[Federal Register Volume 79, Number 148 (Friday, August 1, 2014)]
[Notices]
[Pages 44929-44938]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18125]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72690; File No. SR-BYX-2014-011]
Self-Regulatory Organizations; BATS Y-Exchange, Inc.; Notice of
Filing of Proposed Rule Change To Establish a New Market Data Product
Called the BATS One Feed
July 28, 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 July 18, 2014, BATS Y-Exchange, Inc. (the ``Exchange'' or ``BYX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II 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 establish a new market data product called
the BATS One Feed as well as to establish related market data fees. The
text of the proposed BATS One Feed is attached as Exhibit 5A. The
proposed changes to the fee schedule are attached as Exhibit 5B.
Exhibits 5A and 5B are available on the Exchange's Web site at
www.batstrading.com, at the Exchange's principal office and at the
Public Reference Room of the Commission.
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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish a new market data product called
the BATS One Feed. As described more fully below, the BATS One Feed is
a data feed that will disseminate, on a real-time basis, the aggregate
best bid and offer (``BBO'') of all displayed orders for securities
traded on BYX and its affiliated exchanges\3\ (collectively,
[[Page 44930]]
the ``BATS Exchanges'') and for which the BATS Exchanges report quotes
under the Consolidated Tape Association (``CTA'') Plan or the Nasdaq/
UTP Plan.\4\ The BATS One Feed will also contain the individual last
sale information for BYX and each of its affiliated exchanges. In
addition, the BATS One Feed will contain optional functionality which
will enable recipients to elect to receive aggregated two-sided
quotations from the BATS Exchanges for up to five (5) price levels.
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\3\ The Exchange's affiliated exchanges are EDGA Exchange, Inc.
(``EDGA''), EDGX Exchange, Inc. (``EDGX''), and BATS Exchange, Inc.
(``BATS''). On January 23, 2014, BATS Global Markets, Inc.
(``BGMI''), the former parent company of the Exchange and BATS,
completed its business combination with Direct Edge Holdings LLC,
the parent company of EDGA and EDGX. See Securities Exchange Act
Release No. 71375 (January 23, 2014), 79 FR 4771 (January 29, 2014)
(SR-BATS-2013-059; SR-BYX-2013-039). Upon completion of the business
combination, DE Holdings and BGMI each became intermediate holding
companies, held under a single new holding company. The new holding
company, formerly named ``BATS Global Markets Holdings, Inc.,''
changed its name to ``BATS Global Markets, Inc.'' and BGMI changed
its name to ``BATS Global Markets Holdings, Inc.''
\4\ The Exchange understands that each of the BATS Exchanges
will separately file substantially similar proposed rule changes
with the Commission to implement the BATS One Feed and its related
fees.
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The BATS One Feed is designed to meet the needs of prospective
Members that do not need or are unwilling to pay for the individual
book feeds offered by each of the individual BATS Exchanges. In
addition, the BATS One Feed offers market data vendors and purchasers a
suitable alternative to the use of consolidated data where consolidated
data are not required to be purchased or displayed. Finally, the
proposed new data feed provides investors with new options for
receiving market data and competes with similar market data products
offered by NYSE Technologies, an affiliate of the New York Stock
Exchange, Inc. (``NYSE'') and the Nasdaq Stock Market LLC
(``Nasdaq'').\5\ The provision of new options for investors to receive
market data was a primary goal of the market data amendments adopted by
Regulation NMS.\6\
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\5\ See Nasdaq Basic, http://www.nasdaqtrader.com/Trader.aspx?id=nasdaqbasic (last visited May 29, 2014) (data feed
offering the BBO and Last Sale information for all U.S. exchange-
listed securities based on liquidity within the Nasdaq market
center, as well as trades reported to the FINRA/Nasdaq Trade
Reporting Facility (``TRF'')); Nasdaq NLS Plus, http://www.nasdaqtrader.com/Trader.aspx?id=NLSplus (last visited July 8,
2014) (data feed providing last sale data as well as consolidated
volume from the following Nasdaq OMX markets for U.S. exchange-
listed securities: Nasdaq, FINRA/Nasdaq TRF, Nasdaq OMX BX, and
Nasdaq OMX PSX); NYSE Technologies Best Book and Trade (``BQT''),
http://www.nyxdata.com/Data-Products/NYSE-Best-Quote-and-Trades
(last visited May 27, 2014) (data feed providing unified view of BBO
and last sale information for the NYSE, NYSE Arca, and NYSE MKT).
\6\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, at 37503 (June 29, 2005) (Regulation NMS
Adopting Release).
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Description of the BATS One Feed
The BATS One Feed will contain the aggregate BBO of the BATS
Exchanges for all securities that are traded on the BATS Exchanges and
for which the BATS Exchanges report quotes under the CTA Plan or the
Nasdaq/UTP Plan. The aggregate BBO would include the total size of all
orders at the BBO available on all BATS Exchanges.\7\ The BATS One Feed
would also disseminate last sale information for each of the individual
BATS Exchanges (collectively with the aggregate BBO, the ``BATS One
Summary Feed''). The last sale information will include the price,
size, time of execution, and individual BATS Exchange on which the
trade was executed. The last sale message will also include the
cumulative number of shares executed on all BATS Exchanges for that
trading day. The Exchange will disseminate the aggregate BBO of the
BATS Exchanges and last sale information through the BATS One Feed no
earlier than each individual BATS Exchange provides its BBO and last
sale information to the processors under the CTA Plan or the Nasdaq/UTP
Plan.
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\7\ The Exchange notes that quotations of odd lot size, which is
generally less than 100 shares, are included in the total size of
all orders at a particular price level in the BATS One Feed but are
currently not reported by the BATS Exchanges to the consolidated
tape.
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The BATS One Feed would also consist of Symbol Summary, Market
Status, Retail Liquidity Identifier on behalf of BYX, Trading Status,
and Trade Break messages. The Symbol Summary message will include the
total executed volume across all BATS Exchanges. The Market Status
message is disseminated to reflect a change in the status of one of the
BATS Exchanges. For example, the Market Status message will indicate
whether one of the BATS Exchanges is experiencing a systems issue or
disruption and quotation or trade information from that market is not
currently being disseminated via the BATS One Feed as part of the
aggregated BBO. The Market Status message will also indicate where BATS
Exchange is no longer experiencing a systems issue or disruption to
properly reflect the status of the aggregated BBO.
The Retail Liquidity Identifier indicator message will be
disseminated via the BATS One Feed on behalf of the Exchange pursuant
to BYX's Retail Price Improvement (``RPI'') Program.\8\ The Retail
Liquidity Identifier indicates when RPI interest priced at least $0.001
better than BYX's Protected Bid or Protected Offer for a particular
security is available in the System. The Exchange proposes to
disseminate the Retail Liquidity Indicator via the BATS One Feed in the
same manner as it is currently disseminated through consolidated data
streams (i.e., pursuant to the Consolidated Tape Association Plan/
Consolidated Quotation Plan, or CTA/CQ, for Tape A and Tape B
securities, and the Nasdaq UTP Plan for Tape C securities) as well as
through proprietary BYX data feeds. The Retail Liquidity Identifier
will reflect the symbol and the side (buy or sell) of the RPI interest,
but does not include the price or size of the RPI interest. In
particular, like CQ and UTP quoting outputs, the BATS One Feed will
include a field for codes related to the Retail Price Improvement
Identifier. The codes indicate RPI interest that is priced better than
BYX's Protected Bid or Protected Offer by at least the minimum level of
price improvement as required by the Program.
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\8\ For a description of BYX's RPI Program, see BYX Rule 11.24.
See also Securities Exchange Act Release No. 68303 (November 27,
2012), 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019) (Order
Granting Approval of Proposed Rule Change, as Modified by Amendment
No. 2, to Adopt a Retail Price Improvement Program); Securities
Exchange Act Release No. 67734 (August 27, 2012), 77 FR 53242
(August 31, 2012) (SR-BYX-2019-019) (Notice of Filing of Proposed
Rule Change to Adopt a Retail Price Improvement Program).
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The Trade Break message will indicate when an execution on a BATS
Exchange is broken in accordance with the individual BATS Exchange's
rules.\9\ The Trading Status message will indicate the current trading
status of a security on each individual BATS Exchange. For example, a
Trading Status message will be sent when a short sale price restriction
is in effect pursuant to Rule 201 of Regulation SHO (``Short Sale
Circuit Breaker''),\10\ or the security is subject to a trading halt,
suspension or pause declared by the listing market. A Trading Status
message will be sent whenever a security's trading status changes.
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\9\ See, e.g., Exchange [sic] and EDGA Rule 11.13, Clearly
Erroneous Executions, and BATS and BYX Rule 11.17, Clearly Erroneous
Executions.
\10\ 17 CFR 242.200(g); 17 CFR 242.201.
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Optional Aggregate Depth of Book. The BATS One Feed will also
contain optional functionality which will enable recipients to receive
two-sided quotations from the BATS Exchanges for five (5) price levels
for all securities that are traded on the BATS Exchanges in addition to
the BATS One Summary Feed (``BATS One Premium Feed''). For each price
level on one of the BATS Exchanges, the BATS One Premium Feed option of
the BATS One Feed will include a two-sided quote and the
[[Page 44931]]
number of shares available to buy and sell at that particular price
level.\11\
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\11\ Recipients who do not elect to receive the BATS One Premium
Feed will receive the aggregate BBO of the BATS Exchanges under the
BATS Summary Feed, which, unlike the BATS Premium Feed, would not
delineate the size available at the BBO on each individual BATS
Exchange.
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BATS One Feed Fees
The Exchange proposes to amend its fee schedule to incorporate fees
related to the BATS One Feed. The Exchange proposes to charge different
fees to vendors depending on whether the vendor elects to receive: (i)
BATS One Summary Feed; or (ii) the optional BATS One Premium Feed.
These fees include the following, each of which are described in detail
below: (i) Distributor Fees; \12\ (ii) Usage Fees for both Professional
and Non-Professional Users; \13\ and (iii) Enterprise Fees.\14\ The
amount of each fee may differ depending on whether they use the BATS
One Feed data for internal or external distribution. Vendors that
distribute the BATS One Feed data both internally and externally will
be subject to the higher of the two Distribution Fees.
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\12\ The Exchange notes that distribution fees as well as the
distinctions based on external versus internal distribution have
been previously filed with the Commission by Nasdaq, Nasdaq OMX BX,
and Nasdaq OMX PSX. See Nasdaq Rule 7019(b); see also Securities
Exchange Act Release No. 62876 (September 9, 2010), 75 FR 56624
(September 16, 2010) (SR-PHLX-2010-120); Securities Exchange Act
Release Nos. 62907 (September 14, 2010), 75 FR 57314 (September 20,
2010) (SR-NASDAQ-2010-110); 59582 (March 16, 2009), 74 FR 12423
(March 24, 2009) (Order approving SR-NASDAQ-2008-102); Securities
Exchange Act Release No. 63442 (December 6, 2010), 75 FR 77029
(December 10, 2010) (SR-BX-2010-081).
\13\ The Exchange notes that usage fees as well as the
distinctions based on professional and non-professional subscribers
have been previously filed with or approved by the Commission by
Nasdaq and the NYSE. See Securities Exchange Act Release Nos. 59582
(March 16, 2009), 74 FR 12423 (March 24, 2009) (Order approving SR-
NASDAQ-2008-102).
\14\ The Exchange notes that enterprise fees have been
previously filed with or approved by the Commission by Nasdaq, NYSE
and the CTA/CQ Plans. See Nasdaq Rule 7047. Securities Exchange Act
Release Nos. 71507 (February 7, 2014), 79 FR 8763 (February 13,
2014) (SR-NASDAQ-20140011); 70211 (August 15, 2013), 78 FR 51781
(August 21, 2013) (SR-NYSE-2013-58); 70010 (July 19, 2013) (File No.
SR-CTA/CQ-2013-04).
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Definitions. The Exchange also proposes to include in its fee
schedule the following defined terms that relate to the BATS One Feed
fees.
``Distributor'' will be defined as ``any entity that
receives the BATS One Feed directly from BYX or indirectly through
another entity and then distributes it internally or externally to a
third party.'' \15\
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\15\ The proposed definition of ``Distributor'' is similar to
Nasdaq Rule 7047(d)(1).
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``Internal Distributor'' will be defined as a
``Distributor that receives the BATS One Feed and then distributes that
data to one or more Users within the Distributor's own entity.'' \16\
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\16\ The proposed definition of ``Internal Distributor'' is
similar to Nasdaq Rule 7047(d)(1)(A).
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``External Distributor'' will be defined as a
``Distributor that receives the BATS One Feed and then distributes that
data to one or more Users outside the Distributor's own entity.'' \17\
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\17\ The proposed definition of ``External Distributor'' is
similar to Nasdaq Rule 7047(d)(1)(B).
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``User'' will be defined as a ``natural person, a
proprietorship, corporation, partnership, or entity, or device
(computer or other automated service), that is entitled to receive
Exchange data.''
``Non-Professional User'' will be defined as ``a natural
person who is not: (i) Registered or qualified in any capacity with the
Commission, the Commodity Futures Trading Commission, any state
securities agency, any securities exchange or association; any
commodities or futures contract market or association; (ii) engaged as
an ``investment adviser'' as that term is defined in Section 201(11) of
the Investment Advisers Act of 1940 (whether or not registered or
qualified under that Act); or (iii) employed by a bank or other
organization exempt from registration under federal or state securities
laws to perform functions that will require registration or
qualification if such functions were performed for an organization not
so exempt.'' \18\
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\18\ The proposed definition of ``Professional User'' is similar
to Nasdaq Rule 7047(d)(3)(A).
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``Professional User'' will be defined as ``any User other
than a Non-Professional User.'' \19\
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\19\ The proposed definition of ``Non-Professional User'' is
similar to Nasdaq Rule 7047(d)(3)(B).
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Internal Distribution Fees. Each Internal Distributor that receives
only the BATS One Summary Feed shall pay an Internal Distributor Fee of
$10,000.00 per month. Each Internal Distributor shall pay an Internal
Distributor Fee of $15,000.00 per month where they elect to also
receive the BATS One Premium Feed. The Exchange will charge no usage
fees for BATS One Feed where the data is received and subsequently
internally distributed to Professional or Non-Professional Users.
External Distribution Fees. The Exchange proposes to charge those
firms that distribute the BATS One Feed externally an External
Distributor Fee of $2,500.00 per month for the BATS One Summary Feed.
Each External Distributor shall pay an External Distributor Fee of
$5,000.00 per month where they elect to also receive the BATS One
Premium Feed. The Exchange also proposes to establish a New External
Distributor Credit under which new External Distributors will not be
charged a Distributor Fee for their first three (3) months in order to
allow them to enlist new Users to receive the BATS One Feed.
In addition to Internal and External Distribution Fees, the
Exchange also proposes to charge recipient firms who receive the BATS
One Feed from External Distributors different fees for both their
Professional Users and Non-Professional Users. The Exchange will assess
a monthly fee for Professional Users of $10.00 per user for receipt of
the BATS One Summary Feed or $15.00 per user who elects to also receive
the BATS One Premium Feed. Non-Professional Users will be assessed a
monthly fee of $0.25 per user for the BATS One Summary Feed or $0.50
per user where they elects to also receive the BATS One Premium Feed.
External Distributors must count every Professional User and Non-
Professional User to which they provide BATS One Feed data. Thus, the
Distributor's count will include every person and device that accesses
the data regardless of the purpose for which the individual or device
uses the data.\20\ Distributors must report all Professional and Non-
Professional Users in accordance with the following:
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\20\ Requiring that every person or device to which they provide
the data is counted by the Distributor receiving the BATS One Feed
is similar to the NYSE Unit-of-Count Policy. The only difference is
that the NYSE Unit-of-Count Policy requires the counting of users
receiving a market data product through both internal and external
distribution. Because the Exchange proposes to charge Usage Fees
solely to recipient firms whose Users receive data from an external
distributor and not through internal distribution, it only requires
the counting of Users by Distributors that disseminate the BATS One
Feed externally.
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In connection with an External Distributor's distribution
of the BATS One Feed, the Distributor should count as one User each
unique User that the Distributor has entitled to have access to the
BATS One Feed. However, where a device is dedicated specifically to a
single individual, the Distributor should count only the individual and
need not count the device.
The External Distributor should identify and report each
unique User. If a User uses the same unique method to gain access to
the BATS One Feed, the Distributor should count that as one User.
However, if a unique User uses multiple methods to gain access to the
BATS One Feed (e.g., a single User has multiple passwords and user
identifications), the External Distributor
[[Page 44932]]
should report all of those methods as an individual User.
External Distributors should report each unique individual
person who receives access through multiple devices as one User so long
as each device is dedicated specifically to that individual.
If an External Distributor entitles one or more
individuals to use the same device, the External Distributor should
include only the individuals, and not the device, in the count.
Each External Distributor will receive a credit against its monthly
Distributor Fee for the BATS One Feed equal to the amount of its
monthly Usage Fees up to a maximum of the Distributor Fee for the BATS
One Feed. For example, an External Distributor will be subject to a
$5,000.00 monthly Distributor Fee where they elect to receive the BATS
One Premium Feed. If that External Distributor reports User quantities
totaling $5,000.00 or more of monthly usage of the BATS One Premium
Feed, it will pay no net Distributor Fee, whereas if that same External
Distributor were to report User quantities totaling $4,000.00 of
monthly usage, it will pay a net of $1,000 for the Distributor Fee.
Enterprise Fee. The Exchange also proposes to establish a
$50,000.00 per month Enterprise Fee that will permit a recipient firm
who receives the BATS Summary Feed portion of the BATS One Feed from an
external distributor to receive the data for an unlimited number of
Professional and Non-Professional Users and $100,000.00 per month for
recipient firms who elect to also receive the BATS One Premium Feed.
For example, if a recipient firm had 15,000 Professional Subscribers
who each receive the BATS One Summary Feed portion of the BATS One Feed
at $10.00 per month, then that recipient firm will pay $150,000.00 per
month in Professional Subscriber fees. Under the proposed Enterprise
Fee, the recipient firm will pay a flat fee of $50,000.00 for an
unlimited number of Professional and Non-Professional Users for the
BATS Summary Feed portion of the BATS One Feed. A recipient firm must
pay a separate Enterprise Fee for each External Distributor that
controls display of the BATS One Feed if it wishes such Subscriber to
be covered by an Enterprise Fee rather than by per-Subscriber fees. A
Subscriber that pays the Enterprise Fee will not have to report the
number of such Subscribers on a monthly basis. However, every six
months, a Subscriber must provide the Exchange with a count of the
total number of natural person users of each product, including both
Professional and Non-Professional Users.
Implementation Date
The Exchange will announce the effective date of the proposed rule
change in a Trading Notice to be published as soon as practicable
following approval of the proposed rule change by the Commission. The
Exchange anticipates making available the BATS One Feed for evaluation
as soon as practicable after approval of the proposed rule change by
the Commission.
2. Statutory Basis
The BATS One Feed
The Exchange believes that the proposed BATS One Feed is consistent
with Section 6(b) of the Act,\21\ in general, and furthers the
objectives of Section 6(b)(5) of the Act,\22\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and to protect investors and the public
interest, and that it is not designed to permit unfair discrimination
among customers, brokers, or dealers. This proposal is in keeping with
those principles in that it promotes increased transparency through the
dissemination of the BATS One Feed. The Exchange also believes this
proposal is consistent with Section 6(b)(5) of the Act because it
protects investors and the public interest and promotes just and
equitable principles of trade by providing investors with new options
for receiving market data as requested by market data vendors and
purchasers that expressed an interest in exchange-only data for
instances where consolidated data is no longer required to be purchased
and displayed. The proposed rule change would benefit investors by
facilitating their prompt access to real-time last sale information and
best-bid-and-offer information contained in the BATS One Feed.
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\21\ 15 U.S.C. 78f.
\22\ 15 U.S.C. 78f(b)(5).
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The Exchange also believes that the proposed rule change is
consistent with Section 11(A) of the Act \23\ in that it supports (i)
fair competition among brokers and dealers, among exchange markets, and
between exchange markets and markets other than exchange markets and
(ii) the availability to brokers, dealers, and investors of information
with respect to quotations for and transactions in securities.
Furthermore, the proposed rule change is consistent with Rule 603 of
Regulation NMS,\24\ which provides that any national securities
exchange that distributes information with respect to quotations for or
transactions in an NMS stock do so on terms that are not unreasonably
discriminatory.
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\23\ 15 U.S.C. 78k-1.
\24\ See 17 CFR 242.603.
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In adopting Regulation NMS, the Commission granted self-regulatory
organizations and broker-dealers increased authority and flexibility to
offer new and unique market data to consumers of such data. It was
believed that this authority would expand the amount of data available
to users and consumers of such data and also spur innovation and
competition for the provision of market data. The Exchange believes
that the data products proposed herein are precisely the sort of market
data products that the Commission envisioned when it adopted Regulation
NMS. The Commission concluded that Regulation NMS--by lessening
regulation of the market in proprietary data--would itself further the
Act's goals of facilitating efficiency and competition:
[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\25\
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\25\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (File No. S7-10-04).
By removing ``unnecessary regulatory restrictions'' on the ability of
exchanges to sell their own data, Regulation NMS advanced the goals of
the Act and the principles reflected in its legislative history.
If the free market should determine whether proprietary data is
sold to broker-dealers at all, it follows that the price at which such
data is sold should be set by the market as well. The BATS One Feed is
precisely the sort of market data product that the Commission
envisioned when it adopted Regulation NMS.
The BATS One Feed would be distributed and purchased on a voluntary
basis, in that neither the BATS Exchanges nor market data distributors
are required by any rule or regulation to make this data available.
Accordingly, distributors and users can discontinue use at any time and
for any reason, including due to an assessment of the reasonableness of
fees charged.
[[Page 44933]]
BATS One Feed Fees
The Exchange also believes that the proposed fees for the BATS One
Feed are consistent with Section 6(b) of the Act,\26\ in general, and
Section 6(b)(4) of the Act,\27\ in particular, in that it [sic] they
provide for an equitable allocation of reasonable fees among users and
recipients of the data and are not designed to permit unfair
discrimination among customers, brokers, or dealers. In adopting
Regulation NMS, the Commission granted self-regulatory organizations
and broker-dealers increased authority and flexibility to offer new and
unique market data to the public. It was believed that this authority
would expand the amount of data available to consumers, and also spur
innovation and competition for the provision of market data.
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\26\ 15 U.S.C. 78f.
\27\ 15 U.S.C. 78f(b)(4).
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The Exchange also notes that products described herein are entirely
optional. Firms are not required to purchase the BATS One Feed. Firms
have a wide variety of alternative market data products from which to
choose. Moreover, the Exchange is not required to make these
proprietary data products available or to offer any specific pricing
alternatives to any customers. 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 market
forces 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.' \28\
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\28\ Id. at 535 (quoting H.R. Rep. No. 94-229 at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 323).
The court agreed with the Commission's conclusion that ``Congress
intended that `competitive forces should dictate the services and
practices that constitute the U.S. national market system for trading
equity securities.' '' \29\
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\29\ Id.
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The 2010 Dodd-Frank amendments to the Exchange Act reinforce the
court's conclusions about congressional intent. On July 21, 2010,
President Barack Obama signed into law H.R. 4173, the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank Act''),
which amended Section 19 of the Act. Among other things, Section 916 of
the Dodd-Frank Act amended paragraph (A) of Section 19(b)(3) of the Act
by inserting the phrase ``on any person, whether or not the person is a
member of the self-regulatory organization'' after ``due, fee or other
charge imposed by the self-regulatory organization.'' As a result, all
SRO rule proposals establishing or changing dues, fees, or other
charges are immediately effective upon filing regardless of whether
such dues, fees, or other charges are imposed on members of the SRO,
non-members, or both. Section 916 further amended paragraph (C) of
Section 19(b)(3) of the Exchange Act to read, in pertinent part, ``At
any time within the 60-day period beginning on the date of filing of
such a proposed rule change in accordance with the provisions of
paragraph (1) [of Section 19(b)], the Commission summarily may
temporarily suspend the change in the rules of the self-regulatory
organization made thereby, 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
this title. If the Commission takes such action, the Commission shall
institute proceedings under paragraph (2)(B) [of Section 19(b)] to
determine whether the proposed rule should be approved or
disapproved.'' The court's conclusions about Congressional intent are
therefore reinforced by the Dodd-Frank Act amendments, which create a
presumption that exchange fees, including market data fees, may take
effect immediately, without prior Commission approval, and that the
Commission should take action to suspend a fee change and institute a
proceeding to determine whether the fee change should be approved or
disapproved only where the Commission has concerns that the change may
not be consistent with the Act. As explained below in the Exchange's
Statement on Burden on Competition, the Exchange believes that there is
substantial evidence of competition in the marketplace for data and
that the Commission can rely upon such evidence in concluding that the
fees established in this filing are the product of competition and
therefore satisfy the relevant statutory standards.\30\ In addition,
the existence of alternatives to these data products, such as
proprietary last sale data from other sources, as described below,
further ensures that the Exchange cannot set unreasonable fees, or fees
that are unreasonably discriminatory, when vendors and subscribers can
elect such alternatives. As the NetCoalition decision noted, the
Commission is not required to undertake a cost-of-service or ratemaking
approach.
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\30\ Section 916 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the ``Dodd-Frank Act'') amended
paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3),
to make clear that all exchange fees for market data may be filed by
exchanges on an immediately effective basis.
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User Fees. The Exchange believes that implementing the Professional
and Non-Professional User fees for the BATS One Feed is reasonable
because it will make the product more affordable and result in their
greater availability to Professional and Non-Professional Users.
Moreover, introducing a Non-Professional User fee for the BATS One Feed
is reasonable because it provides an additional method for retail
investors to access the BATS One Feed data and provides the same data
that is available to Professional Users.
In addition, the proposed fees are reasonable when compared to fees
for comparable products offered by the NYSE, Nasdaq, and under the CTA
and CQ Plans. Specifically, Nasdaq offers Nasdaq Basic, which includes
best bid and offer and last sale data for Nasdaq and the FINRA/Nasdaq
TRF, for a monthly fee of $26 per professional subscriber and $1 per
non-professional subscriber; alternatively, a broker-dealer may
purchase an enterprise license at a rate of $100,000 per month for
distribution to an unlimited number of non-professional users or
$365,000 per month for up to 16,000 professional users, plus $2 for
each additional professional user over 16,000.\31\ The Exchange notes
that Nasdaq Basic also offers data for Nasdaq OMX BX and Nasdaq OMX
PSX, as described below. The NYSE offers BQT, which provides BBO and
last sale information for the NYSE, NYSE Arca, and NYSE MKT, for a
monthly fee of $18 per professional subscriber and $1 per non-
professional subscriber; alternatively, a broker-dealer may purchase an
enterprise license at a rate of $365,000 per month for an unlimited
number of professional users. The NYSE does not offer an enterprise
license for non-professional users. BYX's proposed per-user fees are
lower than the NYSE's and Nasdaq's fees. In addition, the Exchange is
proposing Professional and Non-Professional User fees and Enterprise
Fees that are less than the fees currently charged by the CTA and CQ
Plans. Under the CTA and CQ Plans, Tape A consolidated last sale and
bid-ask data are offered together for a monthly fee of $20-$50 per
device,
[[Page 44934]]
depending on the number of professional subscribers, and $1.00 per non-
professional subscriber, depending on the number of non-professional
subscribers.\32\ A monthly enterprise fee of $686,400 is available
under which a U.S. registered broker-dealer may distribute data to an
unlimited number of its own employees and its nonprofessional
subscriber brokerage account customers. Finally, in contrast to Nasdaq
UTP and the CTA and CQ Plans, the Exchange also will permit enterprise
distribution by a non-broker-dealer.
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\31\ See Nasdaq Rule 7047.
\32\ See CTA Plan dated September 9, 2013 and CQ Plan dated
September 9, 2013, available at https://cta.nyxdata.com/CTA.
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Enterprise Fee. The proposed Enterprise Fee for the BATS One Feed
is reasonable as the fee proposed is less than the enterprise fees
currently charged for NYSE BQT, Nasdaq Basic, and consolidated data
distributed under the Nasdaq UTP and the CTA and CQ Plans. In addition,
the Enterprise Fee could result in a fee reduction for recipient firms
with a large number of Professional and Non-Professional Users. If a
recipient firm has a smaller number of Professional Users of the BATS
One Feed, then it may continue using the per user structure and benefit
from the per user fee reductions. By reducing prices for recipient
firms with a large number of Professional and Non-Professional Users,
the Exchange believes that more firms may choose to receive and to
distribute the BATS One Feed, thereby expanding the distribution of
this market data for the benefit of investors.
The Exchange further believes that the proposed Enterprise Fee is
reasonable because it will simplify reporting for certain recipients
that have large numbers of Professional and Non-Professional Users.
Firms that pay the proposed Enterprise Fee will not have to report the
number of Users on a monthly basis as they currently do, but rather
will only have to count natural person users every six months, which is
a significant reduction in administrative burden.
The Exchange believes that the proposed fees are equitable and not
unfairly discriminatory because they will be charged uniformly to
recipient firms and Users that select these products. The fee structure
of differentiated professional and non-professional fees has long been
used by other exchanges for their proprietary data products, and by the
Nasdaq UTP and the CTA and CQ Plans in order to reduce the price of
data to retail investors and make it more broadly available.\33\
Offering the BATS One Feed to Non-Professional Users with the same data
available to Professional Users results in greater equity among data
recipients. Finally, the Exchange believes that it is equitable and not
unfairly discriminatory to establish an Enterprise Fee because it
reduces the Exchange's costs and the Distributor's administrative
burdens in tracking and auditing large numbers of users.
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\33\ See, e.g., Securities Exchange Act Release No. 20002, File
No. S7-433 (July 22, 1983) (establishing nonprofessional fees for
CTA data); NASDAQ Rules 7023(b), 7047.
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Distribution Fee. The Exchange believes that the proposed
Distribution Fees are also reasonable, equitably allocated, and not
unreasonably discriminatory. The fees for Members and non-Members are
uniform except with respect to reasonable distinctions with respect to
internal and external distribution.\34\ The Exchange believes that the
Distribution Fees for the BATS One Feed are reasonable and fair in
light of alternatives offered by other market centers. First, although
the Internal Distribution fee is higher than those of competitor
products, there are no usage fees assessed for Users that receive the
BATS One Feed data through Internal Distribution, which results in a
net cost that is lower than competitor products for many data
recipients and will be easier to administer. In addition, for External
Distribution, the Distribution Fees are similar to or lower than
similar products. For example, under the Nasdaq UTP and CTA and CQ
Plans, consolidated last sale and bid-ask data are offered for a
combined monthly fee of $3,000 for redistribution.\35\ The Exchange is
proposing Distribution Fees that are less than the fees currently
charged by the Nasdaq UTP and CTA and CQ Plans.
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\34\ The Exchange notes that distinctions based on external
versus internal distribution have been previously filed with the
Commission by Nasdaq, Nasdaq OMX BX, and Nasdaq OMX PSX. See Nasdaq
Rule 019(b); see also Securities Exchange Act Release No. 62876
(September 9, 2010), 75 FR 56624 (September 16, 2010) (SR-PHLX-2010-
120); Securities Exchange Act Release No. 62907 (September 14,
2010), 75 FR 57314 (September 20, 2010) (SR-NASDAQ-2010-110);
Securities Exchange Act Release No. 63442 (December 6, 2010), 75 FR
77029 (December 10, 2010) (SR-BX-2010-081).
\35\ See CTA Plan dated September 9, 2013 and CQ Plan dated
September 9, 2013, available at https://cta.nyxdata.com/CTA, Nasdaq
UTP fees available at http://www.nasdaqtrader.com/Trader.aspx?id=DPPriceListUTP#uf.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended. An
exchange's ability to price its proprietary 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 last sale data.
Because other exchanges already offer similar products,\36\ the
Exchange's proposed BATS One Feed will enhance competition.
Specifically, the BATS One Feed was developed to compete with similar
market data products offered by Nasdaq and NYSE Technologies, an
affiliate of the NYSE.\37\ The BATS One Feed will foster competition by
providing an alternative market data product to those offered by Nasdaq
and the NYSE for less cost, as described in more detail in Section 3(b)
above. This proposed new data feed provides investors with new options
for receiving market data, which was a primary goal of the market data
amendments adopted by Regulation NMS.\38\
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\36\ See supra note 5.
\37\ Id.
\38\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, at 37503 (June 29, 2005) (Regulation NMS
Adopting Release).
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The proposed BATS One Feed would enhance competition by offering a
market data product that is designed to compete directly with similar
products offered by the NYSE and Nasdaq. Nasdaq Basic is a product that
includes two feeds, QBBO, which provides BBO information for all U.S.
exchange-listed securities on Nasdaq and NLS Plus, which provides last
sale data as well as consolidated volume from the following Nasdaq OMX
markets for U.S. exchange-listed securities: Nasdaq, FINRA/Nasdaq
TRF,\39\ Nasdaq OMX BX, and Nasdaq OMX PSX.\40\ Likewise, NYSE BQT
includes BBO and last sale information for the NYSE, NYSE Arca, and
NYSE MKT.\41\ As a result, Nasdaq Basic and
[[Page 44935]]
NYSE BQT comprise a significant view of the market on any given day and
both include data from multiple trading venues. As the BATS Exchanges
are consistently one of the top exchange operators by market share for
U.S. equities trading, excluding opening and closing auction volume,
the data included within the BATS One Feed will provide investors with
an alternative to Nasdaq Basic and NYSE BQT and a new option for
obtaining a broad market view, consistent with the primary goal of the
market data amendments adopted by Regulation NMS.\42\
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\39\ See Nasdaq Basic, http://www.nasdaqtrader.com/Trader.aspx?id=nasdaqbasic (last visited May 29, 2014) (data feed
offering the BBO and Last Sale information for all U.S. exchange-
listed securities based on liquidity within the Nasdaq market
center, as well as trades reported to the FINRA/Nasdaq TRF).
\40\ See Nasdaq NLS Plus, http://www.nasdaqtrader.com/Trader.aspx?id=NLSplus (last visited July 8, 2014) (data feed
providing last sale data as well as consolidated volume from the
following Nasdaq OMX markets for U.S. exchange-listed securities:
Nasdaq, FINRA/Nasdaq TRF, Nasdaq OMX BX, and Nasdaq OMX PSX).
\41\ See NYSE Technologies BQT, http://www.nyxdata.com/Data-Products/NYSE-Best-Quote-and-Trades (last visited May 27, 2014)
(data feed providing unified view of BBO and last sale information
for the NYSE, NYSE Arca, and NYSE MKT).
\42\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, at 37503 (June 29, 2005) (Regulation NMS
Adopting Release).
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The BATS One Feed will not only provide content that is competitive
with the similar products offered by other exchanges, but will provide
pricing that is competitive as well. As previously stated, the fees for
the BATS One Feed are significantly lower than alternative exchange
products. The BATS One Feed is 60% less expensive per professional user
and more than 85% less expensive for an enterprise license for
professional users (50% less for non-professional users) when compared
to a similar competitor exchange product, offering firms a lower cost
alternative for similar content.
As the Exchange considers the integration of the BATS One Feed into
External Distributor products an important ingredient to the product's
success, the Exchange has designed pricing that enables External
Distributors to spend three months integrating BATS One Feed data into
their products and to enlist new Users to receive the BATS One Feed
data for free with no External Distribution charges. In addition, the
Exchange is providing External Distributors a credit against their
monthly External Distribution Fee equal to the amount of its monthly
Usage Fees up to the amount of the External Distribution Fee, which
could result in the External Distributor paying a discounted or no
External Distribution Fee once the free three months period has ended.
With the fee incentives in place, External Distributors may freely
choose to include the BATS One Feed data into their product thereby
increasing competition with External Distributors offering similar
products, replace alternative data provided by Nasdaq Basic or NYSE BQT
with the BATS One Feed data or enhance their product to include BATS
One Feed data along with data offered by competitors to create a
distributor product that may be more valuable than the BATS One Feed or
any competitor product alone. As with any product, the recipients of
the data will determine the value of the data provided by the exchange
directly or through an External Distributor. Potential subscribers may
opt to disfavor the BATS One Feed based on the content provided or the
pricing and may believe that alternatives offer them better value.
Accordingly, the Exchange does not believe that the proposed BATS One
Feed will impair the ability of External Distributors or competing
venues to maintain their competitive standing in the financial markets.
The Exchange believes the BATS One Feed will further enhance
competition by providing External Distributors with a data feed that
allows them to more quickly and efficiently integrate into their
existing products. Today, Distributors subscribe to various market data
products offered by single exchanges and resell that data, either
separately or in the aggregate, to their subscribers as part of the
their own market data offerings. Distributors may incur administrative
costs when consolidating and augmenting the data to meet their
subscriber's need. Consequently, many External Distributors will simply
choose to not take the data because of the effort and cost required to
aggregate data from separate feeds into their existing products. Those
same Distributors have expressed interest in the BATS One Feed so that
they may easily incorporate aggregated or summarized BATS Exchange data
into their own products without themselves incurring the costs of the
repackaging and aggregating the data it would receive by subscribing to
each market data product offered by the individual BATS Exchanges. The
Exchange, therefore, believes that by providing market data that
encompasses combined data from affiliated exchanges, the Exchange
enables certain External Distributors with the ability to compete in
the provision of similar content with other External Distributors,
where they may not have done so previously if they were required to
subscribe to the depth-of-book feeds from each individual BATS
Exchange.
Although the Exchange considers the acceptance of the BATS One Feed
by External Distributors as important to the success of the product,
depending on their needs, External Distributors may choose not to
subscribe to the BATS One Feed and may rather receive the BATS Exchange
individual market data products and incorporate them into their
specific market data products. For example, the BATS Premium Feed
provides depth-of-book information for up to five price levels while
each of the BATS Exchange's individual data feeds offer complete depth-
of-book and are not limited to five price levels.\43\ Those subscribers
who wish to view the complete depth-of-book from each individual BATS
Exchange may prefer to subscribe to one or all of individual BATS
Exchange depth-of-book data feeds instead of the BATS One Feed. The
BATS One Feed simply provides another option for Distributors to choose
from when selecting a product that meets their market data needs.
Subscribers who seek a broader market view but do not need complete
depth-of-book may select the BATS One Feed while subscribers that seek
the complete depth-of-book information may subscribe to the depth-of-
book feeds of each individual BATS Exchanges.
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\43\ See EDGA Rule 13.8, EDGX Rule 13.8, BZX Rule 11.22(a) and
(c), and BYX Rule 11.22 (a) and (c) for a description of the depth
of book feeds offered by each of the BATS Exchanges.
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Latency. The BATS One Feed is not intended to compete with similar
products offered by External Distributors. Rather, it is intended to
assist External Distributors in incorporating aggregated and summarized
data from the BATS Exchanges into their own market data products that
are provided to the end user. Therefore, Distributors will receive the
data, who will, in turn, make available BATS One Feed to their end
users, either separately or as incorporated into the various market
data products they provide. As stated above, Distributors have
expressed a desire for a product like the BATS One Feed so that they
may easily incorporate aggregated or summarized BATS Exchange data into
their own products without themselves incurring the administrative
costs of repackaging and aggregating the data it would receive by
subscribing to each market data product offered by the individual BATS
Exchange.
Notwithstanding the above, the Exchange believes that External
Distributors may create a product similar to BATS One Feed based on the
market data products offered by the individual BATS Exchanges with
minimal latency difference. In order to create the BATS One Feed, the
Exchange will receive the individual data feeds from each BATS Exchange
and, in turn, aggregate and summarize that data to create the BATS One
Feed. This is the same process an External Distributor would undergo
should it create a market data product similar to the BATS One Feed to
distribute to its end users. In addition, the servers of
[[Page 44936]]
most External Distributors are likely located in the same facilities as
the Exchange, and, therefore, should receive the individual data feed
from each BATS Exchange on or about the same time the Exchange would
for it to create the BATS One Feed. Therefore, the Exchange believes
that it will not incur any potential latency advantage that will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
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 to the
creation of proprietary data and strict pricing discipline for the
proprietary products themselves. Numerous exchanges compete with each
other for listings and order flow and sales of market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to compete in any or all of those areas, including by 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.
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. The U.S. Department of Justice
also has acknowledged the aggressive competition among exchanges,
including for the sale of proprietary market data itself. In announcing
that the bid for NYSE Euronext by Nasdaq OMX Group Inc. and
Intercontinental Exchange Inc. had been abandoned, Assistant Attorney
General Christine Varney stated that exchanges ``compete head to head
to offer real-time equity data products. These data products include
the best bid and offer of every exchange and information on each equity
trade, including the last sale.'' \44\
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\44\ Press Release, U.S. Department of Justice, Assistant
Attorney General Christine Varney Holds Conference Call Regarding
Nasdaq OMX Group Inc. and Intercontinental Exchange 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.
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It is common for broker-dealers to further exploit this recognized
competitive constraint by sending their order flow and transaction
reports to multiple markets, rather than providing them all to a single
market. 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.'' \45\
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\45\ 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.
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In addition, in the case of products that are distributed through
market data vendors, 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. Internet portals, such as Google, impose price
discipline by providing only data that they believe will enable them to
attract ``eyeballs'' that contribute to their advertising revenue.
Similarly, vendors will not elect to make available the products
described herein unless their customers request them, and customers
will not elect to purchase them unless they can be used for profit-
generating purposes. All of these operate as constraints on pricing
proprietary data products.
Joint Product Nature of Exchange Platform. Transaction execution
and proprietary data products are complementary in that market data is
both an input and a byproduct of the execution service. In fact, market
data and trade 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 quality, and price
and distribution of their data products. The more trade executions a
platform does, the more valuable its market data products become.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's broker-
dealer customers view the costs of transaction executions and market
data as a unified cost of doing business with the exchange.
Other market participants have noted that the liquidity provided by
the order book, trade execution, core market data, and non-core market
data are joint products of a joint platform and have common costs.\46\
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.\47\
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\46\ See Securities Exchange Act Release No. 62887 (Sept. 10,
2010), 75 FR 57092, 57095 (Sept. 17, 2010) (SR-Phlx-2010-121);
Securities Exchange Act Release No. 62907 (Sept. 14, 2010), 75 FR
57314, 57317 (Sept. 20, 2010) (SR-Nasdaq-2010-110); Securities
Exchange Act Release No. 62908 (Sept. 14, 2010), 75 FR 57321, 57324
(Sept. 20, 2010) (SR-Nasdaq-2010-111) (``all of the exchange's costs
are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data
about market activity. The total return that an exchange earns
reflects the revenues it receives from the joint products and the
total costs of the joint products.''); see also August 1, 2008
Comment Letter of Jeffrey S. Davis, Vice President and Deputy
General Counsel, Nasdaq OMX Group, Inc., Statement of Janusz Ordover
and Gustavo Bamberger (``because market data is both an input to and
a byproduct of executing trades on a particular platform, market
data and trade execution services are an example of `joint products'
with `joint costs.' ''), attachment at pg. 4, available at
www.sec.gov/comments/34-57917/3457917-12.pdf.
\47\ 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 invariable 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. Thus, because it
[[Page 44937]]
is impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, system costs and regulatory costs affect the price of both
obtaining the market data itself and creating and distributing market
data products. It would be equally misleading, however, to attribute
all of an exchange's costs to the market data portion of an exchange's
joint products. Rather, all of an exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including eleven equities self-regulatory organization (``SRO'')
markets, as well as internalizing broker-dealers (``BDs'') and various
forms of alternative trading systems (``ATSs''), including dark pools
and electronic communication networks (``ECNs''). Competition among
trading platforms can be expected to constrain the aggregate return
that each platform earns from the sale of its joint products, but
different platforms may choose from a range of possible, and equally
reasonable, pricing strategies as the means of recovering total costs.
For example, some platforms may choose to pay rebates to attract
orders, charge relatively low prices for market data products (or
provide market data products free of charge), and charge relatively
high prices for accessing posted liquidity. Other platforms may choose
a strategy of paying lower rebates (or no rebates) to attract orders,
setting relatively high prices for market data products, and setting
relatively low prices for accessing posted liquidity. In this
environment, there is no economic basis for regulating maximum prices
for one of the joint products in an industry in which suppliers face
competitive constraints with regard to the joint offering.
Existence of Alternatives. As stated above, broker-dealers
currently have numerous alternative venues for their order flow,
including eleven SRO markets, as well as internalizing BDs and various
forms of ATSs, including dark pools and ECNs. Each SRO market competes
to produce transaction reports via trade executions, and two FINRA-
regulated Trade Reporting Facilities (``TRFs'') compete to attract
internalized transaction reports. Competitive markets for order flow,
executions, and transaction reports provide pricing discipline for the
inputs of proprietary data products.
The large number of SROs, TRFs, BDs, and ATSs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO, TRF, ATS, and BD is currently permitted to produce proprietary
data products, and many currently do so or have announced plans to do
so, including NASDAQ, NYSE, NYSE Amex, and NYSEArca.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple
broker-dealers' production of proprietary data products. The potential
sources of proprietary products are virtually limitless. The fact that
proprietary data from ATSs, BDs, and vendors can by-pass SROs is
significant in two respects. First, non-SROs can compete directly with
SROs for the production and sale of proprietary data products, as BATS
and Arca did before registering as exchanges by publishing proprietary
book data on the Internet. Second, because a single order or
transaction report can appear in an SRO proprietary product, a non-SRO
proprietary product, or both, the data available in proprietary
products is exponentially greater than the actual number of orders and
transaction reports that exist in the marketplace.
Retail broker-dealers, such as Schwab and Fidelity, offer their
customers proprietary data only if it promotes trading and generates
sufficient commission revenue. Although the business models may differ,
these vendors' pricing discipline is the same: They can simply refuse
to purchase any proprietary data product that fails to provide
sufficient value. The Exchange and other producers of proprietary data
products must understand and respond to these varying business models
and pricing disciplines in order to market proprietary data products
successfully.
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, and TracECN. A proliferation of dark pools and other
ATSs operate profitably with fragmentary shares of consolidated market
volume.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While broker-dealers
have previously published their proprietary data individually,
Regulation NMS encourages market data vendors and broker-dealers to
produce proprietary products cooperatively in a manner never before
possible. Multiple market data vendors already have the capability to
aggregate data and disseminate it on a profitable scale, including
Bloomberg and Thomson-Reuters.
Competitive forces constrain the prices that platforms can charge
for non-core market information. A trading platform cannot generate
market information unless it receives trade orders. For this reason, a
platform can be expected to use its market data product as a tool for
attracting liquidity and trading to its exchange.
While, by definition, information that is proprietary to an
exchange cannot be obtained elsewhere, this does not enable the owner
of such information to exercise monopoly power over that information
vis-[agrave]-vis firms with the need for such information. Even though
market information from one platform may not be a perfect substitute
for market information from one or more other platforms, the existence
of alternative sources of information can be expected to constrain the
prices platforms charge for market data.
Besides the fact that similar information can be obtained
elsewhere, the feasibility of supra-competitive pricing is constrained
by the traders' ability to shift their trades elsewhere, which lowers
the activity on the exchange and thus, in the long run, reduces the
quality of the information generated by the exchange.
Competition among platforms has driven the Exchange to improve its
platform data offerings and to cater to customers' data needs by
proposing the BATS One Feed. The vigor of competition for non-core data
information is significant and the Exchange believes that this proposal
clearly evidences such competition. The Exchange proposes the BATS One
Feed and pricing model in order to keep pace with changes in the
industry and evolving customer needs. It is entirely optional and is
geared towards attracting new customers, as well as retaining existing
customers.
The Exchange has witnessed competitors creating new products and
innovative pricing in this space over the course of the past year. In
all cases, firms make decisions on how much and what types of data to
consume on the basis of the total cost of interacting with
[[Page 44938]]
the Exchange or other exchanges. The explicit data fees are but one
factor in a total platform analysis. Some competitors have lower
transactions fees and higher data fees, and others are vice versa. The
market for this non-core data information is highly competitive and
continually evolves as products develop and change.
In establishing 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, because vendors and subscribers can elect
these alternatives or choose not to purchase a specific proprietary
data product if its cost is not justified by the returns that any
particular vendor or subscriber would achieve through the purchase.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days of such
date (i) as the Commission may designate if it finds such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the Exchange consents, the Commission shall:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BYX-2014-011 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-BYX-2014-011. 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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of BYX. 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-BYX-2014-011 and should be
submitted on or before August 22, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18125 Filed 7-31-14; 8:45 am]
BILLING CODE 8011-01-P