[Federal Register Volume 77, Number 199 (Monday, October 15, 2012)]
[Notices]
[Pages 62582-62587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25220]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68004; File No. SR-NYSEMKT-2012-49]
Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Establish Fees for
Certain Proprietary Options Market Data Products
October 9, 2012.
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 September 26, 2012, NYSE MKT LLC (the ``Exchange'' or
``NYSE MKT'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to establish fees for certain proprietary
options market data products. 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish fees for certain proprietary
options market data products. The products covered by the fees are
ArcaBook for Amex Options--Trades, ArcaBook for Amex Options--Top of
Book, ArcaBook for Amex Options--Depth of Book, ArcaBook for Amex
Options--Complex, ArcaBook for Amex Options--Series Status, and
ArcaBook for Amex Options--Order Imbalance (collectively, the ``Amex
Options Products'').\4\ The fees set forth below, which will be
implemented on October 1, 2012, are for all six of the Amex Options
Products collectively; at this time, the Exchange is not establishing
separate pricing for each of the individual products.
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\4\ See Securities Exchange Act Release No. 67719 (Aug. 23,
2012); 77 FR 52767 (Aug. 30, 2012) (SR-NYSEMKT-2012-40).
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Access and Redistribution Fees
The Exchange proposes to charge an Access Fee of $3,000 per month
and a Redistribution Fee of $2,000 per month.
Professional End-User \5\ Fee
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\5\ A Professional End-User is a person or entity that receives
market data from the Exchange or a Redistributor and uses that
market data solely for its own internal purposes. A Professional
End-User is not permitted to redistribute that market data to any
person or entity outside of its organization.
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For the receipt and use of the Amex Options Products, the Exchange
proposes to charge Professional End-Users $50 per month for each ``User
per Source.'' \6\ A ``Source'' is a Professional End-User-controlled
source of data from a Redistributor,\7\ such as a data feed; in this
case, it is the Amex Options Products. Professional End-Users must
receive approval to report User per Source by way of a license with the
[[Page 62583]]
Exchange; without such approval, the Professional End-User must report
each access identifier (``Access ID''). An Access ID is a unique
identifier that a Professional End-User has assigned to a natural
person, application, or device (each, a ``User''),\8\ which identifier
the Professional End-User's Entitlement System uses to administer
technical controls over access to market data.\9\
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\6\ The Exchange notes that the User per Source reporting policy
differs from the unit-of-count policy used for other Exchange market
data products, such as NYSE MKT Trades and NYSE MKT BBO. See
Securities Exchange Act Release No. 62187 (May 27, 2010), 75 FR
31500 (June 3, 2010) (SR-NYSEAmex-2010-35). Because the Amex Options
Products are new and the Exchange has not charged for them before,
the Exchange has determined to utilize an updated methodology that
it believes may be easier for it and its customers to administer.
Based on its experience with these products, the Exchange will
consider adopting User per Source reporting for other market data
products in the future.
\7\ A Redistributor is any entity that makes market data
available to any person other than the Redistributor and its
employees, directors, officers and partners, irrespective of the
means of transmission or access.
\8\ An Access ID may be a User name, but is not limited to a
User name. For example, it could be a host name, Internet protocol
(``IP'') address, or a MAC/network address. A User may have more
than one Access ID assigned to control access to market data.
Sharing of passwords and/or Access IDs among Users is prohibited, as
is simultaneous access by multiple Users using the same Access ID.
Simultaneous access by an individual User is allowed if the
Professional End-User discloses in advance the technical and/or
process controls that prohibit the sharing of Access IDs or other
means of accessing data.
\9\ The Exchange considers any mechanism that controls access to
market data to constitute an Entitlement System. Examples of an
Entitlement System include a system that a Redistributor provides
for permissioning Users to receive and use market data, a dedicated
system that a Professional End-User develops internally, a server-
based market data application that controls access to a limited
group of authorized Users, and a closed network in which physical
access to the network determines a User's ability to access market
data. Each Professional End-User must use an Entitlement System to
control all data distribution. Each Entitlement System should
control or track simultaneous access, generate authentic entitlement
reports, control Access IDs and passwords, and maintain an audit
trail.
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Controlled Access
The unit-of-count for Redistributors of controlled accesses to
market data, such as display devices and single-use application program
interfaces (``APIs''), is each Access ID. Redistributors must ensure,
by way of their agreements with clients, that Access IDs are not shared
among Users. If a Professional End-User cannot or does not disclose in
advance its restrictions relating to Access ID sharing, thereby
enabling simultaneous access by multiple Users, the maximum number of
potential accesses (i.e., the greatest number of natural persons,
applications, and devices that can access the market data) will be
chargeable.
Reporting Internal Use
Professional End-Users approved for User per Source reporting may
report the total number of natural persons per each Source rather than
the number of Access IDs per Source. For example, if a natural person
has two Access IDs receiving data from a single Redistributor's data
feed, the Professional End-User may report a count of one. If a natural
person has one Access ID receiving data from two Redistributors' data
feeds, however, the Professional End-User must report a count of two.
Likewise, if a natural person has two Access IDs receiving data feeds
from two separate Redistributors, the Professional End-User must report
a count of two.
In order to report User per Source, the Professional End-User must
identify the User associated with each Access ID. Possible methods to
identify the User include using human resources or other corporate
identifiers associated with a User in an inventory system. Where an
Access ID cannot be associated to a natural person User, the
Professional End-User must treat that Access ID as a User per Source.
This aspect of User per Source reporting applies only to a
Professional End-User's controlled internal distribution of data, and
does not apply to Redistributor-controlled access as described above;
therefore, a Professional End-User may not net internal Users against
Access IDs for a Redistributor's controlled access, such as a device or
API, as described in the preceding section.
Application Usage
Some internal distribution networks feature downstream applications
that control access to market data without using a centralized
Entitlement System. The Access IDs of each such application must be
reported, and Professional End-Users must ensure that audit trails are
maintained. Professional End-Users that have been approved for User per
Source reporting may report each of the Users of the application and
not the Access IDs of these systems; however, Professional End-Users
must ensure that all Users are reported across all Entitlement Systems
and applications. For example, a User that has an Access ID from an
Entitlement System and an Access ID from a downstream application each
receiving data from a single Redistributor source would be reported
once.
Counting Users in Closed Networks
In a Closed Network, a Professional End-User has an environment
whereby market data is published on an intranet or subnet with no other
access control such as an Entitlement System. In environments such as
this, all assigned IP addresses on the network range are considered a
User per Source and are therefore reportable. In the case of a closed
network in which physical access to the network determines a User's
ability to access market data, the Professional End-User must report
any device that has physical access to the network as a separate User
per Source.
In closed networks that employ virtual devices, the Professional
End-User must report all physical and virtual devices. For example, if
a server provides five different market data products through five
different IP addresses, each of which is capable of accessing market
data, the Professional End-User must report all five IP addresses for
each of the five products. That is, the Professional End-User must
report virtual devices (in the form of IP addresses) as well as
physical devices, and not just the physical server.\10\
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\10\ If a physical or virtual device (including an IP address)
is capable of receiving a market data product, the Professional End-
User must report the device regardless of whether a User uses the
device to gain access to the market data product.
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Audit Trails
In order to remove an Access ID from the reporting and fee
obligations for the Amex Options Products, the Professional End-User
must disable the ability of the Access ID to receive such data
entirely. The Professional End-User must maintain an audit trail to
evidence the disabling of an Access ID for any period. In the absence
of an adequate audit trail, all Access IDs that connect to the server
remain fee liable. If the Professional End-User cannot limit or track
the number of Access IDs, it must report all Access IDs.
Same User Name for Multiple Uses
Frequently, Users are assigned the same User name to log into
multiple services and applications that do not share a common
Entitlement System. For example, a natural person might elect to use
the same User name to gain access to Redistributor A's services as it
uses to gain access to Redistributor B's services. Or, he or she may
use the same User name to access Redistributor A's Service X as he or
she uses to gain access to Redistributor A's Service Y. Or, he or she
may use the same User name to access Application A with Redistributor
A's data as he or she may use to access Application B with
Redistributor A's data. Despite the use of the same User name for
multiple purposes, each use of a User name by a separate Entitlement
System must be treated as a separate Access ID.
Simultaneous Access and Contention-Based Entitlement Systems
Simultaneous Access is the capability of a single Access ID to be
used concurrently on two or more devices identified on a network by
their host name, IP address, or other system-level identifier for
network access. Entitlement Systems must control and track the number
of simultaneous accesses by a single Access ID.
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Contention-Based Entitlement Systems are not consistent with User
per Source reporting. Those are systems for which a limited number of
``tokens'' or ``accesses'' that control the number of simultaneous
Users are shared among Users. As is the case if a Professional End-User
cannot or does not disclose in advance its restrictions relating to
Access ID sharing, thereby enabling simultaneous access by multiple
Users, the maximum number of potential accesses (i.e., the greatest
number of natural persons, applications, and devices that can access
the market data) will be chargeable.
Nonprofessional End-User Fees
The Exchange proposes to charge each Redistributor $1.00 per month
for each Nonprofessional End-User to whom it provides Amex Options
Products. The Exchange proposes to impose the charge on the
Redistributor, rather than on the Nonprofessional End-User. In
addition, the Exchange proposes to cap the Nonprofessional End-User Fee
at $5,000 per month for each Redistributor. The Exchange proposes to
apply the same criteria for qualification as a Non-Professional End-
User as it does for non-professional subscribers to its other
products.\11\
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\11\ The Exchange defines a nonprofessional subscriber as a
natural person who receives market data solely for his or her
personal, non-business use and who is not a ``Securities
Professional,'' meaning that the person is not (1) registered or
qualified with the Commission, the Commodities Futures Trading
Commission, any state securities agency, any securities exchange or
association, or any commodities or futures contract market or
association; (2) engaged as an ``investment adviser'' as that term
is defined in Section 202(a)(11) of the Investment Advisors Act of
1940 (whether or not registered or qualified under that statute); or
(3) employed by a bank or other organization that is exempt from
registration under federal and/or state securities laws to perform
functions that would require him or her to be so registered or
qualified if he or she were to perform such function for an
organization not so exempt. The nonprofessional subscriber policy is
available at http://www.nyxdata.com/Docs/Market-Data/Policies.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Securities Exchange Act of 1934
(the ``Act'') \12\ in general and with Section 6(b)(4) and 6(b)(5) of
the Act \13\ 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. The proposed Amex Options Products fees are reasonable,
equitable, and not unfairly discriminatory because they will provide
additional data to the marketplace and give investors greater choices
at prices that are comparable to other similar products. For example,
the Chicago Board Options Exchange (``CBOE'') offers CBOE Streaming
Markets, a streaming data feed that includes best bids and offers
(``BBOs''), trades, customer vs. non-customer breakdown of the BBOs,
contingent prices (all-or-none orders) better than or equal to the
BBOs, and BBO data and last sale data for complex strategies.\14\ CBOE
charges a direct connect fee of $3,500 per connection per month, a per
user fee of $25 per month per Authorized User or Device, and $500 per
month per data port for receipt of this data.\15\ NASDAQ PHLX offers
PHLX Depth of Market, a data product that provides order and quotation
information for individual quotes and orders on the PHLX book, last
sale information for trades executed on PHLX, and an imbalance message,
for which it charges $4,000 per month for internal distribution and
$4,500 per month for external distribution.\16\ The Exchange also notes
that its affiliate offers an integrated equities market data feed and
equity depth-of-book product that are priced comparably to the proposed
Amex Options Products pricing.\17\ The Exchange further believes that
the proposed Amex Options Products fees are equitable and not unfairly
discriminatory because the general categories of fees--Direct Access,
Redistributor, Professional End-User, and Non-Professional End-User--
are comparable to the fee categories already established by the
Exchange as well as other exchanges for market data products and the
fees will apply equally to all persons in the respective categories
that choose to purchase the Amex Options Product.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(4) and (5).
\14\ See Securities Exchange Act Release No. 66486 (Feb. 28,
2012), 77 FR 13166 (Mar. 5, 2012) (SR-CBOE-2012-016).
\15\ Id.
\16\ See Securities Exchange Act Release No. 67466 (July 19,
2012), 77 FR 43629 (July 25, 2012) (SR-Phlx-2012-93) (``PHLX
Filing'').
\17\ The proposed Access Fee of $3,000 per month is the same as
the $3,000 Direct Access Fee for the NYSE Arca Integrated Data Feed,
an equities market data product that includes NYSE Arca BBO, NYSE
Arca Trades, NYSE ArcaBook, and certain additional market data. The
proposed Redistribution Fee of $2,000 per month is less than the
$3,000 Redistribution Fee for the NYSE Arca Integrated Feed. The
proposed Non-Professional End-User Fee of $1.00 per month (capped at
$5,000) is less than the $10 per month Non-Professional Subscriber
Fee (capped at $20,000) charged by NYSE Arca for NYSE ArcaBook. The
Professional End-User Fee of $50 per month per User per Source is
more than the NYSE ArcaBook $30 per month Professional Subscriber
Fee. See Securities Exchange Act Release Nos. 66128 (Jan. 10, 2012),
77 FR 2331 (Jan. 17, 2012) (SR-NYSEArca-2011-96), and 63291 (Nov. 9,
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97). However,
the Exchange believes that the difference in the Professional fees
is reasonable and equitable because the Amex Options Products offer
more data than the NYSE Arca Integrated Feed.
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The Exchange believes that the proposed User per Source reporting
methodology is reasonable, equitable, and not unfairly discriminatory
because it will help to simplify market data administration. The
Exchange recognizes that each Redistributor and Professional End-User
may use Amex Options Products differently, and the reporting
methodology takes into account the various uses and provides a means to
avoid duplicative counting that will allow data recipients to better
manage their costs. Moreover, the reporting methodology does not
discriminate among data recipients and users, as the reporting
methodology would apply equally to all Professional End-Users that
choose to utilize it.
The existence of alternatives to the Amex Options Products,
including real-time consolidated data, free delayed consolidated data,
and 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 such
alternatives. The recent decision of the United States Court of Appeals
for the District of Columbia Circuit in NetCoalition v. SEC, No. 09-
1042 (DC Cir. 2010), upheld the Commission's reliance 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.'
NetCoalition at 15 (quoting H.R. Rep. No. 94-229 at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321, 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 at 16.
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
[[Page 62585]]
of competition and therefore satisfy the relevant statutory
standards.\19\
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\19\ Section 916 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (``Dodd-Frank Act'') amended
paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3),
to make clear that all exchange fees for market data may be filed by
exchanges on an immediately effective basis.
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As the NetCoalition decision noted, the Commission is not required
to undertake a cost-of-service or ratemaking approach, and the Exchange
incorporates by reference into this proposed rule change its analysis
of this topic in another recent rule filing by its affiliate.\20\
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\20\ See Securities Exchange Act Release No. 63291 (Nov. 9,
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97).
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For these reasons, the Exchange believes that the proposed fees are
reasonable, equitable, and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. An exchange's ability to
price its data feed products is constrained by (1) competition among
exchanges in a variety of dimensions, (2) the existence of inexpensive
real-time consolidated data and free delayed consolidated data, and (3)
the inherent contestability of the market for proprietary data.
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 options
exchanges compete with each other for trades and market data, providing
virtually limitless opportunities for entrepreneurs who wish to produce
and distribute their own market data. This proprietary data is produced
by each individual exchange in a vigorously competitive market.
It is common for broker-dealers to further exploit this competition
by sending their order flow to multiple markets, rather than providing
it all to a single market. The current options market structure is
dispersed and complex with trading volume dispersed among many highly
automated trading centers that compete for order flow in the same
options, with trading centers offering a wide range of services that
are designed to attract different types of market participants with
varying trading needs.\21\
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\21\ See, e.g., Securities Exchange Act Release No. 49175,
Concept Release: Competitive Developments in the Options Markets
(Feb. 3, 2004), 69 FR 6124, 6125-6126 (Feb. 3, 2004) (S7-07-04).
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Competitive markets for 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 recently acknowledged the
aggressive competition among exchanges. In announcing the abandoned bid
for NYSE Euronext by NASDAQ OMX Group Inc. and IntercontinentalExchange
Inc., 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.'' \22\
Similarly, the options markets vigorously compete with respect to
options data products.\23\
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\22\ 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.
\23\ See PHLX Filing, supra note 16, which describes a variety
of options market data products and their pricing.
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Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platform where the order can be posted, including the
execution fees, data quality, and price and distribution of its data
products. Without trade executions, exchange data products cannot
exist. Further, data products are valuable to many end-users only
insofar as they provide information that end-users expect will assist
them or their customers in making trading decisions. In that respect,
the Exchange believes that the Amex Options Products will offer options
market data information that is useful for both professionals and non-
professionals in making trading and investment decisions.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence.\24\ 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 of data
as a unified cost of doing business with the exchange. A broker-dealer
will direct orders to a particular exchange only if the expected
revenues from executing trades on the exchange exceed net transaction
execution costs and the cost of data that the broker-dealer chooses to
buy to support its trading decisions (or those of its customers). The
choice of data products is, in turn, a product of the value of the
products in making profitable trading decisions. If the cost of the
proprietary product exceeds its expected value, the broker-dealer will
choose not to buy it.
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\24\ Although the Exchange charges an Options Regulatory Fee, it
does not offset the full cost of the Exchange's regulatory program,
e.g., non-customer trading activity. See Securities Exchange Act
Release No. 64400 (May 4, 2011), 76 FR 27118 (May 10, 2011) (SR-
NYSEAmex-2011-27).
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Moreover, if broker-dealers choose to direct fewer orders to a
particular exchange, the value of that exchange's market data product
to those broker-dealers decreases for two reasons. First, the product
will contain less information because executions of fewer orders will
be reflected in it. Second, and perhaps more importantly, the product
will be less valuable to broker-dealers that choose to direct their
orders to other venues because it does not provide information about
the venues to which they are directing their orders. Data from the
competing venues to which the broker-dealers are directing orders would
become correspondingly more valuable.
Similarly, in the case of products that are distributed through
market data vendors, the vendors provide price discipline for
proprietary data products because they control the primary means of
access to certain end-users. Vendors impose price restraints based upon
their business models. For example, vendors such as Bloomberg and
Thomson Reuters that assess a surcharge on data they sell may refuse to
offer proprietary products that end-users will not purchase in
sufficient numbers. Internet portals, such as Google, impose a
discipline by providing only data that will enable them to attract
``eyeballs'' that contribute to their advertising revenue.
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
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common costs.\25\ 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.\26\
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\25\ See Securities Exchange Act Release No. 62887 (Sept. 10,
2010), 75 FR 57092, 57095 (Sept. 17, 2010) (SR-Phlx-2010-121);
Securities Exchange Act Release No. 62907 (Sept. 14, 2010), 75 FR
57314, 57317 (Sept. 20, 2010) (SR-NASDAQ-2010-110); and Securities
Exchange Act Release No. 62908 (Sept. 14, 2010) (SR-NASDAQ-2010-
111), 75 FR 57321, 57324 (Sept. 20, 2010) (``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.
\26\ 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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The Exchange believes that retail broker-dealers, such as Schwab
and Fidelity, offer their customers proprietary data only if it
promotes trading and generates what they believe is sufficient
commission revenue to justify the cost of acquiring that data. 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 what they believe is 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.
Moreover, the Exchange believes that products can enhance order flow to
the Exchange by providing more widespread distribution of information
about transactions in real time, thereby encouraging wider
participation in the market. Conversely, less order flow to a venue
decreases the value of that venue's market data products to
distributors and investors because the products contain less content.
Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of an exchange's costs to the market data
portion of an exchange's joint product. 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.
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
information (or provide information 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 information,
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.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including 10 self-regulatory organization (``SRO'') options markets.
Plans to launch two new options exchanges have been announced.\27\ Each
SRO market competes to produce transaction reports via trade
executions. The large number of SROs that currently produce proprietary
data or are currently capable of producing it provides further pricing
discipline for proprietary data products. Each SRO is currently
permitted to produce proprietary data products, and many currently do
or have announced plans to do so, including but not limited to the
Exchange, NYSE Arca, CBOE, C2, ISE, NASDAQ OMX, NASDAQ PHLX, NASDAQ BX,
and BATS. Because market data users can thus 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 information for its own.
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\27\ Nina Mehta and Nikolaj Gammeltoft, ``Miami Options Exchange
Moves Closer to Becoming 11th U.S. Venue,'' Bloomberg.com (Aug. 16,
2012), available at http://www.bloomberg.com/news/2012-08-16/miami-options-exchange-moves-closer-to-becoming-11th-u-s-venue.html.
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In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
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.\28\
As noted above, two new options exchanges recently have been
proposed.\29\
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\28\ Today, BATS provides data at no charge on its Web site in
order to attract more order flow, and uses market data revenue
rebates from resulting additional executions to maintain low
execution charges for its users. 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.
\29\ See supra note 27.
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In this environment, a super-competitive increase in the fees
charged for either transactions or data has the potential to impair
revenues from both products. A broker-dealer that shifted its order
flow from one platform to another in response to order execution price
differentials would both reduce the value of that platform's market
data and reduce its own need to consume data from the disfavored
platform. If a platform increases its market data fees, the change may
affect the overall cost of doing business with the platform, and
affected market participants will assess whether they can lower their
trading costs by directing orders elsewhere, thereby lessening the need
for the more expensive data, or simply not purchase the data.
[[Page 62587]]
In establishing the fees for the Amex Options Products, the
Exchange considered the competitiveness of the market for 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
product, including real-time consolidated data, free delayed
consolidated data, and 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. Accordingly, the Exchange believes that the
acceptance of data feed products in the marketplace demonstrates the
consistency of these fees with applicable statutory standards.
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 NYSE MKT.
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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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEMKT-2012-49 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File Number SR-NYSEMKT-2012-49. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEMKT-2012-49 and should
be submitted on or before November 5, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25220 Filed 10-12-12; 8:45 am]
BILLING CODE 8011-01-P