[Federal Register Volume 80, Number 8 (Tuesday, January 13, 2015)]
[Notices]
[Pages 1681-1687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-00295]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74011; File No. SR-NYSEARCA-2014-149]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Amending the Fees
for NYSE ArcaBook
January 7, 2015.
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 December 24, 2014, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') 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 amend the fees for NYSE ArcaBook to: (1)
Establish eligibility requirements for redistribution on a managed non-
display basis and add an access fee for managed non-display data
recipients, operative on January 1, 2015; and (2) establish a fee cap
for redistributor internal support use, operative on March 1, 2015. The
text of the proposed rule change is available on the Exchange's Web
site at www.nyse.com, at the principal office of the Exchange, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the fees for NYSE ArcaBook, as set
forth on the NYSE Arca Equities Proprietary Market Data Fee Schedule
(``Fee Schedule''), as follows:
To establish eligibility requirements for redistribution
of market data on a Managed Non-Display basis and establish an access
fee for Managed Non-Display data recipients, operative on January 1,
2015; and
To establish a fee cap for redistributor internal support
use, operative on March 1, 2015.
Proposed Changes to Managed Non-Display Services and Fees
Non-Display Use of NYSE Arca Equities market data means accessing,
processing, or consuming NYSE Arca Equities market data delivered via
direct and/or Redistributor \4\ data feeds for a purpose other than in
support of a data recipient's display or further internal or external
redistribution. A Redistributor approved for Managed Non-Display
Services manages and controls the access to NYSE ArcaBook and does not
allow for further internal distribution or external redistribution of
NYSE ArcaBook by the data recipients. Managed Non-Display Services Fees
apply when a data recipient's non-
[[Page 1682]]
display applications are hosted by a Redistributor that has been
approved for Managed Non-Display Services.\5\
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\4\ ``Redistributor'' means a vendor or any other person that
provides an NYSE data product to a data recipient or to any system
that a data recipient uses, irrespective of the means of
transmission or access.
\5\ See Securities Exchange Act Release Nos. 69315 (Apr. 5,
2013), 78 FR 21668 (Apr. 11, 2013) (SR-NYSEArca-2013-37) and 73011
(Sept. 5, 2014), 79 FR 54315 (Sept. 11, 2014) (SR-NYSEArca-2014-93)
(``Non-Display Fee filings'').
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A Redistributor approved for Managed Non-Display Services is
required to report to the Exchange on a monthly basis the data
recipients that are receiving NYSE ArcaBook through the Redistributor's
Managed Non-Display Service. A data recipient receiving NYSE ArcaBook
through a Redistributor's Managed Non-Display Service does not have any
reporting requirements.
Currently, to be approved for Managed Non-Display Services, a
Redistributor of the Managed Non-Display Services must be approved
under the Unit-of-Count policy.\6\ In connection with the retirement of
the Unit-of-Count Policy,\7\ eligibility for Managed Non-Display
Services of NYSE ArcaBook would no longer be based on eligibility under
the Unit-of-Count Policy. The Exchange proposes instead to establish
eligibility requirements specifically for the redistribution of market
data for Managed Non-Display Services. The Exchange also proposes to
add an access fee that would apply to a data recipient that receives
NYSE ArcaBook from an approved Redistributor of Managed Non-Display
Services.
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\6\ See Securities Exchange Act Release No. 62188 (May 27,
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-23)
(establishing Unit-of-Count Policy for NYSE Arca BBO and NYSE Arca
Trades). NYSE ArcaBook uses the Unit-of-Count Policy for purposes of
determining eligibility for Managed Non-Display Services.
\7\ The Exchange has separately proposed to retire the Unit-of-
Count Policy and modify the eligibility requirements for Managed
Non-Display Services for all of its proprietary market data
products, including NYSE ArcaBook, and thereby harmonize the
eligibility requirements for all NYSE Arca Equities data products
that have Managed Non-Display fees. See SR-NYSEArca-2014-147 (filing
for NYSE Arca BBO and NYSE Arca Trades) and SR-NYSEArca-2014-148
(filing for NYSE Arca Integrated Feed) (collectively, ``NYSE Arca
2014 Filings'').
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The proposed eligibility requirements for the provision of Managed
Non-Display Services would be similar to the eligibility requirements
for the Unit-of-Count Policy in that they would require the
Redistributor to manage and control the access to NYSE ArcaBook for
data recipients' non-display applications and not allow for further
internal distribution or external redistribution of the information by
data recipients. In addition, to be eligible to provide Managed Non-
Display Services, the Redistributor would be required to (a) host the
data recipients' non-display applications in equipment located in the
Redistributor's data center and/or hosted space/cage and (b) offer NYSE
ArcaBook in the Redistributor's own messaging formats (rather than
using raw message formats) by reformatting and/or altering NYSE
ArcaBook prior to retransmission without affecting the integrity of
NYSE ArcaBook and without rendering NYSE ArcaBook inaccurate, unfair,
uninformative, fictitious, misleading or discriminatory. The proposed
eligibility requirements are similar to data distribution models
currently in use and align the Exchange with other markets.\8\
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\8\ See Securities Exchange Act Release Nos. 70748 (Oct. 23,
2013), 70748 (Oct. 23, 2013), 78 FR 64569 (Oct. 29, 2013) (SR-Phlx-
2013-105) (notice of filing and immediate effectiveness of proposed
rule change to establish non-display Managed Data Solution for
NASDAQ OMX PHLX (``Phlx'')); 70269 (Aug. 27, 2013), 78 FR 54336
(Sept. 3, 2013) (SR-NASDAQ-2013-106) (notice of filing and immediate
effectiveness of proposed rule change to establish non-display
Managed Data Solution for NASDAQ Stock Market (``NASDAQ'')); and
69182 (Mar. 19, 2013), 78 FR 18378 (Mar. 26, 2013) (SR-Phlx-2013-28)
(notice of filing and immediate effectiveness of proposed rule
change to establish non-display Managed Data Solution for Phlx
equities market PSX).
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The reporting requirements associated with the Managed Non-Display
Service would not change. A Redistributor approved for Managed Non-
Display Service would be required to report to the Exchange on a
monthly basis the data recipients that are receiving NYSE ArcaBook
through the Redistributor's Managed Non-Display Service. A data
recipient receiving NYSE ArcaBook through a Redistributor's Managed
Non-Display Service would continue not to have any reporting
requirements.
In addition, the Exchange proposes to adopt an Access Fee of
$1,000/month applicable only to data recipients that receive NYSE
ArcaBook from an approved Redistributor of Managed Non-Display
Services, operative January 1, 2015. Currently, data recipients are
required to pay an Access Fee of $2,000/month to receive NYSE ArcaBook,
which has not been charged to data recipients of Managed Non-Display
Services of NYSE ArcaBook. Because the purpose of an access fee is to
charge data recipients for access to the Exchange's proprietary market
data, the Exchange believes it is appropriate to charge an access fee
to all data recipients, including recipients of Managed Non-Display
Services.\9\ In recognition that data recipients of Managed Non-Display
Services receive NYSE ArcaBook in a controlled format, the Exchange
proposes to establish an Access Fee that would be applicable only to
data recipients of Managed Non-Display Services and that would be half
the size of the current Access Fee. In connection with this change, the
Exchange also proposes to amend the Fee Schedule to specify that the
current Access Fee of $2,000/month is charged to data recipients other
than those receiving data through Managed Non-Display Services. The
proposed Managed Non-Display Access fee would be in addition to the
current Managed Non-Display Services Fee of $1,800/month by each data
recipient.
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\9\ In order to harmonize its approach to fees for its market
data products, the Exchange is proposing to establish access fees
for Managed Non-Display Services for NYSE Arca BBO, NYSE Arca
Trades, and NYSE Arca Integrated Feed that are also half of the
existing access fee for each respective data feed. See NYSE Arca
2014 Filings, supra note 7.
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Proposed Redistributor Internal Support User Fee Cap
The Exchange currently charges a Professional User Fee of $40/
month. This user fee generally applies to each display device that has
access to NYSE ArcaBook. The Exchange proposes to establish a
Redistributor Support Fee Cap of $2,000/month, the equivalent of fees
payable for 50 Professional Users per month, effective as of March 1,
2015, and to add the Redistributor Support Fee Cap to the Fee Schedule.
The proposed cap on user fees would apply to a Redistributor's
internal users who receive the NYSE ArcaBook data feed and provide
support to the Redistributor for the NYSE ArcaBook data feed in the
areas of customer service, data quality, development, software product
management, product development, programming, technical operations,
technical support, and sales. These internal users would be required to
be located on the Redistributor's premises or to access NYSE ArcaBook
only on the Redistributor's platform. Internal users using NYSE
ArcaBook in connection with trading, investment advice, newsroom
activities, research, algorithmic programming for trading systems, free
trials/sales promotions, personal use, or to perform any other
functions not related to the provision of support functions to the
Redistributor's external customers would not be included in the
Redistributor Support Fee Cap.\10\
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\10\ See Nasdaq Global Data Policies, Oct. 10, 2014, http://www.nasdaqtrader.com/content/AdministrationSupport/AgreementsData/datapolicies.pdf (last visited Dec. 15, 2014), ``Non-Billable:
Internal Administrative Usage Policy,'' which establishes similar
standards for internal administrative usage on a non-billable basis.
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Redistributors would have to request that their Professional User
Fees related to such internal support functions be counted towards the
Redistributor
[[Page 1683]]
Support Fee Cap. To be eligible for the fee cap, a Redistributor would
have to provide the Exchange with a list of all employees who would be
reported as eligible internal users, and to include in the list the job
functions of the employees and explanations of their uses of NYSE
ArcaBook. The Exchange reserves the right under its contracts with
Redistributors to monitor use closely and be provided with updated
lists of employees, their job functions and their use of NYSE ArcaBook,
upon request. If an employee's use of NYSE ArcaBook does not meet the
requirements of internal support function described above, it would not
be eligible for the Redistributor Support Fee Cap and would be charged
a separate Professional User Fee.
The proposed Redistributor Support Fee Cap would be operative March
1, 2015.
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 revising the eligibility requirements
for Managed Non-Display Services so that the requirements are more
closely aligned with the nature of the services being provided is
reasonable. The proposed additional requirements for hosting in the
Redistributor's data center and for reformatting and/or altering the
market data prior to retransmission are also consistent with similar
requirements of other markets for the provision of managed data.\13\
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\13\ See supra note 8.
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The Exchange believes that the proposed Access Fee for Managed Non-
Display Services is reasonable, because the data is of value to
recipients, and it is reasonable to charge them a lower access fee
because they are receiving the data through a Redistributor in a
controlled form rather than from the Exchange in raw form. The Exchange
believes that the proposed fee directly and appropriately reflects the
significant value of using non-display data in a wide range of
computer-automated functions relating to both trading and non-trading
activities and that the number and range of these functions continue to
grow through innovation and technology developments. NASDAQ and Phlx
also both offer managed non-display data solutions and charge access
fees for such services.\14\ The fee is also equitable and not unfairly
discriminatory because it would apply to all data recipients that
choose to subscribe to Managed Non-Display Services for NYSE ArcaBook.
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\14\ See supra note 8. NASDAQ offers a Managed Data Solution
that assesses a monthly Managed Data Solution Administration fee of
$1,500 and monthly Subscriber fees of $60 for non-professionals to
$300 for professionals. See NASDAQ Rule 7026(b). Phlx charges a
monthly Managed Data Solution Administration fee of $2,000 and a
monthly Subscriber fee of $500. The monthly License fee is in
addition to the monthly Distributor fee of $3,500 (for external
usage), and the $500 monthly Subscriber fee is assessed for each
Subscriber of a Managed Data Solution. See Securities Exchange Act
Release No. 70748 (October 23, 2013), 78 FR 64569 (October 29, 2013)
(SR-Phlx-2013-105).
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The Exchange believes that it is reasonable to establish the
Redistributor Support Fee Cap. The purpose of the Professional User Fee
is to charge for each use of NYSE ArcaBook data feed. The Exchange
believes it is appropriate to charge user fees for employees who
provide internal support functions at Redistributors because the
business model of Redistributors is distributing data, and as a related
function, providing support functions for such distribution of data.
Accordingly, the internal support functions at a Redistributor
contribute to the value that such Redistributor provides to its own
customers, and are therefore an integral part of a Redistributor's
business model. While such internal use is a value to a Redistributor
and its customers, the Exchange recognizes that internal support
functions differ from other uses of NYSE ArcaBook, which is why the
Exchange provides for a Redistributor Support Fee Cap. The Exchange
believes it is reasonable to establish a fee cap to reflect the value
that such support functions serve within a Redistributor. While the
NYSE anticipates that only the largest vendors would devote sufficient
personnel to administrative functions to take advantage of the proposed
increased fee cap, in the Exchange's view, limiting the fee exposure of
its largest vendors does not unreasonably discriminate against other
vendors under Section 603(a)(2) of Regulation NMS.
The fees are also equitable and not unfairly discriminatory because
they will apply to all data recipients that choose to subscribe to the
feeds.
The Exchange notes that NYSE ArcaBook is entirely optional. The
Exchange is not required to make NYSE ArcaBook available or to offer
any specific pricing alternatives to any customers, nor is any firm
required to purchase NYSE ArcaBook. Firms that do purchase NYSE
ArcaBook do so for the primary goals of using it to increase revenues,
reduce expenses, and in some instances compete directly with the
Exchange (including for order flow); those firms are able to determine
for themselves whether NYSE ArcaBook or any other similar products are
attractively priced or not.
Firms that do not wish to purchase NYSE ArcaBook at the new prices
have a variety of alternative market data products from which to
choose,\15\ or if NYSE ArcaBook does not provide sufficient value to
firms as offered based on the uses those firms have or planned to make
of it, such firms may simply choose to conduct their business
operations in ways that do not use NYSE ArcaBook. The Exchange notes
that broker-dealers are not required to purchase proprietary market
data to comply with their best execution obligations.\16\ Similarly,
there is no requirement in Regulation NMS or any other rule that
proprietary data be utilized for order routing decisions, and some
broker-dealers and ATSs have chosen not to do so.\17\
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\15\ See NASDAQ Rule 7023 (Nasdaq Totalview) and BATS Rule
11.22(a) and (c) (BATS TCP Pitch and Multicast Pitch).
\16\ 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).
\17\ For example, Goldman Sachs Execution and Clearing, L.P. has
disclosed that it does not use proprietary market data in connection
with Sigma X, its ATS. See response to Question E3, available at
http://www.goldmansachs.com/media-relations/in-the-news/current/pdf-media/gsec-order-handling-practices-ats-specific.pdf. By way of
comparison, IEX has disclosed that it uses proprietary market data
feeds from all registered stock exchanges and the LavaFlow ECN. See
http://www.iextrading.com/about/.
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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
[[Page 1684]]
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.' '' \18\
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\18\ 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.\19\
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\19\ The Exchange believes that cost-based pricing would be
impractical because it would create enormous administrative burdens
for all parties and 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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For these reasons, the Exchange believes that the proposed fees are
reasonable, equitable, and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. An exchange's ability to
price its proprietary market data feed products is constrained by
actual competition for the sale of proprietary market data products,
the joint product nature of exchange platforms, and the existence of
alternatives to the Exchange's proprietary data.
The Existence of Actual Competition
The market for proprietary data products is currently competitive
and inherently contestable because there is fierce competition for the
inputs necessary for the creation of proprietary data and strict
pricing discipline for the proprietary products themselves. Numerous
exchanges compete with one another for listings and order flow and
sales of market data itself, providing ample opportunities for
entrepreneurs who wish to compete in any or all of those areas,
including producing and distributing their own market data. Proprietary
data products are produced and distributed by each individual exchange,
as well as other entities, in a vigorously competitive market. Indeed,
the U.S. Department of Justice (``DOJ'') (the primary antitrust
regulator) has expressly acknowledged the aggressive actual competition
among exchanges, including for the sale of proprietary market data. In
2011, the DOJ stated that exchanges ``compete head to head to offer
real-time equity data products. These data products include the best
bid and offer of every exchange and information on each equity trade,
including the last sale.'' \20\
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\20\ 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; see
also Complaint in U.S. v. Deutsche Borse AG and NYSE Euronext, Case
No. 11-cv-2280 (D.C. Dist.) ] 24 (``NYSE and Direct Edge compete
head-to-head . . . in the provision of real-time proprietary equity
data products.'')
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Moreover, competitive markets for listings, order flow, executions,
and transaction reports provide pricing discipline for the inputs of
proprietary data products and therefore constrain markets from
overpricing proprietary market data. Broker-dealers send their order
flow and transaction reports to multiple venues, rather than providing
them all to a single venue, which in turn reinforces this competitive
constraint. As a 2010 Commission Concept Release noted, the ``current
market structure can be described as dispersed and complex'' with
``trading volume . . . dispersed among many highly automated trading
centers that compete for order flow in the same stocks'' and ``trading
centers offer[ing] a wide range of services that are designed to
attract different types of market participants with varying trading
needs.'' \21\ More recently, SEC Chair Mary Jo White has noted that
competition for order flow in exchange-listed equities is ``intense''
and divided among many trading venues, including exchanges, more than
40 alternative trading systems, and more than 250 broker-dealers.\22\
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\21\ Concept Release on Equity Market Structure, Securities
Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21,
2010) (File No. S7-02-10). This Concept Release included data from
the third quarter of 2009 showing that no market center traded more
than 20% of the volume of listed stocks, further evidencing the
dispersal of and competition for trading activity. Id. at 3598. Data
available on ArcaVision show that from June 30, 2013 to June 30,
2014, no exchange traded more than 12% of the volume of listed
stocks by either trade or dollar volume, further evidencing the
continued dispersal of and fierce competition for trading activity.
See https://www.arcavision.com/Arcavision/arcalogin.jsp.
\22\ Mary Jo White, Enhancing Our Equity Market Structure,
Sandler O'Neill & Partners, L.P. Global Exchange and Brokerage
Conference (June 5, 2014) (available on the Commission Web site),
citing Tuttle, Laura, 2014, ``OTC Trading: Description of Non-ATS
OTC Trading in National Market System Stocks,'' at 7-8.
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If an exchange succeeds in its competition for quotations, order
flow, and trade executions, then it earns trading revenues and
increases the value of its proprietary market data products because
they will contain greater quote and trade information. Conversely, if
an exchange is less successful in attracting quotes, order flow, and
trade executions, then its market data products may be less desirable
to customers using them in support of order routing and trading
decisions in light of the diminished content; data products offered by
competing venues may become correspondingly more attractive. Thus,
competition for quotations, order flow, and trade executions puts
significant pressure on an exchange to maintain both execution and data
fees at reasonable levels.
In addition, in the case of products that are also redistributed
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
[[Page 1685]]
surcharge on data they sell are able to refuse to offer proprietary
products that their end users do not or will not purchase in sufficient
numbers. Vendors will not elect to make available NYSE ArcaBook unless
their customers request it, and customers will not elect to pay the
proposed fees unless NYSE ArcaBook can provide value by sufficiently
increasing revenues or reducing costs in the customer's business in a
manner that will offset the fees. All of these factors operate as
constraints on pricing proprietary data products.
Joint Product Nature of Exchange Platform
Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, proprietary market data and trade
executions are a paradigmatic example of joint products with joint
costs. The decision of whether and on which platform to post an order
will depend on the attributes of the platforms where the order can be
posted, including the execution fees, data availability and quality,
and price and distribution of 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 November 2014 more than 80% of the
transaction volume on each of NYSE Arca Equities and the Exchange's
affiliates New York Stock Exchange LLC (``NYSE'') and NYSE MKT LLC
(``NYSE MKT''), was executed by market participants that purchased one
or more proprietary market data products (the 20 firms were not the
same for each market). A supra-competitive increase in the fees for
either executions or market data would create a risk of reducing an
exchange's revenues from both products.
Other market participants have noted that proprietary market data
and trade executions are joint products of a joint platform and have
common costs.\23\ 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.\24\
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\23\ See Securities Exchange Act Release No. 72153 (May 12,
2014), 79 FR 28575, 28578 n.15 (May 16, 2014) (SR-NASDAQ-2014-045)
(``[A]ll of the exchange's costs are incurred for the unified
purposes of attracting order flow, executing and/or routing orders,
and generating and selling data about market activity. The total
return that an exchange earns reflects the revenues it receives from
the joint products and the total costs of the joint products.'').
See also Securities Exchange Act Release No. 62907 (Sept. 14, 2010),
75 FR 57314, 57317 (Sept. 20, 2010) (SR-NASDAQ-2010-110), and
Securities Exchange Act Release No. 62908 (Sept. 14, 2010), 75 FR
57321, 57324 (Sept. 20, 2010) (SR-NASDAQ-2010-111).
\24\ 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 equities self-regulatory organization
(``SRO'') markets, as well as various forms of ATSs, including dark
pools and electronic communication networks (``ECNs''), and
internalizing broker-dealers. SRO markets compete to attract order flow
and produce transaction reports via trade executions, and two FINRA-
regulated Trade Reporting Facilities compete to attract transaction
reports from the non-SRO venues.\25\
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\25\ FINRA's Alternative Display Facility also receives over-
the-counter trade reports that it sends to CTA.
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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 and Direct Edge, which previously operated
as ATSs and obtained exchange status in 2008 and 2010, respectively,
have provided certain market data at no charge on their Web sites in
order to attract more order flow, and use revenue rebates from
resulting additional executions to maintain low execution charges for
their users.\26\ Similarly, LavaFlow ECN
[[Page 1686]]
provides market data to its subscribers at no charge.\27\ In this
environment, there is no economic basis for regulating maximum prices
for one of the joint products in an industry in which suppliers face
competitive constraints with regard to the joint offering.
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\26\ 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.
\27\ See ``LavaFlow--ADF Migration,'' available at https://www.lavatrading.com/news/pdf/LavaFlow_ADF_Migration.pdf.
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Existence of Alternatives
The large number of SROs, ATSs, and internalizing broker-dealers
that currently produce proprietary data or are currently capable of
producing it provides further pricing discipline for proprietary data
products. Each SRO, ATS, and broker-dealer is currently permitted to
produce and sell proprietary data products, and many currently do or
have announced plans to do so, including but not limited to the
Exchange, NYSE, NYSE MKT, NASDAQ OMX, BATS, and Direct Edge.
The fact that proprietary data from ATSs, internalizing broker-
dealers, and vendors can bypass SROs is significant in two respects.
First, non-SROs can compete directly with SROs for the production and
sale of proprietary data products. By way of example, BATS and NYSE
Arca both published proprietary data on the Internet before registering
as exchanges. Second, because a single order or transaction report can
appear in an SRO proprietary product, a non-SRO proprietary product, or
both, the amount of data available via proprietary products is greater
in size than the actual number of orders and transaction reports that
exist in the marketplace. With respect to NYSE ArcaBook, competitors
offer a close substitute product.\28\ Because market data users can
find suitable substitutes for most proprietary market data products, a
market that overprices its market data products stands a high risk that
users may substitute another source of market data information for its
own.
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\28\ See supra note 15.
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Those competitive pressures imposed by available alternatives are
evident in the Exchange's proposed pricing.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid and inexpensive. The history
of electronic trading is replete with examples of entrants that swiftly
grew into some of the largest electronic trading platforms and
proprietary data producers: Archipelago, Bloomberg Tradebook, Island,
RediBook, Attain, TrackECN, BATS Trading and Direct Edge. As noted
above, BATS launched as an ATS in 2006 and became an exchange in 2008,
while Direct Edge began operations in 2007 and obtained exchange status
in 2010. As noted above, LavaFlow ECN provides market data to its
subscribers at no charge.\29\
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\29\ See supra note 27.
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In setting the proposed fees, the Exchange considered the
competitiveness of the market for proprietary data and all of the
implications of that competition. The Exchange believes that it has
considered all relevant factors and has not considered irrelevant
factors in order to establish fair, reasonable, and not unreasonably
discriminatory fees and an equitable allocation of fees among all
users. The existence of numerous alternatives to the Exchange's
products, including proprietary data from other sources, ensures that
the Exchange cannot set unreasonable fees, or fees that are
unreasonably discriminatory, when vendors and subscribers can elect
these alternatives or choose not to purchase a specific proprietary
data product if the attendant fees are not justified by the returns
that any particular vendor or data recipient would achieve through the
purchase.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
Section 19(b)(3)(A) \30\ of the Act and subparagraph (f)(2) of Rule
19b-4 \31\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 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) \32\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\32\ 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-NYSEARCA-2014-149 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEARCA-2014-149. 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 the filing will also be available
for inspection and copying at the NYSE's principal office and on its
Internet Web site at www.nyse.com. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NYSEARCA-2014-149 and should be submitted on or before
February 3, 2015.
[[Page 1687]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-00295 Filed 1-12-15; 8:45 am]
BILLING CODE 8011-01-P