well as
physical devices, and not just the physical server.\11\
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\11\ If a physical or virtual device (including an IP address)
is capable of receiving a market data product, the Professional End-
User must report the device regardless of whether a User uses the
device to gain access to the market data product.
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Same User Name for Multiple Uses
Frequently, Users are assigned the same User name to log into
multiple services and applications that do not share a common
Entitlement System. For example, a natural person might elect to use
the same User name to gain access to Redistributor A's services as it
uses to gain access to Redistributor B's services. Or, he or she may
use the same User name to access Redistributor A's Service X as he or
she uses to gain access to Redistributor A's Service Y. Or, he or she
may use the same User name to access Application A with Redistributor
A's data as he or she may use to access Application B with
Redistributor A's data. Despite the use of the same User name for
multiple purposes, each use of a User name by a separate Entitlement
System must be treated as a separate Access ID.
Simultaneous Access and Contention-Based Entitlement Systems
Simultaneous access is the capability of a single Access ID to be
used concurrently on two or more devices identified on a network by
their host name, IP address, or other system-level identifier for
network access. Entitlement Systems must control and track the number
of simultaneous accesses by a single Access ID.
Contention-Based Entitlement Systems are not consistent with User
per Source reporting. Those are systems for which a limited number of
``tokens'' or ``accesses'' that control the number of simultaneous
Users are shared among Users. As is the case if a Professional End-User
cannot or does not disclose in advance its restrictions relating to
Access ID sharing, thereby enabling simultaneous access by multiple
Users, the maximum number of potential accesses (i.e., the greatest
number of natural persons, applications, and devices that can access
the market data) will be chargeable.
Rationale for New Non-Display Usage Fee Structure
As noted in a previous market data fee filing by the Exchange's
affiliate, ``technology has made it increasingly difficult to define
`device' and to control who has access to devices, [and] the markets
have struggled to make device counts uniform among their customers.''
\12\ Significant change has characterized the industry in recent years,
stemming in large measure from changes in regulation and technological
advances, which has led to the rise in automated and algorithmic
trading. Additionally, market data feeds have become faster and contain
a vastly larger number of quotes and trades. Today, a majority of
trading is done by leveraging non-display devices consuming massive
amounts of data. Some firms base their business models largely on
incorporating non-display data into applications and do not require
widespread data access by the firm's employees. Changes in market data
consumption patterns have increased the use and importance of non-
display data.
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\12\ See Securities Exchange Act Release No. 59544 (Mar. 9,
2009), 74 FR 11162 (Mar. 16, 2009) (SR-NYSE-2008-131). At least one
other Exchange also has noted such administrative challenges. In
establishing a non-display usage fee for internal distributors of
TotalView and OpenView, NASDAQ Stock Market LLC (``NASDAQ'') noted
that as ``the number of devices increase, so does the administrative
burden on the end customer of counting these devices.'' See
Securities Exchange Act Release No. 61700 (Mar. 12, 2010), 75 FR
13172 (Mar. 18, 2010) (SR-NASDAQ-2010-034).
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Applications that can be used in non-display devices provide added
value in their capability to manipulate and spread the data they
consume. Such applications have the ability to perform calculations on
the live data stream and manufacture new data out of it. Data can be
processed much faster by a non-display device than it can be by a human
being processing information that he or she views on a data terminal.
Non-display devices also can dispense data to multiple computer
applications as compared with the restriction of data to one display
terminal.
While the non-display data has become increasingly valuable to data
recipients who can use it to generate substantial profits, it has
become increasing difficult for them and the Exchange to accurately
count non-display devices. The number and type of non-display devices,
as well as their complexity and interconnectedness, have grown in
recent years, creating administrative challenges for vendors, data
recipients, and the Exchange to accurately count such devices and audit
such counts. Unlike a display device, such as a Bloomberg terminal, it
is not possible to simply walk through a trading floor or areas of a
data recipient's premises to identify non-display devices. During an
audit, an auditor must review a firm's entitlement report to determine
usage. While display use is generally associated with an individual end
user and/or unique user ID, a non-display use is more difficult to
account for because the entitlement report may show a server name or IP
address or it may not. The auditor must review each IP or server and
further inquire about downstream use and quantity of servers with
access to data; this type of counting is very labor-intensive and prone
to inaccuracies.
For these reasons, the Exchange determined that its current fee
structure, which in certain instances is based on counting non-display
devices, does not adequately reflect market and technology developments
and the value of the non-display data and its many profit-generating
uses for subscribers. As such, the Exchange, in conjunction with its
domestic and foreign affiliate exchanges, undertook a review of its
market data policies with a goal of bringing greater consistency and
clarity to its fee structure; easing administration for itself,
vendors, and subscribers; and setting fees at a level that better
reflects the current value of the data provided. As a result of this
review, the Exchange has determined to amend its fee schedule.
Proposed Non-Display Usage Fees
The Exchange proposes to establish new monthly fees for non-display
usage, which will be consistent with the structure of certain non-
display fees established for certain equity market data products of the
Exchange and its affiliates.\13\ Non-display usage will
[[Page 28929]]
mean accessing, processing or consuming an NYSE Amex data product
delivered via direct and/or Redistributor \14\ data feeds, for a
purpose other than in support of its display or further internal or
external redistribution. The proposed non-display fees will apply to
the non-display use of the data product as part of automated
calculations or algorithms to support trading decision-making processes
or the operation of trading platforms (``Non-Display Trading
Activities''). They include, but are not limited to, high frequency
trading, automated order or quote generation and/or order pegging, or
price referencing for the purposes of algorithmic trading and/or smart
order routing. Applications and devices that solely facilitate display,
internal distribution, or redistribution of the data product with no
other uses and applications that use the data product for other non-
trading activities, such as the creation of derived data, quantitative
analysis, fund administration, portfolio management, and compliance,
are not covered by the proposed non-display fee structure and are
subject to the current fee structure. The Exchange reserves the right
to audit data recipients' use of NYSE Amex market data products in Non-
Display Trading Activities in accordance with NYSE Amex's vendor and
subscriber agreements.
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\13\ See Securities Exchange Act Release Nos. 69285 (Apr. 3,
2013), 78 FR 21172 (Apr. 9, 2013) (SR-NYSEMKT-2013-32); 69315 (Apr.
5, 2013), 78 FR 21668 (Apr. 11, 2013) (SR-NYSEArca-2013-37); 69278
(Apr. 2, 2013), 78 FR 20973 (Apr. 8, 2013) (SR-NYSE-2013-25). The
Exchange and its affiliates established fees for internal use and
for managed non-display services. Under the latter, a data
recipient's non-display applications must be hosted by a
Redistributor approved by the respective exchange. The Exchange does
not propose to establish fees for managed non-display services for
options market data products at this time.
\14\ ``Redistributor'' will be defined to mean a vendor or any
other person that provides an NYSE Amex data product to a data
recipient or to any system that a data recipient uses, irrespective
of the means of transmission or access. Although the text differs
from the definition in n.7 supra, the Exchange does not believe
there is any material difference in the definition.
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The fee structure will have three categories, which recognize the
different uses for the market data. Category 1 Fees apply where a data
recipient's non-display use of real time market data is for the purpose
of principal trading. Category 2 Fees apply where a data recipient's
non-display use of market data is for the purpose of broker/agency
trading, i.e., trading-based activities to facilitate the recipient's
customers' business. If a data recipient trades both on a principal and
agency basis, then the data recipient must pay both categories of fees.
Category 3 Fees apply where a data recipient's non-display use of
market data is, in whole or in part, for the purpose of providing
reference prices in the operation of one or more trading platforms,
including but not limited to multilateral trading facilities,
alternative trading systems, broker crossing networks, dark pools, and
systematic internalization systems.\15\ A data recipient will not be
liable for Category 3 Fees for those market data products for which it
is also paying Category 1 and/or Category 2 Fees.
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\15\ The Exchange is not aware of any such trading platform for
options products, but is including the category to maintain
consistency with the structure of its internal non-display use fees
for equities products. See supra n.13.
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The fees for NYSE Amex Options non-display use per data recipient
organization for each category will be as follows:
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Category 2 trading as
Category 1 trading as principal (per month) broker/agency (per Category 3 trading
month) platform (per month)
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$1,000...................................................... $1,000 $1,000
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For non-display use, there will be no reporting requirements
regarding non-display device counts, thus doing away with the
administrative burdens described above. Data recipients will be
required to declare the market data products used within their non-
display trading applications by executing an NYSE Euronext Non-Display
Usage Declaration.
Proposed Tiered Fee Structure for Display Usage by Professional End-
Users
The Exchange proposes to introduce a tiered fee structure for
display usage by Professional End-Users based on the number of users.
Specifically, the Exchange proposes to charge the following monthly
fees for Professional End-Users:
------------------------------------------------------------------------
Fee per
Professional End-Users Professional
End-User
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1-50.................................................... $50
51-100.................................................. $35
101+.................................................... $20
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Example
Broker-Dealer A obtains Amex Options Products directly from the
Exchange for internal use. Broker-Dealer A trades both on a principal
and agency basis and has (i) 80 individual persons who use 100 display
devices and (ii) 50 non-display devices.
Under the current fee schedule, Broker-Dealer A pays
the Exchange the $3,000 access fee plus $50 for each of 80
individuals who use display devices, or $4,000, and $50 for each of
the 50 non-display devices, or $2,500, for a total of $9,500 per
month.
Under the proposed fee schedule, Broker-Dealer A will
pay the Exchange the $3,000 access fee, plus $50 for each of the
first 50 Professional End-Users of display devices and $35 for the
remaining 30 Professional End-Users of display devices, or $3,550,
plus Category 1 and Category 2 fees for non-display use, or $2,000,
for a total of $8,550 per month. The new fees will result in a $950
monthly savings.
No redistribution fee is charged in either case.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\16\ in general, and
Sections 6(b)(4) and 6(b)(5) of the Act,\17\ in particular, in that it
provides an equitable allocation of reasonable fees among users and
recipients of the data and is not designed to permit unfair
discrimination among customers, issuers, and brokers.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(4), (5).
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As described in detail in the section ``Rationale for New Non-
Display Usage Fee Structure'' above, which is incorporated by reference
herein, technology has made it increasingly difficult to define
``device'' and to control who has access to devices. Significant change
has characterized the industry in recent years, stemming in large
measure from changes in regulation and technological advances, which
has led to the rise in automated and algorithmic trading, which have
the potential to generate substantial profits. Indeed, data used in a
single non-display device running a single trading algorithm can
generate large profits. Market data technology and usage has evolved to
the point where it is no longer practical, nor fair and equitable, to
count non-display devices. The administrative costs and difficulties of
establishing reliable counts and
[[Page 28930]]
conducting an effective audit of non-display devices have become too
burdensome, impractical, and non-economic for the Exchange, vendors,
and data recipients. Rather, the Exchange believes that its proposed
flat fee structure for non-display use is reasonable, equitable, and
not unfairly discriminatory in light of these developments.
The Exchange and its affiliates already have established non-
display fees for certain equity market data products.\18\ Other
exchanges also have established differentiated fees based on non-
display usage, including a flat or enterprise fee, for options market
data. For example, NASDAQ Options Market (``NOM'') offers a $2,500 per
month ``Non-Display Enterprise License'' fee that permits distribution
of Best of NASDAQ Options (``BONO'') or NASDAQ ITCH-to-Trade Options
(``ITTO'') to an unlimited number of non-display devices within a firm
without any per user charge.\19\ In addition, NASDAQ OMX PHLX, Inc.
(``Phlx'') offers an alternative $10,000 per month ``Non-Display
Enterprise License'' fee that permits distribution to an unlimited
number of internal non-display subscribers without incurring additional
fees for each internal subscriber.\20\ The Non-Display Enterprise
License covers non-display subscriber fees for all Phlx proprietary
direct data feed products and is in addition to any other associated
distributor fees for Phlx proprietary direct data feed products. NASDAQ
OMX BX, Inc. (``BX'') also offers an alternative non-display usage fee
of $16,000 for its BX TotalView data feed.\21\
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\18\ See supra n.13.
\19\ See NASDAQ Options Rules Chapter XV, Section 4.
Alternatively, NOM charges each professional subscriber $5 per month
for BONO and $10 per month for ITTO.
\20\ See Section IX of the NASDAQ OMX PHLX LLC Pricing Schedule
and Securities Exchange Act Release No. 68576 (Jan. 3, 2013), 78 FR
1886 (Jan. 9, 2013) (SR-Phlx-2012-145). Alternatively, Phlx charges
each professional subscriber $40 per month.
\21\ See NASDAQ OMX BX Rule 7023(a)(2). Alternatively, BX
charges each professional subscriber $20 per month for BX TotalView
for NASDAQ issues and $20 per month for BX TotalView for NYSE and
regional issues.
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The Exchange believes that the new fee schedule, which could
potentially result in certain data recipients with a small number of
non-display devices paying more than they have previously, is fair and
reasonable in light of market and technology developments. The current
fee structure does not properly reflect the significant overall value
that non-display data can provide in trading algorithms and other uses
that provide professional users with the potential to generate
substantial profits. The Exchange believes that it is equitable and not
unfairly discriminatory to establish an overall monthly fee that better
reflects the value of the data to the data recipients in their profit-
generating activities and does away with the costs and administrative
burdens of counting non-display devices. It will also result in a more
consistent pricing structure between equities and options markets.
The Exchange also believes that the proposed tiered pricing
structure for display usage by Professional End-Users is reasonable
because other exchanges use tiered pricing for professional users. For
example, professional subscribers pay a monthly fee for non-display
usage based upon direct access to NASDAQ Level 2, NASDAQ TotalView, or
NASDAQ OpenView ranging from $300 per month for 1-10 subscribers to
$75,000 per month for 250+ subscribers.\22\ In addition, the
Consolidated Tape Association (``CTA'') historically has offered CTA
Tape A Market Data, which includes consolidated last sale and bid-ask
data, for a monthly fee for professional subscribers on a tiered,
sliding scale basis under which subscribers pay less per device as the
number of devices increases.\23\
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\22\ See NASDAQ Rule 7023.
\23\ See, e.g., Exhibit E of CTA Plan dated July 25, 2012,
Securities Exchange Act Release No. 69157 (Mar. 18, 2013), 78 FR
17946 (Mar. 25, 2013) (SR-CTA/CQ-2013-01).
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The Exchange also believes that the proposed display fees are
reasonable because the Exchange is not increasing its fees for any
current data recipient, but rather lowering fees for data recipients
with a large number of Professional End-Users. The Exchange believes
that the proposed display fees and tiered pricing structure are
equitable and not unfairly discriminatory because they will encourage
customers to provide access to the Exchange's market data to a greater
number of Professional End-Users. In addition, encouraging greater
access through reduced fees for display use of the Exchange's market
data will increase transparency of the market, which would benefit all
market participants.
The Exchange also notes that purchasing Amex Options Products is
entirely optional. Firms are not required to purchase them and have a
wide variety of alternative options market data products from which to
choose.\24\ Moreover, the Exchange is not required to make these
proprietary data products available or to offer any specific pricing
alternatives to any customers.
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\24\ See supra nn.19-21.
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The decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir.
2010), upheld reliance by the Securities and Exchange Commission
(``Commission'') upon the existence of competitive market mechanisms to
set reasonable and equitably allocated fees for proprietary market
data:
In fact, the legislative history indicates that the Congress
intended that the market system `evolve through the interplay of
competitive forces as unnecessary regulatory restrictions are removed'
and that the SEC wield its regulatory power `in those situations where
competition may not be sufficient,' such as in the creation of a
`consolidated transactional reporting system.'
Id. at 535 (quoting H.R. Rep. No. 94-229 at 92 (1975), as reprinted in
1975 U.S.C.C.A.N. 323). The court agreed with the Commission's
conclusion that ``Congress intended that `competitive forces should
dictate the services and practices that constitute the U.S. national
market system for trading equity securities.' '' \25\ The Exchange
believes that this is also true with respect to options markets.
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\25\ NetCoalition, 615 F.3d at 535.
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As explained below in the Exchange's Statement on Burden on
Competition, the Exchange believes that there is substantial evidence
of competition in the marketplace for data and that the Commission can
rely upon such evidence in concluding that the fees established in this
filing are the product of competition and therefore satisfy the
relevant statutory standards.\26\ In addition, the existence of
alternatives to these data products, such as proprietary last sale data
from other sources, as described below, further ensures that the
Exchange cannot set unreasonable fees, or fees that are unreasonably
discriminatory, when vendors and subscribers can elect such
alternatives.
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\26\ Section 916 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the ``Dodd-Frank Act'') amended
paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3),
to make clear that all exchange fees for market data may be filed by
exchanges on an immediately effective basis.
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As the NetCoalition decision noted, the Commission is not required
to undertake a cost-of-service or ratemaking approach, and the Exchange
incorporates by reference into this proposed rule change its
affiliate's
[[Page 28931]]
analysis of this topic in another rule filing.\27\
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\27\ See Securities Exchange Act Release No. 63291 (Nov. 9,
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97).
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For these reasons, the Exchange believes that the proposed fees are
reasonable, equitable, and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. An exchange's ability to
price its proprietary data products is constrained by actual
competition for the sale of proprietary data products, the joint
product nature of exchange platforms, and the existence of alternatives
to the Exchange's proprietary data.
The Existence of Actual Competition. The market for proprietary
options data products is currently competitive and inherently
contestable because there is fierce competition for the inputs
necessary for the creation of proprietary data and strict pricing
discipline to the proprietary products themselves. Numerous exchanges
compete with each other for options trades and sales of options market
data itself, providing virtually limitless opportunities for
entrepreneurs who wish to compete in any or all of those areas,
including producing and distributing their own options market data.
Proprietary options data products are produced and distributed by each
individual exchange, as well as other entities, in a vigorously
competitive market.
Competitive markets for order flow, executions, and transaction
reports provide pricing discipline for the inputs of proprietary
options data products and therefore constrain markets from overpricing
proprietary market data. The U.S. Department of Justice has
acknowledged the aggressive competition among exchanges, including for
the sale of proprietary market data itself. In announcing that the bid
for NYSE Euronext by NASDAQ OMX Group Inc. and IntercontinentalExchange
Inc. had been abandoned, Assistant Attorney General Christine Varney
stated that exchanges ``compete head to head to offer real-time equity
data products. These data products include the best bid and offer of
every exchange and information on each equity trade, including the last
sale.'' \28\ Similarly, the options markets vigorously compete with
respect to options data products.\29\
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\28\ Press Release, U.S. Department of Justice, Assistant
Attorney General Christine Varney Holds Conference Call Regarding
NASDAQ OMX Group Inc. and IntercontinentalExchange Inc. Abandoning
Their Bid for NYSE Euronext (May 16, 2011), available at http://www.justice.gov/iso/opa/atr/speeches/2011/at-speech-110516.html.
\29\ See, e.g., Securities Exchange Act Release No. 67466 (July
19, 2012), 77 FR 43629 (July 25, 2012) (SR-Phlx-2012-93), which
describes a variety of options market data products and their
pricing.
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It is common for broker-dealers to further exploit this recognized
competitive constraint by sending their order flow and transaction
reports to multiple markets, rather than providing them all to a single
market. In addition, in the case of products that are distributed
through market data vendors, the market data vendors themselves provide
additional price discipline for proprietary data products because they
control the primary means of access to certain end users. These vendors
impose price discipline based upon their business models. For example,
vendors that assess a surcharge on data they sell are able to refuse to
offer proprietary products that their end users do not or will not
purchase in sufficient numbers. Vendors will not elect to make
available the Amex Options Products unless their customers request it,
and data recipients with Professional End-Users will not elect to
purchase them unless they can be used for profit-generating purposes.
All of these operate as constraints on pricing proprietary data
products.
Joint Product Nature of Exchange Platform. Transaction execution
and proprietary data products are complementary in that market data is
both an input and a byproduct of the execution service. In fact, market
data and trade 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 platforms where the order
can be posted, including the execution fees, data quality, and price
and distribution of their data products. The more trade executions a
platform does, the more valuable its market data products become.
Further, data products are valuable to many end-users only insofar as
they provide information that end-users expect will assist them in
making trading decisions. In that respect, the Exchange believes that
the Amex Options Products will offer options market data information
that is useful for professionals in making trading decisions based on
both display and non-display usage, the latter of which includes, as
described above, high frequency trading, automated order and quote
generation and order pegging, and price referencing for the purposes of
algorithmic trading and smart order routing.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's broker-
dealer customers view the costs of transaction executions and market
data as a unified cost of doing business with the exchange.
Other market participants have noted that the liquidity provided by
the order book, trade execution, core market data, and non-core market
data are joint products of a joint platform and have common costs.\30\
The Exchange agrees with and adopts those discussions and the arguments
therein. The Exchange also notes that the economics literature confirms
that there is no way to allocate common costs between joint products
that would shed any light on competitive or efficient pricing.\31\
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\30\ See Securities Exchange Act Release No. 62887 (Sept. 10,
2010), 75 FR 57092, 57095 (Sept. 17, 2010) (SR-Phlx-2010-121);
Securities Exchange Act Release No. 62907 (Sept. 14, 2010), 75 FR
57314, 57317 (Sept. 20, 2010) (SR-NASDAQ-2010-110); and Securities
Exchange Act Release No. 62908 (Sept. 14, 2010), 75 FR 57321, 57324
(Sept. 20, 2010) (SR-NASDAQ-2010-111) (``all of the exchange's costs
are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data
about market activity. The total return that an exchange earns
reflects the revenues it receives from the joint products and the
total costs of the joint products.''); see also August 1, 2008
Comment Letter of Jeffrey S. Davis, Vice President and Deputy
General Counsel, NASDAQ OMX Group, Inc., Statement of Janusz Ordover
and Gustavo Bamberger (``because market data is both an input to and
a byproduct of executing trades on a particular platform, market
data and trade execution services are an example of `joint products'
with `joint costs.'''), attachment at pg. 4, available at
www.sec.gov/comments/34-57917/3457917-12.pdf.
\31\ See generally Mark Hirschey, Fundamentals of Managerial
Economics, at 600 (2009) (``It is important to note, however, that
although it is possible to determine the separate marginal costs of
goods produced in variable proportions, it is impossible to
determine their individual average costs. This is because common
costs are expenses necessary for manufacture of a joint product.
Common costs of production--raw material and equipment costs,
management expenses, and other overhead--cannot be allocated to each
individual by-product on any economically sound basis.[hellip] Any
allocation of common costs is wrong and arbitrary.''). This is not
new economic theory. See, e.g., F. W. Taussig, ``A Contribution to
the Theory of Railway Rates,'' Quarterly Journal of Economics V(4)
438, 465 (July 1891) (``Yet, surely, the division is purely
arbitrary. These items of cost, in fact, are jointly incurred for
both sorts of traffic; and I cannot share the hope entertained by
the statistician of the Commission, Professor Henry C. Adams, that
we shall ever reach a mode of apportionment that will lead to
trustworthy results.'').
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[[Page 28932]]
Analyzing the cost of market data product production and
distribution in isolation from the cost of all of the inputs supporting
the creation of market data and market data products will inevitably
underestimate the cost of the data and data products. Thus, because it
is impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, system costs and regulatory costs affect the price of both
obtaining the market data itself and creating and distributing market
data products. It would be equally misleading, however, to attribute
all of an exchange's costs to the market data portion of an exchange's
joint products. Rather, all of an exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including 11 self-regulatory organization (``SRO'') options markets.
One of the 11 just launched operations in December 2012; another one of
the 11 SROs has announced plans to launch a second options
exchange,\32\ which would bring the total number of options SROs to 12.
The Exchange believes that these new entrants demonstrate that
competition is robust.
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\32\ Press Release, SEC Publishes ISE's Form 1 Application for a
Second Options Exchange (Mar. 5, 2013), available at http://
www.ise.com/assets/documents/AboutISE/PressRelease/CompanyNews/2013/
20130305$SEC_Publishes_ISEs_Form_1_Application_for_a_
Second_Options_Exchange.pdf.
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Each SRO market competes to produce transaction reports via trade
executions. Competition among trading platforms can be expected to
constrain the aggregate return that each platform earns from the sale
of its joint products, but different platforms may choose from a range
of possible, and equally reasonable, pricing strategies as the means of
recovering total costs. For example, some platforms may choose to pay
rebates to attract orders, charge relatively low prices for market data
products (or provide market data products free of charge), and charge
relatively high prices for accessing posted liquidity. Other platforms
may choose a strategy of paying lower rebates (or no rebates) to
attract orders, setting relatively high prices for market data
products, and setting relatively low prices for accessing posted
liquidity. In this environment, there is no economic basis for
regulating maximum prices for one of the joint products in an industry
in which suppliers face competitive constraints with regard to the
joint offering.
Existence of Alternatives. The large number of SROs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO is currently permitted to produce proprietary data products, and
many currently do or have announced plans to do so, including but not
limited to the Exchange, NYSE Arca, Inc.; Chicago Board Options
Exchange, Incorporated; C2 Options Exchange, Incorporated;
International Securities Exchange, LLC; NASDAQ; Phlx; BX; BATS
Exchange, Inc. (``BATS''); and Miami International Securities Exchange
LLC. Because market data users can thus find suitable substitutes for
most proprietary market data products,\33\ a market that overprices its
market data products stands a high risk that users may substitute
another source of market data information for its own.
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\33\ See supra nn.19-21.
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Those competitive pressures imposed by available alternatives are
evident in the Exchange's proposed pricing. As noted above, the
proposed non-display fees for NYSE Amex Options are generally lower
than the maximum non-display fees charged by other exchanges such as
NASDAQ, Phlx, and BX for comparable products.\34\ The proposed display
fees are being reduced for data recipients with relatively larger
numbers of Professional End-Users.
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\34\ Id.
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In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
As noted above, a new options exchange launched in December 2012, and a
12th options exchange has filed for Commission approval to commence
operations. The history of electronic trading is replete with examples
of entrants that swiftly grew into some of the largest electronic
trading platforms and proprietary data producers: Archipelago,
Bloomberg Tradebook, Island, RediBook, Attain, TrackECN, BATS, and
Direct Edge. Today, BATS and Direct Edge provide certain market data at
no charge on their Web sites in order to attract more order flow, and
use revenue rebates from resulting additional executions to maintain
low execution charges for their users.\35\
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\35\ This is simply a securities market-specific example of the
well-established principle that in certain circumstances more sales
at lower margins can be more profitable than fewer sales at higher
margins; this example is additional evidence that market data is an
inherent part of a market's joint platform.
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Further, data products are valuable to certain end users only
insofar as they provide information that end users expect will benefit
them in their trading decisions. As noted above, non-display data can
be particularly valuable for high frequency trading, automated order
and quote generation and order pegging, and price referencing for the
purposes of algorithmic trading and smart order routing, whereas
display data can be used for monitoring real-time market conditions and
trading activity. The Exchange believes the proposed fees will benefit
customers by providing them with a clearer way to determine their fee
liability for non-display devices and reduced prices for customers with
larger numbers of display devices.
In establishing the proposed fees, the Exchange considered the
competitiveness of the market for proprietary options data and all of
the implications of that competition. The Exchange believes that it has
considered all relevant factors and has not considered irrelevant
factors in order to establish fair, reasonable, and not unreasonably
discriminatory fees and an equitable allocation of fees among all
users. The existence of numerous alternatives to the Exchange's
products, including proprietary data from other sources, ensures that
the Exchange cannot set unreasonable fees, or fees that are
unreasonably discriminatory, when vendors and subscribers can elect
these alternatives or choose not to purchase a specific proprietary
data product if its cost to purchase is not justified by the returns
any particular vendor or subscriber would achieve through the purchase.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange published draft Data Policies on its Web site on
November 20, 2012. Among other things, the Data Policies addressed non-
display use for certain market data products. The Exchange solicited
comments on the Data Policies in the form of a survey. The Exchange
received 12 comments relating to non-display use. Exhibit 2 contains a
copy of the notice soliciting
[[Page 28933]]
comment, the Data Policies, the 12 comments received in alphabetical
order, and an alphabetical listing of such comments.
Nine commenters \36\ requested greater clarity with respect to the
definition and examples of non-display use. Specifically, the
commenters requested that the Exchange provide a consistent definition
of non-display use. As described above, the definition of non-display
use will be accessing, processing or consuming an NYSE Amex data
product delivered via direct and/or Redistributor data feeds, for a
purpose other than in support of its display or further internal or
external redistribution. The Exchange believes that this definition
addresses the comments and will clearly describe the types of
activities that will qualify for the proposed fee. The Exchange also
provided examples for illustrative purposes, which are not exclusive.
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\36\ Barclays, Brown Brothers Harriman, CMC Markets, Deutsche
Bank, Flowtraders, Nomura, Threadneedle, Transtrend BV, and UBS.
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Four commenters \37\ also questioned whether price referencing,
compliance, accounting or auditing activities, and derived data should
be considered non-display use. The Data Policies listed price
referencing, compliance, accounting or auditing activities, and derived
data as examples of non-display usage; however, as discussed above, the
Exchange has determined that price referencing for the purposes of
algorithmic trading and/or smart order routing would be considered Non-
Display Trading Activities, and applications that use the data product
for non-trading activities, such as compliance, accounting or auditing
activities, and derived data are not covered by the non-display fees
and are subject to the current standard per-device fee structure.
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\37\ Barclays, CMC Markets, Transtrend BV, and UBS.
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Three commenters \38\ asked for examples of how the Exchange would
charge for customers that use both display and non-display devices. The
Exchange believes that the pricing examples provided above are
responsive to this request. One commenter \39\ stated that the proposed
fees are excessive. The Exchange believes that the proposed fees are
reasonable, equitable, and not unfairly discriminatory for the reasons
discussed in Section 3(b) above.
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\38\ Essex Radez LLC, Fidelity Market Data, and Lloyds TSB Bank
plc.
\39\ Essex Radez LLC.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \40\ of the Act and subparagraph (f)(2) of Rule
19b-4 \41\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\40\ 15 U.S.C. 78s(b)(3)(A).
\41\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) \42\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\42\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEMKT-2013-40 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEMKT-2013-40. 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available. All
submissions should refer to File Number SR-NYSEMKT-2013-40 and should
be submitted on or before June 6, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11634 Filed 5-15-13; 8:45 am]
BILLING CODE 8011-01-P