[Federal Register Volume 79, Number 176 (Thursday, September 11, 2014)]
[Notices]
[Pages 54325-54331]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-21647]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73008; File No. SR-NYSEMKT-2014-73]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change Amending Its Fees for
Non-Display Use of NYSE Amex Options Market Data
September 5, 2014.
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 August 25, 2014, NYSE MKT LLC (``Exchange'' or ``NYSE MKT'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC'') 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its fees for non-display use of NYSE
Amex Options market data, operative on September 1, 2014. The text of
the proposed rule change is available on the Exchange's Web site at
www.nyse.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change
[[Page 54326]]
and discussed any comments it received on the proposed rule change. The
text of those statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its fees for non-display use of NYSE
Amex Options market data, operative on September 1, 2014.\3\
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\3\ The Exchange's affiliates have submitted or will be
submitting similar proposals. See, e.g., SR-NYSE-2014-43.
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The Exchange established the current non-display fees for 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'')
in May 2013.\4\ Fees cover all six products.\5\
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\4\ See Securities Exchange Act Release No. 69553 (May 10,
2013), 78 FR 28926 (May 16, 2013) (SR-NYSEMKT-2013-40) (``2013
Release'').
\5\ The Exchange began offering ArcaBook for Amex Options--
Complex separately at no charge on May 1, 2014. See Securities
Exchange Act Release No. 72074 (May 1, 2014), 79 FR 26277 (May 7,
2014) (SR-NYSEArca-2014-51).
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Under the proposal, non-display use would continue to mean
accessing, processing, or consuming an Exchange data product delivered
via direct and/or Redistributor \6\ data feeds for a purpose other than
in support of a data recipient's display or further internal or
external redistribution (``Non-Display Use''). As is the case today,
non-display fees would 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.
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\6\ ``Redistributor'' means a vendor or any person that provides
a real-time NYSE data product to a data recipient or to any system
that a data recipient uses, irrespective of the means of
transmission or access.
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The Exchange is proposing to expand the types of uses considered
Non-Display Use to also include non-trading uses. In addition, the
proposal would specify that Non-Display Use would include any trading
use, rather than only certain types of trading, such as high frequency
or algorithmic trading, as under the current fee structure. Under the
proposal, examples of Non-Display Use would include any trading in any
asset class, automated order or quote generation and/or order pegging,
price referencing for algorithmic trading or smart order routing,
operations control programs, investment analysis, order verification,
surveillance programs, risk management, compliance, and portfolio
management. The Exchange believes that non-trading uses benefit data
recipients by allowing users to automate functions, achieving greater
speed and accuracy, and in turn, for example, reducing costs of labor
to perform the functions manually. This approach would address the
difficulties of monitoring and auditing different types of trading
versus non-trading uses of the data and the burden of counting devices
used for non-trading purposes under the current fees.
Proposed Changes to Non-Display Fees
The Exchange proposes to amend the fee structure applicable to Non-
Display Use of Amex Options Products. Specifically, the Exchange
proposes certain changes to the three categories of, and fees
applicable to, data recipients. The Exchange also proposes
corresponding changes to the Fee Schedule text to remove references to
the current category descriptions.
Under the proposal, Category 1 Fees would apply when a data
recipient's Non-Display Use of real-time market data is on its own
behalf as opposed to on behalf of its clients. This proposal represents
an expansion of the application of Category 1 Fees, which currently
apply solely to the Non-Display Use of real time market data for the
purpose of principal trading, to usage of such data for non-trading
purposes.
Under the proposal, Category 2 Fees would apply to a data
recipient's Non-Display Use of real-time market data on behalf of its
clients as opposed to on its own behalf. This proposal also represents
an expansion of the application of Category 2 Fees, which currently
apply solely to trading activities to facilitate a customer business,
to usage of such data for non-trading purposes. In contrast to the
current fee structure, data recipients will not be liable for Category
2 Non-Display fees for which they are also paying Category 1 Non-
Display fees.\7\
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\7\ See 2013 Release, supra note 4, at 28929.
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The Exchange believes its proposal to apply Category 1 Fees and
Category 2 Fees to Non-Display Use of market data for non-trading
purposes would address the difficulties of monitoring and auditing
trading versus non-trading uses of the data and the burden of counting
devices used for purposes of applying the per-device fees. As discussed
in more detail in the 2013 Release,\8\ the ability to accurately count
devices and audit such counts creates administrative challenges for
vendors, data recipients, and the Exchange.
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\8\ See id. at 28928.
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Under the proposal, Category 3 Fees would apply to data recipients'
Non-Display Use of real-time market data for the purpose of internally
matching buy and sell orders within an organization, including matching
customer orders on a data recipient's own behalf and/or on behalf of
its clients. This category would apply to Non-Display Use in trading
platform(s), such as, but not restricted to, alternative trading
systems (``ATSs''), broker crossing networks, broker crossing systems
not filed as ATSs, dark pools, multilateral trading facilities,
exchanges and systematic internalization systems. Currently, 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. The Exchange believes
its proposed revision to its description of the data recipients to whom
Category 3 Fees apply is more precise because it focuses on the
functions of internally matching orders.
In addition, the Exchange is proposing to change the application of
Category 3 Fees to data recipients that also use data for purposes that
give rise to Category 1 and/or Category 2 Fees. Currently, a data
recipient is not liable for Category 3 Fees for those Amex Options
Products for which it is also paying Category 1 and/or Category 2
Fees.\9\ Under the proposal, a data recipient's Non-Display Use of
real-time market data for Category 3 purposes would require such data
recipient to pay Category 3 Fees in addition to any Category 1 Fees or
Category 2 Fees it is required to pay for Non-Display Use of market
data.
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\9\ See id.
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There will continue to be no monthly or other reporting
requirements for data recipients' Non-Display Use. However, the
Exchange continues to reserve the right to audit data recipients' Non-
Display Use of Exchange market data products in accordance with the
Exchange's vendor and subscriber agreements.
A data recipient that receives real-time Exchange market data for
Non-Display Use would be required to complete and submit a Non-Display
Use Declaration before September 1, 2014. The Non-Display Use
Declaration would
[[Page 54327]]
replace the current declaration on the NYSE Euronext Non-Display Usage
Declaration.\10\ A firm subject to Category 3 Fees would be required to
identify each platform that uses data on a Non-Display Use basis, such
as ATSs and broker crossing systems not registered as ATSs, as part of
the Non-Display Use Declaration. Beginning in 2016, data recipients
would be required to submit, by January 31 of each year, a Non-Display
Use Declaration. In addition, if a data recipient's use of real-time
Exchange market data changes at any time after the data recipient
submits a Non-Display Use Declaration, the data recipient would be
required to update it at the time of the change to reflect the change
of use.
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\10\ As described in more detail in the Statutory Basis section,
in order to modulate the overall fee increase that could apply, if a
firm subject to Category 3 Fees has more than three platforms, it
would only be required to declare three platforms.
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Comparison of Current Fees to Proposed Fees
The chart below compares the proposed changes to current monthly
fees:
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Data feed Current fee Proposed fee
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Amex Options Products Non- $1,000............ $5,000.*
Display Category 1.
Amex Options Products Non- $1,000............ $5,000.*
Display Category 2.
Amex Options Products Non- $1,000, or $0 if $5,000, capped at
Display Category 3. Category 1 or 2 $15,000.
fees paid.
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* Data recipients will not be liable for Category 2 Non-Display fees for
which they are also paying Category 1 Non-Display fees.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\11\ in general, and
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ 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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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(4), (5).
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The Exchange believes that charging for non-trading uses is
reasonable because data recipients can derive substantial value from
such uses, for example, by automating tasks so that they can be
performed more quickly and accurately and less expensively than if they
were performed manually. The Exchange also notes that The NASDAQ Stock
Market (``NASDAQ'') and NASDAQ OMX PHLX (``Phlx'') do not make any
distinction in their non-display use fees between trading or non-
trading uses, and as such, the proposed change will harmonize the
Exchange's approach with those exchanges. Finally, the Exchange notes
that eliminating the trading versus non-trading distinction would
substantially simplify fee calculations and ease administrative burdens
for the Exchange.
After further experience, the Exchange also believes that it is
more equitable and not unfairly discriminatory to eliminate the
distinction for non-trading versus trading uses in light of the
significant value of both types of uses. The Exchange notes that
because non-display fees are flat fees, the expansion to cover non-
trading uses could only result in a fee increase for a data recipient
that is using the data solely for non-trading purposes and is only
subject to per-device fees; at this time, the Exchange has not
identified such a data recipient. Based on data available to the
Exchange, all data recipients use the data for at least one trading
purpose, and therefore the changes to the fees that they will pay under
the proposal would not be due to the elimination of the distinction
between trading and non-trading uses. The Exchange further notes that
based on Non-Display Use Declarations submitted to date, some users
have declared no Non-Display Use, and as such the proposed changes
would have no impact on them.
The Exchange believes that it is reasonable to require annual
submissions of the Non-Display Use Declaration so that the Exchange
will have current and accurate information about the use of its market
data products and can correctly assess fees for the uses of those
products. The annual submission requirement is equitable and not
unfairly discriminatory because it will apply to all users.
The Exchange believes that the proposed fee increases of $4,000 per
month for each of Categories 1, 2, and 3 is reasonable. In establishing
the non-display fees in May 2013, the Exchange set its fees below
comparable fees charged by certain of its competitors.\13\ After
gaining further experience with its new display/non-display fee
structure, the Exchange believes that the proposed fees better reflect
the significant value of the non-display data to data recipients, which
purchase such data on an entirely voluntary basis. Non-display data can
be used by data recipients for a wide variety of profit-generating
purposes, including proprietary and agency trading and smart order
routing, as well as by data recipients that operate order matching and
execution platforms that compete directly with the Exchange for order
flow. The data also can be used for a variety of non-trading purposes
that indirectly support trading, such as risk management and
compliance. While some of these non-trading uses do not directly
generate revenues, they can nonetheless substantially reduce the
recipient's costs by automating such functions so that they can be
carried out in a more efficient and accurate manner and reduce errors
and labor costs, thereby benefiting end users. The Exchange believes
that the proposed fees directly and appropriately reflect the
significant value of using non-display data in a wide range of
computer-automated functions relating to both trading and non-trading
activities and that the number and range of these functions continue to
grow through innovation and technology developments.\14\
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\13\ See 2013 Release, supra note 4, at 28930.
\14\ See also Exchange Act Release No. 69157, March 18, 2013, 78
FR 17946, 17949 (March 25, 2013) (SR-CTA/CQ-2013-01) (``[D]ata feeds
have become more valuable, as recipients now use them to perform a
far larger array of non-display functions. Some firms even base
their business models on the incorporation of data feeds into black
boxes and application programming interfaces that apply trading
algorithms to the data, but that do not require widespread data
access by the firm's employees. As a result, these firms pay little
for data usage beyond access fees, yet their data access and usage
is critical to their businesses.'').
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The fee increases are also reasonable in that they support the
Exchange's efforts to regularly upgrade systems to support more modern
data distribution formats and protocols as technology evolves. For
example, the Exchange will make its proprietary data products available
over an upgraded distribution channel and protocol ``XDP'' early next
year.
Charging a separate fee for Category 3 data recipients that already
pay a fee under Category 1 or 2 is reasonable
[[Page 54328]]
because it eliminates what is effectively a discount for such data
recipients under the current Fee Schedule and results in a more
equitable allocation of fees to users that derive a benefit from a
Category 3 use, and as such is not unfairly discriminatory. The current
fee can be viewed as having an effective non-display fee cap of $2,000
while the proposed fee would have an effective non-display fee cap of
$20,000. The Exchange believes that the proposed fees (and their
associated caps) more closely correspond to the value that Category 3
recipients derive from the various uses of the data, some of which are
operating various types of alternative trading venues that directly
compete for order flow with the Exchange. Limiting the fees in Category
3 to no more than three trading platforms and charging only one fee for
users that fall under both Category 1 and 2 is reasonable because it
modulates the size of the fee increase for certain recipients as
compared to what they pay under the current fee structure, in much the
same manner as the current fee does by limiting the non-display fees to
a maximum of two categories. The Exchange does not believe that it will
be burdensome for Category 3 recipients to determine, or the Exchange
to audit, whether a recipient has one, two, three or more separate
platforms.
The fees are also competitive with offerings by other exchanges,
which structure and set their fees in a variety of ways. 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.\15\ In addition, 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.\16\ The Non-
Display Enterprise License covers non-display subscriber fees for all
Phlx proprietary direct data feed products (Top of Phlx Options
(``TOPO''), TOPO Plus Orders, PHLX Orders and PHLX Depth Data feeds)
and is in addition to any other associated distributor fees for Phlx
proprietary direct data feed products,\17\ The Exchange further notes
that its proposed fees are less than the non-display fees charged by
the Options Price Reporting Authority (``OPRA'').\18\
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\15\ 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.
\16\ See Section IX of the NASDAQ OMX PHLX LLC Pricing Schedule
and Securities Exchange Act Release No. 68576 (January 3, 2013), 78
FR 1886 (January 9, 2013) (SR-Phlx-2012-145). Alternatively, Phlx
charges each professional subscriber $40 per month.
\17\ See id.
\18\ See Securities Exchange Act Release No. 67648 (August 14,
2012), 77 FR (August 17, 2012) (SR-OPRA-2012-04) (establishing
effective October 1, 2012 a non-display application fee of $500/
installation/month, with an enterprise fee alternative of $7500/
month that would permit a professional subscriber to receive access
to OPRA data for use in an unlimited number of non-display
application installations).
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The Exchange also notes that all of the products described herein
are entirely optional. The Exchange is not required to make these
proprietary data products available or to offer any specific pricing
alternatives to any customers, nor is any firm required to purchase any
of the products. Firms that do purchase non-display products do so with
the primary goals of using them to increase revenues, reduce expenses,
and in some instances compete directly with the Exchange for order
flow; those firms are able to determine for themselves whether any
specific product such as these are attractively priced or not.
Firms that do not wish to purchase the data at the new prices have
a wide variety of alternative market data products from which to
choose,\19\ or if the non-display data products do not provide
sufficient value to firms as offered based on the uses those firms have
or planned to make of them, such firms may simply choose to conduct
their business operations in ways that do not require those data
products. The Exchange notes that broker-dealers are not required to
purchase proprietary market data to comply with their best execution
obligations.\20\ Similarly, there is no requirement in Regulation NMS
or any other rule that proprietary data be utilized for order routing
decisions.
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\19\ See supra notes 14-17. Because ArcaBook for Amex Options--
Trades and ArcaBook for Amex Options--Top of Book are subsets of the
consolidated core data offered by OPRA, customers may choose to
purchase those consolidated data products instead.
\20\ See In the Matter of the Application of Securities Industry
And Financial Markets Association For Review of Actions Taken by
Self-Regulatory Organizations, Release Nos. 34-72182; AP-3-15350;
AP-3-15351 (May 16, 2014).
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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.'
635 F.3d 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.' '' \21\
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\21\ 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 proprietary market data and that
the Commission can rely upon such evidence in concluding that the fees
established in this filing are the product of competition and therefore
satisfy the relevant statutory standards. In addition, the existence of
alternatives to these data products, such as consolidated data and
proprietary data from other sources, as described below, further
ensures that the Exchange cannot set unreasonable fees, or fees that
are unreasonably discriminatory, when vendors and subscribers can
select such alternatives.
As the NetCoalition decision noted, the Commission is not required
to undertake a cost-of-service or ratemaking approach. The Exchange
believes that, even if it were possible as a matter of economic theory,
cost-based pricing for non-core market data would be so complicated
that it could not be done practically or offer any significant
benefits.\22\
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\22\ The Exchange believes that cost-based pricing would be
impractical because it would create enormous administrative burdens
for all parties, including the Commission, to cost-regulate a large
number of participants and standardize and analyze extraordinary
amounts of information, accounts, and reports. In addition, and as
described below, it is impossible to regulate market data prices in
isolation from prices charged by markets for other services that are
joint products. Cost-based rate regulation would also lead to
litigation and may distort incentives, including those to minimize
costs and to innovate, leading to further waste. Under cost-based
pricing, the Commission would be burdened with determining a fair
rate of return, and the industry could experience frequent rate
increases based on escalating expense levels. Even in industries
historically subject to utility regulation, cost-based ratemaking
has been discredited. As such, the Exchange believes that cost-based
ratemaking would be inappropriate for proprietary market data and
inconsistent with Congress's direction that the Commission use its
authority to foster the development of the national market system,
and that market forces will continue to provide appropriate pricing
discipline. See Appendix C to NYSE's comments to the Commission's
2000 Concept Release on the Regulation of Market Information Fees
and Revenues, which can be found on the Commission's Web site at
http://www.sec.gov/rules/concept/s72899/buck1.htm.
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[[Page 54329]]
For these reasons, the Exchange believes that the proposed fees are
reasonable, equitable, and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. An exchange's ability to
price its proprietary market data feed products is constrained by
actual competition for the sale of proprietary market data products,
the joint product nature of exchange platforms, and the existence of
alternatives to the Exchange's proprietary data.
The Existence of Actual Competition. The market for proprietary
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 for the proprietary products themselves. Numerous exchanges
compete with one another for options trades and sales of options market
data itself, providing ample opportunities for entrepreneurs who wish
to compete in any or all of those areas, including producing and
distributing their own 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. Indeed, the
U.S. Department of Justice (``DOJ'') (the primary antitrust regulator)
has expressly acknowledged the aggressive actual competition among
exchanges, including for the sale of proprietary market data. In 2011,
the DOJ stated that exchanges ``compete head to head to offer real-time
equity data products. These data products include the best bid and
offer of every exchange and information on each equity trade, including
the last sale.'' \23\ Similarly, the options markets vigorously compete
with respect to options data products.\24\
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\23\ 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.
\24\ 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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Moreover, 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 options market data. Broker-dealers send their
order flow to multiple venues, rather than providing them all to a
single venue, which in turn reinforces this competitive constraint.
Options markets, similar to the equities markets, are highly
fragmented.\25\
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\25\ See, e.g., Press Release, TABB Says US Equity Options
Market Makers Need Scalable Technology to Compete in Today's Complex
Market Structure (February 25, 2013), available at http://www.tabbgroup.com/PageDetail.aspx?PageID=16&ItemID=1231;
Fragmentation Vexes Options Markets (April 21, 2014), available at
http://marketsmedia.com/fragmentation-vexes-options-market/.
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If an exchange succeeds in its competition for quotations, order
flow, and trade executions, then it earns trading revenues and
increases the value of its proprietary options market data products
because they will contain greater quote and trade information.
Conversely, if an exchange is less successful in attracting quotes,
order flow, and trade executions, then its options market data products
may be less desirable to customers using them in support of order
routing and trading decisions in light of the diminished content; data
products offered by competing venues may become correspondingly more
attractive. Thus, competition for quotations, order flow, and trade
executions puts significant pressure on an exchange to maintain both
execution and data fees at reasonable levels.
In addition, in the case of products that are distributed through
market data vendors, such as Bloomberg and Thompson Reuters, the
vendors themselves provide additional price discipline for proprietary
data products because they control the primary means of access to
certain end users. These vendors impose price discipline based upon
their business models. For example, vendors that assess a surcharge on
data they sell are able to refuse to offer proprietary products that
their end users do not or will not purchase in sufficient numbers.
Vendors will not elect to make available Amex Options Products
described herein unless their customers request them, and customers
will not elect to pay the proposed increased fees for non-display uses
unless the non-display uses of these data products can provide value by
sufficiently increasing revenues or reducing costs in the customer's
business in a manner that will offset the fees. All of these factors
operate as constraints on pricing proprietary data products.
Joint Product Nature of Exchange Platform. Transaction execution
and proprietary data products are complementary in that market data is
both an input and a byproduct of the execution service. In fact,
proprietary market data and trade executions are a paradigmatic example
of joint products with joint costs. The decision whether and on which
platform to post an order will depend on the attributes of the
platforms where the order can be posted, including the execution fees,
data availability and quality, and price and distribution of their data
products. Without a platform to post quotations, receive orders, and
execute trades, exchange data products would not exist.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's platform for posting quotes,
accepting orders, and executing transactions and the cost of regulating
the exchange to ensure its fair operation and maintain investor
confidence. The total return that a trading platform earns reflects the
revenues it receives from both products and the joint costs it incurs.
Moreover, an exchange's broker-dealer customers generally view the
costs of transaction executions and market data as a unified cost of
doing business with the exchange. A broker-dealer will only choose to
direct orders to an exchange if the revenue from the transaction
exceeds its cost, including the cost of any market data that the
broker-dealer chooses to buy in support of its order routing and
trading decisions. If the costs of the transaction are not offset by
its value, then the broker-dealer may choose instead not to purchase
the product and trade away from that exchange. There is substantial
evidence of the strong correlation between order flow and market data
purchases. For example, in July 2014 more than 80% of the options
transaction volume on each of NYSE MKT and NYSE Arca was executed by
market participants that purchased one or more proprietary market data
products. A super-competitive increase in the fees for either
executions or market data would create a risk of reducing an exchange's
revenues from both products.
Other market participants have noted that proprietary market data
and trade executions are joint products of a joint
[[Page 54330]]
platform and have common costs.\26\ 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.\27\
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\26\ See Securities Exchange Act Release No. 72153 (May 12,
2014), 79 FR 28575, 28578 n.15 (May 16, 2014) (SR-NASDAQ-2014-045)
(``[A]ll of the exchange's costs are incurred for the unified
purposes of attracting order flow, executing and/or routing orders,
and generating and selling data about market activity. The total
return that an exchange earns reflects the revenues it receives from
the joint products and the total costs of the joint products.'').
See also Securities Exchange Act Release No. 62907 (September 14,
2010), 75 FR 57314, 57317 (September 20, 2010) (SR-NASDAQ-2010-110),
and Securities Exchange Act Release No. 62908 (September 14, 2010),
75 FR 57321, 57324 (September 20, 2010) (SR-NASDAQ-2010-111).
\27\ See generally Mark Hirschey, Fundamentals of Managerial
Economics, at 600 (2009) (``It is important to note, however, that
although it is possible to determine the separate marginal costs of
goods produced in variable proportions, it is impossible to
determine their individual average costs. This is because common
costs are expenses necessary for manufacture of a joint product.
Common costs of production--raw material and equipment costs,
management expenses, and other overhead--cannot be allocated to each
individual by-product on any economically sound basis.. . . Any
allocation of common costs is wrong and arbitrary.''). This is not
new economic theory. See, e.g., F. W. Taussig, ``A Contribution to
the Theory of Railway Rates,'' Quarterly Journal of Economics V(4)
438, 465 (July 1891) (``Yet, surely, the division is purely
arbitrary. These items of cost, in fact, are jointly incurred for
both sorts of traffic; and I cannot share the hope entertained by
the statistician of the Commission, Professor Henry C. Adams, that
we shall ever reach a mode of apportionment that will lead to
trustworthy results.'').
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Analyzing the cost of market data product production and
distribution in isolation from the cost of all of the inputs supporting
the creation of market data and market data products will inevitably
underestimate the cost of the data and data products because it is
impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, and system and regulatory costs affect the price of both
obtaining the market data itself and creating and distributing market
data products. It would be equally misleading, however, to attribute
all of an exchange's costs to the market data portion of an exchange's
joint products. Rather, all of an exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
As noted above, the level of competition and contestability in the
market is evident in the numerous alternative venues that compete for
order flow, including 12 self-regulatory organization (``SRO'') options
markets. Two of the 12 have launched operations since December
2012.\28\ The Exchange believes that these new entrants demonstrate
that competition is robust.
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\28\ See Securities Exchange Act Release Nos. 70050 (July 26,
2013), 78 FR (August 1, 2013) (approving exchange registration for
Topaz Exchange, LLC) (known as ISE Gemini); and 68341 (December 3,
2012), 77 FR 73065 (December 7, 2012) (approving exchange
registration for Miami International Securities Exchange LLC
(``Miami Exchange'')).
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Competition among trading platforms can be expected to constrain
the aggregate return that each platform earns from the sale of its
joint products, but different trading platforms may choose from a range
of possible, and equally reasonable, pricing strategies as the means of
recovering total costs. For example, some platforms may choose to pay
rebates to attract orders, charge relatively low prices for market data
products (or provide market data products free of charge), and charge
relatively high prices for accessing posted liquidity. Other platforms
may choose a strategy of paying lower rebates (or no rebates) to
attract orders, setting relatively high prices for market data
products, and setting relatively low prices for accessing posted
liquidity. For example, BATS Exchange, Inc. (``BATS''), which
previously operated as an ATS and obtained exchange status in 2008, has
provided certain market data at no charge on its Web site in order to
attract more order flow, and uses revenue rebates from resulting
additional executions to maintain low execution charges for its
users.\29\ The Exchange currently offers ArcaBook for Arca Options--
Complex for free. 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.\30\
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\29\ See description of free market data from BATS Options,
available at http://www.batsoptions.com/market_data/products/. 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.
\30\ The Exchange notes that a small number of Category 3 non-
display data recipients could be using the market data strictly for
competitive purposes (e.g., other exchanges) or for business
purposes unrelated to trading or investment (e.g., Internet portals
that wish to attract ``eyeballs'' to their pages primarily generate
advertising revenue for themselves). The Exchange does not believe
that the proposed fees will impose any unnecessary burden on these
competitors or other businesses.
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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 and sell 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; ISE Gemini;
NASDAQ; Phlx; BX; BATS; and Miami Exchange.
The fact that proprietary data from vendors can bypass SROs is
significant in two respects. First, non-SROs can compete directly with
SROs for the production and sale of proprietary data products. By way
of example, BATS and NYSE Arca both published proprietary data on the
Internet before registering as exchanges. Second, because a single
order or transaction report can appear in an SRO proprietary product, a
non-SRO proprietary product, or both, the amount of data available via
proprietary products is greater in size than the actual number of
orders and transaction reports that exist in the marketplace. For
example, with respect to ArcaBook for Arca Options--Trades and ArcaBook
for Arca Options--Top of Book, the data appears in the real-time core
data offered by OPRA for a fee. Close substitute products also are
offered by several competitors.\31\ Because market data users can find
suitable substitutes for most proprietary market data products, a
market that overprices its market data products stands a high risk that
users may substitute one or more other sources of market data
information for its own.
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\31\ See supra notes 15-18.
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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 are generally lower than the maximum non-
display fees charged by other exchanges such as NASDAQ and Phlx, for
comparable products.\32\
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\32\ 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 and inexpensive. The history
of electronic trading is replete with examples of entrants that swiftly
grew into some of the largest electronic trading platforms and
proprietary data producers: Archipelago, Bloomberg
[[Page 54331]]
Tradebook, Island, RediBook, Attain, TrackECN, and BATS. As noted
above, BATS launched as an ATS in 2006 and became an exchange in 2008.
Two new options exchanges have launched operations since December
2012.\33\
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\33\ See supra note 28.
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In establishing the proposed fees, the Exchange considered the
competitiveness of the market for proprietary options market data and
all of the implications of that competition. The Exchange believes that
it has considered all relevant factors, and has not considered
irrelevant factors, in order to establish fair, reasonable, and not
unreasonably discriminatory fees and an equitable allocation of fees
among all users. The existence of numerous alternatives to the
Exchange's products, including proprietary data from other sources,
ensures that the Exchange cannot set unreasonable fees, or fees that
are unreasonably discriminatory, when vendors and subscribers can elect
these alternatives or choose not to purchase a specific proprietary
data product if the attendant fees are not justified by the returns
that any particular vendor or data recipient would achieve through the
purchase.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \34\ of the Act and subparagraph (f)(2) of Rule
19b-4 \35\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\34\ 15 U.S.C. 78s(b)(3)(A).
\35\ 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) \36\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\36\ 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-2014-73 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-NYSEMKT-2014-73. 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 available publicly. All
submissions should refer to File Number SR-NYSEMKT-2014-73 and should
be submitted on or before October 2, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21647 Filed 9-10-14; 8:45 am]
BILLING CODE 8011-01-P